CTA Case No. 4341 (Decision)

� REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY PHILIPPINE CASINO OPERATORS CORPORATION, Petitioner, - versus - C.T.A. CASE NO. 4341 COMMISSIONER OF INTERNAL REVENUE, Respondent. K- - - - - - - -K PROVIDENT INTERNATIONAL RESOURCES CORPORATION, Petitioner, - versus - C.T.A. CASE NO. 4342 Promulgated COMMISSIONER OF INTERNAL REVENUE, APR 12 1995 Respondent. / X X- - - - - - - DECISION These are consolidated cases involving assessments of alleged deficiency 25" surtax of improper accumulation of profits and business taxes for taxable years 1981 to 1985 based on the Memorandum Report <Exh. 3, pp. 230-244, BIR Records) of Mr. Aureliano G.

DECISION - C.T.A. Case Nos. 4341 & 4342 -2 Sison, Jr., respondent's Supervising Revenue Enforcement Officer, computed as follows: <Philippine Casino Operators Corporation> YeaJ~ Kind of Tax Aaount <BIR Rec. Page No.> (339- 340) 1981 Incoae Tax p 20,120,627.10 (339- 340) 1982 Inco11e Tax 24,694,116.30 (339- 340) 1983 Inco11e Tax 24,441,146.10 (343- 344) 1984 Inco11e Tax 25,666,646.30 (343- 344) 1985 Inco11e Tax 2315021597.28 118,425,133.08 <BIR Rec. Page No.> Year Kind of TaK Aaount (339-340) (339-340) 1981 25~ Surtax on laproperly p 2,933,159.75 (341-342> 1982 Accuaulated Profits 3,598,614.75 (341-342> 1983 5,410,797.50 (341-342) 1984 25~ Surtax on Iaproperly 6,198,579.00 1985 Accuaulated Profits 61 3331 994.00 25~ Surtax on Iaproperly p 24,475,145.00 Accuaulated Profits 25~ Surtax on hproper l y AccuauJated Profits 25~ Surtax on hproperl y Accuaulated Profits 1981 Fixed and Percentage p 2,689,309.50 (357> 1982 Taxes 2,992,156.44 (355> 1983 3,375,817.69 (353) 1984 Fixed and Percentage 3,980,718.19 (351> 1985 Taxes 41 431 1 563.59 (348) Fixed and Percentage p 17,469,565.41 Taxes Fixed and Percentage Taxes FiKed and Percentage Taxes

DECISION - C.T.A. Case Nos. 4341 & 4342 -3 <Provident International Resources Corporation) Kind of Tax <BIR Rec. Page No.) 1981 Inco11e Tax p 1,033,743.90 (335- 356) 1982 Inco11e Tax 5,729,283.00 <335- 336) 1983 lnco11e TaK 5,456,570.70 (335- 336) 1984 Inco11e Tax 9,770,685.60 (337- 338) 1985 Inco�e TaK 16,577,904.30 (337- 338) 1986 Inco11e Tax (332- 334) 20,796,908.00 P59,365,095.50 1981 25~ SurtaK on l�properly P 155,967.88 (335-336) 1982 Acc\.taulated Profits 839,181.50 (335-336) 1983 (332-334) 1984 25~ Surtax on Japroperly 1,213,527.25 (332-334) 1985 Accuaulated Profits 2,364,076.00 (332-334) 1986 4,469,881.00 (332-334> 25~ Surtax on laproperly 6,340,000.00 Accuaulated Profits p 15,382,633.63 25~ Surtax on hproperl y Accuaulated Profits 25~ Surtax on Japroperly Accuaulated Profits 25~ Surtax on Iaproperly Accuaulated Profits Kind of Tax <BIR Rec. Page No.) 1982 Fixed TaK p 9,674.85 (359) 1983 FiKed Tax (359) 1984 Fixed TaK 8,774.85 (359) 1985 Fixed Tax (359) 1986 Fixed Tax 7,874.85 (359) 6,974.85 6,074.85 p 39,374.25 1981 Docuaentary p 22,300.00 (330-331) Staap Tax On May 8, 1987, petitioners protested the above assess�ents but was subsequently denied by the respondent in a letter, dated January 3, 1989, (E>Ch. HH> "since your clients, PIRC and PCOC failed to register and affiliate their businesses with PAGCOR, they are not therefore, entitled to the enjoyment of the ta>C e>Cemption privileges

