G.R. No. 252965 - Concurring and Dissenting Opinion

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.

I concur in striking down Sections 11 (f) and (g) of Republic Act No. (RA) 114941 (Bayanihan 2 Law) for being unconstitutional, and Revenue Regulation No. (RR) 30-2020, Revenue Memorandum Circular No. (RMC) 64-2020, as well as parts of RMC 102-2017 and RMC 78-2018 (collectively, the Assailed Tax Issuances), for having been issued contrary to relevant tax laws and RA 9487, or the "PAGCOR Charter."2 However, I respectfully dissent insofar as the ponencia purports that the instant case has already been rendered moot and academic by the enactment of RA 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."3

As pointed out by Associate Justice Alfredo Benjamin S. Caguioa (Justice Caguioa) during the Court's deliberations, the issue in the instant petition has not been rendered moot and academic by RA 11590.4 The general rule is that laws do not have retroactive effect, unless the contrary is provided.5 This principle of prospectivity applies whether the statute is original or amendatory,6 such as RA 11590. It bears stressing that nowhere in RA 11590 does it provide for the retroactive application of any of its provisions, including its repealing clause which expressly mentions the PAGCOR Charter and the Bayanihan 2 Law, as well as their corresponding rules and regulations, e.g., the Assailed Tax Issuances. In fact, the aforesaid principle finds particular significance in tax statutes and tax rules and regulations for it has been settled that the taxing authority's right to receive tax collections accrues the moment the said tax is deemed payable under the provisions of the relevant tax law, and must be paid without delay once it is due.7 Thus, prior to the Court passing upon the legality or constitutionality of tax laws or revenue measures, the same must enjoy the presumption of validity and must be said to produce legal effects, unless otherwise enjoined.

Here, the Court issued a temporary restraining order (TRO) on January 5, 2021 which prevented the Bureau of Internal Revenue (BIR) from enforcing the provisions of the Bayanihan 2 Law and the Assailed Tax Issuances. However, while the BIR was prevented from implementing the foregoing, it does not necessarily follow that the taxes that could have been exacted therefrom did not accrue in favor of the State. Rather, the issuance of a TRO in this case simply means that the State, through the BIR, could not yet demand the payment of said taxes. Consequently, had the Court deemed it proper to uphold the Assailed Tax Issuances and the Bayanihan 2 Law, petitioners, and any other similarly situated taxpayers, would have been liable for all the accrued taxes up until the effectivity date of RA 11590 which repealed them. On the other hand, if the Court had struck down the Assailed Tax Issuances and Sections 11 (f) and (g) of the Bayanihan 2 Law, as it eventually did,8 then no taxes would have accrued since a void act cannot give rise to any right or obligation.9

Therefore, what the Court had to resolve in this case was not whether petitioners, and other similarly situated taxpayers, were liable for any taxes after the passage of RA 11590, but rather if they were liable for the payment of taxes from the issuance of RMC 102-2017 up until the effectivity of RA 11590. Hence, the issues presented in the instant petition have not been rendered moot and academic and are, in fact, ripe for judicial review.

On the validity of Sections 11 (f) and (g) of the Bayanihan 2 Law, I concur with the ponencia that the same are unconstitutional for being riders.10 A "rider" is any provision "which is alien to or not germane to the subject or purpose of the bill in which it is incorporated,"11 and is specifically proscribed by Sections 25 (2) and Section 26 (1), Article VI of the 1987 Constitution, to wit:

(2) No provision or enactment shall be embraced in the general appropriations bill unless it relates specifically to some particular appropriation therein. Any such provision or enactment shall be limited in its operation to the appropriation to which it relates.

Sec. 26. (1) Every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof.

