G.R. No. 252965

G.R. No. 252965/G.R. No. 254102, December 7, 2021,
♦ Decision, Gaerlan, [J]
♦ Concurring and Dissenting Opinion, Perlas-Bernabe, [J]
♦ Dissenting Opinion, Leonen, [J]
♦ Dissenting Opinion, Lazaro-Javier, [J]

SAINT WEALTH LTD., AS REPRESENTED BY DAVID BUENAVENTURA & ANG LAW OFFICES, PETITIONER, VS. BUREAU OF INTERNAL REVENUE, HEREIN REPRESENTED BY HON. CAESAR R. DULAY, IN HIS CAPACITY AS COMMISSIONER OF THE BUREAU OF INTERNAL REVENUE, AND JOHN DOES AND JANE DOES, AS PERSONS ACTING FOR, IN BEHALF, OR UNDER THE AUTHORITY OF RESPONDENTS, RESPONDENTS.

MARCO POLO ENTERPRISES LIMITED, MG UNIVERSAL LINK LIMITED, OG GLOBAL ACCESS LIMITED, PRIDE FORTUNE LIMITED, VIP GLOBAL SOLUTIONS LIMITED, AG INTERPACIFIC RESOURCES LIMITED, WANFANG TECHNOLOGY MANAGEMENT LTD., IMPERIAL CHOICE LIMITED, BESTBETINNET LIMITED, RIESLING CAPITAL LIMITED, GOLDEN DRAGON EMPIRE LTD., ORIENTAL GAME LIMITED, MOST SUCCESS INTERNATIONAL GROUP LIMITED, AND HIGH ZONE CAPITAL INVESTMENT GROUP LIMITED, PETITIONERS, VS. THE SECRETARY OF FINANCE, IN THE PERSON OF CARLOS G. DOMINGUEZ III AND THE COMMISSIONER OF INTERNAL REVENUE IN THE PERSON OF CAESAR R. DULAY, RESPONDENTS.

These are consolidated petitions for certiorari and prohibition with urgent prayer for the issuance of a temporary restraining order (TRO) and/or preliminary injunction (Consolidated Petitions),1 seeking to annul and set aside: (1) Section 11(f) and (g) of Republic Act (R.A.) No. 11494 (Bayanihan 2 Law); (2) Revenue Regulation (RR) No. 30-2020 (RR No. 30-2020) of the Department of Finance (DOF) and the Bureau of Internal Revenue (BIR); (3) Revenue Memorandum Circular (RMC) No. 64-2020 (RMC No. 64-2020) of the BIR; (4) RMC No. 102-2017 of the BIR; and (5) RMC No. 78-2018 of the BIR (the Assailed Tax Issuances).

In 1983, Presidential Decree No. 1869 (PAGCOR Charter) was enacted, consolidating all laws relative to the franchise and powers of the Philippine Amusement and Gaming Corporation (PAGCOR).2 Under Section 10 of the PAGCOR Charter, PAGCOR is granted rights, privileges, and authority to operate and license gambling casinos, gaming clubs, and other similar recreation or amusement places within the territorial jurisdiction of the Philippines.3

From 2016, the Philippines began regulating online gaming hubs, specifically the Philippine Offshore Gaming Operators (POGOs). Thus, on September 1, 2016, the PAGCOR issued the Rules and Regulations for Philippine Offshore Gaming Operations (POGO Rules and Regulations).4

The POGO Rules and Regulations defines offshore gaming as "the offering by a licensee of PAGCOR authorized online games of chance via the internet using a network and software or program, exclusively to offshore authorized players excluding Filipinos abroad, who have registered and established an online gaming account with the licensee."5 Moreover, the POGO Rules and Regulations explains that offshore gaming has three components:

The POGO Rules and Regulations further provides that POGOs must register with PAGCOR. Upon registration, the POGO is given an Offshore Gaming License (OGL). Entities who may be given an OGL are either: (1) Philippine-based operators; or (2) offshore-based operators. Philippine-based operators are corporations organized in the Philippines which will either conduct offshore gaming operations themselves or engage the services of PAGCOR-accredited service providers. Meanwhile, offshore-based operators are corporations organized in any foreign country which will engage the services of PAGCOR-accredited local gaming agents and/or service providers for its offshore gaming operations.7

POGO licensees are likewise required to pay several monthly regulatory fees. Thus, from these regulatory fees alone, PAGCOR is able to generate billions of pesos in revenues.

On December 27, 2017, the BIR issued RMC No. 102-2017, entitled "Taxation of Taxpayers Engaged in Philippine Offshore Gaming Operations," which recognized that online activity is sufficient to constitute doing business in the Philippines, and clarified the taxability of POGOs. Under RMC No. 102-2017, POGOs may either be classified as Licensees (Philippine-based or offshore-based) or Other Entities (such as local gaming agents and other service providers).

