EN BANC

[ G.R. No. 252965. December 07, 2021 ]

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.

[G.R. No. 254102]

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.

DISSENTING OPINION

LAZARO-JAVIER, J.:

With the digital age comes the proliferation of online gaming and gambling. Games of chance are now within the fingertips of every Filipino in the comfort of their respective homes. The entry of these online gaming and gambling entities was so swift even government was at a quandary on their proper tax treatment. It took time before the conundrum got definitively resolved upon the enactment of Republic Act 11590 (RA 11590),1 An Act Taxing Philippine Offshore Gaming Operations (POGOs).

The law introduced Section 125-A of the National Internal Revenue Code (NIRC), thus:

SEC. 125-A. Gaming Tax on Services Rendered by Offshore Gaming Licensees. — Any provision of existing laws, rules or regulations to the contrary notwithstanding, the entire gross gaming revenue or receipts or the agreed predetermined minimum monthly revenue or receipts from gaming, whichever is higher, shall be levied, assessed, and collected a gaming tax equivalent to five percent (5%), in lieu of all other direct and indirect internal revenue taxes and local taxes, with respect to gaming income: Provided, That the gaming tax shall be directly remitted to the Bureau of Internal Revenue not later than the 20th day following the end of each month: Provided, further, That the Philippine Amusement and Gaming Corporation or any special economic zone authority or tourism zone authority or freeport authority may impose regulatory fees on offshore gaming licensees which shall not cumulatively exceed two percent (2%) of the gross gaming revenue or receipts derived from gaming operations and similar related activities of all offshore gaming licensees or a predetermined minimum guaranteed fee, whichever is higher: Provided, furthermore, That for purposes of this Section, gross gaming revenue or receipts shall mean gross wagers less payouts: Provided, finally, That the taking of wagers made in the Philippines and the grave failure to cooperate with the third-party auditor sell result in the revocation of the license of the offshore gaming licensee.

The Philippine Amusement and Gaming Corporation or any special economic zone authority or tourism zone authority or freeport authority shall engage the services of a third-party audit platform that would determine the gross gaming revenues or receipts of offshore gaming licensees. To ensure that the proper taxes and regulatory fees are levied, periodic reports about the results of the operation showing, among others, the gross gaming revenue or receipts of each offshore gaming licensee shall be submitted to the Bureau of Internal Revenue by the Philippine Amusement and Gaming Corporation or any special economic zone authority or tourism zone authority or freeport authority as certified by their third-party auditor: Provided, That the third-party auditor shall be independent, reputable, internationally-known, and duly accredited as such by an accrediting or similar agency recognized by industry experts: Provided, finally, That nothing herein shall prevent the Bureau of Internal Revenue and the Commission on Audit from undertaking a post-audit or independent verification of the gross gaming revenues determined by the third-party auditor.2

Verily, the taxability of POGOs is now beyond question. Section 125-A, NIRC imposes a five percent (5%) gaming tax on all income derived from gaming operations and twenty-five percent (25%) income tax on income derived from non-gaming operations from sources within the Philippines on offshore-based POGO licensees such as petitioners here.

I nevertheless agree with the ponencia that the passage of RA 11590 should not deter the Court from ruling on the validity of the assailed tax issuances and petitioners’ consequent tax liabilities, if any, prior to the enactment of RA 11590.

With all due respect, however, I disagree with the finding of the ponencia that offshore-based POGO licensees derive no income from sources within the Philippines, hence, cannot, be subjected to income tax. As will be discussed: (1) petitioners are foreign corporations “doing business” in the Philippines under the twin characterization test; (2) the Philippines has jurisdiction over petitioners under the sliding scale test; and (3) they are taxable as resident foreign corporations under the NIRC on sources from within the Philippines.

Offshore-based POGO licensees are deemed “doing business” in the Philippines

Under the twin characterization test laid out by this Court in the landmark case of Mentholatum Co., Inc. v. Mangiliman,3 a foreign corporation is considered “doing business” in the Philippines when:

a. The foreign corporation 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; and

b. The foreign corporation is engaged in activities which implies a continuity of commercial dealings and arrangements, and contemplates, to that 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 and object of its organization.4

x x x x

This definition has since been adopted with qualification in various pieces of legislation.5 For instance, Republic Act No. 7042,6 the Foreign Investment Act of 1991, defines “doing business” thus:

d) The phrase ‘doing business’ shall include soliciting orders, service contracts, opening offices, whether called ‘liaison’ offices or branches: appointing representatives or distributors domiciled in the Philippines or who in any calendar year stay in the country for a period or periods totalling one hundred eight(y) (180) days or more; participating in the management, supervision or control of any domestic business, firm, entity, or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works; or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization; Provided, however, That the phrase ‘doing business’ shall not be deemed to include mere investment as a shareholder by a foreign entity in domestic corporations duly registered to do business, and/or the exercise of rights as such investor, nor having a nominee director or officer to represent its interests in such corporation, nor appointing a representative or distributor domiciled in the Philippines which transacts business in its own name and for its own account.”7 (Emphasis supplied)

