G.R. No. 172087 - Philippine Amusement and Gaming Corp. vs. Bureau of Internal Revenue

Case Summary (G.R. No. 172087)

Applicable Law and Legal Sources

Constitutional provisions applied: 1987 Constitution, specifically Article III, Section 1 (equal protection) and Section 10 (non-impairment of contracts); Article XII, Section 11 (franchise subject to amendment by Congress). Statutory framework: P.D. No. 1869 (PAGCOR charter and tax exemptions), R.A. No. 8424 (NIRC of 1997) — Section 27(c) and Section 108 (VAT provisions), and R.A. No. 9337 (amendments to the NIRC, including removal of PAGCOR from the list of GOCCs exempt from corporate income tax). Administrative issuance: BIR Revenue Regulations No. 16-2005 (implementing VAT provisions).

Key Dates

PAGCOR created and chartered by executive decrees during the 1970s and consolidated by P.D. No. 1869. NIRC (R.A. No. 8424) effective January 1, 1998. R.A. No. 9337 enacted May 24, 2005 (amending Section 27(c) and VAT provisions). BIR issued RR No. 16-2005 (implementing VAT provisions) on September 1, 2005. Petition for certiorari filed April 17, 2006; case resolved by the Court (decision referenced in the prompt).

Procedural Posture

PAGCOR filed a petition for certiorari and prohibition under Rule 65 seeking: (1) declaration that Section 1(c) of R.A. No. 9337 (which omitted PAGCOR from the list of GOCCs exempt from corporate income tax) is void for violating equal protection and the non-impairment clause; and (2) prohibition against implementing RR No. 16-2005 to the extent it subjects PAGCOR and its licensees/franchisees to 10% VAT. The BIR filed a comment; the OSG filed a manifestation in lieu of comment.

Undisputed Facts

PAGCOR’s charter (P.D. No. 1869) historically granted broad tax exemptions (direct and indirect) and a 5% franchise tax. Under R.A. No. 8424 (NIRC of 1997), Section 27(c) originally exempted several GOCCs, including PAGCOR, from corporate income tax. R.A. No. 9337 amended Section 27(c) by omitting PAGCOR from that enumeration. BIR’s RR No. 16-2005 expressly listed PAGCOR as a franchisee subject to the 10% VAT under Section 108 of the NIRC as amended.

Issues Presented

Whether Section 1(c) of R.A. No. 9337 (amending Section 27(c) of the NIRC) is void for violating the equal protection clause (Article III, Section 1).
Whether Section 1(c) of R.A. No. 9337 is void for violating the non-impairment of contracts clause (Article III, Section 10).
Whether RR No. 16-2005 (Section 4.108-3(h)) is void for exceeding the BIR’s authority by subjecting PAGCOR and its licensees/franchisees to 10% VAT when the basic law does not impose such VAT.

Contentions of the Parties

PAGCOR: The amendment removing its exemption from corporate income tax is unconstitutional (equal protection and non-impairment), and RR No. 16-2005 improperly imposes VAT on PAGCOR and its licensees contrary to the NIRC and prior jurisprudence.
BIR: R.A. No. 9337 and P.D. No. 1869 should be harmoniously construed; R.A. No. 9337 is constitutional; BIR regulations are presumed valid until struck down.
OSG: Concurred with PAGCOR’s arguments regarding RR No. 16-2005 exceeding statutory authority and noted that tax laws must operate uniformly among similarly situated subjects.

Court’s Analysis — Effect of R.A. No. 9337 on Corporate Income Tax Exemption

The Court found that Section 1 of R.A. No. 9337 effectively removed PAGCOR from the specific exemption list in Section 27(c) of the NIRC; PAGCOR is therefore no longer exempt from corporate income tax under the amended statutory text. Legislative history (bicameral conference records) showed PAGCOR’s original exemption in R.A. 8424 derived from PAGCOR’s own request rather than a classification supported by substantial distinctions. The express inclusion of specific GOCCs in R.A. 8424 invoked expressio unius est exclusio alterius, such that omission of PAGCOR under R.A. 9337 means it falls within the general rule requiring GOCCs to pay corporate income tax.

Court’s Analysis — Equal Protection Claim

Applying the equal protection framework (as explained in City of Manila v. Laguio, Jr.), the Court observed that classifications by the legislature are permissible if reasonable and non-arbitrary — requiring substantial distinctions, germane purpose, applicability beyond existing conditions, and equal application within the class. The Court concluded that PAGCOR’s original exemption lacked such classification rationale (it was granted upon request), so PAGCOR could not successfully invoke the equal protection clause to resist the removal of its statutory exemption.