Further, RMC No. 102-2017 outlines the tax treatments for Licensees and Other Entities, to wit:

Thus, under RMC No. 102-2017, Licensees must pay a five percent (5%) franchise tax, in lieu of all other taxes, for their income arising from their gaming operations. Such franchise tax is based on their entire gross gaming revenues. Meanwhile, for income arising from non-gaming operations, Licensees must pay normal income tax, value-added tax (VAT), and other applicable taxes.8

On the other hand, Other Entities, who must also be registered with PAGCOR, are subject to five percent (5%) franchise tax for income arising from gaming operations, and normal income tax, VAT, and other applicable taxes for income arising from non-gaming operations. Other Entities deriving income solely from non-gaming operations shall be liable to pay normal income tax, VAT, and other applicable taxes.9

Thereafter, to implement RMC No. 102-2017, the BIR issued RMC No. 78-2018 dated September 7, 2018, entitled "Registration Requirements of Philippine Offshore Gaming Operators and Its Accredited Service Providers," which reiterated that online activity is sufficient to do business in the Philippines and considered POGOs as "Resident Foreign Corporation Engaged in Business in the Philippines." As such, RMC No. 78-2018, requires all offshore-based and Philippine-based POGO licensees to register with the BIR.10

At the start of 2020, the COVID-19 pandemic hit the Philippines, which brought about the closure of several business establishments and industries. Sometime in mid-2020, the Philippines began relaxing community quarantine restrictions, and the government started allowing some industries to operate, including POGOs. Thus, on May 7, 2020, the BIR issued RMC No. 46-2020, entitled "Guidelines & Requirements for POGO Licensees and Service Providers in the Application of a BIR Clearance for the Resumption of Operations." Under RMC No. 46-2020, POGOs must comply with the following conditions and submit the following documents before they can resume their operations:

On June 24, 2020, the BIR issued RMC No. 64-2020, revising RMC 46-2020, as follows:

On September 11, 2020, the Bayanihan 2 Law, entitled "An Act Providing for COVID-19 Response and Recovery Interventions and Providing Mechanisms to Accelerate the Recovery and Bolster the Resiliency of the Philippine Economy, Providing Funds Therefor, and For Other Purposes," was enacted as an emergency response law to address the COVID-19 pandemic. Section 11 of the Bayanihan 2 Law outlines the sources of funding for the COVID-19 measures to be undertaken by the government.11 Among others, Section 11 mentions a five percent (5%) franchise tax based on the gross bets or turnovers earned by POGOs:

To implement Section 11(f) and (g) of the Bayanihan 2 Law, the BIR and the DOF issued RR No. 30-2020 dated September 30, 2020, which provides:

On August 24, 2020, Saint Wealth Ltd. (Saint Wealth), an offshore-based POGO licensee, filed a Petition for Certiorari and Prohibition [With Application for a Temporary Restraining Order and/or Writ of Preliminary Injunction] (the Saint Wealth Petition), assailing the constitutionality of RMC No. 64-2020, and praying for the issuance of a TRO and/or writ of preliminary injunction to enjoin the enforcement of the same.

According to Saint Wealth, RMC No. 64-2020 should be invalidated based on the following arguments:

First, RMC No. 64-2020 violates Saint Wealth's constitutional right to due process because when the BIR issued RMC No. 64-2020, in relation to RMC No. 102-2017, the BIR arrogated upon itself the power to determine the classification and taxability of POGOs, notwithstanding the absence of any tax law passed by Congress.13 Therefore, the issuance of RMC No. 64-2020 and RMC No. 102-2017, with respect to the imposition of franchise tax on off-shore based POGO licensees, is an invalid exercise of quasi-legislative powers on the part of the BIR, and consequently, is a violation of POGO licensees' constitutional right to due process.14

Second, RMC No. 64-2020 violates the equal protection clause. Under RMC No. 64-2020, Saint Wealth, an offshore-based POGO licensee, is treated as if it is similarly situated with Philippine-based casino providers.15 However, there exists a reasonable classification between offshore-based POGO licensees and Philippine-based entities that justifies a difference in treatment:

Considering that a reasonable classification exists between Saint Wealth, an offshore-based POGO licensee, and Philippine-based operators, the BIR should treat them differently and should not impose similar tax liabilities on these different classes of entities.17

Third, RMC No. 64-2020 violates the fundamental principle of situs of taxation. Saint Wealth is a non-resident foreign corporation. Under Philippine tax laws, specifically the National Internal Revenue Code (NIRC), non-resident foreign corporations are only liable to pay taxes on income received from sources within the Philippines. However, Saint Wealth's income is derived from sources outside the Philippines since all of its operations are located abroad. Therefore, it should not be subjected to any Philippine tax.18