More, Section 1, Republic Act No. 54558 decrees:

SECTION. 1. Definition and scope of this Act. – (1) x x x the phrase “doing business” shall include soliciting orders, purchases, service contracts, opening offices, whether called “liaison” offices or branches; appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines for a period or periods totaling one hundred eighty days 180 or more; participating in the management, supervision or control of any domestic business firm, entity or corporation in the Philippines; and any other act or acts that imply a continuity of commercial dealings or arrangements, and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization.” (Emphasis supplied)

In Section 65, Presidential Decree No. 1789,9 the Omnibus Investment Code of 1981, a similar definition has been provided.

ARTICLE 65. Definition of Terms. – As used in this Book, the term “investment” shall mean equity participation in any enterprise formed, organized[,] or existing under the laws of the Philippines; and the phrase “doing business” shall include soliciting orders, purchases, service contracts, opening offices, whether called “liaison” offices or branches; appointing representatives or distributors who are domiciled in the Philippines or who in any calendar year stay in the Philippines for a period or periods totalling one hundred eighty 180 days or more; participating in the management, supervision or control of any domestic business firm, entity or corporation in the Philippines, and any other act or acts that imply a continuity of commercial dealings or arrangements and contemplate to that extent the performance of acts or works, or the exercise of some of the functions normally incident to, and in progressive prosecution of, commercial gain or of the purpose and object of the business organization. (Emphases supplied)

There are other statutes defining the term “doing business” in the same wise, and as may be observed, one common denominator among them all is the concept of “continuity.”10

Indeed, the twin-characterization test (i.e. transactions must be for the pursuit of the main business, and with intent to continue the same for some time) has become the hallmark of what constitutes “doing business in the Philippines.”11 What is determinative of “doing business” is not just the number or the quantity of the transactions, but also the intention of an entity to continue the body of its business in the country. The fact that it derives income from its activities should also be considered.12

Here, it is admitted that in pursuit of their main business (i.e., offshore gaming), petitioners applied for a Philippine Amusement and Gaming Corporation (PAGCOR) license for offshore gaming operations with the intent to continue their main line of business here. In fact, they conducted their offshore gaming operations through the services of PAGCOR-accredited local gaming agents and service providers for its gaming operations.

The ponencia focuses on the so called three (3) components of offshore gaming:

1. Prize consisting of money or something else of value which can be won under the rules of the game;

2. A player who:

a. Being located outside of the Philippines and not a Filipino citizen, enters the game remotely or takes any step in the game by means of a communication device capable of accessing an electronic communication network such as the internet

b. Gives or undertakes to give, a monetary payment or other valuable consideration to enter in the course of, or for, the game; and

3. The winning of a prize is decided by chance.

to support the conclusion that offshore-based POGO licensees such as petitioners are not doing business in the Philippines.

But offshore gaming activities are said to be not supposedly performed within the Philippine territory only because they are done on the virtual plane.

Hence, the question is, may offshore-based POGO licensees be deemed doing business in the Philippines though their transactions are done online?

I believe so.

In SEC-OGC Opinion No. 17-03 dated April 4, 2017,13 the Securities and Exchange Commission (SEC) was faced with the same dilemma relative to the inquiry of Sony Computer Entertainment Hong Kong (SCEH) on the license requirement for foreign corporations doing business in the Philippines:

By way of a background, you stated that SCEH is a company organized and existing under the laws of Hong Kong and operates Sony Entertainment Network (SEN) in Singapore, Indonesia, Taiwan, Malaysia, Thailand, and Hong Kong. SEN is an online platform that offers various content and services such as an online community and an online gaming system, which requires a SEN account in order to participate. Since SEN is an internet-based system, persons in the Philippines can create a SEN account to participate in the online community and to purchase content from and/or use SEN’s services even if the SCEH does not have a physical presence in the Philippines. A SEN account holder can buy content and services from SEN only by using funds from an associated SEN online wallet, which can be funded by using a credit or debit card or a prepaid card where available.

Finally, SEN employees are located in Hong Kong while SEN’s servers are based in the United States.

