TAXATION 2
Local Taxation – General Principles
Atty. AJ Kasilag
Soy Abeto Notes 1
LOCAL TAXATION
General Principles
G.R. No. 152492. October 16, 2003
PALMA
DEVELOPMENT
CORPORATION,
petitioner, vs. MUNICIPALITY
OF
MALANGAS,
ZAMBOANGA DEL SUR, respondent
Taxation; Section 133(e) of RA No. 7160 prohibit the
imposition, in the guise of wharfage, of fees—as well as all
other taxes or charges in any form whatsoever.
By express language of Sections 153 and 155 of RA
No. 7160, local government units, through their
Sanggunian, may prescribe the terms and conditions for
the imposition of toll fees or charges for the use of any
public road, pier or wharf funded and constructed by
them. A service fee imposed on vehicles using municipal
roads leading to the wharf is thus valid. However, Section
133(e) of RA No. 7160 prohibits the imposition, in the
guise of wharfage, of fees—as well as all other taxes
or charges in any form whatsoever—on goods or
merchandise. It is therefore irrelevant if the fees imposed
are actually for police surveillance on the goods, because
any other form of imposition on goods passing
through the territorial jurisdiction of the municipality
is clearly prohibited by Section 133(e).
A wharfage does not lose its basic character by being
labeled as a service fee “for police surveillance on all
goods.”
Under Section 131 (y) of RA No. 7160, wharfage is
defined as “a fee assessed against the cargo of a vessel
engaged in foreign or domestic trade based on quantity,
weight, or measure received and/or discharged by vessel.”
It is apparent that a wharfage does not lose its basic
character by being labeled as a service fee “for police
surveillance on all goods.”
Unjust Enrichment; Two conditions for unjust enrichment to
be deemed present; There is no unjust enrichment where
the one receiving the benefit has a legal right or entitlement
thereto, or when there is no causal relation between one’s
enrichment and the other’s impoverishment.
Unpersuasive is the contention of respondent
that petitioner would unjustly be enriched at the former’s
expense. Though the rules thereon apply equally well to
the government, for unjust enrichment to be deemed
present, two conditions must generally concur: (a) a
person is unjustly benefited, and (b) such benefit is
derived at another’s expense or damage.
In the instant case, the benefits from the use of
the municipal roads and the wharf were not unjustly
derived by petitioner. Those benefits resulted from the
infrastructure that the municipality was mandated by law
to provide. There is no unjust enrichment where the one
receiving the benefit has a legal right or entitlement
thereto, or when there is no causal relation between one’s
enrichment and the other’s impoverishment.
---We note that Section 5G.01 imposes two types of service
fees: 1) one for the use of the municipal roads and 2)
another for police surveillance on all goods and
equipment sheltered in the premises of the wharf.
The amount of service fees, however, is based on the type
of vehicle that passes through the road and the type
of goods being transported.
While both parties admit that the service fees imposed are
for the use of the municipal roads, petitioner maintains
that the service fee for police surveillance on goods
harbored on the wharf is in the guise of a wharfage, a
prohibited imposition under Section 133(e) of RA No.
7160. xxx
Nevertheless, a remand is still unnecessary even if the
service fee charged against the goods are for police
surveillance, because Section 133(e) of RA No. 7160
expressly prohibits the imposition of all other taxes, fees
or charges in any form whatsoever upon the merchandise
or goods that pass through the territorial jurisdiction of
local government units. It is therefore immaterial to the
instant case whether the service fee on the goods is for
police surveillance or not, since the subject provision of
the revenue ordinance is invalid. Reception of further
evidence to establish this fact would not legalize the
imposition of such fee in any way.
G.R. No. 126232. November 27, 1998
THE PROVINCE OF BULACAN, ROBERTO M.
PAGDANGANAN, FLORENCE CHAVES, and MANUEL
DJ SIAYNGCO in their capacity as PROVINCIAL
GOVERNOR, PROVINCIAL TREASURER, PROVINCIAL
LEGAL ADVISER, respectively, petitioners, vs. THE
HONORABLE COURT OF APPEALS (FORMER
TAXATION 2
Local Taxation – General Principles
Atty. AJ Kasilag
Soy Abeto Notes 2
SPECIAL 12TH DIVISION), REPUBLIC
CORPORATION, respondents.
CEMENT
Taxation; Municipal
Corporations; Local
Government
Units; A province has no authority to impose taxes on
stones, sand, gravel, earth and other quarry resources
extracted from private lands.
In any case, the remaining issues raised by petitioner
are likewise devoid of merit, a province having no
authority to impose taxes on stones, sand, gravel, earth
and other quarry resources extracted from private lands.
---The pertinent provisions of the Local Government
Code are as follows:
Sec. 134. Scope of Taxing Powers. —Except as otherwise
provided in this Code, the province may levy only the
taxes, fees, and charges as provided in this Article.
Sec. 138. Tax on Sand, Gravel and Other Quarry Resources.
—The province may levy and collect not more than ten
percent (10%) of fair market value in the locality per
cubic meter of ordinary stones, sand, gravel, earth,
and other quarry resources, as defined under the
National Internal Revenue Code, as amended, extracted
from public lands or from the beds of seas, lakes, rivers,
streams, creeks, and other public waters within its
territorial jurisdiction.
A province may not levy excise taxes on articles already
taxed by the National Internal Revenue Code.