Fourth, RMC No. 64-2020 violates the rule on uniformity of taxation. Since offshore-based POGO licensees are differently situated from Philippine-based casino providers, offshore-based POGO licensees, including Saint Wealth, should be taxed differently. Moreover, RMC No. 64-2020 likewise violates the rule on uniformity of taxation because it treats differently offshore-based POGO licensees from other foreign corporations which are not engaged in trade or business in the Philippines. RMC No. 64-2020 imposes several tax liabilities, including taxes on income derived from sources abroad, upon offshore-based POGO licensees, while other foreign corporations are not being imposed with such taxes.19

Meanwhile, as regards Saint Wealth's prayer for the issuance of injunctive relief, Saint Wealth alleged that all the requisites for the issuance of such relief are present because: (1) the issuance of RMC No. 64-2020 violates its right to due process and equal protection, and RMC No. 64-2020 likewise violates the principles of situs and uniformity of taxation; (2) there is an urgent need for injunctive relief to prevent the BIR from unduly collecting taxes from Saint Wealth; and (3) there is no other ordinary, speedy, or adequate remedy to prevent the infliction of irreparable injury, except for the issuance of a TRO and/or a writ of preliminary injunction.20

On November 19, 2020, offshore-based POGO licensees, namely: (1) Marco Polo Enterprises Limited; (2) MG Universal Link Limited; (3) OG Global Access Limited; (4) Pride Fortune Limited; (5) VIP Global Solutions Limited: (6) AG Interpacific Resources Limited; (7) Wanfang Technology Management Ltd.; (8) Imperial Choice Limited; (9) Bestbetinnet Limited; (10) Riesling Capital Limited; (11) Golden Dragon Empire Ltd.; (12) Oriental Game Limited; (13) Most Success International Group Limited; and (14) High Zone Capital Investment Group Limited (collectively referred to as Marco Polo petitioners) filed a Petition for Certiorari and Prohibition (With Application for Temporary Restraining Order/Writ of Preliminary Injunction) (the Marco Polo Petition), assailing the constitutionality of Section 11(f) and (g) of the Bayanihan 2 Law, RR No. 30-2020, RMC No. 102-2017, and RMC No. 78-2018.

First, Section 11(f) and (g) of the Bayanihan 2 Law are unconstitutional for being riders. They are violative of Article VI, Section 26(1) of the 1987 Constitution because they go beyond and are not germane to the subject matter of the Bayanihan 2 Law:21

Second, Section 11(f) of the Bayanihan 2 Law violates substantive due process, and is arbitrary and confiscatory:24

Third, Section 11(f) of the Bayanihan 2 Law is repugnant to substantive due process because it whimsically disregards the principle of territoriality in taxation:27

Fourth, Section 11(f) of the Bayanihan 2 Law violates the equal protection clause:29

Fifth, Section 11(g) of the Bayanihan 2 Law is also unconstitutional because it whimsically disregards the principle of territoriality in taxation. Similar to Section 11(f) of the Bayanihan 2 Law, Section 11(g) also violates the principle of territoriality in taxation because it taxes "non-gaming" income of offshore-based POGO licensees derived from sources abroad. Section 11(g) likewise disregards the destination principle because it imposes VAT on goods and services which are consumed outside the territory of the Philippines.32

Sixth, Section 11(g) of the Bayanihan 2 Law likewise violates the equal protection clause. There is no substantial distinction or justification to treat offshore-based POGO licensees differently and to tax them on income from sources abroad when other foreign corporations are only taxed on income derived from sources within the Philippines. There is likewise no substantial distinction or justification to charge offshore-based POGO licensees with VAT for their sale of goods and services destined for abroad. Further, the discrimination against offshore-based POGO licensees is not germane to the purpose of the Bayanihan 2 Law because such discrimination has no relation to the law's purpose as a COVID-19 temporary relief measure.33

Seventh, since Section 11(f) and (g) of the Bayanihan 2 Law are unconstitutional, RMC No. 30-2020 is also unconstitutional because it has no statutory basis and/or mandate of any existing law.34

Ninth, RMC No. 102-2017 is confiscatory and violates the equal protection clause. Similar to the provisions of the Bayanihan 2 Law, RMC No. 102-2017 discriminates against offshore-based POGO licensees, making them the only foreign corporations subject to taxes for income abroad, therefore, violating the principle of territoriality. There is also no substantial distinction or justification to treat offshore-based POGO licensees differently and tax them on income from sources abroad when other foreign corporations are not subjected to the same.38

Tenth, RMC No. 78-2018, which imposed registration requirements pursuant to the taxes imposed under RMC No. 102-2017, is void for having been issued without statutory basis and/or for being unconstitutional. Since RMC No. 102-2017 is unconstitutional and void, it follows that RMC No. 78-2018, which imposes registration requirements to enforce RMC No. 102-2017, is likewise unconstitutional and void.39

The Marco Polo Petition likewise prayed for the issuance of a TRO and/or writ of preliminary injunction.40 In support of its application for the issuance of a TRO and/or writ of preliminary injunction, the Marco Polo Petition made the following arguments:

On January 5, 2021, a TRO45 was issued in favor of the Marco Polo petitioners. The TRO enjoined the implementation of: (1) Section 11(f) and (g) of the Bayanihan 2 Law; (2) RR No. 30-2020; (3) RMC No. 102-2017; and (4) RMC No. 78-2018.