SCEH is seeking confirmation that it is not engaged in doing business in the Philippines and will not be required to obtain a license for the following activities:

1) Offer and sale of SEN services on the internet without restricting persons located in the Philippines from availing of these services (Maintenance);

2) Assuming that Maintenance, by itself, is not considered doing business in the Philippines, accepting online payments for using SEN in any currency, including Philippine currency;

3) Marketing or advertising the SEN in the Philippines through (a) online and printed publications, and (b) television and radio commercials, which is based on the enumerated acts constituting not “doing business” provided in Section 1(f) of the Implementing Rules and Regulations (IRR) of the Foreign Investment Act of 1991 (FIA); and

4) Further, as a form of expansion, hiring Independent Contractors for marketing or advertising of its products and the selling of prepaid cards in relation to its online gaming services.

x x x x

Using the twin-characterization test, the SEC found SCEH to be “doing business” in the Philippines, viz.:

You stated that there is no reason to consider that SCEH will be doing business in the Philippines since the activities of SCEH are carried outside of the Philippines, considering that its employees are in Hong Kong, that its property is outside the Philippines, and that the SEN servers are in the United States.

However, we opine that the activities SCEH proposes to undertake shall be considered as “doing business” in the Philippines since the twin characterization lest is satisfied in this case. First, the following activities indicate that SCEH will be continuing the body or substance of the business of SCEH for which it was organized in the Philippines, to wit: (i) funding of the SEN online wallet; (ii) offering and selling SEN services; (iii) accepting online payments for using SEN in any currency, including Philippine currency; (iv) marketing or advertising; and (v) hiring Independent Contractors lor marketing or advertising of its products and the selling of prepaid cards in relation to its online gaming services.

Second, the above-mentioned enumerated activities are transactions consummated within the Philippines although they are done in virtual plane. The following salient points of the online commercial transactions, or e-commerce, will find themselves in the Philippines:

(i) The creation of a new SEN account will take place in the Philippines in order to participate in SEN;

(ii) The offering for sale and sale of online content and services of SEN will be made to the SEN account holder who is located in the Philippines;

(iii) The funding of the SEN online wallet will take place in the Philippines as will be further discussed below;

(iv) The payment of the sale of online content and services of SEN will be made from the Philippines by the SEN account holder; and

(v) The delivery of the online content and services of SEN will be made in the Philippines.

The salient points above-mentioned are evidenced by the use of an IP address through a device (e.g. PlayStation 4, computer, HDTV or mobile device) used by the SEN account holder. IP address is short for Internet Protocol (IP) address. The IP is the method or protocol by which data is sent from one computer to another on the Internet. Each computer (known as a host) on the Internet has at least one IP address that uniquely identifies it from all other computers on the Internet. An IP address consists of four numbers, each of which contains one to three digits, with a single dot (.) separating each number or set of digits (e.g., 78.125.0.209). Moreover, an IP address may reveal such information as the continent, country, region, and city in which a computer is located; the ISP (Internet Service Provider) that services that particular computer; and such technical information as the precise latitude and longitude of the country, as well as the locale, of the computer. The location of an IP address can be traced through the use of an IP geolocation service.

Here, once the SEN account holder enters the SEN online store through his device, he may view the content or service which is offered to him for sale that is sent to his device in the Philippines. Thereafter, the SEN account holder may accept the offer of the content or service from the Philippines by clicking “Confirm Purchase.” Once it is purchased, the acceptance of the offer is transmitted from his IP Address through his device in the Philippines to the virtual plane, and the content or service is delivered through said virtual plane to the account of the SEN account holder who is in the Philippines. The SEN account holder will then download the content or service through his device through his IP address located in the Philippines. Clearly, such transaction(s) will be consummated in the Philippines.

Furthermore, it must be remembered that the offering for sale and the sale of content and services, and the funding of the SEN online wallet, are intricately connected since the sale of the SEN content and services cannot be consummated without the funding of said SEN online wallet. Since the SEN online wallet funded by credit cards and debit cards, it, thus, logically and reasonably means that may be SCEH will likewise have arrangements with the credit card/debit card issuers here in the Philippines.