The rationale for the prohibition against riders is to "to prevent hodge-podge or log-rolling legislation, to avoid surprise or fraud upon the legislature, and to fairly appraise the people of the subjects of legislation that are being considered."12 Jurisprudence has laid down a "germaneness" standard to test whether a provision is a rider, i.e., that the provision must have some reasonable relation to the subject matter as expressed in the title thereof.13

As the ponencia aptly pointed out, Bayanihan 2 Law was not intended to be a tax measure. Its full title 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." The proponents of House Bill No. 6953 and Senate Bill No. 1564, the pre-cursors of the Bayanihan 2 Law, all characterized the Act as "socioeconomic relief efforts,"14 a "stopgap measure,"15 or a "stimulus bill."16 At its core, the law intends to empower the government to further address the COVID-19 pandemic while providing some measure of financial assistance to the public for a limited time.17

A close reading of the provisions of the Bayanihan 2 Law would show that there are two (2) main pillars to this relief measure: (1) empowering the President to exercise the necessary powers under Section 23 (2), Article VI of the Constitution to address a national emergency;18 and (2) providing for the appropriations of the funds necessary to enable the response and recovery interventions under the law.19

The assailed provisions of the Bayanihan 2 Law are found under Section 11 thereof, captioned "Sources of Funding" A perusal of paragraphs (a) to (e), however, would show that these identify already-existing funds that are to be realigned or funds previously identified under the FY 2020 Budget of Expenditures and Sources of Financing (BESF).20 Paragraphs (f) and (g), on the other hand, if read on their own, appear to introduce new tax impositions, to wit:

SECTION 11. Sources of Funding. – The enumerated subsidy and stimulus measures, as well as all other measures to address the COVID-19 pandemic shall be funded from the following:

(f) Amounts derived from the five percent (5%) franchise tax on the gross bets or turnovers or the agreed pre-determined minimum monthly revenues from gaming operations, whichever is higher, earned by offshore gaming licensees, including gaming operators, gaming agents, service providers and gaming support providers;

(g) Income tax, VAT, and other applicable taxes on income from non-gaming operations earned by offshore gaming licensees, operators, agents, service providers and support providers.

Neither provision identifies any pre-existing tax laws from which such tax liabilities would arise. Undeniably, it appears to be a new revenue measure altogether. Moreover, unlike the other provisions of this temporary relief statute, Sections 11 (f) and (g) were intended to outlive the December 19, 2020 expiration date of RA 11494, viz.:

After two (2) years or upon a determination that the threat of COVID-19 has been successfully contained or abated, whichever comes first, the revenues derived from franchise taxes on gross bets or turnovers under paragraph (f) and income from non-gaming operations under paragraph (g) shall continue to be collected and shall accrue to the General Fund of the Government. The BIR shall implement closure orders against offshore gaming licensees, operators, agents, service providers and support providers who fail to pay the taxes due, and such entities shall cease to operate, (emphasis supplied)

Had Sections 11 (f) and (g) merely directed the collection of funds from existing tax exactions to the COVID-19 intervention measures of the Bayanihan 2 Law, there would be no need to specify that the collections thereof after the pandemic has abated would accrue to the General Fund. The logical implication of including this paragraph is that prior to the Bayanihan 2 Law, there was no statute which imposed the same taxes as found in Sections 11 (f) and (g); necessarily, the foregoing provisions should be considered as new tax measures.

The question now devolves as to whether introducing new tax measures is germane to the subject matter of the Bayanihan 2 Law. It is my considered view that it is not. As above-mentioned, the two (2) pillars which characterize the law are its emergency power provisions and the special appropriations to fund the same. Moreover, the law was never intended to remain effective for an extended period of time; hence, it provides for its own expiration date in Section 18 thereof. It was simply a necessary "stopgap" to further bolster the government's efforts to address the COVID-19 pandemic. Undoubtedly, the Executive can neither exercise emergency powers nor re-allocate funding without a statute passed by Congress. These exigencies are what impelled the passage of the Bayanihan 2 Law. Surely, tax measures intended to remain effective for an indefinite amount of time are anathema to the admitted limited .lifespan of an act passed to provide only temporary relief, and cannot be said to be germane to the subject matter of the said law.

Given the foregoing, I concur with the ponencia that Sections 11 (f) and (g) should be struck down for being riders to the Bayanihan 2 Law in contravention of Section 26 (1) of the Constitution.21 Necessarily, RR 302020 and RMC 64-2020, which merely implement Sections 11 (f) and (g) of RA 11494, should similarly be struck down since it is a basic legal principle that the spring cannot rise higher than its source.22

In determining the validity of RMC 102-2017 and RMC 78-2018, it becomes imperative to identify the statutory basis of the BIR in circulating these issuances and the obligations they impose on taxpayers, such as herein petitioners.