On January 15, 2021, the DOF Secretary and the BIR Commissioner (respondents), through the Office of the Solicitor General (OSG), filed their Consolidated Comment46 to the Consolidated Petitions.

In the Consolidated Comment, the respondents raised several procedural and substantive issues.

With regard to the procedural issues, the respondents argued that the Consolidated Petitions did not present an actual justiciable controversy. Moreover, the respondents contended that resort to a petition for certiorari and prohibition was improper, and a facial challenge is not permitted to assail the provisions of the Bayanihan 2 Law and the BIR issuances. Finally, the respondents alleged that the Consolidated Petitions violated the doctrine of hierarchy of courts, and exhaustion of administrative remedies.47

First, Section 11(f) and (g) of the Bayanihan 2 Law does not violate the "one subject, one title rule" under Article VI of the Constitution:

Second, Section 11(f) and (g) of the Bayanihan 2 Law, as well as the Assailed Tax Issuances, do not violate the petitioners' right to due process:51

Third, Section 11(f) and (g) of the Bayanihan 2 Law, as well as the Assailed Tax Issuances, do not violate the equal protection clause.56 There exists a reasonable classification between offshore-based POGO licensees and other foreign corporations that justifies the difference in treatment under the Bayanihan 2 Law:

Fourth, the tax impositions on POGO licensees do not violate the principles of situs and uniformity of taxation:61

In the Consolidated Comment, the respondents likewise moved for the reconsideration of the issuance of the TRO. The respondents argued that the requisites for the issuance of a TRO were not met because:

On September 22, 2021, President Rodrigo Duterte signed R.A. No. 11590, entitled "An Act Taxing Philippine Offshore Gaming Operations, Amending for the Purpose Sections 22, 25, 27, 28, 106, 108, and Adding New Sections 125-A and 288-G of the National Internal Revenue Code of 1997, As Amended, And For Other Purposes."

R.A. No. 11590 categorically classifies POGO licensees, whether Philippine-based or offshore-based as corporations "engaged in doing business in the Philippines."70 R.A. No. 11590 likewise imposes a five percent (5%) gaming tax on the income of POGOs derived from their gaming operations.71 Such gaming tax is based on the entire gross gaming revenue or receipts or the agreed predetermined minimum monthly revenue, whichever is higher:

As regards income derived from non-gaming operations, R.A. No. 11590 imposes a 25% income tax on Philippine-based POGOs for their income derived from sources within and without the Philippines.72 On the other hand, for offshore-based POGO licensees, they are subject to 25% income tax for their income only from sources within the Philippines:73

Finally, with respect to the imposition of VAT, R.A. No. 11590 provides that sales of goods and properties to POGOs, as well as services rendered to POGOs by service providers, shall be subject to zero percent (0%) rate. 74

This Court is tasked to tackle the following pivotal issues: (1) whether offshore-based POGO licensees are liable to pay a five percent (5%) franchise tax for income derived from their gaming operations; and (2) whether offshore-based POGO licensees are liable to pay income tax, VAT, and other applicable taxes for income derived from their non-gaming operations.

Prefatorily, it is worthy to note that the Consolidated Petitions appear to have been rendered moot by the enactment of R.A. No. 11590, which categorically imposes the following taxes on offshore-based POGO licensees, such as the petitioners:

R.A. No. 11590 similarly states that all laws, rules and regulations, including the Bayanihan 2 Law, which are contrary to or inconsistent with any provision of the same are repealed and modified accordingly.75

In Jacinto-Henares v. St. Paul College of Makati,76 this Court explained the principle of mootness in this wise:

With the enactment of R.A. No. 11590, a supervening event has transpired which directly addressed the pivotal issues raised in the Consolidated Petitions because a valid law has been passed clarifying the taxability of POGOs, including offshore-based POGO licensees, and imposing the applicable taxes thereon.