The permission to use and buy from the SEN online store through the funding of the SEN online wallet also clearly indicates that there is intent to continue the main business for a period of time. Once the SEN account holder puts funds in the SEN online wallet, he can resume transactions on the SEN while his account is still active (subject of course, to the SEN’s rules on membership in the network), thereby maintaining a business relationship with the SCEH even if the transactions are intermittent and infrequent and even if the SEN user only purchases credit and uses them up at one time.

x x x x

SCEH averred that it was not doing business in the Philippines since the activities of SCEH were carried outside of the Philippines, its employees were in Hong Kong, its property was outside the Philippines, and that the SEN servers were located in the United States (U.S.). Offshore-based POGO licensees raised the same arguments save for the fact that they conducted their offshore gaming operations through the services of PAGCOR-accredited local gaming agents and service providers for its gaming operations.

Despite the averments of SCEH, the SEC still opined that the activities SCEH proposed to undertake would deem it as “doing business” in the Philippines since the twin characterization test was satisfied. First, the enumerated activities to be undertaken by SCEH indicated that it would be continuing in the Philippines the substance of the business for which it was organized. Second, the SCEH enumerated activities which were considered consummated within the Philippines, albeit done in a virtual plane. I see no reason not to apply the same ruling to offshore-based POGO licensees whose footprints are all over the Philippines; they entered into contracts with PAGCOR-accredited local gaming agents and service providers in furtherance of their main line of business, i.e. gaming operations.

Verily, the gaming operations conducted by offshore-based POGO licensees within the Philippines through the services of PAGCOR-accredited local gaming agents and service providers for its offshore gaming operations implies the continuity of commercial dealings and arrangements, and contemplates the performance of acts incident to, and in the progressive prosecution of their business. These services will not be provided intermittently but for a long period of time in the Philippines. Accordingly, petitioners are considered resident foreign corporations doing business here in the Philippines.

Petitioners’ activities are deemed consummated in the Philippines, hence, they are proper subjects of government regulations and taxes

In the U.S., there is currently no statute or case law which addresses the question of whether owning or operating a website or online platform constitutes “doing business.”14 Numerous court opinions, however, have addressed a similar issue: whether a corporation’s internet activities in a foreign State is sufficient to justify the court of that State in exercising personal jurisdiction over the corporation.

Exploring the issue of “jurisdiction” with regard to websites is useful in determining where the online activities of a corporation are deemed consummated and, corollarily, whether it need to “qualify [or obtain a license] to do business” based on its website or online activities. One requisite for courts to obtain personal jurisdiction is that the corporation has “minimum contacts” with the foreign state, such that its ability to be sued there “does not offend the traditional notions of fair play and substance.”

In Zippo Mfg. Co. v. Zippo Dot Com, Inc.,15 the U.S. District Court for Western District of Pennsylvania elucidated on the State’s jurisdiction over non-resident defendants in cases involving the latter’s internet activities:

x x x x

The Constitutional limitations on the exercise of personal jurisdiction differ depending upon whether a court seeks to exercise general or specific jurisdiction over a non-resident defendant.16 General jurisdiction permits a court to exercise personal jurisdiction over a non­resident defendant for non-forum related activities when the defendant has engaged in “systematic and continuous” activities in the forum state.17 In the absence of general jurisdiction, specific jurisdiction permits a court to exercise personal jurisdiction over a non-resident defendant for forum-related activities where the “relationship between the defendant and the forum falls within the ‘minimum contacts’ framework” of International Shoe Co. v. Washington18 and its progeny.19 Manufacturing does not contend that we should exercise general personal jurisdiction over Dot Com. Manufacturing concedes that if personal jurisdiction exists in this case, it must be specific.

A three-pronged test has emerged for determining whether the exercise of specific personal jurisdiction over a non-resident defendant is appropriate: (1) the defendant must have sufficient “minimum contacts” with the forum state, (2) the claim asserted *1123 against the defendant must arise out of those contacts, and (3) the exercise of jurisdiction must be reasonable.20 The “Constitutional touchstone” of the minimum contacts analysis is embodied in the first prong, “whether the defendant purposefully established” contacts with the forum state.21 Defendants who “‘reach out beyond one state” and create continuing relationships and obligations with the citizens of another state are subject to regulation and sanctions in the other State for consequences of their actions.”22 “[T]he foreseeability that is critical to the due process analysis is x x x that the defendant’s conduct and connection with the forum State are such that he should reasonably expect to be haled into court there.”23 This protects defendants from being forced to answer for their actions in a foreign jurisdiction based on “random, fortuitous or attenuated” contacts.24 “Jurisdiction is proper, however, where contacts proximately result from actions by the defendant himself that create a ‘substantial connection’ with the forum State.”25