The Court of Appeals erred in ruling that a province
can impose only the taxes specifically mentioned under
the Local Government Code. As correctly pointed out by
petitioners, Section 186 allows a province to levy taxes
other than those specifically enumerated under the Code,
subject to the conditions specified therein.
This finding, nevertheless, affords cold comfort
to petitioners as they are still prohibited from
imposing taxes on stones, sand, gravel, earth and
other quarry resources extracted from private
lands. The tax imposed by the Province of Bulacan is an
excise tax, being a tax upon the performance, carrying on,
or exercise of an activity.
---The Local Government Code provides:
Section 133. —Common Limitations on the Taxing Powers
of Local Government Units. —Unless otherwise provided
herein, the exercise of the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to
the levy of the following:
(h) Excise taxes on articles enumerated under the National
Internal Revenue Code, as amended, and taxes, fees or
charges on petroleum products;
A province may not, therefore, levy excise taxes on articles
already taxed by the National Internal Revenue Code.
Unfortunately for petitioners, the National Internal
Revenue Code provides:
Section 151. —Mineral Products. —
(A) Rates of Tax. —There shall be levied, assessed and
collected on minerals, mineral products and quarry
resources, excise tax as follows:
xxx
xxx
xxx
(2) On all nonmetallic minerals and quarry resources, a
tax of two percent (2%) based on the actual market value
of the gross output thereof at the time of removal, in case
of those locally extracted or produced; or the values used
by the Bureau of Customs in determining tariff and
customs duties, net of excise tax and value-added tax, in
the case of importation.
xxx
xxx
xxx
(B) [Definition of Terms]. —For purposes of this
Section, the term—
xxx
xxx
xxx
(4) Quarry resources shall mean any common stone or
other common mineral substances as the Director of the
Bureau of Mines and Geo-Sciences may declare to be
quarry resources such as, but not restricted to, marl,
marble, granite, volcanic cinders, basalt, tuff and rock
phosphate: Provided, that they contain no metal or metals
or other valuable minerals in economically workable
quantities.
A province may not ordinarily impose taxes on stones, sand,
gravel, earth and other quarry resources, as the same are
already taxed under the National Internal Revenue Code.
TAXATION 2
Local Taxation – General Principles
Atty. AJ Kasilag
Soy Abeto Notes 3
It is clearly apparent from the above provision that
the National Internal Revenue Code levies a tax
on all quarry resources, regardless of origin, whether
extracted from public or private land.
Thus, a province may not ordinarily impose taxes on
stones, sand, gravel, earth and other quarry resources, as
the same are already taxed under the National Internal
Revenue Code.
The province can, however, impose a tax on
stones, sand, gravel, earth and other quarry resources
extracted from public land because it is expressly
empowered to do so under the Local Government
Code. As to stones, sand, gravel, earth and other quarry
resources extracted from private land, however, it may not
do so, because of the limitation provided by Section 133
of the Code in relation to Section 151 of the National
Internal Revenue Code.
---Given the above disquisition, petitioners cannot claim that
the appellate court unjustly deprived them of the power
to create their sources of revenue, their assessment of
taxes
against
Republic
Cement
being ultra
vires, traversing as it does the limitations set by the Local
Government Code.
Natural Resources; Regalian Doctrine; A province may not
invoke the Regalian doctrine to extend the coverage of its
ordinance to quarry resources extracted from private lands,
for taxes, being burdens, are not to be presumed beyond
what the applicable statute expressly and clearly declares,
tax statutes being construed strictissimi juris against the
government.
Section 21 of Provincial Ordinance No. 3 is
practically only a reproduction of Section 138 of the
Local Government Code. A cursory reading of both
would show that both refer to ordinary sand, stone, gravel,
earth and other quarry resources extracted from public
lands. Even if we disregard the limitation set by Section
133 of the Local Government Code, petitioners may not
impose taxes on stones, sand, gravel, earth and other
quarry resources extracted from private lands on the basis
of Section 21 of Provincial Ordinance No. 3 as the latter
clearly applies only to quarry resources extracted from
public lands. Petitioners may not invoke the Regalian
doctrine to extend the coverage of their ordinance to
quarry resources extracted from private lands, for taxes,
being burdens, are not to be presumed beyond what the
applicable statute expressly and clearly declares, tax
statutes being construed strictissimi juris against the
government.
Note. —Where the Secretary of Justice reviews, pursuant
to law, a tax measure enacted by a local government unit
to determine if the officials performed their functions in
accordance with law, that is, with the prescribed
procedure for the enactment of tax ordinances and the
grant of powers under the Local Government Code, the
same is an act of mere supervision, not control. (Drilon vs.
Lim, 235 SCRA 135 [1994])
G.R. No. 166408. October 6, 2008
QUEZON CITY and THE CITY TREASURER OF
QUEZON
CITY,
petitioners, vs. ABS-CBN
BROADCASTING CORPORATION, respondent.
Franchise Tax; The right to exemption from local franchise
tax must be clearly established and cannot be made out of
inference or implications but must be laid beyond
reasonable doubt.