The subject of RMC 102-2017 reads: "Taxation of Taxpayers Engaged in Philippine Offshore Gaming Operations." The prelude of the circular is clear that the BIR's aim was to "adapt existing taxes" to Philippine Offshore Gaming Operations (POGOs) to lessen the tax leak from their activities:

The Bureau of Internal Revenue (BIR), not a newcomer to the workings and tax issues presented by online business transactions through the internet, feels that the challenge in gaming operations is how to implement a fair and equitable taxation of online gaming businesses, how to monitor the revenues and revenue-generating activities of POGO and how to adapt existing taxes to POGO so as to lessen the so-called "lost potential tax revenues". This is the perspective from which the current issue of taxing taxpayers engaged in POGO should be viewed.23

The BIR further states that "online activity is sufficient to constitute doing business in the Philippines x x x." Hence, it imposed regulatory and administrative requirements to POGOs, which was further outlined in RMC 78-2018.24 It likewise clarified that the following taxes apply to POGOs:

Petitioners in G.R. No. 254102 argue that RMC 102-2017 is void for lack of statutory basis since there is no law imposing any kind of taxes on the offshore gaming revenue of foreign-based POGO Licensees.25 They posit that income of foreign-based POGO Licensees are necessarily income derived from sources outside of the Philippines since the generating "activity", i.e., the games of chance, occur abroad. Even the National Internal Revenue Code (Tax Code) limits the taxation of foreign corporations to income derived from within the Philippines. Moreover, they argue that the PAGCOR Charter could likewise not be the basis for the taxation of POGOs considering that when it was enacted in 1983, offshore gaming through the internet did not yet exist. Considering that no tax law allows the taxation of foreign-source income of foreign corporations, RMC 102-2017 has no legal basis.26 Aside from the lack of statutory basis, petitioners also attack RMC 102-2017 on the grounds of violation of the rule on territoriality of taxation. They argue that imposing taxes on foreign-sourced income violates the basic principle that the taxing power of a State does not extend beyond its territorial limits.27 With respect to RMC 78-2018, petitioners advance that since this issuance merely enforces RMC 102-2017, the latter's infirmity likewise extends to the former.28

For their part, respondents, in their consolidated comment, counter that RMC 102-2017 did not impose a tax but merely interpreted the provisions of the PAGCOR Charter. They argue that the mere fact that POGOs are Licensees of PAGCOR already subjects them to the five percent (5%) franchise tax. Respondents maintain that the POGOs' gaming and income generating activities are rendered in the Philippines through their service providers, and that the placement of online bets are "just a small portion of a POGO [L]icensee's gaming activity." In any case, respondents insist that even if petitioners' income is derived from sources outside the Philippines, it still would not exempt them from the five percent (5%) franchise tax since a franchise tax is imposed on the exercise of enjoying a franchise. Hence, the mere fact that petitioners operate within the Philippines would make them liable for the same.29 With respect to RMC 78-2018, respondents argue that this merely provides guidelines on the registration of POGOs and it enjoys the presumption of legality.30

As earlier stated, while I concur with the majority in striking down RMC 102-2017 and RMC 78-2018 for want of statutory basis, I would like to offer my own views regarding the matter as it presents an opportunity to propound on principles in an emerging area of tax law, i.e., the taxation of the digital economy.

In the above-enumeration of the alleged applicable taxes, RMC 102-2017 draws from both the PAGCOR Charter and the Tax Code. Specifically, items 1 to 3 on the treatment of income from gaming and non-gaming operations of POGOs and other entities, are derived from the language of Section 13 of the PAGCOR Charter,31 whereas items 4 to 6 are applications of Section 5 732 of the Tax Code on withholding taxes. Hence, the issue to resolve is whether RMC 102-2017 went beyond the ambit of these statutes so as to constitute an invalid exercise of quasi-legislative power; particularly, with regard to the application of the taxes therein to the income of offshore or foreign-based POGO Licensees. However, even before delving into the import of the above-mentioned statutes for the applicable taxes, it must first be determined if offshore or foreign-based POGO Licensees are even taxable in the Philippines.