The “reasonableness” prong exists to protect defendants against unfairly inconvenient litigation.26 Under this prong, the exercise of jurisdiction will be reasonable if it does not offend “traditional notions of fair play and substantial justice”. 27 When determining the reasonableness of a particular forum, the court must consider the burden on the defendant in light of other factors including: “the forum state’s interest in adjudicating the dispute; the plaintiffs interest in obtaining convenient and effective relief, at least when that interest is not adequately protected by the plaintiffs right to choose the forum; the interstate judicial system’s interest in obtaining the most efficient resolution of controversies; and the shared interest of the several states in furthering fundamental substantive social policies.”28

2. The Internet and Jurisdiction

In Hanson v. Denckla, the Supreme Court noted that “[a]s technological progress has increased the flow of commerce between States, the need for jurisdiction has undergone a similar increase.” 29 Twenty seven years later, the Court observed that jurisdiction could not be avoided “merely because the defendant did not physically enter the forum state.”30 The Court observed that:

[I]t is an inescapable fact of modern commercial life that a substantial amount of commercial business is transacted solely by mail and wire communications across state lines, thus obviating the need for physical presence within a State in which business is conducted.

Enter the Internet, a global “‘super-network’ of over 15,000 computer networks used by over 30 million individuals, corporations, organizations, and educational institutions worldwide.”31 “In recent years, businesses have begun to use the Internet to provide information and products to consumers and other businesses.”32 The internet makes it possible to conduct business throughout the world entirely from a desktop. With this global revolution looming on the horizon, the development of the law concerning the permissible scope of personal jurisdiction based on Internet use is in its infant stages. The *1124 cases are scant. Nevertheless, our review of the available cases and materials reveals that the likelihood that personal jurisdiction can be constitutionally exercised is directly proportionate to the nature and quality of commercial activity that an entity conducts over the Internet. This sliding scale is consistent with well developed personal jurisdiction principles. At one end of the spectrum are situations where a defendant clearly does business over the Internet. If the defendant enters into contracts with residents of a foreign jurisdiction that involve the knowing and repeated transmission of computer files over the Internet, personal jurisdiction is proper. E.g.[,] CompuServe, Inc. v. Patterson, 89 F.3d 1257 (6th Cir. 1996). At the opposite end are situations where a defendant has simply posted information on an Internet Web site which is accessible to users in foreign jurisdictions. A passive Web site that does little more than make information available to those who are interested in it is not grounds for the exercise personal jurisdiction. E.g.[,] Bensusan Restaurant Corp., v. King, 937 F. Supp. 295 (S.D.N.Y. 1996). The middle ground is occupied by interactive Web sites where a user can exchange information with the host computer. In these cases, the exercise of jurisdiction is determined by examining the level of interactivity and commercial nature of the exchange of information that occurs on the Web site. E.g. [,] Maritz, Inc. v. Cybergold, Inc., 947 F. Supp. 1328 (E.D.Mo. 1996).

Traditionally, when an entity intentionally reaches beyond its boundaries to conduct business with foreign residents, the exercise of specific jurisdiction is proper.33 Different results should not be reached simply because business is conducted over the Internet. x x x

x x x x

Thus, the Sliding Scale Test or Zippo Test was born. This test was based on the premise that “the likelihood that ‘personal jurisdiction’ can be constitutionally exercised is directly proportionate to the nature and quantity of commercial activity that an entity conducts over the internet.” At one end of the scale are “passive” websites, which alone generally do not generate sufficient contacts with a foreign state to establish personal jurisdiction since they are only used to post information therein. At the other end of the scale are “active” websites, which generate sufficient business over the internet to establish personal jurisdiction. “Interactive” websites fall in the center of the scale since they are hybrid sites that contain elements of both passive and active websites, and courts determine whether to exercise personal jurisdiction over the interactive website owner on a case-by-case basis.

Verily, the Sliding Scale Test was specifically tailored to aid courts in determining whether the nature and level of a non-resident defendant’s internet activity constitute “minimum contacts” for jurisdictional purposes. I submit that the same test is applicable here in determining whether the Philippines may regulate and tax offshore-based POGOs in view of the nature and extent of their operations here.

Here, the Court can take judicial notice of the fact that offshore-based POGO licensees have conducted gaming operations through PAGCOR-accredited local gaming agents and service providers for its gaming operations. The enormity of the transactions has been noticeable not only from the end of the BIR and PAGCOR but by the Legislature itself through congressional hearing by both Houses in aid of legislation, ranging from taxability, immigration issues, rise of criminal activities, etc.. Billions of foreign currency transactions go through these entities day by day aided by the internet. It is not merely a passive website as money has been changing hands here in the Philippines.

