HI-STAKES GAMING, INCORPORATED v. COMMISSIONER OF INTERNAL REVENUE

REPUBLIC OF THE PHILIPPINES Court of Tax Appeals QUEZON CITY Special Third Division HI-STAKES GAMING, CTA CASE NO. 10172 INCORPORATED Petitioner, Members: -versus- RINGPIS-LIBAN, Chairperson, and MODESTO-SAN PEDRO, JJ COMMISSIONER OF Promulgated: J Ul S INTERNAL REVENUE, 'W)I) 2 Respondent. c.AM.J X ---------------------------------------------------------------~-'7-----------~-�--Xl-t-~-e?.l-�------------------- X DECISION MODESTO-SAN PEDRO, J.: The Case Before the Court is a Petition for Review, 1 filed by petitioner Hi-Stakes Gaming Incorporated against respondent Commissioner of Internal Revenue ("CIR"), seeking the reversal of the Decision rendered by respondent holding petitioner liable for deficiency corporate income tax covering taxable year 201 1 in the amount of P6,539,087.94, inclusive of interest, surcharge, and compromise penalty.2 The Parties Petitioner is authorized and licensed by the Philippine Amusement and Gaming Corporation ("PAGCOR") to conduct, maintain, and operate the business of games, recreation, and am usement and is duly registered with the Bureau of Internal Revenue ("BIR").3 Meanwhile, respondent is the duly appointed Commissioner of the BIR empowered to perform duties of said office including, among others, the power to decide on disputed assessments, refunds of internal revenue taxes,/ 1 See Petition for Review, Records pp. 6-26. Pre-Trial O rder, id., pp. 262-268. Ibid.

DEC'ISION C l A Case o. 10172 Page 2 of II fees, or other charges, penalties imposed in relation thereto, or other matters arising under the National Internal Revenue Code of1997 ("Tax Code'') or other laws or portions thereof administered by the BIR.4 The Facts The BIR, through Regional Director Araceli L. Francisco, issued Letter odOacafftcfeoiAdcuuen9rtthJiMonurglaiytrryei2ec0o(1A"r3dLn,snOaouAGfth"puo)eertviiNztaiioronr.nageGLrtoOfrooAerux-apa2llm1Siu8ninp-tee2err0ntvhali3els-or0ber0voC0eoln0kau0rsie0toa6taf5Bx/aeLeclsAtcrcoa2oun0vna1etns0rid0na0gRn0dte5av8xoe3atn9hbu3eleer, year20 11 .5 On 13 October 2014, petitioner received a Preliminary Assessment Notice, dated 7 October 20 14, issued by Officer in Charge-Assistant Regional Director Conrado C. Lee ("OIC-Assistant RD Lee") covering taxable year 2011.6 Thereafter, the BIR issued a Formal Letter of Demand, dated 28 October 20 14, with assessment notices assessing petitioner for alleged deficiency income tax in the amount of P6,055,509.36 for taxable yea r 2011 pursuant to Revenue Memorandum Circular ("RMC") No. 33-2013.7 On 20 November 2014, OIC-Assistant RD Lee issued a Letter acknowledging receipt of petitioner' s protest to the PAN.8 Petitioner filed a Letter of Protest/ Request for Reconsideration to the FLO, dated 2 December 2014, in response.9 Respondent then issued the Final Decision of Disputed Assessment, dated 27 July 2015, 10 to which petitioner filed a Request for Reconsideration. 11 CIR rendered its Final Decision dated 15 August 2019. 12 On 26 September 2019, petitioner filed the instant Petition for Review/ 4 Ibid. 5 Ibid. 6 Ibid. Franchise Tax Due from the Philippine Amusement and Gaming 7 Ibid; Subject: Income Tax and Corporation (PAGCOR), its Contractees and Licensees, 17 April 201 3. 8 Pre-Trial Order, Records, pp. 262-268 . 9 Ibid. 10 Ibid. I I Ibid. 12 Ibid.

