Held
Yes, Johann is correct that WWGC’s offshore operator income is not taxable in the Philippines because it is not derived from sources within the Philippines, as established by the National Internal Revenue Code and the Supreme Court ruling in Ltd v. Bureau of Internal Revenue, G.R. No. 252965 (2021).
Explanation
The fundamental principle under Philippine tax law is that foreign corporations are taxable only on income derived from sources within the Philippines (NIRC Sec. 23(F)). The concept of "source" of income refers to the origin or situs of the activity or property that produces the income (Ltd v. BIR). For income from services, the key factor is where the services are actually performed (NIRC Sec. 42(A)(3), Ltd v. BIR, Revenue v. Baier-Nickel).
PAGCOR classifies offshore-based POGOs as corporations engaged in business in the Philippines, but this does not automatically mean all their income is taxable. The BIR's Revenue Memorandum Circular (RMC) treats offshore-based POGOs as doing business in the Philippines and subjects them to corporate income tax or the 5% preferential tax under the PAGCOR charter. However, the Supreme Court in Ltd v. BIR clarified that offshore-based POGOs are only taxable on income derived from sources within the Philippines. Since the placing of bets, players, and payment of prizes all occur outside the Philippines, the income from these offshore gaming operations is sourced outside the Philippines and thus not subject to Philippine income tax.
The only Philippine connection is the requirement for offshore-based POGOs to engage PAGCOR-accredited local agents and service providers, which are separate entities. The income generated by the offshore-based POGO itself is not from Philippine sources because the actual gaming activity and revenue generation occur outside the country.
Application to the facts
Johann, as CEO of WWGC, an offshore-based POGO licensed by PAGCOR, argues that their income is not taxable because 100% of their operations are located abroad and income is not derived from Philippine sources. The law and Supreme Court rulings support Johann’s argument that income tax applies only to income derived from Philippine sources. Since WWGC’s offshore gaming operations involve placing bets, players, and prize payments all outside the Philippines, the income is sourced outside the Philippines.
Although the BIR RMC asserts that offshore-based POGOs are doing business in the Philippines and subject to income tax, the Supreme Court in Ltd v. BIR invalidated such imposition to the extent it taxes income not derived from Philippine sources. The Court emphasized that the source of income from services is where the services are performed, and since the gaming services of WWGC are performed offshore, their income is not Philippine-sourced.
Therefore, WWGC’s income from offshore gaming operations is not taxable under Philippine income tax laws, consistent with the principle of situs of taxation and the Supreme Court’s ruling.
Under the NIRC, a foreign corporation is taxable only on income derived from sources within the Philippines.
"(A) Tax on Resident Foreign Corporations. (1) In General. - Except as otherwise provided in this Code, a corporation organized, authorized, or existing under the laws of any foreign country, engaged in trade or business within the Philippines, shall be subject to an income tax equivalent to twenty-five percent (25%) of the taxable income derived in the preceding taxable year from all sources within the Philippines effective July 1, 2020."
Section 125-A of the NIRC provides that a 5% gaming tax is imposed on gross gaming revenue or receipts from gaming, but also states that the taking of wagers made in the Philippines will result in the revocation of the offshore gaming license.
[[CASE HOLDING — Ltd v. Bureau Of Internal Revenue, G.R. No. 252965 (2021-12-07)]]
The Supreme Court explained that the placing of bets, the players, and the payment of prizes for offshore-based POGOs all occur outside the Philippines. The only connection to the Philippines is the requirement to engage PAGCOR-accredited local gaming agents and service providers, which are separate from the offshore-based POGO licensees.
The Supreme Court further clarified that while all POGO licensees are classified as doing business in the Philippines, foreign corporations are only taxed for income derived from sources within the Philippines. Offshore-based POGO licensees are only liable to pay income tax for income derived within the Philippines.
The Court stated that Section 42(A) of the NIRC provides the guidelines for determining what income is derived from sources within the Philippines, and Section 42(C) identifies what income is sourced without. For income derived from the sale of services, the determining factor is where the actual performance of the service occurs.
[[CASE HOLDING — Revenue v. Baier-Nickel, G.R. No. 153793 (2006-08-29)]]
The Supreme Court discussed that income may be derived from capital, labor, or the sale of capital assets.
The Court emphasized that for personal services, the source of income is determined by the place where the services were actually rendered.
Laws retrieved
Everything retrieval surfaced, not only what the answer relied on. Read the ones it quotes.
- Sec 23, The National Internal Revenue Code of 1997 as amended
- Sec 28, The National Internal Revenue Code of 1997 as amended
- Sec 22, The National Internal Revenue Code of 1997 as amended
- Sec 42, The National Internal Revenue Code of 1997 as amended
- Sec 125-A, The National Internal Revenue Code of 1997 as amended
- Sec 27, The National Internal Revenue Code of 1997 as amended
- Sec 108, The National Internal Revenue Code of 1997 as amended
"All these three components do not involve and are not performed within the Philippine territory. None of these components likewise deals with Filipino citizens. To reiterate, the placing of bets occurs outside the Philippines; the players must not be Filipino citizens, or within the Philippines; and the payment of the prize also occurs outside of the Philippines. Given the above, the only point of contact of an offshore-based POGO licensee to the Philippines is that it is required, pursuant to its OGL, to engage the services of PAGCOR-accredited local gaming agents and service providers for its offshore gaming o…
"A similar provision is found in Section 42 of our NIRC, thus: SEC. 42. x x x (A) Gross Income From Sources Within the Philippines. ... x x x x x x x (3) Services. - Compensation for labor or personal services performed in the Philippines; x x x x (C) Gross Income From Sources Without the Philippines. x x x x x x x (3) Compensation for labor or personal services performed without the Philippines; The following discussions on sourcing of income under the Internal Revenue Code of the U.S., are instructive: The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from thr…
Cases retrieved
Everything retrieval surfaced, not only what the answer relied on. Read the ones it quotes.