Offshore-based POGO licensees are taxable as resident foreign corporations

Since offshore-based POGO licensees are deemed to be doing business here, they squarely fall under the definition of “resident foreign corporations” in Section 22(H) of the NIRC, thus:

SEC. 22. Definitions. – When used in this Title:

(H) The term ‘resident foreign corporation’ applies to a foreign corporation engaged in trade or business within the Philippines.34

Consequently, they are subject to income tax in accordance with Section 23 of the NIRC:

SEC. 23. General Principles of Income Taxation in the Philippines. – Except when otherwise provided in this Code:

(A) A citizen of the Philippines residing therein is taxable on all income derived from sources within and without the Philippines;

(B) A nonresident citizen is taxable only on income derived from sources within the Philippines;

(C) An individual citizen of the Philippines who is working and deriving income from abroad as an overseas contract worker is taxable only on income derived from sources within the Philippines: Provided, That a seaman who is a citizen of the Philippines and who receives compensation for services rendered abroad as a member of the complement of a vessel engaged exclusively in international trade shall be treated as an overseas contract worker;

(D) An alien individual, whether a resident or not of the Philippines, is taxable only on income derived from sources within the Philippines;

(E) A domestic corporation is taxable on all income derived from sources within and without the Philippines; and

(F) A foreign corporation, whether engaged or not in trade or business in the Philippines, is taxable only on income derived from sources within the Philippines.35 (Emphases supplied)

As the provision plainly states, a foreign corporation, whether engaged or not in trade or business in the Philippines, is subject to Philippine income taxation on income received from all sources within the Philippines. This rule is based on the source concept defined as:

Source concept. The jurisdiction to impose income tax is based either on the relationship of the income (tax object) to the taxing state (commonly known as the source or situs principle) or the relationship of the taxpayer (tax subject) to the taxing state based on residence or nationality. Under the source principle, a State’s claim to tax income is based on the State’s relationship to that income.36

In CIR v. Baier-Nickel,37 the Court provided a background on sourcing of income under the Internal Revenue Code of the U.S. from whence our Tax Code originated:

The following discussions on sourcing of income under the Internal Revenue Code of the U.S., are instructive:

The Supreme Court has said, in a definition much quoted but often debated, that income may be derived from three possible sources only: (1) capital and/or (2) labor; and/or (3) the sale of capital assets. While the three elements of this attempt at definition need not be accepted as all-inclusive, they serve as useful guides in any inquiry into whether a particular item is from “sources within the United States” and suggest an investigation into the nature and location of the activities or property which produce the income.

If the income is from labor the place where the labor is done should be decisive; if it is done in this country, the income should be from “sources within the United States.” If the income is from capital, the place where the capital is employed should be decisive; if it is employed in this country, the income should be from “sources within the United States.” If the income is from the sale of capital assets, the place where the sale is made should be likewise decisive.

Much confusion will be avoided by regarding the term “source” in this fundamental light. It is not a place, it is an activity or property. As such, it has a situs or location, and if that situs or location is within the United States the resulting income is taxable to nonresident aliens and foreign corporations.

The intention of Congress in the 1916 and subsequent statutes was to discard the 1909 and 1913 basis of taxing nonresident aliens and foreign corporations and to make the test of taxability the “source,” or situs of the activities or property which produce the income. The result is that, on the one hand, nonresident aliens end nonresident foreign corporations are prevented from deriving income from the United States free from tax, and, on the other hand, there is no undue imposition of a tax when the activities do not take place in. and the property producing income is not employed in, this country. Thus, if income is to be taxed, the recipient thereof must be resident within the jurisdiction, or the property or activities out of which the income issues or is derived must be situated within the jurisdiction so that the source of the income may be said to have a situs in this country.

The underlying theory is that the consideration for taxation is protection of life and property and that the income rightly to be levied upon to defray the burdens of the United States Government is that income which is created by activities and property protected by this Government or obtained by persons enjoying that protection.38 (Emphases supplied)

The important factor which determines the source of income of personal services, therefore, is not the residence of the payor, or the place where the contract for service is entered into, or the place of payment, but the place where the services were actually rendered.39

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, e.g., sale of tickets in the Philippines is the activity that produces the income as 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.40

Here, I respectfully submit that the services of offshore-based POGO licencees – “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” – are being rendered here. These enumerated activities are transactions deemed to have been consummated within the Philippines, albeit done on the virtual plane. From placing the bet to winning a bet, the commercial transaction, e-commerce or any sort of virtual transactions find themselves within the Philippines through the services of PAGCOR-accredited local gaming agents and service providers for its offshore gaming operations.