Court’s Analysis — Non-Impairment (Contracts) Claim

The Court rejected PAGCOR’s non-impairment argument. The non-impairment clause protects contractual obligations against legislative laws that alter private contracts; it does not shield franchises from legislative amendment. Article XII, Section 11 expressly conditions franchises on congressional power to amend, alter, or repeal when the common good requires. The Court relied on precedent (Manila Electric Company v. Province of Laguna) distinguishing franchise-granted exemptions from contractual obligations binding the State acting in a private capacity (e.g., government bonds). Because PAGCOR’s tax exemption was granted in its franchise and franchises are subject to congressional amendment, R.A. No. 9337’s removal of the exemption did not violate the non-impairment clause.

Court’s Analysis — Validity of RR No. 16-2005 Re VAT

The Court held RR No. 16-2005 invalid insofar as it subjects PAGCOR to the 10% VAT. R.A. No. 9337’s amendments addressed removal of the corporate income tax exemption but did not add PAGCOR to the VAT base; moreover, R.A. No. 9337 retained Section 108(B)(3) (zero-rating services rendered to persons/entities whose exemption under special laws effectively subjects supplied services to 0% rate) and R.A. No. 9337’s Section 7(k) exempting transactions covered by special laws. PAGCOR’s charter (P.D. No. 1869) provides a broad exemption from taxes — interpreted to include indirect taxes such as VAT and to extend to persons or entities contracting with PAGCOR. The Court relied on precedent (Commissioner v. Acesite and John Gotamco) that recognized extensions of exemption to contractors/lessors transacting with tax-

Case Syllabus (G.R. No. 172087)

Citation and Forum

Reported as 660 Phil. 636, En Banc.
G.R. No. 172087; Decision dated March 15, 2011.
Decision authored by Justice Peralta, En Banc.

Nature of the Petition and Reliefs Sought

Petition for Certiorari and Prohibition under Rule 65 of the Rules of Court, filed April 17, 2006, by petitioner Philippine Amusement and Gaming Corporation (PAGCOR).
Petitioner sought declaration of nullity of Section 1 of Republic Act No. 9337 insofar as it amends Section 27(c) of the National Internal Revenue Code of 1997 by excluding PAGCOR from exemption from corporate income tax, on the ground that the amendment is repugnant to Sections 1 and 10, Article III of the 1987 Constitution.
Petitioner further prayed for prohibition against implementation of BIR Revenue Regulations No. 16-2005 (RR No. 16-2005), alleging the regulation is contrary to law.
Prayer included issuance of Temporary Restraining Order and/or Preliminary Injunction.

Undisputed Factual Background

PAGCOR was created by Presidential Decree No. 1067-A, effective January 1, 1977.
P.D. No. 1067-B (supplementing P.D. No. 1067-A) concurrently granted tax exemptions to PAGCOR, subject only to a franchise tax of 5% of gross revenue.
P.D. No. 1399 (June 2, 1978) expanded PAGCOR’s exemptions.
P.D. No. 1869 consolidated and amended prior PAGCOR franchise laws; Section 13 of P.D. 1869 contained comprehensive exemptions including:
- (1) Exemption from customs duties, taxes and imposts on importations for equipment and gambling paraphernalia used exclusively by casinos.
- (2)(a) A blanket exemption from “No tax of any kind or form, income or otherwise,” except a 5% franchise tax on gross revenue; such franchise tax to be in lieu of all kinds of taxes, levies, fees or assessments.
- (2)(b) Extension of the franchise-holder exemption to corporations, associations, agencies, or individuals contracting with PAGCOR or receiving remuneration for essential facilities/technical services rendered to PAGCOR or its operator.
- (3) Dividend-income provisions subject to special rules and incentives.
PAGCOR’s tax exemption was removed by P.D. No. 1931 (June 1984) but restored by Letter of Instruction No. 1430 (September 1984).
R.A. No. 8424 (National Internal Revenue Code of 1997) took effect January 1, 1998; Section 27(c) originally provided that GOCCs shall pay corporate income tax except GSIS, SSS, PHIC, PCSO, and PAGCOR — i.e., PAGCOR was expressly exempted from corporate income tax by Section 27(c) of R.A. No. 8424.
R.A. No. 9337 (enacted May 24, 2005) amended certain sections of the Tax Code, including Section 27(c); Section 1 of R.A. No. 9337 amended Section 27(c) by removing PAGCOR from the enumeration of GOCCs exempt from corporate income tax (PAGCOR was omitted in the amended text).
Various parties filed constitutional challenges to R.A. No. 9337; on September 1, 2005, the Court dismissed the petitions and upheld the constitutionality of R.A. No. 9337 (see Abakada Guro Party List v. Ermita).
On September 1, 2005, the BIR promulgated Revenue Regulations No. 16-A-2005 (RR No. 16-2005) implementing the VAT provisions and specifically identified PAGCOR as among franchisees subject to 10% VAT under Section 108 of the Tax Code, as amended by R.A. No. 9337 (Sec. 4.108-3(h) of RR No. 16-2005 named PAGCOR and its licensees/franchisees).
Prior jurisprudence included the Court’s decision in Commissioner of Internal Revenue v. Acesite (Philippines) Hotel Corporation, where PAGCOR’s VAT-exempt status and extension of exemption to entities dealing with PAGCOR were discussed.