DECISIO:\ CTA Case No. 10172 Page 3 of I I On 9 October 2019, respondent CIR was served with Summons. 13 On 10 January 2020, respondent filed his Answer14 and raised the fol lowing special and affirmative defenses: ( 1) The Court has no jurisdiction over the present case because the (2) aApsassyseustmhsmeineagnssttehhsaasstedtbhedicseofCmicoieuefrnitcnyhaal,isnejcxuoermicsuedtiotcartxyioe, sna,nfodpredttieatmxioaanbnelderaiybselealir;ab2l0e1t1o; (3) and 33-2013 is valid insofar as it imposes income tax to RMC No. licensees and contractees ofPAGCOR. Then, on 28 January 2020, respondent transmitted the BI R Records of hundred ninety-three (393) pages and filed the the case consisting of three 15 of which the Cou rt took note in a Minute corresponding Compliance, Resolution, dated 31 January 2020. 16 2020 Petiti oner and respondent filed their Pre-Trial Briefs on 27 August Conf 17 and 28 August 2020,18 respectively. Following this , th e Pre-Trial erence was held on 1 September 2020. 19 1 Oct The c2pt0oa2rbt0ei,er2s02fw0il2he0idc.htThtehhiuersJC,oooinuntrt2Sa0tdipJmuainltautteaidorynano2df0F2ap1acp, trtsohvaenePddriIens-sTiutrseiasRl(e"OsJorSldFuetIri"o)wno,a2n1s dated ober 7O rendered. 22 During trial, petitioner presented the following witnesses: (l )Raymundo V. Nazar io, petitioner's President, who testified and identified hi s Jy.Aicial Affidavit23 during the hearing on 2 December 2020;24 and/ 13 Records, p. 64. 14 /d., p. 87- IOI. 15 !d., pp. 106- 109. 16 !d., p. 110. 17 /d., pp. 11 3- 118. 18 /d., pp. 175- 180. 19 !d.' pp. 334-336. 20 !d., pp. 2 19-22 1. 21 /d., pp. 230-23 I . 22 / d., pp. 262-268. 23 Exhibits " P- 12" and " P- 12- 1", id., pp. 12 1- 128. 24 !d., pp. 237-239.

DECISION CTA Case o. 10 172 Page 4 of II (2) Girlie Garcia-Salazar, petitioner's former Chief Accountant, who testified and identified her Judicial Affidavit25 during the hearing on 11 February 2021.26 Petitioner formally offered its documentary evidence on 15 March 2021,27 with respondent's Comment [Re: Petitioner's Formal Offer of Evidence] filed through private courier and received by this Court on 26 May 2021.28 In a Resolution, dated 16 July 2021 , the Court admitted all of ence e xcept Exhibits "P-5", petitioner's formally offered documentary evid Upo n petiti oner's Motion29 "P-6", "P-7", "P-14", "P-14-1", and "P-14-2". with respondent's Comment,30 the Court admitted Exhibit "P-5" and set a date for Commissioner's Hearing for comparison of photocopies with the originals of Exhibits "P-14", "P-14-1 ", and "P-14-2" in a Resolution, dated 5 January 2022.31 During the Commissioner's Hearing on I March 2022,32 petitioner compared the photocopies with the originals of which the Court took note in a Minute Resolution dated 18 March 2022.33 Thereafter, respondent presented the following witnesses: (1) Revenue O f ficer Marie An n Santos, who testified and identified her Judicial Af f idavit34 during the hearing on 22 February 2022;35 and ( 2) Revenue Officer Katrina P. Pasion, who testified and identified her Judicial Affidavi t36 during the heari ng on 10 March 2022.37 Respondent formally offered his documentary evidence on 21 March 2022,38 with petitioner's Comment to the Formal Offer of Evidence filed on 3 March 2022.39 In a Resolution, dated 11 May 2022,40 the Court admitted all of respondent's formally offered evidence/ 25 Exhibits ��P-13" and "P-13-1 ", id., pp. 243-246. 26 /d. . pp. 276-278. 27 /d. . pp. 289-306. �28 /d. . pp. 364-365. (ofthe Resolution dated July 16, 202 1), id., pp. 373 -3 77. Motion for Recon sideration 29 1 Comment (on Petitioner's Motion for Recon sideration), id., pp. 382-386. 11 /d. , pp.390-391. 12 !d. , pp. 402-403 13 !d. , p. 450. 1~ Exhib its �'R- 1I" and " P-I 1-a", id. , pp. 2 11-216. 15 /d. , p. 397. 16 Exhibits ��R-13" and " R-1 3- 1��, id., pp. 41 1-415. 17 /d. , pp. 441-443. 18 /d. , pp. 451-456. 19 /d. , pp. 459-463. 40 !d., pp. 468-469.