DECISION - C.T.A. Case Nos. 4341 & 4342 -4 provided for under Section 13 <2> (e) of P. D. No. 1869." <E�phasis supplied). Apparently, this is the only ground for the denial of said protests. Hence, these appeals. In their Petitions for Review, petitioners contended that under Presidential Decree Nos. 1399 and 1869, they are eMempt from all taMes, fees or levies of any kind and that registration and affiliation with the Philippine Amusement and Gaming Corporation <PAGCOR> was not needed for them to be taM eMempt. But even if registration was not a prerequisite to petitioner's taM exemption, they, however, registered just the same. Respondent, on the other hand, argued that "Under Presidential Decree No. 1869, in order that corporations, associations, agencies or individuals having any contractual relationship with the PAGCOR in connection with the operation of casinos may be entitled to exemption from taxes, they must register and affiliate their businesses with PAGCOR." <Emphasis supplied; Answer, p. 31 CTA Records> and since petitioners did not register and affiliate their businesses with PAGCOR, they are not entitled to said tax exemption. Moreover, "the tax exemption under P.O. Nos. 1399 and 1869 does not include the 25~ surtax on improper accumulation of

DECISION - C.T.A. Case Nos. 4341 & 4342 -5 profits since the surta>< is not a ta>< but a penalty" (ibid.). The issues to be resolved are: 1) Whether or not registration and affiliation with PAGCOR are required in order that entities having contractual relationship with PAGCOR can claim ta>< e><emption. 2> Whether or not said ta>< e><emption covers surta>< on improperly accumulated profits. We find both issues for the petitioner. It was not disputed that petitioners, Philippine Casino Operators Corporation <PCOC> and Provident International Resources Corporation <PI RC>, had contractual relations <E><hs. A and D for PCOC's Contract to Operate and E><hs. B, C, and E for PIRC's Contracts of Leases) with the PAGCOR. It was also not disputed that under P. D. Nos. 1399 and 1869, PAGCOR was e><empted from any kind or form of ta><, e><cept a franchise ta>< of 5~ of the gross revenues derived by PAGCOR. Such e><emption was also e><tended to those entities having �contractual relationship in connection with the operations of the casino/s ��� " Thus, Section 4 (2) <b) of P. D. No. 1399 provided: "(b) Others: The e><emption herein granted for earnings derived from the operations conducted under the franchise, specifically from the payment of any ta><, income or otherwise, as well as any form of charges, fees

DECISION - C.T.A. Case Nos. 4341 & 4342 -G or levies, shall inure to the benefit of and extend to corporation/s, associations/s, agency/ i es, ot~ individual Is with whom the Franchisee has any contractual relationship in connection with the operations of the casino/s authorized to be conducted under the franchise and to those receivino remuneration from the Franchise Holder as a result of essential facilities furnished and/or technical services rendered to the Franchise Holder. " (Emphasis supplied> Said exemption was reiterated under Section 13 <2> (b) of P. D. No. 1869 <which consolidated and amended P.O. Nos. 1067- A, 1067-B, 1067-C, 1399 and 1632, relative to the franchise and powers of the PAGCOR> which provided, thus: (b) Others: The exemption herein granted for earnings derived from the operations conducted under the franchise specifically from the payment of any tax, income or otherwise, as well as any form of charges, fees or levies, shall inure to the benefit of and extend to corporation(s), associations(s), aoencv(ies), or individual(s) with who� the Corporation or operator has any contractual relationship in connection with the operations of the casino<s> authorized to be conducted under the Franchise and to those receiving comoensation or other remuneration from the Corporation or operator as a result of essential facilities furnished and/or technical services rendered to the Corporation or operator. <Emphasis s1..1ppl i ed) The bone of contention, however, as raised by the respondent lies in the sixth "whereas" clause of P.O. No. 1869 which stated, thus: WHEREAS, in order to make PAGCOR's regulatory powers �ore effective, it is necessary that businesses primarily engaged in gambling operations be affiliated with PAGCOR, and become subject to its regulatory powers