Nevertheless, this Court finds it imperative to resolve the instant case vis-à-vis the petitioners' tax liabilities prior to the passage of R.A. No. 11590, and to discuss the substantive issues raised by the petitioners. As succinctly held in David v. Macapagal-Arroyo,78 this Court may still decide a case, which is otherwise moot and academic, when constitutional issues raised require the formulation of controlling principles to guide the bench, the bar, and the public:

Here, the petitioners raise, among others, genuine issues on the constitutionality of Section 11(f) and (g) of the Bayanihan 2 Law. Thus, this Court is impelled to consider and resolve the Consolidated Petitions to provide guidance as to the tax liabilities of offshore-based POGO licensees, including the petitioners, prior to the passage of R.A. No. 11590.

The PAGCOR Charter Imposes a Franchise Tax upon its Licensees on Revenues Derived from Gaming Operations, and Income Tax, VAT, and Other Applicable Taxes on Revenues Derived from Non-Gaming Operations.

Under Section 13(2)(a) of the PAGCOR Charter, PAGCOR is exempt from the payment of any and all taxes on its income derived from gaming operations, except for a five percent (5%) franchise tax on its gross revenues or earning:

Such exemption extends to PAGCOR's licensees pursuant to Section 13(2)(b) of the PAGCOR Charter, which provides:

Considering the above-cited provisions, this Court clarified in Bloomberry Resorts and Hotels, Inc. v. Bureau of Internal Revenue (Bloomberry),80 that PAGCOR's tax privilege of paying only a five percent (5%) franchise tax for income generated from its gaming operations, in lieu of all other taxes, inures to the benefit of PAGCOR's licensees:

Clearly, both law and jurisprudence mandate that PAGCOR's licensees are only liable to pay a five percent (5%) franchise tax for income derived from its gaming operations. However, a plain reading of the PAGCOR Charter and the ruling in Bloomberry shows that the liability of paying the five percent (5%) franchise tax only applies to PAGCOR's licensees which are connected to the operations of casinos and other related amusement places.

Stated differently, the payment of this five percent (5%) franchise tax only applies to PAGCOR licensees which operate casinos and other related amusement places, and excludes those licensees who derive profit from other means, such as POGOs. Thus, POGOs, including offshore-based POGO licensees, are not taxed under the PAGCOR Charter.

Prior to the Bayanihan 2 Law, there is No Law which Imposes a Five Percent (5%) Franchise Tax on POGO Licensees.

To recall, in 2017, the BIR issued RMC No. 102-2017, which is the first issuance which dealt with the taxability of POGOs. RMC No. 102-2017 imposed, among others, a five percent (5%) franchise tax upon the gross gaming revenues derived from gaming operations of POGOs. Supposedly, such franchise tax is based on the PAGCOR Charter and settled jurisprudence.

However, as stated above, the franchise tax liability of PAGCOR licensees only applies to those which operate casinos and other related amusement places. It is undeniable that POGOs do not fall within the contemplation of licensees who operate casinos and other related amusement places. The PAGCOR Charter is clear, and when a law is clear, there is no room for any interpretation.

Moreover, as aptly observed by Senior Associate Justice Estela Perlas-Bernabe (Justice Perlas-Bernabe), when the PAGCOR Charter was enacted, offshore gaming was not yet in existence. Thus, the PAGCOR Charter could not have contemplated virtual gaming websites as "casinos and other related amusement places" mentioned under Section 13(2)(b) thereof. Consequently, the PAGCOR Charter cannot be said to have been the basis for imposing tax on POGO Licensees.82

Simply then, when RMC No. 102-2017 was issued, there was no law imposing any franchise tax on POGOs. Thus, RMC No. 102-2017 is invalid, insofar as it imposed franchise taxes on POGOS, because it was passed without any statutory basis.

Likewise, as pointed out by Associate Justice Alfredo Benjamin Caguioa (Justice Caguioa),83 RMC No. 102-2017 is likewise invalid and unconstitutional because it effectively amended the PAGCOR Charter when it imposed taxes on entities not taxed under the law. It must be emphasized that the State's inherent power to tax is exclusively vested in Congress.84 Without such imprimatur from Congress, the BIR cannot arrogate upon itself the authority to impose taxes, especially because "[t]he rule is that a tax is never presumed and there must be clear language in the law imposing the tax. Any doubt whether a person, article or activity is taxable is resolved against taxation."85

Moreover, the BIR cannot enlarge or go beyond the provisions of the law it administers. As held in Purisima v. Lazatin (Purisima):86

Indeed, the ruling in Purisima applies squarely in this case. The BIR encroached upon the authority reserved exclusively for Congress when it issued RMC No. 102-2017 and imposed a five percent (5%) franchise tax upon POGOs when the PAGCOR Charter itself does not tax POGOs. RMC No. 102-2017 likewise failed to indicate which provisions of the PAGCOR Charter it was implementing when it imposed the franchise tax. Accordingly, RMC No. 102-2017, and consequently, RMC No. 78-2018, insofar as they imposed franchise taxes on POGOS, are invalid and unconstitutional for being issued without any statutory basis and for encroaching upon legislative power to enact tax laws.