Section 8 of R.A. No. 7966 imposes on ABS-CBN
a franchise tax equivalent to three (3) percent of all gross
receipts of the radio/television business transacted under
the franchise and the franchise tax shall be “in lieu of all
taxes” on the franchise or earnings thereof. The “in lieu of
all taxes” provision in the franchise of ABS-CBN does not
expressly provide what kind of taxes ABS-CBN is
exempted from. It is not clear whether the exemption
would include both local, whether municipal, city or
provincial, and national tax. What is clear is that ABS-CBN
shall be liable to pay three (3) percent franchise tax and
income taxes under Title II of the NIRC. But whether the
“in lieu of all taxes provision” would include exemption
from local tax is not unequivocal. As adverted to earlier,
the right to exemption from local franchise tax must be
clearly established and cannot be made out of inference
or implications but must be laid beyond reasonable
doubt. Verily, the uncertainty in the “in lieu of all taxes”
provision should be construed against ABS-CBN. ABSCBN has the burden to prove that it is in fact covered by
the exemption so claimed. ABS-CBN miserably failed in
this regard.
----
TAXATION 2
Local Taxation – General Principles
Atty. AJ Kasilag
Soy Abeto Notes 4
Under Section 31, Article 13 of the Quezon City
Revenue Code of 1993, a franchise tax was imposed on
businesses operating within its jurisdiction. The provision
states:
“Section 31. Imposition of Tax. —Any provision of
special laws or grant of tax exemption to the contrary
notwithstanding, any person, corporation, partnership or
association enjoying a franchise whether issued by the
national government or local government and, doing
business in Quezon City, shall pay a franchise tax at the
rate of ten percent (10%) of one percent (1%) for 19931994, twenty percent (20%) of one percent (1%) for 1995,
and thirty percent (30%) of one percent (1%) for 1996 and
the succeeding years thereafter, of gross receipts and
sales derived from the operation of the business in
Quezon City during the preceding calendar year.”
II. The “in lieu of all taxes” provision in its
franchise does not exempt ABS-CBN from payment of
local franchise tax.
A. The present controversy essentially boils down to
a dispute between the inherent taxing power of Congress
and the delegated authority to tax of local governments
under the 1987 Constitution and effected under the LGC
of 1991.
The power of the local government of Quezon City to
impose franchise tax is based on Section 151 in relation to
Section 137 of the LGC, to wit:
“Section 137. Franchise Tax. —Notwithstanding any
exemption granted by any law or other special law, the
province may impose a tax on businesses enjoying a
franchise, at the rate not exceeding fifty percent (50%) of
one percent (1%) of the gross annual receipts for the
preceding calendar year based on the incoming receipt,
or realized within its territorial jurisdiction. x x x
Section 151. Scope of Taxing Powers. —Except as
otherwise provided in this Code, the city may levy the taxes,
fees and charges which the province or municipality may
impose: Provided, however, That the taxes, fees and
charges levied and collected by highly urbanized and
component cities shall accrue to them and distributed in
accordance with the provisions of this Code.
The rates of taxes that the city may levy may exceed
the maximum rates allowed for the province or
municipality by not more than fifty percent (50%) except
the rates of professional and amusement taxes.”
(Emphasis supplied)
Such taxing power by the local government, however,
is limited in the sense that Congress can enact legislation
granting exemptions.
In the case under review, the Philippine Congress
enacted R.A. No. 7966 on March 30, 1995, subsequent to
the effectivity of the LGC on January 1, 1992. Under it,
ABS-CBN was granted the franchise to install and operate
radio and television broadcasting stations in the
Philippines. Likewise, Section 8 imposed on ABS-CBN the
duty of paying 3% franchise tax. It bears stressing,
however, that payment of the percentage franchise tax
shall be “in lieu of all taxes” on the said franchise.
Congress has the inherent power to tax, which
includes the power to grant tax exemptions. On the other
hand, the power of Quezon City to tax is prescribed by
Section 151 in relation to Section 137 of the LGC which
expressly provides that notwithstanding any exemption
granted by any law or other special law, the City may
impose a franchise tax. It must be noted that Section 137
of the LGC does not prohibit grant of future exemptions.
As earlier discussed, this Court in City Government of
Quezon City v. Bayan Telecommunications, Inc. sustained
the power of Congress to grant tax exemptions over and
above the power of the local government’s delegated
power to tax.
B. The more pertinent issue now to consider is whether
or not, by passing R.A. No. 7966, which contains the “in
lieu of all taxes” provision, Congress intended to exempt
ABS-CBN from local franchise tax.
Taxes are what civilized people pay for civilized
society. They are the lifeblood of the nation. Thus, statutes
granting tax exemptions are construed stricissimi
juris against the taxpayer and liberally in favor of the
taxing authority. A claim of tax exemption must be clearly
shown and based on language in law too plain to be
mistaken. Otherwise stated, taxation is the rule, exemption
is the exception. The burden of proof rests upon the party
claiming the exemption to prove that it is in fact covered
by the exemption so claimed.
TAXATION 2
Local Taxation – General Principles
Atty. AJ Kasilag
Soy Abeto Notes 5
The basis for the rule on strict construction to
statutory provisions granting tax exemptions or
deductions is to minimize differential treatment and foster
impartiality, fairness and equality of treatment among
taxpayers. He who claims an exemption from his share of
common burden must justify his claim that the legislature
intended to exempt him by unmistakable terms. For
exemptions from taxation are not favored in law, nor are
they presumed. They must be expressed in the clearest
and most unambiguous language and not left to mere
implications. It has been held that “exemptions are never
presumed, the burden is on the claimant to establish
clearly his right to exemption and cannot be made out of
inference or implications but must be laid beyond
reasonable doubt. In other words, since taxation is the rule
and exemption the exception, the intention to make an
exemption ought to be expressed in clear and
unambiguous terms.