The power of taxation is an inherent attribute of sovereignty which every independent government may exercise even without express conferment by the people.33 Taxation emanates from necessity,34 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.35 Indeed, it seems only logical to exact a tax from those who stand to benefit, whether directly or indirectly, from the expenditure of public funds derived from the same.36 Necessarily, implied within the power to tax is the power to choose what or whom to tax.37 Undoubtedly, the State may tax any persons, property, income, or business within its territorial limits.38 In this regard, it should be clarified that even non-resident aliens or foreign corporations may likewise be subjected to the State's power to tax if they have availed of the State's resources or protection in some manner in the conduct of an income-generating activity.39 However, the State's choice of who specifically to tax is not unbridled, and is, in fact, restrained by the fundamental rights enshrined in our Constitution, specifically, the due process clause.40

As a rule, the State's power to tax does not extend beyond its territorial limits.41 Case law holds that "[i]f an interest in property is taxed, the situs of either the property or interest must be found within the State. If an income is taxed, the recipient thereof must have a domicile within the State or the property or business out of which the income issues must be situated within the State so that the income may be said to have a situs therein. Personal property may be separated from its owner and he may be taxed on its account at the place where the property is although it is not a citizen or resident of the State which imposes the tax."42 This territorial limitation of taxation is what necessitates the taxation of only income derived from sources "within" the Philippines for non-resident aliens and foreign corporations. If the income was derived or sourced within the Philippines, then naturally, the non-resident alien or foreign corporation should give a portion of the said income to the government as a reasonable payment for its protection and for allowing the facility of the transaction which made the generation of income possible in the first place.43 Hence, keeping in mind this limitation, it is apt to determine whether income was derived or sourced within the Philippines relative to the sale of services which POGOs are engaged in.

Section 42 (A)44 of the Tax Code provides the guidelines in determining what income is sourced within the Philippines, whereas Section 42 (C)45 identifies what are income sourced without. The word "source" connotes "origin;"46 the test is to determine if the income originated from the Philippines. A reading of the foregoing provisions makes it clear that for income derived from the sale of services, the focal point is where the actual performance of the service occurs. On this score, it is instructive to refer to the seminal case of Commissioner of Internal Revenue v. British Overseas Airways Corp. (BOAC)47 to understand the precise aspect of the activity which triggers the taxable event, viz.:

The source of an income is the property, activity or service that produced the income. For the source of income to be considered as coming from the Philippines, it is sufficient that the income is derived from activity within the Philippines. In BOAC's case, the sale of tickets in the Philippines is the activity that produces the income. The tickets exchanged hands here and payments for fares were also made here in Philippine currency. The situs of the source of payments is the Philippines. The flow of wealth proceeded from, and occurred within, Philippine territory, enjoying the protection accorded by the Philippine government. In consideration of such protection, the flow of wealth should share the burden of supporting the government.

The absence of flight operations to and from the Philippines is not determinative of the source of income or the situs of income taxation. Admittedly, BOAC was an off-line international airline at the time pertinent to this case. The test of taxability is the "source"; and the source of an income is that activity . . . which produced the income. Unquestionably, the passage documentations in these cases were sold in the Philippines and the revenue therefrom was derived from a business activity regularly pursued within the Philippines. And even if the BOAC tickets sold covered the "transport of passengers and cargo to and from foreign cities", it cannot alter the fact that income from the sale of tickets was derived from the Philippines. The word "source" conveys one essential idea, that of origin, and the origin of the income herein is the Philippines.

In BOAC, the transaction involved the sale of air transport to passengers. Even though the actual transportation would occur outside of the Philippines, the Court held that the sale of tickets here already constituted a taxable activity. However, the Court had occasion to expound on this doctrine in Commissioner of Internal Revenue v. Baier-Nickel (Baier-Nickel).49 In Baier-Nickel, the Court clarified that the "source" was not determined by where the income is disbursed or physically received, but rather where the business activity that produced the income was actually conducted, viz.:

Both the petitioner and respondent cited the case of Commissioner of Internal Revenue v. British Overseas Airways Corporation in support of their arguments, but the correct interpretation of the said case favors the theory of respondent that it is the situs of the activity that determines whether such income is taxable in the Philippines. The conflict between the majority and the dissenting opinion in the said case has nothing to do with the underlying principle of the law on sourcing of income. In fact, both applied the case of Alexander Howden & Co., Ltd. v. Collector of Internal Revenue. The divergence in opinion centered on whether the sale of tickets in the Philippines is to be construed as the "activity" that produced the income, as viewed by the majority, or merely the physical source of the income, as ratiocinated by Justice Florentino P. Feliciano in his dissent. The majority, through Justice Ameurfina Melencio-Herrera, as ponente, interpreted the sale of tickets as a business activity that gave rise to the income of BOAC. Petitioner cannot therefore invoke said case to support its view that source of income is the physical source of the money earned. If such was the interpretation of the majority, the Court would have simply stated that source of income is not the business activity of BOAC but the place where the person or entity disbursing the income is located or where BOAC physically received the same. But such was not the import of the ruling of the Court. It even explained in detail the business activity undertaken by BOAC in the Philippines to pinpoint the taxable activity and to justify its conclusion that BOAC is subject to Philippine income taxation. x x x.

The Court reiterates the rule that "source of income" relates to the property, activity or service that produced the income. With respect to rendition of labor or personal service, as in the instant case, it is the place where the labor or service was performed that determines the source of the income. There is therefore no merit in petitioner's interpretation which equates source of income in labor or personal service with the residence of the payor or the place of payment of the income.

However, this reading of the law flows from the dated notion that a business requires physical presence within the State to provide its services, or a more analog form of conducting business. With the proliferation of digital commerce, there is now the added complication of specifically pinpointing where the "activity that produced the income" occurs when the transaction is conducted over the internet, as in the case of offshore gaming.

This is essentially the same complication when resolving the situs of taxation rules under current tax conventions that bind the Philippines. It bears noting that "[t]he purpose of these international agreements is to reconcile the national fiscal legislations of the contracting parties in order to help the taxpayer avoid simultaneous taxation in two different jurisdictions. More precisely, the tax conventions are drafted with a view towards the elimination of international juridical double taxation, which is defined as the imposition of comparable taxes in two or more states on the same taxpayer in respect of the same subject matter and for identical periods."51 Aside from the rules on situs of taxation under Section 42 of the Tax Code, the provisions on Permanent Establishments, as found in tax treaties, can also serve as basis for determining whether an entity or activity is taxable in one Contracting State or the Other, since treaties also form part of the law of the land under our Constitution.52

For example, the Permanent Establishment provision in the Republic of the Philippines (RP)-United States of America (US) Tax Treaty defines a "permanent establishment" as a "fixed place of business through which a resident of one of the Contracting States engages in a trade or business,"53 and includes a "seat of management," "branch," "office," "store or other sales outlet," "factory," "workshop," "warehouse," "mine, quarry, or other place of extraction of natural resources," or "building site or construction or assembly project or supervisory activities."54 Interestingly, an almost exact same definition is found in the RP-China Tax Treaty,55 as well as other tax treaties.56

However, since the traditional meaning of Permanent Establishment is a "fixed place" of business, it stands to reason that it requires the occupation of a physical premises or some manner of installation or spaces used for the carrying on of business within the Contracting State.57 It bears emphasizing that treaties should be interpreted "in accordance with the ordinary meaning to be given to the terms of the treaty in their context."58 The fact that offshore gaming and other digital transactions were not yet existing at the time these treaties were ratified lends credence to the view that virtual spaces, such as gaming websites or portals, could not constitute "fixed places" amounting to Permanent Establishments. If anything, it would be the server which hosts the website or portal which could constitute a "place of business" for purposes of constituting a Permanent Establishment.

This is the challenge of taxing the "digital economy" as observed by the Organization for Economic Cooperation and Development (OECD) – specifically: (1) the mobility of users that allow them to carry on commercial activities remotely across borders, compounded by the use of virtual private networks (VPNs) or proxy servers that could mask the location of where the digital transaction actually occurs; (2) the mobility of business functions that allow 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; and (3) the volatility due to further rapidly evolving technology.59

As the OECD observed, the complexity of the digital economy could allow businesses to avoid a taxable presence or escape taxation anywhere by working around local laws and outdated conceptions of Permanent Establishments, viz.:

In many digital economy business models, a non-resident company may interact with customers in a country remotely through a website or other digital means (e.g. an application on a mobile device) without maintaining a physical presence in the country. Increasing reliance on automated processes may further decrease reliance on local physical presence. The domestic laws of most countries require some degree of physical presence before business profits are subject to taxation. In addition, under Articles 5 and 7 of the OECD Model Tax Convention, a company is subject to tax on its business profits in a country of which it is a non-resident only if it has a permanent establishment (PE) in that country. Accordingly, such non-resident company may not be subject to tax in the country in which it has customers.