In an emerging digital economy, no clear boundaries has been set nor a scope of authority or imposition has been taken up by the Legislature. Even then, if the Philippines that has substantial connection with the assets or services which are subject to tax, e.g., enrolled under the Philippine Payment System, or the delivery of goods and services are in the Philippines, then the government can assert that the Philippines is the tax situs for the digital transaction.

At any rate, offshore-based POGO licensees should be subject to tax in exchange for the privileges they enjoy

While PAGCOR insists that none of the components of offshore gaming are being performed within Philippine territory, I cannot take its submission hook, line and sinker. At the back of my mind, so many questions linger as to their operations:

a. Why is there a proliferation of foreigners in the Philippines engaged in such operations?

b. Why are there numerous offices, residential condominiums rented specifically for POGO operations and other array of services for them?

c. If the only transaction entered into by these offshore-based POGO licensees are the service contracts with these service providers located in the Philippines, what interest do they have here in the Philippines?

It is an open secret that PAGCOR and other institutions have provided aide and protection to these entities to the point that even the government could not explain their proliferation. Since their inception, they enjoyed protection here in the Philippines, it is high time they contribute to the expenditures of the government.

In Lorenzo v. Posadas, Jr.,41 this benefit-based taxation was mentioned by the Court, but it nevertheless emphasized that the obligation to pay taxes rests on governmental existence and necessity, to wit:

Taxes are essential to the very existence of government.42 The obligation to pay taxes rests not upon the privileges enjoyed by, or the protection afforded to, a citizen by the government, but upon the necessity of money for the support of the state.43 For this reason, no one is allowed to object to or resist the payment of taxes solely because no personal benefit to him can be pointed out.44

x x x x

This basis of taxation was subsequently articulated in CIR v. Algue, Inc.,45 where the Court pronounced:

It is said that taxes are what we pay for civilization society. Without taxes, the government would be paralyzed for lack of the motive power to activate and operate it. Hence, despite the natural reluctance to surrender part of one’s hard earned income to the taxing authorities, every person who is able to must contribute his share in the running of the government. The government for its part, is expected to respond in the form of tangible and intangible benefits intended to improve the lives of the people and enhance their moral and material values. This symbiotic relationship is the rationale of taxation and should dispel the erroneous notion that it is an arbitrary method of exaction by those in the seat of power.46 (Emphasis and italics supplied)

x x x x

Thus, the basis of taxation is the existence of a social contract, characterized as a symbiotic relationship between the State and its citizens – offshore gaming licensees in this case, which compel reciprocal duties of protection and support between the parties. In Abakada Guro Party List v. Ermita,47 the Supreme Court restated the basis of taxation – “The expenses of government, having for their object the interest of all, should be borne by everyone, and the more man enjoys the advantages of society, the more he ought to hold himself honored-in contributing to those expenses.”

As a result, I register my dissent and vote to dismiss the Petition.

_________________________________

Footnotes

1 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. (Republic Act No. 11590, Approved on September 22 2021).

2 Id.

3 72 Phil. 524-531 (1941).

4 Id. at 528.

5 MR Holdings, Ltd. v. Bajar, et al., 430 Phil. 443, 462 (2002).

6 An Act to Promote Foreign Investments, Prescribes ihe Procedures for Registering Enterprises Doing Business in the Philippines, and for Other Purposes.

7 Section 3(d) of Republic Act No. 7042, Approved on June 13, 1991 (as amended).

8 An Act to Require that the Making of Invesments and the Doing of Business Within the Philippines by Foreigners or Business Organizations Owned in Whole or in Part by Foreigners Should Contribute to the Sound and Balanced Development of the National Economy on a Self-Sustaining Basis, and for Other Purposes, Enacted Without executive approval, September 30, 1968, (65 O.G. No. 29, p. 7410).

9 A Decree to Revise, Amend and Codify the Investment, Agricultural, and Export Incentives Acts to be known as the Omnibus Investment Code, (Presidential Decree No. 1789, Signed on January 16, 1981).

10 Supra note 5 at 464.

11 C. Villanueva, Philippine Corporate Law (2010 ed.), p. 986.

12 See Cargill, Inc. v. Intra Strata Assurance Corporation, Inc., 629 Phil. 320, 333 (2010).

13 SEC-OGC Opinion No. 17-03 Re; Foreign Corporation; Doing business; Online Gaming, issued by Hon. Camilo S. Correa, General Counsel of Securities and Exchange Commission.