DECISION - C.T.A. Case Nos. 4341 & 4342 -7 with respect to operation, capitalization and organizational structure; <Emphasis supplied). and in Section 9 of the same decree, thus: Sec. 9. Regulatory Power. The Corporation shall maintain a Registry of the affiliated entities, and shall exercise all the powers, authm~ity and responsibilities vested in the Securities and Exchange Commission over such affiliated entities mentioned under the preceding section ��� <Emphasis supplied) which now form the basis for respondent's assessments against the petitioners. Respondent interpreted that "since the aforesaid entities are required to register and affiliate their businesses with the PAGCOR, it necessarily follows that the tax exemption of the PAGCOR extends to them only if they register and affiliate their businesses with the PAGCOR. This is so because it is the cardinal rule that tax exemptions are not presumed; that they are construed strictissimi iuris against the taxpayer and liberally in favor of the taxing authority; that the tax exemption cannot be made by inference or implication but must be proven beyond reasonable doubt and in case of doubt, the same shall be resolved against exemption. xxx" (Respondent's Memorandum, p. 276, CTA Records) We disagree. We find such interpretation contrary to reason and common sense, if� not, unfair to the petitioners. The use

DECISION - C.T.A. Case Nos. 4341 & 4342 -8 by the respondent of the phrase "they <ta)( e)(emptions> are construed strictissimi juris against the ta)(payer and liberally in favor of the taxing authority" is to Our mind, very partial to the respondent and obviously prejudicial to the interests of the petitioners. It certainly lacks the required candor in the interpretation of laws. Well-settled is the rule that interpretation of tax laws should be "construed against the Government because revenue laws impose special burdens" <Marinduque Mines Agents, Inc. vs. Hinabangan, Samar, L-18924, June 30, 1964; Luzon Stevedoring vs. Trinidad, 43 Phil 803). If the "intent to tax is clear" which is absent in this case, then the pendulu� swings to the other end to favor the government and the oft-quoted rule that "tax exe�ptions are construed strictissimi juris against the ta)(payer" would then govern (see Jai-alai Corp. vs. Collector, 57 0. G. 2490; Commissioner vs. Filipinas Cia de Seguros, L-14880, April 29, 1960). It would certainly be stretching too far the imagination of this Court in order to find a connection between the "whereas" clause togethel~ with Sec. 9 of P. D. 1869 and Sec. 13 (2) (b) of the same decree. There simply is no link between "registration" and "ta)( e)(emption". In fine, We find that registration was never intended by

DECISION - C.T.A. Case Nos. 4341 & 4342 -9 law to be a prerequisite for the tax exemption. Otherwise, it would have said so. We agree with the petitioners' observation that "if it had indeed been the intention that registration was a prerequisite for exemption, then Section 13 (2) (b) would have so stated, just as Section 18 of P.O. No. 66, granting enterprises that registered with the Export Processing Zone Authority exemption from certain local taxes and licences. Thus, said law expressly makes the tax exemption available only to a "zone .~egi stered enterprise"' <Petitioners' Memorandum, p. 249, CTA Records> � In this particular case the law is crystal clear on this matter and leaves no room for interpretation. We are not inclined to confuse the same in an aimless way by responding to respondent's biased interpretation. "Where the law does not distinguish, We ought not to distinguish." We also find meritorious the other facts and arguments raised by the petitioners, more particularly, that "petitioners have registered with PAGCOR" <Exh. T> and that "assuming registration was necessary, P.O. No. 1869 has no retroactive effect" since said law took effect fifteen days following December 26, 1983, the date of publication in the Official Gazette <Ex h. 11).