Section 8 of R.A. No. 7966 imposes on ABS-CBN
a franchise tax equivalent to three (3) percent of all gross
receipts of the radio/television business transacted under
the franchise and the franchise tax shall be “in lieu of all
taxes” on the franchise or earnings thereof.
The “in lieu of all taxes” provision in the franchise
of ABS-CBN does not expressly provide what kind of
taxes ABS-CBN is exempted from. It is not clear whether
the exemption would include both local, whether
municipal, city or provincial, and national tax. What is
clear is that ABS-CBN shall be liable to pay three (3)
percent franchise tax and income taxes under Title II
of the NIRC. But whether the “in lieu of all taxes
provision” would include exemption from local tax is
not unequivocal.
As adverted to earlier, the right to exemption from
local franchise tax must be clearly established and cannot
be made out of inference or implications but must be laid
beyond reasonable doubt. Verily, the uncertainty in the “in
lieu of all taxes” provision should be construed against
ABS-CBN. ABS-CBN has the burden to prove that it is in
fact covered by the exemption so claimed. ABS-CBN
miserably failed in this regard.
ABS-CBN cites the cases Carcar Electric & Ice Plant v.
Collector of Internal Revenue, Manila Railroad v. Rafferty,
Philippine Railway Co. v. Collector of Internal
Revenue, and Visayan Electric Co. v. David to support its
claim that that the “in lieu of all taxes” clause includes
exemption from all taxes.
However, a review of the foregoing case law reveals
that the grantees’ respective franchises expressly exempt
them from municipal and provincial taxes.
In the case under review, ABS-CBN’s franchise did not
embody an exemption similar to those in Carcar, Manila
Railroad, Philippine Railway, and Visayan Electric. Too, the
franchise failed to specify the taxing authority from whose
jurisdiction the taxing power is withheld, whether
municipal, provincial, or national. In fine, since ABS-CBN
failed to justify its claim for exemption from local franchise
tax, by a grant expressed in terms “too plain to be
mistaken” its claim for exemption for local franchise tax
must fail.
Franchise Tax; Value Added Tax (VAT); In keeping with the
laws that have been passed since the grant of ABS-CBN’s
franchise, the corporation should now be subject to Value
Added Tax (VAT), instead of the 3% franchise tax.
(C. The “in lieu of all taxes” clause in the franchise of
ABS-CBN has become functus officio with the abolition of
the franchise tax on broadcasting companies with yearly
gross receipts exceeding Ten Million Pesos.)
In its decision dated January 20, 1999, the RTC held
that pursuant to the “in lieu of all taxes” provision
contained in Section 8 of R.A. No. 7966, ABS-CBN is
exempt from the payment of the local franchise tax. The
RTC further pronounced that ABS-CBN shall instead be
liable to pay a franchise tax of 3% of all gross receipts in
lieu of all other taxes.
On this score, the RTC ruling is flawed. In keeping
with the laws that have been passed since the grant of
ABS-CBN’s franchise, the corporation should now be
subject to VAT, instead of the 3% franchise tax.
---At the time of the enactment of its franchise on May
3, 1995, ABS-CBN was subject to 3% franchise tax under
Section 117(b) of the 1977 National Internal Revenue
Code (NIRC), as amended, viz.:
“SECTION 117. Tax on franchises. —Any provision of
general or special laws to the contrary notwithstanding,
there shall be levied, assessed and collected in respect to
TAXATION 2
Local Taxation – General Principles
Atty. AJ Kasilag
Soy Abeto Notes 6
all franchise, upon the gross receipts from the business
covered by the law granting the franchise, a tax in
accordance with the schedule prescribed hereunder:
(a) On electric utilities, city gas, and water supplies
Two (2%) percent
(b) On telephone and/or telegraph systems, radio
and/or broadcasting stations Three (3%) percent
(c) On other franchises Five (5%) percent. (Emphasis
supplied)
On January 1, 1996, R.A. No. 7716, otherwise known as
the Expanded Value Added Tax Law, took effect and
subjected to VAT those services rendered by radio and/or
broadcasting stations.
Notably, under the same law, “telephone and/or
telegraph systems, broadcasting stations and other
franchise grantees” were omitted from the list of entities
subject to franchise tax. The impression was that these
entities were subject to 10% VAT but not to franchise tax.
Only the franchise tax on “electric, gas and water utilities”
remained.
Subsequently, R.A. No. 8241 took effect on January 1,
1997 containing more amendments to the NIRC. Radio
and/or television companies whose annual gross
receipts do not exceed P10,000,000.00 were granted the
option to choose between paying 3% national franchise
tax or 10% VAT.
On the other hand, radio and/or television companies
with yearly gross receipts exceeding P10,000,000.00 were
subject to 10% VAT, pursuant to Section 102 of the NIRC.
On January 1, 1998, R.A. No. 8424 was passed
confirming the 10% VAT liability of radio and/or television
companies with yearly gross receipts exceeding
P10,000,000.00.