The BIR can only Impose Income Tax Upon Income Derived from the Philippines; VAT can only be Imposed for Services and Goods Consumed in the Philippines.

Apart from franchise tax, RMC No. 102-2017 likewise imposed income tax, VAT, and other applicable taxes on offshore-based POGO licensees upon their income derived from non-gaming operations or other related services.

"Income from Other Related Services" is defined by RMC No. 102-2017 as "income or earning realized or derived not from gaming operations but from such other necessary and related services, shows, and entertainment."87

At this juncture, it is vital to recall that the principle of taxation is an inherent attribute of sovereignty. As stated by Justice Perlas-Bernabe, taxation emanates from necessity,88 and is grounded on a mutually advantageous relationship between the State and those it governs; every person surrenders a portion of their income for the running of the government, and the government in turn, provides tangible and intangible benefits to serve and protect those within its jurisdiction.89 Similarly, Associate Justice Japar B. Dimaampao (Justice Dimaampao) cited the principle of equality in taxation, which states that the subjects of every state ought to contribute towards the support of the government, as nearly as possible, in proportion to their respective abilities; that is, in proportion to the revenue which they respectively enjoy under the protection of the state.90

Thus, it is within the context of whether or not POGOs, particularly offshore-based POGO licensees, enjoy the protection of the State that this Court must determine whether the Philippines may impose taxes upon them.

To resolve this query, it is vital to understand the services performed by offshore-based POGO licensees to determine how they operate and how they derive revenues.

Under the POGO Rules and Regulations, POGOs are entities which provide and participate in offshore gaming services. As stated above, offshore gaming refers to "the offering by a licensee of PAGCOR authorized online games of chance via the Internet using a network and software or program, exclusively to offshore authorized players excluding Filipinos abroad, who have registered and established an online gaming account with the licensee."91 Offshore gaming has three components:

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 operations.93 These service providers are separate and distinct entities from the offshore-based POGO licensees. Simply put, the only transaction entered into by these offshore-based POGO licensees are the service contracts with these service providers located in the Philippines.

Because of the supposed continuing presence (through transacting with service providers) of offshore-based POGO licensees in the Philippines, the BIR has categorized offshore-based POGO licensees as resident foreign corporations. Notably, R.A. No. 11590 likewise classifies all POGO licensees, including offshore-based POGO licensees as corporations "engaged in doing business in the Philippines." Nevertheless, the NIRC provides that foreign corporations are only taxed for income derived in the Philippines:

In fact, R.A. No. 11590 likewise categorically provides that offshore-based POGO licensees are only liable to pay income tax for income derived within the Philippines.

As mentioned by Justice Perlas-Bernabe, Section 42(A)94 of the NIRC provides the guidelines in determining what income is derived from sources within the Philippines, while Section 42(C)95 thereof identifies what income is sourced without. In explaining the concept of "source" vis-à-vis taxation, this Court stated in Manila Gas Corporation v. Collector of Internal Revenue:96 "[t]he word 'source' conveys only one idea, that of origin, and the origin of the income was the Philippines." Thus, the test is to determine if the income originated from the Philippines.97

A reading of Section 42(A) and (C) of the NIRC makes it clear that for income derived from the sale of services, the focal point is where the actual performance of the service occurs. In this regard, the seminal case of Commissioner of Internal Revenue v. British Overseas Airways Corporation (BOAC)98 is instructive to understand the precise aspect of the activity which triggers the taxable event, viz.:

Thus, as observed by Justice Perlas-Bernabe, in BOAC, the Court held that, while the actual transportation would occur outside the Philippines, the sale of tickets in the Philippines already constituted a taxable activity.100 In this regard, in Commissioner of Internal Revenue v. Baier-Nickel (Baier-Nickel),101 this Court expounded on its ruling in BOAC, and clarified that the "source" of income is not determined by where income is disbursed or physically received, but rather, where the business activity that produced such income is actually conducted:

Applying the rulings of BOAC and Baier-Nickel to the instant case, it appears that offshore-based POGO licensees derive no income from the sources within the Philippines because the "activity" which produces income occurs and is located outside the territory of the Philippines. Indeed, the flow of wealth or the income-generating activity – the placing of bets less the amount of payout – transpires outside the Philippines.