Procedural History Before This Court

Multiple petitions assailed R.A. No. 9337 on various constitutional grounds (e.g., separation of powers on tax rates, equal protection, procedural concerns); these were addressed in consolidated proceedings and dismissed with R.A. No. 9337 upheld.
Following the BIR’s issuance of RR No. 16-2005, PAGCOR filed the present Rule 65 petition challenging (1) constitutionality of Section 1(c) of R.A. No. 9337 under equal protection and non-impairment clauses; and (2) validity and scope of RR No. 16-2005 insofar as it imposed VAT on PAGCOR and its licensees/franchisees.
The BIR filed a Comment contending that R.A. No. 9337 and P.D. No. 1869 are harmonious and valid, and that BIR regulations are presumed valid.
The Office of the Solicitor General filed a Manifestation in Lieu of Comment concurring with the petitioner’s arguments and asserting that RR No. 16-2005 exceeded BIR’s authority.

Issues Presented (as framed by petitioner)

I. Whether Section 1(c) of R.A. No. 9337 is null and void ab initio for being repugnant to the Equal Protection Clause (Section 1, Article III) of the 1987 Constitution.
II. Whether Section 1(c) of R.A. No. 9337 is null and void ab initio for being repugnant to the Non-Impairment Clause (Section 10, Article III) of the 1987 Constitution.
III. Whether RR No. 16-2005, Sec. 4.108-3(h) is null and void ab initio for exceeding the scope of the basic law (R.A. No. 8424, Section 108, as amended), inasmuch as the Regulation imposed VAT on PAGCOR and its licensees/franchisees when the basic law, as interpreted by jurisprudence, does not impose VAT on PAGCOR or its licensees/franchisees.

Positions and Arguments of the Parties

Petitioner (PAGCOR):
- Contended that omission of PAGCOR from Section 27(c) (via R.A. No. 9337) violated equal protection under Section 1, Article III because PAGCOR was singled out.
- Argued that R.A. No. 9337 impaired contractual relations and the inducements relied upon by private parties who transacted with PAGCOR (invoking the non-impairment clause, Section 10, Article III).
- Asserted that RR No. 16-2005 exceeded the BIR’s authority by subjecting PAGCOR and its licensees/franchisees to 10% VAT, contrary to the basic law and controlling jurisprudence.
Bureau of Internal Revenue (Public Respondent):
- Argued that Section 1 of R.A. No. 9337 and Section 13(2) of P.D. No. 1869 are valid and should be harmoniously construed.
- Maintained that Section 1 of R.A. No. 9337 is not violative of Sections 1 and 10, Article III of the Constitution.
- Asserted that BIR revenue regulations are presumptively valid until struck down by lawful authority.
Office of the Solicitor General (OSG):
- Concurred with petitioner that R.A. No. 9337’s amendments should be construed as excluding PAGCOR from exemption and that the BIR exceeded authority in RR No. 16-2005.
- Emphasized that a tax law must operate with the same force and effect to all persons similarly situated and that inequity arising from singling out a class does not automatically equate to constitutional infirmity, but classification must be reasonable.

Relevant Statutory and Charter Provisions Considered

P.D. No. 1067-A and P.D. No. 1067-B: creation of PAGCOR and initial exemptions; franchise tax of 5% provided as in-lieu tax.
P.D. No. 1399: expansion of exemptions in P.D. No. 1067-B.
P.D. No. 1869 (consolidating P.D.s 1067-A, 1067-B, 1399, 1632): Section 13 provided broad exemptions — customs duties; income and other taxes with exception of 5% franchise tax; extension of exemption to contractors and persons dealing with PAGCOR; dividend rules.
R.A. No. 8424 (National Internal Revenue Code of 1997): Section 27(c) originally exempted certain GOCCs including PAGCOR from corporate income tax.
R.A. No. 9337 (May 24, 2005): amended various provisions of the Tax Code; Section 1 amended Section 27(c) to exclude PAGCOR from the list of GOCCs exempted from corporate income tax; Section 7(k) and Section 6 (amending Section 108) retained and/or preserved exemptions for transactions exempt under special laws and zero-percent rules for services rendered to entities whose exemption under special laws effectively subjects such supplies to 0% rate.
RR No. 16-2005 (BIR): Implementing regulation identifying PAGCOR and its licensees/franchisees as subject to 10% VAT under amended Section 108; Sec. 4.108-3(h) explicitly include