Companies in many industries have customers in a country without a PE in that country, communicating with those customers via phone, mail, and fax and through independent agents. That ability to maintain some level of business connection within a country without being subject to tax on business profits earned from sources within that country is the result of particular policy choices reflected in domestic laws and relevant double tax treaties, and is not in and of itself a [base erosion and profit shifting (BEPS)] issue. However, while the ability of a company to earn revenue from customers in a country without having a PE in that country is not unique to digital businesses, it is available at a greater scale in the digital economy than was previously the case. Where this ability, coupled with strategies that eliminate taxation in the State of residence, results in such revenue not being taxed anywhere, BEPS concerns are raised. In addition, under some circumstances, tax in a market jurisdiction can be artificially avoided by fragmenting operations among multiple group entities in order to qualify for the exceptions to PE status for preparatory and auxiliary activities, or by otherwise ensuring that each location through which business is conducted falls below the PE threshold. Structures of this type raise BEPS concerns.60

The OECD itself proposes several ways to combat the potential "double non-taxation" of the digital economy, including the revision of treaty terms on Permanent Establishments, and implementing better domestic foreign corporation rules among countries.61 Nevertheless, until such time as the existing tax treaties are revisited, or the rules on situs under Section 42 of the Tax Code are amended to account for the digital economy, of which offshore gaming conducted by POGOs are naturally part of, the Court must apply the laws as they currently are and not go beyond their auspices.

Therefore, it is my view that if the foregoing prevalent principles are applied in the present case, the Philippines cannot tax the offshore revenues of foreign-based POGO Licensees.

At this juncture, it must be clarified that foreign-based POGO Licensees do not conduct their business in the same manner as Philippine-based POGO Licensees. The former are required to engage the services of PAGCOR-accredited Service/Support Providers for the conduct of their online gaming activities,62 while the latter conduct the activities themselves. However, as pointed out by the ponencia, the Service Providers and Support Providers are separate entities from the foreign-based POGO Licensees. While the Licensee is the one that offers the gaming activities to bettors, the actual conduct of the online gaming activities is conducted by the Service Providers and Support Providers, Applying the above-discussed principles in BOAC and Baier-Nickel, the activity that generates the income for the foreign-based POGO Licensee is the placing of bets and paying out of winnings to the bettors found outside of the Philippines, whereas the gaming activity is the non-revenue generating component of the whole service. Hence, none of the revenues generated by the foreign-based POGO Licensees can be said to be sourced within the Philippines. On the other hand, the fees paid by the POGO Licensees for the services rendered by the Service Providers and Support Providers can be said to be sourced within the Philippines.

Furthermore, nothing in the version of the Tax Code prior to the amendments under RA 11590 provides for the taxation of the income derived from sources without the Philippines for foreign corporations. Neither was there any tax law that could be said to govern foreign-based Licensees specifically. This was similarly the observation of the proponents of House Bill No. 5777 and Senate Bill No. 2232, the precursor bills of RA 11590:

The reason for this is because, at present, nowhere under the National Internal Revenue Code, otherwise known as the NIRC, as amended, can we find explicit tax provisions pertaining to the offshore gaming licensees including gaming operators, gaming agents, and service providers.

Hence, the long-standing question about the tax obligations of POGOs conducting business in our country remain unanswered and unaddressed, which means billions worth of revenue losses for our government.

Having said these, it is high time that we clarify and establish the taxation regime of offshore gaming licensees, including gaming operators, gaming agents, service providers, and gaming support providers, and incorporate these entities in the Philippine taxation system.

As your Chair of the Senate Ways and Means Committee, we have reviewed the various bills, listened to government agencies, industry and other stakeholders. I believe that legislating the tax regime of the POGOs and incorporating the same in the NIRC is a step towards the right direction.