Pertinently, apart from the disquisitions found in BOAC and Baier-Nickel, Justice Dimaampao also observed the necessity to discuss the other jurisprudential tests to ascertain whether a resident foreign corporation is "doing" or "engaging in" or "transacting" business in the Philippines, to determine the taxability of POGOs, particularly offshore-based POGO licensees, within the jurisdiction of the Philippines.103 These jurisprudential tests are as follows:

Substance Test – the true test in determining whether a foreign corporation is transacting business "seems to be whether [it] is continuing the body or substance of the business or enterprise for which it was organized or whether it has substantially retired from it and turned it over to another."108 As noted by Justice Dimaampao, the Substance Test implies a continuity of commercial dealings and arrangements, and contemplates, to the extent, the performance of acts or works or the exercise of some of the functions normally incident to, and in progressive prosecution of, the purpose of its organization.109

Contract Test – transactions entered into by a foreign corporation which constitute an isolated transaction and are not a series of commercial dealings which signify an intent on the part of such corporation to do business in the Philippines, does not fall under the category of "doing business." Thus, as stressed by Justice Dimaampao, isolated transactions by a foreign corporation do not constitute engaging in business in the Philippines.110

Intention Test – what is determinative of "doing business" is not really the number or the quantity of the transactions, but the intention of the entity to continue the body of its business in the country. The number and quantity are merely evidence of such intention. The phrase "isolated transaction" has a definite and fixed meaning, i.e., a transaction or series of transactions set apart from the common business of a foreign enterprise in the sense that no intention to engage in a progressive pursuit of the purpose and object of the business organization. As such, Justice Dimaampao noted in his Reflections that under the Intention Test, the question of whether a foreign corporation is "doing business" does not necessarily depend upon the frequency of its transactions, but more upon the nature and character of the transactions.

Actual Performance Test – an essential condition to be considered as "doing business" in the Philippines is the actual performance of specific commercial acts within the territory of the Philippines, because, as aptly pointed out by Justice Dimaampao in his Reflections, the Philippines has no jurisdiction over commercial acts performed in foreign territories.

Applying these jurisprudential tests, as well as the discussion of what constitutes doing business under Section 3(d) of the Foreign Investments Act of 1991 (FIA),111 it is abundantly clear that the POGOs, particularly offshore-based POGO licensees, are not doing, engaging in, nor transacting business in the Philippines. As emphasized by Justice Dimaampao: first, the activities of offshore-based POGO licensees do not fall under Section 3(d) of the FIA; second, offshore-based POGO licensees only have a limited presence in the Philippines; and third, the transactions of offshore-based POGO licensees not performed in the Philippines are beyond our jurisdiction.112

In view of all the foregoing, and to answer the query above, it is apparent that POGOs, particularly offshore-based POGO licensees, do not enjoy any protection from the State. To be clear, the very nature of their operations and the limited presence of offshore-based POGO licensees in the Philippines negate the concept of "doing business" in the Philippines; and therefore, POGOs, particularly offshore-based POGO licensees cannot be taxed here.

Relevantly, while the application of the aforementioned jurisprudential tests, including the rulings in BOAC and Baier-Nickel, and the provisions of the FIA, lead to the inescapable conclusion that POGOs, particularly offshore-based POGO licensees, cannot be subjected to tax in the Philippine jurisdiction, it must be borne in mind that the foregoing were promulgated and enacted during a time when businesses require physical presence within a State to provide certain services. As observed by both Justice Perlas-Bernabe and Justice Dimaampao, with the proliferation of digital and online commerce, it becomes more complicated and less straightforward to determine where the activity which produces income occurs, as when the transaction is conducted over the internet.113

Thus, this Court finds it crucial to add a discussion with respect to the challenges of taxing the "digital economy" as suggested by Justice Perlas-Bernabe.114

Justice Perlas-Bernabe explained that according to the Organization for Economic Cooperation and Development (OECD), the digital economy brought about the emergence of new business models which may "quickly cause existing businesses to become obsolete."115 From a tax perspective, the digital economy likewise poses several challenges because of the following key features:

To illustrate, the mobility of users in the digital economy allows them to: (1) carry on commercial activities remotely across borders; and (2) use of virtual private networks (VPNs) or proxy servers that could mask the location of where the digital transaction actually occurs.117 Meanwhile, with respect to the mobility of business functions, the digital economy allows entities to coordinate activities across several territories in one central point while being geographically removed from both the location where the business operations are carried out and where the suppliers or customers are serviced.118

Thus, as observed by Justice Perlas-Bernabe, the complexity of the digital economy could allow businesses to avoid a taxable presence or escape taxation anywhere by simply working around local laws and outdated conceptions of permanent establishments. As stated by the OECD:

To combat this, the OECD offers several proposals, such as revising treaty terms on Permanent Establishments, and implementing better domestic foreign corporation rules among countries.120

However, as mentioned by Justice Perlas-Bernabe, to which this Court concurs, until such time as existing tax treaties and tax laws are revised and revisited to account for the digital economy, this Court must apply the laws as they currently are. Since, as explained above, no income is derived from sources within the Philippines, offshore-based POGO licensees cannot be subjected to income tax.