R.A. No. 9337 was subsequently enacted and became
effective on July 1, 2005. The said law further amended the
NIRC by increasing the rate of VAT to 12%. The effectivity
of the imposition of the 12% VAT was later moved from
January 1, 2006 to February 1, 2006.
In consonance with the above survey of pertinent
laws on the matter, ABS-CBN is subject to the
payment of VAT. It does not have the option to choose
between the payment of franchise tax or VAT since it
is a broadcasting company with yearly gross receipts
exceeding Ten Million Pesos (P10,000,000.00).
Value Added Tax (VAT) is a percentage tax imposed on any
person whether or not a franchise grantee, who in the
course of trade or business, sells, barters, exchanges, leases,
goods or properties, renders services, while the franchise tax
is a percentage tax imposed only on franchise holders.
VAT is a percentage tax imposed on any person
whether or not a franchise grantee, who in the course of
trade or business, sells, barters, exchanges, leases, goods
or properties, renders services. It is also levied on every
importation of goods whether or not in the course of
trade or business. The tax base of the VAT is limited
only to the value added to such goods, properties, or
services by the seller, transferor or lessor. Further, the
VAT is an indirect tax and can be passed on to the buyer.
The franchise tax, on the other hand, is a
percentage tax imposed only on franchise holders. It is
imposed under Section 119 of the Tax Code and is a direct
liability of the franchise grantee.
The clause “in lieu of all taxes” does not pertain to
VAT or any other tax. It cannot apply when what is paid is
a tax other than a franchise tax. Since the franchise tax on
the broadcasting companies with yearly gross receipts
exceeding ten million pesos has been abolished, the “in
lieu of all taxes” clause has now become functus officio,
rendered inoperative.
In sum, ABS-CBN’s claims for exemption must fail
on twin grounds. First, the “in lieu of all taxes” clause in its
franchise failed to specify the taxes the company is sought
to be exempted from. Neither did it particularize the
jurisdiction from which the taxing power is
withheld. Second, the clause has become functus
officio because as the law now stands, ABS-CBN is no
longer subject to a franchise tax. It is now liable for VAT.
Notes. —It is an elementary rule in taxation that
exemptions are strictly construed against the taxpayer
and liberally in favor of the taxing authority—it is the
taxpayer’s duty to justify the exemption by words too
plain to be mistaken and too categorical to be
misinterpreted. (Radio Communications of the Philippines,
TAXATION 2
Local Taxation – General Principles
Atty. AJ Kasilag
Soy Abeto Notes 7
Inc. [RCPI] vs. Provincial Assessor of South Cotabato, 456
SCRA 1 [2005])
The abolition of the 3% franchise tax on
telecommunications companies, and its replacement by
the 10% VAT, was effective and implemented only on
January 1, 1996, following the passage of Revenue
Regulation No. 7-95 (Consolidated Value-Added Tax
Regulations). (Commissioner of Internal Revenue vs.
Philippine Global Communications, Inc., 499 SCRA 53
[2006])
G.R. No. 155491. September 16, 2008
SMART
COMMUNICATIONS,
INC.,
petitioner, vs. THE CITY OF DAVAO, represented
herein by its Mayor HON. RODRIGO R. DUTERTE, and
the SANGGUNIANG PANLUNGSOD OF DAVAO CITY,
respondents
Taxation; Public Utilities; Franchises; Republic Act No. 7294;
Statutory Construction; The grant of tax exemption by R.A.
No. 7294 is not to be interpreted from a consideration of a
single portion or of isolated words or clauses, but from a
general view of the act as a whole.
The “in lieu of all taxes” clause in Smart’s franchise is
put in issue before the Court. In order to ascertain its
meaning, consistent with fundamentals of statutory
construction, all the words in the statute must be
considered. The grant of tax exemption by R.A. No. 7294
is not to be interpreted from a consideration of a single
portion or of isolated words or clauses, but from a general
view of the act as a whole. Every part of the statute must
be construed with reference to the context.
Words and Phrases; The uncertainty in the “in lieu of all
taxes” clause in R.A. No. 7294 on whether Smart is
exempted from both local and national franchise tax must
be construed strictly against Smart which claims the
exemption—in the instant case, the “in lieu of all taxes”
clause applies only to national internal revenue taxes and
not to local taxes.
The uncertainty in the “in lieu of all taxes” clause
in R.A. No. 7294 on whether Smart is exempted from both
local and national franchise tax is construed strictly
against Smart who is claiming the exemption. Smart has
the burden of proving that, aside from the imposed 3%
franchise tax, Congress intended it to be exempted from
all kinds of franchise taxes—whether local or national.
However, Smart failed in this regard. Tax exemptions are
never presumed and are strictly construed against the
taxpayer and liberally in favor of the taxing authority. They
can only be given force when the grant is clear and
categorical. The surrender of the power to tax, when
claimed, must be clearly shown by a language that will
admit of no reasonable construction consistent with the
reservation of the power. If the intention of the legislature
is open to doubt, then the intention of the legislature
must be resolved in favor of the State. In this case, the
doubt must be resolved in favor of the City of Davao. The
“in lieu of all taxes” clause applies only to national internal
revenue taxes and not to local taxes.
Value-Added Tax; It should be noted that the “in lieu of all
taxes” clause in R.A. No. 7294 has become functus officio
with
the
abolition
of
the franchise
tax
on
telecommunications companies—the “in lieu of all taxes”
clause in R.A. No. 7294 was rendered ineffective by the
advent of the Value-Added Tax (VAT) Law.