DECISION - C.T.A. Case Nos. 4341 & 4342 - 10 Th�>r�>for�>, furth�>r discussion on th�>s�> factual �att�>rs and argum�>nts would only b�> an �>X�>rcis�> in v�>rbosity. As to th�> oth�>r issu�> rais�>d by th�> r�>spond�>nt that "tax �>X�>mption do�>s not COV�>r surtax on improp�>rly accumulat�>d profits sine�> th�> surtax is not a tax but a p�>nalty" is again unm�>ritorious. S�>ction 13 (2) (b) of P. D. 1869 is also cl�>ar r�>garding p�>tition�>rs' �>x�>mption "from th�> paym�>nt of ANY incom�> or otherwise, as well as any form of charges, f�>�>S or l�>vi�>s, shall inur�> to th�> b�>n�>fit of and �>xt�>nd to corporation< s), association<s>. agency<ies> or individual<s> with whom the Corporation or operator has any contractual relationship��� " <Emphasis supplied). Th�> languag�> used in th�> law is so exhaustivE>, cl�>ar and all embracing that it leaves no room for interpretation oth�>r than th�> petition�>rs being �>X�>mpt�>d from "ANY tax, income or otherwise" including of course, for that matt �>r, surtax. W�> b�>li�>v�> that a surtax is still a tax, albeit, an additional tax imposed in an amount alr�>ady taxed. In pff�>ct, it is a Tax on a Tax. As it is still a tax, p�>tition�>rs sho1..1ld be �>x�>mpt�>d ther�>from as provid�>d for by the afor�>said law. Moreov�>r, W�> again subscribe to th�> obs�>rvation of th�> p�>tition�>rs that "assuming, argu�>ndo, that th�> 25"

DECISION - C.T.A. Case Nos. 4341 & 4342 - 11 tax on accumulated surplus was in fact a penalty, and not a tax, and that this 'penalty' was therefore not embraced within the tax exemption conferred by Section 4 <2> (b) of P. D. No. 1399 and Section 13 <2> <b) of P. D. No. 1869, then its repeal (by Section 6 Executive Order No. 37> should have retroactive effect and benefit the petitioners in accordance with the familiar principle that the repeal of penal provisions should be given retroactive effect insofar as they favor the persons affected thereby" (Phrase insertion and emphasis supplied; CTA Records, p. 257> WHEREFORE, in all the foregoing, the assessments issued against the petitioners for alleged deficiency inco�e tax, business tax and surtax from 1981 to 1985 are hereby declared CANCELLED. SO ORDERED. ,.;. tJ,~~ RAMON 0. DE VEV: Associate Jud

DECISION - C.T.A. Case Nos. ~3~1 & ~~2 - 12 WE CONCUR: (~s~~on> ERNESTO D. ACOSTA Presiding CERTIFICATION I hereby certify that this decision was reached after due consultation between the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. ~Q~ 0'-c~ ERNESTO D. ACOSTA Presiding Judge Court of Tax Appeals

REPUBLIC OF THE PHILIPPINES COURT OF TAX .APPEALS QUEZON CITY PHILIPPINE CASINO OPERATORS CORPORATION. Petitioner, - versus - C.T.A. CASE NO. 4341 COMMISSIONER OF INTERNAL REVENUE. Respondent. X- - - - - - - - - - - - - X PROVIDENT INTERNATIONAL RESOURCES CORPORATION. Petitioner, - versus - C.T.A. CASE NO. 4342 COMMISSIONER OF INTERNAL REVENUE. Respondent. X- - - - - - - - - - - - - X CONCURRING AND DISSENTING OPINION I concur with the findings that in general petitioners enjoy tax exemption privileges by reason of their contractual relationship to operate and to provide facilities for gambling with PAGCOR. Under Section 13(2)(b) of PO 1869 the tax exemption ~