DECISI ON CTA Case No. 10172 Page 5 of II Thereafter, respondent filed his Memorandum on 27 June 2022.41 Petitioner filed its Memorandum on 25 July 2022.42 With the filing of both parties' respective memoranda, the case was submitted for decision on 2 August 2022.43 Hence this Decision. T he Iss ues44 The issues submitted for this Court's resolution are as follows: (1) Whether petitioner is subject to RMC No. 33-2013 and subsequently liable for deficiency income tax in the amount ofP2,885 ,211.86 for taxable year 2011 ; and (2) Whether the protest to the FLO was filed on time. Arguments of the Pa rties Petitioner 's Arguments45 Petitioner claims that it was denied the right to due process, explaining that it received the PAN, dated 7 October 2014, only on 13 October 2014. Following respondent's own rules, particularly Section 3.1.2 of Revenue R egulations ("Rev. R egs.'') No. 12-99, it had fifteen (15) days from receipt of PAN or until 28 October 2014 within which to file a protest or motion for reconsideration/reinvestigation. Petitioner believes it was not given the said opportunity to respond when respondent issued the FLD/FAN on 28 October 2014. Petitioner, however, admits that it filed its protest only on 11 November 2014 but maintains that the FLO, dated 28 October 2014, is void for violation of due process. Assuming the FLO is valid, petitioner argues that its Protest to the FLO was filed on time. Petitioner relies on its statement in its Protest Letter that a copy of the FLO was "received on November 11, 2014". It claims that respondent's evidence (i.e. Affidavit of Service) to establish petitioner' s supposed receipt of the FLO/FAN on 5 November 2014 cannot be given / weight because it was submitted belatedly and was not part of the evidence/ 41 /d., pp. 470-494. 42 !d. , pp. 496-5 18. 43 /d. , p. 520. 44 /d. , pp. 166-168 . 45 Petitioner's Memorandum , id., pp. 496-5 18 .

Dt:CISIO'\ CIACasc o 10172 Page 6 o f II during pre-trial. It also claims that the respondent was not able to prove that the BIR's resort to substituted service is proper, pursuant to RMC No. 40- 2019. Even assuming the protest was filed three (3) days late, petitioner argues that the case is meritorious and needs to be taken up, citing Republic v. Daondon .46 Finally, petitioner maintains that its income from bingo games should only be subject to franchise tax in lieu of all kinds of taxes. Respondent's Arguments47 Respondent maintains that this Court has no jurisdiction over the assessment that has become final, executory, and demandable due to failure ofpetitioner to file a timely protest to the FLO/FAN. According to respondent, records show that petitioner received the FLO/FAN on 5 November 2014. It counters that petitioner's statement in its Protest Letter on the date of receipt of the FLO/FAN is self-serving. Citing Section 228 of the Tax Code, respondent claims that petitioner had until 5 December 2014 to file a valid protest on the assessment. However, petitioner belatedly filed its protest on 8 December 20 14. Assuming this Court has jurisdiction, respondent asserts that petitioner is still liable to pay the assessed deficiency income taxes for taxable year 2017. According to respondent, petitioner's franchi se with PAGCOR is limited to conduct traditional bingo operations. It does not extend to operation of casinos. Thus, the exemption granted by P.D. 1869 on the payment of 5% franchise tax, in lieu of corporate income tax, does not extend to petitioner. Respondent also points out that RMC No. 33-2013 expressly provides that income from traditional bingo, electronic bingo, and other bingo variations are income from "other related operations" that are subject to corporate income tax. He also argues that RMC No. 33-2013 is merely a clarificatory issuance and did not alter, modify, or amend the intent ofSection 13(2)(b) ofP.D. No. 1869. The Ruling of the Court The instant Petition for Review is meritorious. / 46 G. R. No. 2 10540, 19 April 2016. 47 Memorandum , Records, pp. 470-494.