All things considered, RMC No. 102-2017, and consequently, RMC No. 78-2018, should be struck down, insofar as they imposed income tax and other applicable taxes upon offshore-based POGO licensees, notwithstanding the fact that offshore-based POGO licensees do not derive any income from sources within the Philippines.

Section 11(f) and (g) of the Bayanihan 2 Law are Unconstitutional for Being Riders.

The title of the Bayanihan 2 Law reads: "An Act Providing for Covid-19 Response and Recovery Interventions and Providing Mechanisms to Accelerate the Recovery and Bolster the Resiliency of the Philippine Economy, Providing Funds Therefor, and For Other Purposes." Meanwhile, Section 11 thereof lists the sources of funding to address the COVID-19 pandemic, which includes, among others, the following:

To determine whether certain provisions are riders, it is vital to understand the rationale behind its prohibition. Such proscription against riders was explained by this Court in Fariñas v. Executive Secretary,122 thus:

Similarly, and as observed by Justice Perlas-Bernabe,124 in Atitiw v. Zamora,125 this Court elucidated that the rationale for the prohibition against riders is to prevent hodge-podge or log-rolling legislation, and to ensure that all provisions of a statute have some reasonable relation to the subject matter as expressed in the title thereof:

Following such jurisprudential guides, it is evident that all provisions of a law must be germane to the purpose of the law, and contemplated by the title thereof.

Here, the respondents admit that the Bayanihan 2 Law is not a tax measure. Simply stated, the Bayanihan 2 Law was not enacted to impose new taxes in order to address the COVID-19 pandemic. In fact, and as pointed out by Justice Perlas-Bernabe,127 the proponents of House Bill No. 6953 and Senate Bill No. 1564, the precursors of the Bayanihan 2 Law, all characterized the same as "socioeconomic relief efforts,"128 a "stopgap measure,"129 or a "stimulus bill."130

While the title of the law contains the phrase "providing funds therefor," it must be emphasized that all other provisions relating to sources of funding under Section 11, except for Section 11(f) and (g), are already existing taxes. The Bayanihan 2 Law merely realigns these already existing sources of funding and funnels it to be used for COVID-19 relief measures.

However, as expounded above, before the passage of the Bayanihan 2 Law, there was no law in effect which imposes franchise taxes upon offshore- based POGO licensees. Similarly, there was also no statutory basis to impose income tax and VAT upon offshore-based POGO licensees before the enactment of the Bayanihan 2 Law. This means that the Bayanihan 2 Law, specifically Section 11(f) and (g), appear to introduce new tax impositions.

Such conclusion is likewise supported by the fact that, unlike the other provisions under Section 11 of the Bayanihan 2 Law that are temporary in nature, Section 11(f) and (g) thereof were intended to outlive the December 19, 2020 expiration date of the Bayanihan 2 Law, viz.:

Indeed, and as emphasized by Justice Perlas-Bernabe,131 if all sources of funding under Section 11 of the Bayanihan 2 Law are already existing taxes, there would be no need to specify that the collections thereof after the COVID-19 pandemic has been thwarted would accrue to the General Fund of the Government. The logical implication of this statement, therefore, is that prior to the Bayanihan 2 Law, there was no statute which imposed the same taxes as found in Section 11(f) and (g) of the Bayanihan 2 Law; and consequently, the foregoing provisions are new tax measures.

Thus, this Court is convinced that Section11(f) and (g) of the Bayanihan 2 Law are not germane to the purpose of the law, and therefore, violates the "one subject, one title rule" of the Constitution. The imposition of new taxes, camouflaged as part of a long list of existing taxes, cannot be contemplated as an integral part of a temporary COVID-19 relief measure. Invariably, Section 11(f) and (g) of the Bayanihan 2 Law are unconstitutional, in so far as it imposes new taxes on POGO licensees.

On this score alone, the Consolidated Petitions must be granted. Section 11(f) and (g) of the Bayanihan 2 Law are unconstitutional. Consequently, the Assailed Tax Issuances, specifically RR No. 30-2020 and RMC No. 64-2020, which merely implement Section 11(f) and (g) of the Bayanihan 2 Law, are likewise invalid for having no legal basis.

All in all, before the enactment of R.A. No. 11590, there is no valid law which imposes taxes upon POGOs, including offshore-based POGO licensees. However, this Court deems it proper to emphasize that R.A. No. 11590 cannot be applied retroactively.132 Thus, POGOs, including offshore-based POGO licensees such as the petitioners, cannot be made liable for taxes prior to the enactment and effectivity of R.A. No. 11590.1a⍵⍴h!1

Gesmundo, C.J., Caguioa, Hernando, Carandang, Inting, Zalameda, M. Lopez, Rosario, J. Lopez, and Marquez, JJ., concur.