CONCURRING AND DISSENTING OPINION - C.T.A. CASES NOS. 4341 & 4342 - 2- privileges enjoyed by PAGCOR is extended to other corporation be reason of existing contractual relationship with PAGCOR "in connection with operation of casino" or as a "result of essential facilities furnished and/or technical services rendered to the corporation or operator". "Registration" and "affiliation" are not mentioned by the provision of law as precondition to the enjoyment of the tax exemption privilege. However, one exception to the tax exemption privileges is the imposition of income tax on dividend received by private stockholders of PAGCOR (Section 13(3) of PD 1869). Inasmuch as the tax exemption privilege of PAGCOR is merely extended by operation of law to other corporation having contractual relationship with the former. i t follows that the private stockholders of petitioners should likewise be subjected to income tax on dividends they will receive. The actuation of petitioners of unjustly accumulating their surplus profits instead of declaring dividends prevented the government from imposing income tax on dividends against their stockholders. This gives rise to the right of the

CONCURRING AND DISSENTING OPINION - C.T.A. CASES NOS. 4341 & 434~ - 3- government to impose the 25% surtax under Section 25 of the 1977 Tax Code. partly quoted below: "SEC. 25. Additional tax on corporations improperly accumulating profits or surplus. - (a) Imposition of tax. If any corporation. except banks. insurance companies or personal holding companies whether domestic or foreign. is formed or ava i 1ed of for the purpose of preventing the imposition of the tax upon its shareholders or members of another corporation. through the medium of permitting its gaini and profits to accumulate instead of being divided or distributed. there is levied and assessed against such corporation. for each taxable year. a tax equal to twenty-five per centum of the undistributed portion of its accumulated profits or surplus which shall be in addition to the tax imposed by Section twenty-four. and shall be computed. collected and paid in the same manner and subject to the same provisions of law. including penalties. as that tax." To hold otherwise is to defeat the very purpose of Section 25 of the Tax Code and Section 13(3) of PO 1869 because if we will interpret the latter law as exempting petitioners from the surtax then we will be encouraging them from not declaring dividends thereby preventing the government from collecting income tax on dividends. The imposition of surtax on unjust accumulation of surplus profit and the non - imposition of tax on dividends go hand in hand.

CONCURRING AND DISSENTING OPINION - C.T.A. CASES NOS. 4341 & 4342 - 4- So that when income on dividends was abolished under Executive Order No. 37 on July 31, 1986, the p r o v i s i on on s u r t a x wa s 1 i k e wi .s e abo 1 i s he d . 0 n e does not serve any purpose without the other. Secondly, I agree with the respondent that the additional 25% surtax is actually not a tax but a penalty as held in United Equipment & supply co. vs. Commissioner of Internal Revenue (C.T.A. Case No. 1795, October 30, 1971, appeal denied en bane in G.R. No. L-35653, October 25, 1972, cited in Commissioner of Inte rna 1 Revenue vs. Ayala Securities Corporation, 101 SCRA 231) as follows: "Although petitioner filed an income tax return, no return was filed covering its surplus profits which were improperly accumulated. In fact, no return could have been filed, and the law could not possibly require, for obvious reasons, the filing of a return covering unreasonable accumulation of corporate surplus profits. A tax imposed upon unreasonable accumulation of surplus is in the nature of penalty. (Helvering vs. National Grocery Co.; 304 U.S. 282). It would not be proper for the law to compel a corporation to report improper accumulation of surplus. Accordingly, Section 331 limiting the right to assess internal revenue taxes within five years from the date the return was filed or was due does not apply." Following the rule that tax exemptions are strictly construed against the taxpayer claiming

CONCURRING AND DISSENTING OPINION - C.T.A. CASES NOS. 4341 & 4342 - 5- the same. the exemption from tax herein claimed under PO 1869 could not possibly cover improper accumulation of profits or surplus since the surtax is actually not a tax but a penalty. It is not normally imposed unless a taxpayer violated Section 25 of the said old Tax Cod~. In the instant case based on petitioners' audited financial statements. Philippine Casino has improperly accumulated its profits from 1981 to 1985 and Provident International from 1981 to 1986. The records do not show sufficient justification for such accumulation. Accordingly. assessment on surtax against accumulation of surplus profit should stand. Quezon City. Metro M~nila. ~~� uz.~ ERNESTO D. ACOSTA Presiding Judge