14 Id.

15 Zippo Mfg. Co. v Zippo Dot Com, Inc., 952 F. Supp. 1119 (W.D. Pa. 1997). https://law.justia.com/cases/federal/district-courts/FSupp/952/1119/1432344/. (Accessed on December 27, 2021, 9:19 PM), citing Mellon, 960 F. 2d at 1221.

16 Id, Mellon, 960 F.2d at 1221.

17 Id, Helicopteros Nacionales de Colombia S.A. v. Hall, 466 U.S. 408, 414-16, 104 S. Ct. 1868, 1872-73, 80 L. Ed. 2d 404 (1984).

18 Id, International Shoe Co. v. Washington, 326 U.S. 310, 66 S. Ct. 154, 90 L. Ed. 95 (1945).

19 Id, Mellon, 960 F.2d at 1221.

20 Id.

21 Id, Burger King Corp. v. Rudzewiez, 471 U.S. 462, 475, 105 S. Ct. 2174, 2183-84, 85 L. Ed. 2d 528 (1985) (citing International Shoe Co. v. Washington, 326 U.S. 310, 319, 66 S. Ct. 154, 159-60, 90 L. Ed. 95 (1945)).

22 Id, citing Travelers Health Assn. v Virginia 339 U.S. 643, 647, 70 S. Ct. 927, 929, 94 L. Ed. 1154 (1950)).

23 Id, World-Wide Volkswagen Corp. v. Woodson, 444 U.S. 286, 297, 100 S. Ct. 559, 567, 62 L. Ed. 2d 490 (1980).

24 Id, Keeton v. Hustler Magazine, Inc., 465 U.S. 770, 774, 104 S. Ct. 1473, 1478, 79 L. Ed. 2d 790 (1984).

25 Id, Burger King, 471 U.S. at 475, 105 S. Ct. at 2183-84 (citing McGee v. International Life Insurance Co., 355 U.S. 220, 223, 78 S. Ct. 199, 201, 2 L. Ed. 2d 223 (1957)).

26 Id, World-Wide Volkswagen, 444 U.S. at 292, 100 S Ct. at 564-65.

27 Id, International Shoe, 326 U.S. at 316, 66 S. Ct. at 158.

28 Id, World-Wide Volkswagen, 444 U.S. at 292, 100 S. Ct. at 564.

29 Id, Hanson v. Denckla, 357 U.S. 235, 250-51, 78 S. Ct. 1228, 1237-39, 2 L. Ed. 2d 1283 (1958).

30 Id, Burger King, 471 U.S. at 476, 105 S. Ct. at 2184.

31 Id, Panavision Intern., L.P. v. Toeppen, 938 F Supp. 616 (C.D.Cal. 1996) (citing American Civil Liberties Union v. Reno, 929 F. Supp. 824, 830-48 (E.D.Pa. 1996)).

32 Id.

33 Id, Burger King, 471 U.S. at 475, 105 S. Ct. at 2183-84.

34 AN ACT AMENDING THE NATIONAL INTERNAL REVENUE CODE, AS AMENDED, AND FOR OTHER PURPOSES, Republic Act No. 8424, December 11, 1997.

35 Id.

36 Concepts and issues, I. International Double Taxation, UN Committee of Experts on International Cooperation in Tax Matters Seventh session, Geneva, 24-28 October 2011, Item 5 (h) of the provisional agenda, Revision of the Manual for the Negotiation of Bilateral Tax Treaties.

37 CIR v. Juliane Baier-Nickel, 531 Phil. 480-496 (2006).

38 Id. at 488-489.

39 Id. at 489.

40 See CIR v. British Overseas Airways Corporation, 233 Phil. 406, 422 (1987).

41 Pablo Lorenzo v. Juan Posadas, Jr., 64 Phil.  353, 370 (1937).

42 Id, citing Dobbins v. Erie County, 16 Pet., 435 10 Law, ed., 1022; Kirkland v. Hotchkiss, 100 U.S., 491; 25 Law. ed., 558; Lane County v. Oregon, 7 Wall. 71, 19 Law. ed., 101; Union Refrigerator Transit Co., v. Kentucky, 199 U. S., 194; 26 Sup. Ct., Rep., 36, 50 Law. ed., 150, Charles River Bridge v. Warren Bridge, 11 Pet., 420; 9 Law. ed., 773.

43 Id, citing Dobbins v. Erie County.

44 Id, citing Thomas v. Gay, 169 U. S., 264, 18 Sup. Ct. Rep., 340; 43 Law. ed 740.

45 CIR v. Algue, 241 Phil. 829-836 (1988).

46 Id. at 836.

47 506 Phil. 1, 74 (2005).

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