Will POGOs die out in the coming years amid stricter collection of taxes?

Philippine offshore gaming operators (or known as POGOs) have been one of the main drivers of the real estate industry. Colliers International Philippines estimates that about 37% of closed real estate transactions as of September were transacted with offshore gaming operators and their service providers.

POGOs also occupy around 1.14 million square meters of commercial space or roughly 10% of all office space in the Metro Manila. Aside from increasing the demand for office spaces, POGOs also often provide housing to their employees since most of these are Chinese nationals who come from the mainland and have no permanent residence here in the Philippines.

Being a major driver of demand for real estate , it is important to consider the prospects of the offshore gaming industry as it could have serious implications on real estate prices. A growing POGO industry would make sure that there is a constant demand for condominium units and residential houses being built. On the other hand, if the POGO industry performs poorly, they might have to shut down resulting to lower demand and lower real estate prices.

Below are some of the things that can impact the future of POGOs in the country.

Stricter imposition of taxes by the BIR and tougher crackdown on tax-evading POGOs
President Rodrigo Duterte has given Philippine offshore gaming operators an ultimatum to settle their unpaid tax liabilities or stand to face the consequences.

This statement comes after the BIR shutdown some of the branches of New Oriental Club88 Corporation (NOCC), the largest POGO support service provider in the country. The firm employs roughly 6,700 workers – mostly Chinese nationals working in unregistered branches.

NOCC’s main office located in Makati City is duly registered with the Bureau of Internal Revenue (BIR); however, it failed to register its 11 branches in Paranaque City with the BIR - leading to the padlocking of these. In addition, it also failed to pay the corresponding value-added tax and remit the proper withholding tax.

According to the regulations promulgated by both the BIR and the Philippine Amusement and Gaming Corporation (or more commonly known as PAGCOR), any branch or floor occupied by POGOs should be duly registered with their respective BIR regional district offices. Currently there are 218 offshore gaming operators registered with the BIR employing more than 100,000 workers.

Aside from NOCC, three other POGOs were shut down last September due to their respective unpaid tax liabilities. These POGOs were only allowed to operate once more after paying a total of P1.2 billion in taxes.

From January to August this 2019, the BIR was able to collect a total of P1.63 billion in withholding taxes and corporate taxes from POGOs. This amount is nearly triple of the P579 million collected by the Bureau in 2018.

How are POGOs taxed?
According to the BIR, POGOs are considered service providers and while most of their clients and patrons reside abroad, the services that these POGOs provide are rendered in the Philippines and are clearly taxable by the BIR.

Offshore gaming operators situated in the Philippines are taxed based on BIR Revenue Memorandum Circular No. 102-2017. According to the RMC, the income of POGOs can be divided into two namely: (1) income from gaming operations and (2) income from other related services.

A franchise tax of 5% on gross receipts derived from gaming operations is imposed on POGOs in lieu of all taxes including local and national taxes. Revenues generated from operations, casinos, and amusement places all fall under this category.

For income from other related services or non-gaming operations, the offshore gaming operator is subject to both the normal corporate tax and the value-added tax.

Competitive advantages of POGOs over other offshore gaming operators
Despite stricter implementation and collection of taxes by our government, POGOs still have an advantage compared to its other competitors based in other countries. According to the National Tax Research Center (NRTC) the Philippines is expected to become a major player in the global offshore gaming industry.

Cheaper real estate prices and competitive labor costs are advantages offshore gaming operators enjoy when they situate themselves in the Philippines. The Philippines has lower real estate prices compared to its Southeast Asian peers and this would mean a reduced operational cost for offshore gaming operators. The Philippines is also an ideal location given its proximity to Hong Kong, Macau, and China - which all have a large gaming market.

The Philippine peso is also weaker compared to the Chinese yuan with 1 yuan equaling to roughly 7 pesos. Most of the POGOs revenues comes from Chinese customers and as such they are earning yuan while their operating expenses are only in pesos so this greatly benefits the profit line of these operators.

Apart from this, China also has no authority to force the Philippines to ban offshore gaming operators even if they believe that allowing POGOs to operate would increase the Philippines’s risk of being exposed to money laundering.  President Duterte himself has also acknowledged that POGOs do indeed play an integral and vital role in the country’s economy.  Closing down POGOs would mean less jobs and less economic activity in the Philippines. To combat the risk of exposure to money laundering, POGOs would be regulated by the government but as long as they pay the proper amount of taxes and comply with the government's regulations then they would be allowed to continue business.

Expected New Entrants to the Industry
With the goal of improving and developing the country's online gaming industry, the PAGCOR held G2E Asia this December 2-3 at the Mariott Manila. This event is comprised of an exhibition and an educational conference. It also provides the perfect opportunity for offshore gaming operators to expand their network, find better suppliers, and learn from best industry practices.

The holding of this event is bound to attract the attention of offshore gaming operators abroad and if they see that the Philippines is indeed able to provide a conducive environment for gaming operators to thrive then they would choose to open their businesses here in the country.

Brighter times ahead
Overall, despite the stricter implementation of taxes imposed on POGOs, the future is bright for POGOs as the Philippines still provides a conducive environment for offshore gaming operators to thrive in given - (1) comparatively cheaper prices of real estate; (2) the country's proximity to the large gaming markets of Hong Kong, Macau, and China; (3) competitive labor costs; (4) weaker peso compared to the Chinese yuan, and (5) the administration's stance on regulating POGOs instead of banning them.