OECISIO"' CTA Case No. I 0172 Page 7 of I I iodvFPsfaiLevotytDohliaietp/dtiFeeoP. AdrnAieoNwNrd'hbsaefenrrnfidoogrm,rhetetshtpttuhaoosex,ndpltduahaeepyensepaterrsi'oossscesfuesrtsheessmdceewe1tihnp5aet-ts violatiPonetoitfioitnserrigchlat itmo sdutheaptrothceessF.LD ts invalid for having been issued m The Court agrees with petitioner. for Section 228 ofthe Tax Code provides for the due process requirements the issuance of an assessment as follows: "SEC. 228. Protesting of Assessment. - When the Commiss io ner o r his duly authori zed representative find s that proper taxes should be assessed , he shall first notify the taxpayer of his findings: . .. bfaecvtsoiodn.Twhehitcahxptahyeearssssehsaslml ebnetiinsfmoramdeed; in writing of the law and the otherwise, the assessment shall regulatiWonisth, itnheatapxepraioydertoshablel prescribed by implementing rules and be required to respond to said notice. If the taxpayer fails to respond, the Commissioner or his duly authorized representative shall issue an assessment based on his findings. irrmeecqpeulieepsmttoeSfnfouttrcihnhregeacarsosussnleeessssissdammenreedanntitrtoeignnmusoaluayrctirhoebnifenosv.rpmersotaitegnsadtteimodnanawndemitrhianinsi smtthraairytitvybee(l3yp0re)bsydcaryfibisleinfdrgobmya Within sixty (60) days from filing o f the protest, all relevant supporting documents shall have been submitted; o therw ise, the assessment shall become final. (dfTaoEredaonmcvxemiepshArihosutahpennselpIdyisfesrhtlaeahaaadlfnplesfledsepwbeicrguetiohenotcthdtodefyismenbot(ryesni1tsche8ftodii0hnrreh)etiaynnudlidgn,ae(ed,e3ydcOrxs0ieies)nudfcirodrwousaentm.hoy)igoorsshyrlueftryiabononmmard(cii1ntsdi8rsoeep0icomna)e-rndatmi,pnoaoatdyfyradoibpofaslecpentruhp.io"omeetdaaesl;cnattitooedstd,httdhueheerpecwoCitnsaisoixoewup,nria,tttyhhooeienrrf as The foregoing provision is implemented by Section 3 ofRR No. 12-99, amended, to wit/

