Tax ruling roils Manila Bay

Published in: Latest Intelligence The future of Manila’s ambitious attempt to challenge the casinos of Macau and Singapore has been thrown into question following a ruling by the Bureau of Internal Revenue that the country’s casino and gambling operators must pay 30 percent corporate income tax.

While locally listed companies involved in the four casino hotel projects -- each valued at $1 billion or more -- being developed at Manila Bay’s Entertainment City showed little public annoyance, investors were distraught. Shares of Melco Crown (Philippines) Resorts Corp. fell as much as 12.6 percent after news of the ruling spread this week while shares of its partner Belle Corp. were down as much as 10.3 percent. Bloomberry Resorts Corp. and Alliance Global Group Inc. dipped up to 5.8 percent and 4 percent respectively.

Amado Macasaet, publisher of Malaya Business Insight, thundered in a signed editorial that the ruling was “a loud signal to foreign investors that the Philippines cannot keep its word”, comparable to vacillation that has led to the drying up of planned investment in the country’s mining sector.

Several congressmen joined in the attacks on the Revenue Bureau on Thursday, insisting that only Congress has the power to impose taxes and indicating they would summon bureau commissioner Kim Henares to explain. "No one should be changing the rules in the middle of the game if we want to really attract investments into the country," said Representative Rodolfo Antonino.

Until now, the understanding was that the casinos would pay a 5 percent franchise tax from gross gaming revenue as part of gaming fees of 25 percent tax on gross mass market gambling revenue and  15 percent on VIP turnover. The Revenue Bureau said with the imposition of the corporate income tax, private operators will not be responsible for the franchise tax. By comparison, Macau operators turn over 40 percent of gross revenue to the authorities.

“The low tax level was the magnet that attracted foreign investors to team up with Filipino partners in the gaming business,” Macasaet wrote. “The tax will kill the goose that lays the golden egg.” Indeed, Brad Stone, president of Global Gaming Asset Management, which bought a 9 percent stake in Bloomberry in December, cited the tax structure as a key draw in March.

Though the Revenue Bureau’s memorandum was dated April 17, it was issued April 23 and word of it only spread the following weekend. The timing may yet become an issue. 

Melco Philippines closed a $377 million share offering on April 24 and it is not clear what investors were told. Travellers International Hotel Group, the joint venture of Alliance Global and Malaysia’s Genting Group, hired investment banks to prepare a $500 million initial public offering around the same time. 

Moreover, the first of the four planned Entertainment City casino hotels, Bloomberry’s Solaire Resorts & Casino, only opened March 16. The other three -- Travellers’ Resorts World Bayshore, the Belle and Melco joint venture Belle Grande Manila Bay and Universal Entertainment Corp.’s Manila Bay Resorts -- are far from completion, hence the share offerings to raise construction funds. 

A deal Japan-based Universal announced in December to bring in Robinson Land Corp. as a required local partner was already facing doubts after a signing was postponed in January and the US Department of Justice acknowledged that Universal chairman Kazuo Okada is under criminal investigation over allegations Philippine officials were bribed to advance the Manila project.

The Revenue Bureau’s tax ruling stems from a 2005 decision to remove government-owned Philippine Amusement & Gaming Corp. (Pagcor), which operates its own casinos and regulates and licenses other operators, from a list of government companies exempt from income tax. Pagcor had until now fought a successful rearguard action to forestall collection of the tax and its potential impact on licensees had not been spelled out.

The gambling operators are now preparing a joint response, Bloomberry told the stock exchange. It added, “We expect the [Pagcor] gaming fees will be reduced to remove the 5 percent franchise tax component” and said it was still studying the impact the tax changes would have on its operations.

“It will definitely hit the bottom line because now we have to pay corporate income tax as well,” said Armin Antonio Santos, deputy head of Belle. “There are some legal issues as we were granted by the authority various incentives.”

Santos though said development of the Belle Grande “is going ahead full steam”. 

“We don’t open until mid-2014,” he said. “I am hoping that by the time we open next year things will settle and we will be able to find a common ground with the government.” Added Willy Ocier, vice chair, “We are confident that our project will be successful financially regardless.”

Melco Philippines said it was evaluating options including “legal remedies” while Alliance said: “We are confident that fair and equitable resolution will be made in keeping with the true spirit and intent of our provisional license. We trust that Pagcor will safeguard the economic terms of our agreement and the best interest of the industry.”

Just as news of the tax ruling was spreading last weekend came reports of water pouring from the ceiling of the Solaire and flooding its slot machine area after a pipe burst amid a rainstorm. When it rains in the Philippines, it pours.