POGOs are tax exempt says BIR

Philippine offshore gaming operators (or more commonly known as POGOs) are exempt from taxes, according to the Bureau of Internal Revenue (BIR) during a hearing conducted by the House of Representatives. The BIR’s statement drew the ire of both administration and opposition lawmakers alike; causing them to call for new legislation which would put the country’s young but rapidly growing online gambling industry in check.

Reasoning of the Bureau of International Revenue
During the House Ways and Means committee hearing, the BIR representatives argued that most POGOs are outside of the jurisdiction of the Bureau. In other words, these entities cannot be taxed by the Philippine government. The BIR offered up two explanations in order to back up its controversial position on the matter.

Philippine Offshore Gaming Operators (POVOs) are nonresident foreign corporations which do not earn any taxable income within the Philippines
The Bureau’s strongest argument is anchored on the fact that it classifies POGOs as non resident foreign corporations, which — according to the National Internal Revenue Code (NIRC) — are only taxable on income earned from within the Philippines.

The BIR then proceeds to argue that POGOs, despite having administrative operations in the Philippines, do not actually earn any taxable income within the country. Rather, these entities technically earn their profits from abroad due to the fact that most — if not all of their customers — are located outside the country, specifically in mainland China.

In other words, the Bureau of Internal Revenue says that it does not have the power to tax these entities.

Philippine Offshore Gaming Operators (POGOs) are not registered with the Bureau of Internal Revenue (BIR)
The BIR also added that most of the 60+ POGOs operating in the Philippines are not registered with the tax bureau. As a result, the agency is having a difficult time enforcing the country’s tax laws on these companies.

Despite all of these explanations from the BIR, lawmakers and tax experts are still not convinced and are now calling for an immediate review on the regulations imposed on POGOs. For one, other non resident foreign corporations are already being taxed at a rate of 30% of gross income. Second, non registration is not a valid ground for tax exemption

Implications for the country’s real estate market — the good, the bad, and the ugly
Over the past two to three years, the rapidly growing online gambling industry has been one of the largest drivers for office space demand in the National Capital Region. In fact, a research report released by Colliers show that POGOs account for approximately 37% of all new office space transactions (442,000 square meters) — ranking second just on the heels of the Business Process Outsourcing (BPO) industry. As such, any new legislation which will impact the online gambling industry will also significantly affect the country’s real estate market.

The good: sustained office space demand in the near future

The strong demand for office spaces by POGOs will probably be sustained in the short run (within the next three to five years) due to the following reasons:

1. It will take awhile before any meaningful legislation that would tax POGOs can be enacted by Congress and signed into law by the president. Thus, the online gambling industry (which had ₱400 billion worth of revenues in 2018) should continue to see extraordinary profits within the foreseeable future.

2. Most large property developers require non refundable advance payments worth two to three years of rent. As such — even if POGOs do begin to lose money, the property developers would have more than enough time to look for new tenants to replace the existing POGO firms.

The bad: possible new tax regime for POGOs
The country’s online gambling industry is rapidly approaching the one billion dollar mark. In fact, the industry as a whole was already at $800 million (₱40 billion) as of 2018. It is, thus, understandable to see why lawmakers are upset that POGOs are not being taxed.

According to Congressman Joey Salceda, “A clear definitive tax regime for POGOs will be a potent revenue source, as well as a means of placing these facilities under stricter oversight.” As such, he has submitted a bill, which aims to tax Philippine offshore gaming operators at a rate of 5% based on gross receipts or revenue. Using the 2018 figures, this bill — if enacted into law — could raise at least ₱2 billion in revenues for the government per year. On top of the gross receipts tax, Salceda also proposed taxing foreign POGO workers at a rate of 15%.

The Philippine Amusement and Gaming Corporation (PAGCOR), however, has warned congress with regard to taxing POGOs. According to PAGCOR, a 5% tax may prompt the existing players to move their operations elsewhere.

The ugly: total ban on POGOs
Certain lawmakers from the opposition — such as House Minority Leader Bienavido Abante Jr. — has even gone as far as calling for the total ban of POGOs if the BIR is not able to tax these entities properly. This proposal would obviously devastate the Philippine real estate market, especially the property developers which have positioned themselves to ride on the rapid growth of POGOs.