DECISI ON CTA Case No. 10172 Page 8 of II "SEC. 3. Due Process Requirement in the Issua nce of a Deficiency Tax Assessment. - 3.1 Mode of procedure in the issuance of a deficiency tax assessment: bratttehehhasvgeseesaeeultctsdulaasaaxaxms(ttpesipi3oeeaoame.nynny1etsa.ie.1r,blyrlyufIoPabotsrtrerthePrs,laeajhriinuttmeaiCyrolliiiliosnndsmmdaspeinhriefrmnyitoucAeaiwdAirsreNmseynsinNisocinAcneynEseesesdXdtsrmaoeextsot"nehsaArnoamilwt"trheiNtthhtshanheioexdtcertreehuieNcsolf,eoeyaft)txcht(.hiaiPtecsseueAttssphaN(aosrPniou)rddA.ifpzf-NoOietchsd)fieefIefdfrioncelatrepafabwrttsseehash,srseeeairsrsnlpesultvtmrlaoioeisteeisspavwnusoeatess,aneentaisddosdss d(cdFeaafLstieecD,ioe/FanfIAcrfyeFNctot)ehariexmpshtlatiaoaallxbfl piLtlhbaieteyeytteP,eiriArsnsfacNuoilel,ufsdhsiDetvcoeesahmlorlaifealnsltnghpdbeoefnaoacdprnopdnwlpsiaciidFtvaheimbnirlnaeeednlfpitfeiAtnneoseafdsnleettsif(hesa1smeu5.)lettdn,axtainypsNawyfohretioirccm'hse tfttaiahlxxi"enpoPga/rAysteuNIarbfx,' msetrhsdei,essesapftiinoaocixnnFepdnoLascfDyytteh/hFtraea,AtxtwaNhlxieitaps/hibhaitinayldliefltiriysbf'a,tseegirneiresnecsselup(us1eosw5dinv)siewtedh,oiatcyfhtahstilhnelfeirnffoiiagfnmptdefpoeidlnrniagcpt(ase1ab5yool)fmefddperaeeneyfcntisecaoiiflefptrinttoehcmsoey.f (Emphasis and underscoring, Ours.) FrrpeeLessrDppiooo/dFnnAssBeoeNafsoo.efrrdifptthreooeentneltashp(t e1sa5egf)aoodirnfeasgytthosetihfnresgoa,msidat mhte1he5e.B-IdIdtaRayitseiposeonrrlfeiyoqrdeaucfittreheeiradpttrettoochefegi tviBhvienIeRgPthAtcheaNenttataoixsxpspfuaiaelyyeeetrhrit'esas In Prime Steel Mill, Inc. itmhv.epCo1o5rtm-adnmacyiestsooifoitnshseeurePoAthfNeInFsttLearDgne/aFalAnRdNee:vnejnouinee,4d8 the Supreme Court emphasized the the strict observance by the BIR of '� In spueprvehesrocallrdicbatehsdeespt,arthxoipcseaCydoeururser'tfcohoranstshetientujiostsiionuneadanlcsertirogicfhtatsos.bsessesrmvaennctenboytitchese BIR of the in order to dapSsoatsawrecrnseSslbmuoypIefnenthrttthaeheamelnadaodwu,ftetIa-hncnpecidtr.e,oBbdctIhyeRcesiastsCmserooeuowuqsfrtuntCisrhrteoreumimlcdletmlenytihtssasci/tin~otnphtheelerysoeisnwfsdIuiniatnthnegcrtenhoaefolafrRePaqeAvudeiNernfeuimciesieevpnn.atcMsryt elaattnaridxdo 48 G.R. No. 249153 , 12 September2022.

DECI 10;\ CTA Case No. 10172 Page 9 of II The importance of the PAN stage of the assessment process cannot be discounted as it presents an opportunity for both the taxpayer and the BIR to settle the case a t the earliest possible time without need for the issuance of a FAN. ohrpYiefeugptrmhhilyloeeixdgttohaPpItxnerhapoditlPvahitypAihedpeaNeitrvnd'"esse[ruoshydn)oeCndrufloealeycrdurpealRna.tf,lttecsetvaochrenaenrbserCeueceeoessouitRpfvrroietiCcnnghtogdulaymledtahnmotoetibiocistssncsaesasixruosNvpineoeaoetndy.rhe1etboor2y'Ff-ss9LIttrnh9aeDttesfee/oprFBtnorAhIanaaRNlstt.e.aRt"Thoxeehprveeai1nnyC5uec-oedrauastrvoeyt. cbsnuoeemfbvoesprtrelatehnpteWteelileathysilitsliciegooannYpmoeupprrmleylweidaxaatnsnrhceaeaeslbto1wslg5eoio-tndthuoasstllyshyiguephbtedotmrluyitoeihdtdpeiiftbrfscoeyaRcrsieeseensspstualfriytanectgqbtoueutnahtihlcreehecFm.iPrAcTeAuNnhNmteaw.srntehadneccFnaeLntshD, ebiteeBmvIenaRnoy As the Court also held in Yumex, "(t]hat [the taxpayer] was able to file a protest to the FLD/FAN is RR No. 12- 99 explicitly grants the taxpayer of no moment." "Sec. 3.1.2 of of the PAN to file a response." fifteen ( 15) days from receipt In the same vein, it is beside the point that petitioner was able to submit a "well-prepared protest letter." The fact remains that respondent violated petitioner's right to due without even awaiting its reply to the PAN. process by issuing a FAN ntchooemeTfpfaleyxcWtwC."eoiltldh-esetahttneledddRuieesvptehrnoeucereusRlseergtehuqaluat tiiaronenmsaesNnseotss. ss1me2t-e9nf9ot rittshhvaoitnidfaSaielnscdtitoopnrso2tdr2ui8ccteolysf (Emphasis and underscoring supplied; citations omitted.) � ffH21ii8f3fotteewOOeeecncnvtttIo(ohenb1brd,t5eehar)rre-ye22d.sp00apCry11oel44snpe.edaew5nrreiiltnCtyohctd,oainriuspseenswrs,uitpoihrenoerdigncctdhootfherittfdneohtsteefFedsiniLhilsedsoO(uiw1nt/a5sFont)AtrhcewdaeNsatapo5ypi1osftentofttshiohnetereioor2Ftenh8rLfeeprOrOorlorma/ceFpttce,AsoesepbtNieveoat.reigfdt2atihoi0tnehn1see4mtr,PtahhAtnaheddNePa4uAts9onaNortiiydnl. ipffnioelfritinirtpgmieotnRoaitenfeirods'in,sptsetorhrinegpdtrohreeotnfrtotteeo'rsssetpp.,iosrvnosSducoueacitdnhoducert.pah/orJeefdmPtuhAaeetNuFprrLeiosOcine/soFsssutA,acNnruecrnpeedrdieoobrrfiynttoghpetethhtieeFtilLoFanOpLes/OreF'/sAoFfsANuthNbevsiefpoaqelturaaietlolenydst 49 Ex hibits " R-7", " R-7- 1", and " R-7-2", BIR Records, pp. 147- 149 50 Ex hibit " R-7-4", id., p. 15 1. 51 Exhibits " R-8", " R-8-1 ", " R-8-2", " R-8-3", " R-9", " R-9-1 ", id., pp. 152-158.

