THE Supreme Court has declared unconstitutional a provision in Republic Act No. 11494 or the Bayanihan 2 Law and several revenue regulations issued by the Department of Finance (DOF) and the Bureau of Internal Revenue (BIR) imposing a 5-percent franchise tax on gross bets from gaming operations of the Philippine Offshore Gaming Operators (POGOs).
In a 42-page ruling penned by Associate Justice Samuel Gaerlan and released to the public on September 21, 2022, the Court en banc declared Section 11 (f) and (g) of the Bayanihan 2 Law (An Act Providing for Covid-19 Response and Recovery Intervention and Providing Mechanism to Accelerate the Recover and Bolster the Resiliency of the Philippine Economy, Providing Funds Therefor, and For Other Purposes) are unconstitutional for being “riders.”
The decision stemmed from the petition for prohibition filed by offshore-based gaming operators Saint Wealth Ltd., 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, assailing the constitutionality of the said provisions of Bayanihan 2 Law and related revenue issuances of respondents DOF and BIR.
Section 11 (f) and (g) of the Bayanihan 2 Law provides a list of sources of funds to address the Covid-19 pandemic which include the amounts derived from the 5-percent franchise tax on the gross bets from POGOs and income tax, value-added tax and other applicable taxes on income from non-gaming operations earned by POGO operators, agents, service providers and support providers.
The SC stressed that these provisions violate Section 26, Article VI of the Constitution, which mandates that “every bill passed by the Congress shall embrace only one subject which shall be expressed in the title thereof.”
The SC pointed out that in its previous ruling in Atitiw v. Zamora, it explained that 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.”
The SC noted that respondents—former BIR Commissioner Caesar Dulay and Former Finance Secretary Carlos Dominguez III—even admitted that Bayanihan 2 Law is not a tax measure.
“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,” the SC noted. It added that before the enactment of the Bayanihan 2 Law, there was no law in effect imposing franchise taxes, income tax and VAT on off-shore POGO licensees.
“Thus, this Court is convinced that Section 11 [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 SC declared.
“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 11 [f] and [g] of the Bayanihan 2 Law are unconstitutional, insofar as it imposes new taxes on POGO licensees,” it added.
Consequently, the SC said BIR Revenue Regulation No. 30-2020, Revenue Memorandum Circular No. 64-2020, Revenue Memorandum Circular No. 102-2017 and Revenue Memorandum Circular 78-2018, in so far as they impose franchise tax, income tax and other applicable taxes on off-shore based POGOs, are “null and void for being contrary to the Constitution and other relevant laws.”
The petitioners—all holders of offshore gaming licenses from the Philippine Amusement and Gaming Corp. (Pagcor)—argued that the assailed provisions of Bayanihan 2 Law and related administrative issuances violate their right to due process and equal protection of the law.
The petitioners pointed out that Bayanihan 2 was envisioned as a temporary relief measure apparently enacted to address the Covid-19 pandemic and raise funds for the purpose.
However, the petitioners said a closer examination would show that Sections 11 [f] and [g] of the Bayanihan 2 Law impose new taxes in the guise of merely listing sources of funding.
The petitioners lamented that for a mere opportunity to operate, their clients would be “forced to pay the tax on their offshore income, even if the imposition is not constitutional.”
They also stressed that the law unfairly uses as “tax base” the totality of wagers made through POGOs even as these bets are made online outside the Philippines, in violation of the territoriality principle of taxation.