It should be noted that the “in lieu of all taxes”
clause in R.A. No. 7294 has become functus officio with the
abolition of the franchise tax on telecommunications
companies. As admitted by Smart in its pleadings, it is no
longer paying the 3% franchise tax mandated in its
franchise.
Currently,
Smart
along
with
other
telecommunications companies pays the uniform 10%
value-added tax. The VAT on sale of services of telephone
franchise grantees is equivalent to 10% of gross receipts
derived from the sale or exchange of services. R.A. No.
7716, as amended by the Expanded Value Added Tax
Law (R.A. No. 8241), the pertinent portion of which is
hereunder quoted, amended Section 9 of R.A. No. 7294:
x x x R.A. No. 7716, specifically Section 20 thereof,
expressly repealed the provisions of all special laws
relative to the rate of franchise taxes. It also repealed,
amended, or modified all other laws, orders, issuances,
rules and regulations, or parts thereof which are
inconsistent with it. In effect, the “in lieu of all taxes” clause
in R.A. No. 7294 was rendered ineffective by the advent of
the VAT Law.
The findings of the Bureau of Local Government Finance
(BLGF) are not conclusive on the courts.
In support of its argument that the “in lieu of all
taxes” clause is to be construed as an exemption from
local franchise taxes, Smart submits the opinion of the
Department of Finance, through the BLGF, dated August
TAXATION 2
Local Taxation – General Principles
Atty. AJ Kasilag
Soy Abeto Notes 8
13, 1998 and February 24, 1998, regarding the franchises
of Smart and Globe, respectively. Smart presents the same
arguments as the Philippine Long Distance Telephone
Company in the previous cases already decided by this
Court. As previously held by the Court, the findings of the
BLGF are not conclusive on the courts.
Words and Phrases; Tax Exclusion and Tax Exemption; Both
in their nature and effect, there is no essential difference
between a tax exemption and a tax exclusion—an exclusion
is also an immunity or privilege which frees a taxpayer from
a charge to which others are subjected.
Smart gives another perspective of the “in lieu of
all taxes” clause in Section 9 of R.A. No. 7294 in order to
avoid the payment of local franchise tax. It says that,
viewed from another angle, the “in lieu of all taxes” clause
partakes of the nature of a tax exclusion and not a tax
exemption. A tax exemption means that the taxpayer does
not pay any tax at all. Smart pays VAT, income tax, and
real property tax. Thus, what it enjoys is more accurately a
tax exclusion. However, as previously held by the Court,
both in their nature and effect, there is no essential
difference between a tax exemption and a tax exclusion.
An exemption is an immunity or a privilege; it is the
freedom from a charge or burden to which others are
subjected. An exclusion, on the other hand, is the removal
of otherwise taxable items from the reach of taxation, e.g.,
exclusions from gross income and allowable deductions.
An exclusion is, thus, also an immunity or privilege which
frees a taxpayer from a charge to which others are
subjected. Consequently, the rule that a tax exemption
should be applied in strictissimi juris against the taxpayer
and liberally in favor of the government applies equally to
tax exclusions.
Public Telecommunications Policy Act (R.A. No. 7925); Most
Favored Treatment Clause or Equality Clause; Statutory
Construction; The term “exemption” in Section 23 of R.A.
No. 7925 does not mean tax exemption—it refers to
exemption from certain regulations and requirements
imposed by the National Telecommunications Commission.
We find no reason to disturb the previous
pronouncements of this Court regarding the
interpretation of Section 23 of R.A. No. 7925. As aptly
explained in the en banc decision of this Court
in Philippine Long Distance Telephone Company, Inc. v.
City of Davao, 363 SCRA 522 (2001), and recently in Digital
Telecommunications Philippines, Inc. (Digitel) v. Province of
Pangasinan, 516 SCRA 541 (2007), Congress, in approving
Section 23 of R.A. No. 7925, did not intend it to operate
as a blanket tax exemption to all telecommunications
entities. The language of Section 23 of R.A. No. 7925 and
the proceedings of both Houses of Congress are bereft of
anything that would signify the grant of tax exemptions
to all telecommunications entities, including those whose
exemptions had been withdrawn by R.A. No. 7160. The
term “exemption” in Section 23 of R.A. No. 7925 does not
mean tax exemption. The term refers to exemption from
certain regulations and requirements imposed by the
National Telecommunications Commission.
Contract Clause; Not only are existing laws read into
contracts in order to fix obligations as between parties, but
the reservation of essential attributes of sovereign power is
also read into contracts as a basic postulate of the legal
order—the Contract Clause has never been thought as a
limitation on the exercise of the State’s power of taxation
save only where a tax exemption has been granted for a
valid consideration.
Smart’s franchise was granted with the express
condition that it is subject to amendment, alteration, or
repeal. As held in Tolentino v. Secretary of Finance, 235
SCRA 630 (1994): It is enough to say that the parties to a
contract cannot, through the exercise of prophetic
discernment, fetter the exercise of the taxing power of the
State. For not only are existing laws read into contracts in
order to fix obligations as between parties, but the
reservation of essential attributes of sovereign power is
also read into contracts as a basic postulate of the legal
order. The policy of protecting contracts against
impairment presupposes the maintenance of a
government which retains adequate authority to secure
the peace and good order of society. In truth, the Contract
Clause has never been thought as a limitation on the
exercise of the State’s power of taxation save only where
a tax exemption has been granted for a valid
consideration. x x x.