It will not only plug the loopholes in our country's tax code that led to issues of confusion surrounding the operation of POGOs, but it will also prevent similar issues in the future, which could gravely undermine our government's power to impose and collect the right taxes.

By addressing these gaps in our tax system, we can maximize the POGO industry's potential as a revenue source. In turn, we will have more resources in our country's coffers to fund programs that will improve people's lives and help us build back better following this global health and economic crisis. (emphases supplied)

It is a basic principle that laws shall not be construed as imposing a tax unless they do so clearly and expressly, and any doubt must be strictly construed against the government.65 Consequently, RMC 102-2017 could not have drawn validity from the provisions of the Tax Code, or any other tax law, to cover offshore revenues of foreign-based POGO Licensees during the period prior to the effectivity of RA 11590.

There is also no merit to respondents' contention that even if their income is deemed sourced. without the Philippines, they would still be liable for the five percent (5%) franchise tax under the PAGCOR Charter since a franchise tax is imposed on the exercise of enjoying a franchise. In the first place, it should be emphasized that franchise tax, like any other tax, is still subject to the territoriality principle since, as above-discussed, to hold otherwise would amount to a violation of the due process clause. In this regard, while the five percent (5%) franchise tax is an exaction, it is simultaneously an exemption granted to exempt PAGCOR and its Licensees from regular taxes.66 This is the clear import from the wording of Section 13 of the PAGCOR Charter itself:

(2) Income and Other Taxes. – (a) Franchise Holder: No tax of any kind or form, income or otherwise, as well as fees, charges or levies of whatever nature, whether National or Local, shall be assessed and collected under this Franchise from the Corporation; nor shall any form of tax or charge attach in any way to the earnings of the Corporation, except a Franchise Tax of five (5%) percent of the gross revenue or earnings derived by the Corporation from its operation under this Franchise. Such tax shall be due and payable quarterly to the National Government and shall be in lieu of all kinds of taxes, levies, fees or assessments of any kind, nature or description, levied, established or collected by any municipal, provincial, or national government authority.

(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), association(s), agency(ies), or individual(s) with whom the Corporation or operator has any contractual relationship in connection with the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving compensation 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.

As a form of tax exemption, it necessarily implies that the PAGCOR Licensees are subject to tax in the first place, Moreover, any form of tax exemption must be strictly construed to benefit only those clearly covered thereby.67 The ponencia aptly observed that Section 13 (2)(b) which forms the basis for the extension of the tax exemption to Licensees clearly apply only to those engaged in "the operations of the casino(s) authorized to be conducted under this Franchise and to those receiving compensation 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."68

Given that the PAGCOR Charter and its amendment through RA 948769 were promulgated at the time offshore gaming was not yet in existence, it could not have contemplated virtual gambling websites as the "casinos" mentioned under Section 13 (2)(b) thereof. Consequently, the PAGCOR Charter cannot be said to have been the basis for imposing a tax on the offshore revenues. of foreign-based POGO Licensees. Hence, RMC 102-2017 could likewise not draw its validity from the PAGCOR Charter.

As a result, RMC 102-2017 must be struck down but only insofar as the foregoing points are concerned. As above-mentioned, RMC 102-2017 itemizes several taxes and the others are not necessarily void or subject to the Court's review at present. Petitioners themselves limit their attack based on the taxation of the offshore revenue of foreign-based POGO Licensees. Hence, the circular should only be invalidated to the extent that it went beyond both the Tax Code and the PAGCOR Charter in imposing a tax on the said foreign-based Licensees. Corollary thereto, RMC 78-2018 is similarly void only as it applies to the same foreign-based POGO Licensees since it was merely in further implementation of RMC 102-2017.

As a final note, it should be borne in mind that RA 11590 sought to impose the five percent (5%) franchise tax on POGO Licensees, without any distinction as to whether such gaming revenues were realized within or without the Philippines.70 Whether this constitutes a valid exercise of the power of taxation, however, is a matter that should be resolved separately should a case be brought before the Court specifically challenging RA 11590. I wish to reiterate that my views are confined to the particular period from the issuance of RMC 102-2017 up until the effectivity of RA 11590.1a⍵⍴h!1