DECISIO:\ CTA Case o. 10 172 Page 10 of II ooffsIunctehIrnnndoaenle-Rdc,oemvinepnPluiialeni,p5c2ienwathsietShShsuetapltlruePtmoeretyroCaloneudurmpt rcoCactoeerdgpuoorrraicalatdiloluyne vs. Commissioner ruled on the effect process, viz.: (cfiwEanomchdntietpceethhsdhatdas�tpii�thrdsrneioatnantsoewsdhstsoateugressntids,vddmereteerhepsPsenpcrSitooPfvrnboCeidenrdmefgaon,moartOlefpmusliaertetssarws.oet)eualpsysptsoomirrsreyestluuinenaetd,indtys.do.un.tcpo.ht"rhaoedicroefeiditnssudrnsianiodgltesd.duoWeefnhpitgihrloreeacCtPeeseSsntPhttCeoer for With the Court's conclusion that the assessment is void, there is no need the Court to discuss the other issues rai sed by the parties. WsdDfuielerIfecTcidchiHsiaeibrDonWgynceRyHH,oAnitE-aWaSDRxnteNidaEsskp.FeiunOsctoeRtGdmhEeaApm,rtsoopistnmreaegslimssaImeinmseceonosputrecpndnootaanrtoleastdtfyiedPd2e67riei,ss5Jdu3,hl9htyeh,er0e2re8e0bi7b1yn.y5s9tG4aa,nRsCsitAnAePcsNNeslutiTiCnstiigEEovDpneLe.LoftoiTEftrihDionRenteeeFvrraieinfnesoadtw,rl SO ORDERED. MARIA ROWENA MODESTO-SAN PEDRO Associate Justice WE CONCUR: r~ . ~ _, '-- MA. BELAEsNsoMcia. tRe IJNusGtiPcIeS-LIBAN 52 G.R. No . 172598. 2 1 December 2007.

DECISION CTA Case o. 10172 Page II of II ATTESTATION I attest that the conclusions in the above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court's Division. MA. BELEN M. RINGPIS-LIBAN Associate Justice Chairperson CERTIFICATION taChbheoawvirerpiDPeteruersrcosoinusfia'tosnhnteAtwoottpeeAirsnerttiaiortceinloaeconVh,feHtidht Ie,iisnCSehcocoeutrnrietos.bunylt1a3cteioortfnitfhbieeedfCotorhenasttthitethucetiaocsneonawcnaldussthaiosesnDisginvineisdtihotone Presiding Justice