---The Issue
In sum, the pivotal issue in this case is whether Smart
is liable to pay the franchise tax imposed by the City of
Davao.
The Ruling of the Court
TAXATION 2
Local Taxation – General Principles
Atty. AJ Kasilag
Soy Abeto Notes 9
We rule in the affirmative.
Smart alleges that the “in lieu of all taxes” clause in
Section 9 of its franchise exempts it from all taxes, both
local and national, except the national franchise tax (now
VAT), income tax, and real property tax.
On January 1, 1992, two months ahead of Smart’s
franchise, the Local Government Code (R.A. No. 7160)
took effect. Section 137, in relation to Section 151 of R.A.
No. 7160, allowed the imposition of franchise tax by the
local government units; while Section 193 thereof
provided for the withdrawal of tax exemption privileges
granted prior to the issuance of R.A. No. 7160 except for
those expressly mentioned therein.
Smart argues that it is not covered by Section 137, in
relation to Section 151 of R.A. No. 7160, because its
franchise was granted after the effectivity of the said law.
We agree with Smart’s contention on this matter. The
withdrawal of tax exemptions or incentives provided in
R.A. No. 7160 can only affect those franchises granted
prior to the effectivity of the law. The intention of the
legislature to remove all tax exemptions or incentives
granted prior to the said law is very evident in the
language of Section 193 of R.A. No. 7160. No
interpretation is necessary.
Section 193. Withdrawal of Tax Exemption Privileges. —
Unless otherwise provided in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned
or controlled corporations, except local water districts,
cooperatives duly registered under RA No. 6938, nonstock and non-profit hospitals and educational
institutions, are hereby withdrawn upon the effectivity of
this Code.” (Emphasis supplied.)
II. The “in lieu of all taxes” Clause in R.A. No. 7294
The “in lieu of all taxes” clause in Smart’s franchise is put
in issue before the Court. In order to ascertain its meaning,
consistent with fundamentals of statutory construction, all
the words in the statute must be considered. The grant of
tax exemption by R.A. No. 7294 is not to be interpreted
from a consideration of a single portion or of isolated
words or clauses, but from a general view of the act as a
whole. Every part of the statute must be construed with
reference to the context.
Smart is of the view that the only taxes it may be made
to bear under its franchise are the national franchise tax
(now VAT), income tax, and real property tax. It claims
exemption from the local franchise tax because the “in lieu
of taxes” clause in its franchise does not distinguish
between national and local taxes.
We pay heed that R.A. No. 7294 is not definite in
granting exemption to Smart from local taxation. Section
9 of R.A. No. 7294 imposes on Smart a franchise tax
equivalent to three percent (3%) of all gross receipts of
the business transacted under the franchise and the said
percentage shall be in lieu of all taxes on the franchise or
earnings thereof. R.A. No 7294 does not expressly provide
what kind of taxes Smart is exempted from. It is not clear
whether the “in lieu of all taxes” provision in the franchise
of Smart would include exemption from local or national
taxation. What is clear is that Smart shall pay franchise tax
equivalent to three percent (3%) of all gross receipts of
the business transacted under its franchise. But whether
the franchise tax exemption would include exemption
from exactions by both the local and the national
government is not unequivocal.
The uncertainty in the “in lieu of all taxes” clause in R.A.
No. 7294 on whether Smart is exempted from both local
and national franchise tax is construed strictly against
Smart who is claiming the exemption. Smart has the
burden of proving that, aside from the imposed 3%
franchise tax, Congress intended it to be exempted from
all kinds of franchise taxes—whether local or national.
However, Smart failed in this regard.
Tax exemptions are never presumed and are
strictly construed against the taxpayer and liberally in
favor of the taxing authority. They can only be given force
when the grant is clear and categorical. The surrender of
the power to tax, when claimed, must be clearly shown by
a language that will admit of no reasonable construction
consistent with the reservation of the power. If the
intention of the legislature is open to doubt, then the
intention of the legislature must be resolved in favor of
the State.
In this case, the doubt must be resolved in favor of the
City of Davao. The “in lieu of all taxes” clause applies only
to national internal revenue taxes and not to local taxes.
TAXATION 2
Local Taxation – General Principles
Atty. AJ Kasilag
Soy Abeto Notes 10
It should be noted that the “in lieu of all taxes” clause
in R.A. No. 7294 has become functus officio with the
abolition of the franchise tax on telecommunications
companies. As admitted by Smart in its pleadings, it is no
longer paying the 3% franchise tax mandated in its
franchise.
Currently,
Smart
along
with
other
telecommunications companies pays the uniform 10%
value-added tax.
The VAT on sale of services of telephone franchise
grantees is equivalent to 10% of gross receipts derived
from the sale or exchange of services.
R.A. No. 7716, specifically Section 20 thereof, expressly
repealed the provisions of all special laws relative to the
rate of franchise taxes. It also repealed, amended, or
modified all other laws, orders, issuances, rules and
regulations, or parts thereof which are inconsistent with it.
In effect, the “in lieu of all taxes” clause in R.A. No. 7294
was rendered ineffective by the advent of the VAT Law.
However, the franchise tax that the City of Davao may
impose must comply with Sections 137 and 151 of R.A.
No. 7160. Thus, the local franchise tax that may be
imposed by the city must not exceed 50% of 1% of the
gross annual receipts for the preceding calendar year
based on the income on receipts realized within the
territorial jurisdiction of Davao.
III. Opinion of the Bureau of Local Government Finance
(BLGF)
In support of its argument that the “in lieu of all taxes”
clause is to be construed as an exemption from local
franchise taxes, Smart submits the opinion of the
Department of Finance, through the BLGF, dated August
13, 1998 and February 24, 1998, regarding the franchises
of Smart and Globe, respectively. Smart presents the same
arguments as the Philippine Long Distance Telephone
Company in the previous cases already decided by this
Court.
IV. Tax Exclusion/Tax Exemption
Smart gives another perspective of the “in lieu of all
taxes” clause in Section 9 of R.A. No. 7294 in order to
avoid the payment of local franchise tax. It says that,
viewed from another angle, the “in lieu of all taxes” clause
partakes of the nature of a tax exclusion and not a tax
exemption. A tax exemption means that the taxpayer does
not pay any tax at all. Smart pays VAT, income tax, and
real property tax. Thus, what it enjoys is more accurately a
tax exclusion.
However, as previously held by the Court, both in their
nature and effect, there is no essential difference between
a tax exemption and a tax exclusion. An exemption is an
immunity or a privilege; it is the freedom from a charge or
burden to which others are subjected. An exclusion, on
the other hand, is the removal of otherwise taxable items
from the reach of taxation, e.g., exclusions from gross
income and allowable deductions. An exclusion is, thus,
also an immunity or privilege which frees a taxpayer from
a charge to which others are subjected. Consequently, the
rule that a tax exemption should be applied in strictissimi
juris against the taxpayer and liberally in favor of the
government applies equally to tax exclusions.
V.
Section 23 of R.A. No. 7925
In sum, Smart wants us to interpret anew Section 23 of
R.A. No. 7925, in connection with the franchise of Globe
(R.A. No. 7227), which was enacted on March 19, 1992.
We find no reason to disturb the previous
pronouncements of this Court regarding the
interpretation of Section 23 of R.A. No. 7925. As aptly
explained in the en banc decision of this Court
in Philippine Long Distance Telephone Company, Inc. v.
City of Davao, and recently in Digital Telecommunications
Philippines,
Inc.
(Digitel)
v.
Province of
Pangasinan, Congress, in approving Section 23 of R.A. No.
7925, did not intend it to operate as a blanket tax
exemption to all telecommunications entities.. The
language of Section 23 of R.A. No. 7925 and the
proceedings of both Houses of Congress are bereft of
anything that would signify the grant of tax exemptions
to all telecommunications entities, including those whose
exemptions had been withdrawn by R.A. No. 7160. The
term “exemption” in Section 23 of R.A. No. 7925 does not
mean tax exemption. The term refers to exemption from
certain regulations and requirements imposed by the
National Telecommunications Commission.
Furthermore, in the franchise of Globe (R.A. No. 7229),
the legislature incontrovertibly stated that it will be liable
for one and one-half per centum of all gross receipts from
business transacted under the franchise, in lieu of any and
all taxes of any kind, nature, or description levied,
established, or collected by any authority whatsoever,
municipal, provincial, or national, from which the grantee
TAXATION 2
Local Taxation – General Principles
Atty. AJ Kasilag
Soy Abeto Notes 11
is hereby expressly exempted. The grant of exemption
from municipal, provincial, or national is clear and
categorical—that aside from the franchise tax collected by
virtue of R.A. No. 7229, no other franchise tax may be
collected from Globe regardless of who the taxing power
is. No such provision is found in the franchise of Smart;
the kind of tax from which it is exempted is not clearly
specified.
VI.
Non-impairment Clause of the Constitution
Another argument of Smart is that the imposition of
the local franchise tax by the City of Davao would violate
the constitutional prohibition against impairment of
contracts. The franchise, according to petitioner, is in the
nature of a contract between the government and Smart.
However, we find that there is no violation of Article
III, Section 10 of the 1987 Philippine Constitution. As
previously discussed, the franchise of Smart does not
expressly provide for exemption from local taxes. Absent
the express provision on such exemption under the
franchise, we are constrained to rule against it. The “in lieu
of all taxes” clause in Section 9 of R.A. No. 7294 leaves
much room for interpretation. Due to this ambiguity in the
law, the doubt must be resolved against the grant of tax
exemption.
Moreover, Smart’s franchise was granted with the
express condition that it is subject to amendment,
alteration, or repeal.
Notes. —In all grants by the government to private
corporations, the interpretation of rights, privileges, or
franchises is taken against the grantee. Whatever is not
clearly and expressly granted is withheld. (Alger Electric,
Inc. vs. Court of Appeals, 135 SCRA 37 [1985])
It is a matter of judicial notice that all legislative
franchises for the operation of a telephone system contain
the provision that in the event the Philippine Government
should desire to maintain and operate for itself the system
and enterprise therein authorized, the grantee shall
surrender his franchise and will turn over to the
Government said system and all serviceable equipment
therein, at cost, less reasonable depreciation. (Republic vs.
Republic Telephone Company, Inc., 265 SCRA 1 [1996])