1. How did the Supreme Court resolve the issue of whether or not the exemption of a particular
corporation from franchise tax radiates to exemption from the local franchise tax?
The local government may impose a local franchise pursuant to the authority granted by the LGC
which provides that, notwithstanding any exemption granted by law, the province/city may
impose a franchise tax on all businesses enjoying a franchise. There was thus an implied repeal by
the LGC of PD 551 insofar as the latter imposes a 2% tax “in lieu of all taxes and assessments of
whatever nature.”
The LGC did not violate the non-impairment clause of the Constitution, as the former was enacted
in pursuance of the constitutional policy to ensure autonomy to local government. Likewise, local
legislative bodies are granted direct authority by the Constitution to levy taxes. The Constitution
also reserves to Congress the right to amend, alter or repeal all franchises when the public interest
so requires. But even without such reservation clause, franchise are subject to alterations through
a reasonable exercise of police power and the power to tax, both of which cannot be contracted
away.
2. Briefly discuss whether the taxpayer is exempted from local franchise or not; and what is the
rationale.
In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna, PLDT was a holder
of a legislative franchise under Act No. 3436, as amended. On August 24, 1991, the terms and
conditions of its franchise were consolidated under Republic Act No. 7082, Section 12 of which
embodies the so-called "in-lieu-of-all taxes" clause. Under the said Section, PLDT shall pay a
franchise tax equivalent to three percent (3%) of all its gross receipts, which franchise tax shall be
"in lieu of all taxes." The issue that the Court had to resolve was whether PLDT was liable to pay
franchise tax to the Province of Laguna in view of the "in lieu of all taxes" clause in its franchise
and Section 23 of RA 7925.
Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts
are resolved in favor of municipal corporations in interpreting statutory provisions on municipal
taxing powers, the Court held that Section 23 of RA 7925 could not be considered as having
amended petitioner's franchise so as to entitle it to exemption from the imposition of local
franchise taxes.
In ruling against the claim of PLDT, the Court cited the previous decisions in PLDT v. City of Davao
and PLDT v. City of Bacolod, in denying the claim for exemption from the payment of local
franchise tax.
In sum, the aforecited jurisprudence suggests that aside from the national franchise tax, the
franchisee is still liable to pay the local franchise tax, unless it is expressly and unequivocally
exempted from the payment thereof under its legislative franchise. The "in lieu of all taxes" clause
in a legislative franchise should categorically state that the exemption applies to both local and
national taxes; otherwise, the exemption claimed should be strictly construed against the
taxpayer and liberally in favor of the taxing authority.
Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish
the payment of local franchise tax. It merely replaced the national franchise tax that was
previously paid by telecommunications franchise holders and in its stead imposed a ten percent
(10%) VAT in accordance with Section 108 of the Tax Code. VAT replaced the national franchise
tax, but it did not prohibit nor abolish the imposition of local franchise tax by cities or
municipalities.
The power to tax by local government units emanates from Section 5, Article X of the Constitution
which empowers them to create their own sources of revenues and to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may provide. The imposition of local
franchise tax is not inconsistent with the advent of the VAT, which renders functus officio the
franchise tax paid to the national government. VAT inures to the benefit of the national
government, while a local franchise tax is a revenue of the local government unit.
CASES
THE PROVINCE OF MISAMIS ORIENTAL, represented by its PROVINCIAL TREASURER, petitioner,
vs. CAGAYAN ELECTRIC POWER AND LIGHT COMPANY, INC. (CEPALCO), respondent G.R. No. L45355
January 12, 1990
Issue: Whether CEPALCO is exempt from the provincial franchise tax.
Held: Local Tax Regulation 3-75 issued by the Secretary of Finance in 1976 made it clear that the
franchise tax provided in the Local Tax Code may only be imposed on companies with franchise that
do not contain the exempting clause, i.e. “in-lieu-of-all-taxes-proviso.” CEPALCO’s franchise i.e. RA
3247, 3571 and 6020 (Section 3 thereof), uniformly provides that “in consideration of the franchise
and rights hereby granted, the grantee shall pay a franchise tax equal to 3% of the gross earnings for
electric current sold under the franchise, of which 2% goes to the national Treasury and 1% goes into
the treasury of the municipalities of Tagoloan, Opol, Villanueva, Jasaan, and Cagayan de Oro, as the
case may be: Provided, that the said franchise tax of 3% of the gross earnings shall be in lieu of all
taxes and assessments of whatever authority upon privileges, earnings, income, franchise and poles,
wires, transformers, and insulators of the grantee from which taxes and assessments the grantee is
hereby expressly exempted.
NATIONAL POWER CORPORATION, petitioner,
vs.
CITY OF CABANATUAN, respondent.
G.R. No. 149110
April 9, 2003
Issue: Whether NPC is liable to pay an annual franchise tax to the City government
Held: Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the
National Government, its agencies and instrumentalities, this rule now admits an exception, i.e.,
when specific
provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the aforementioned
entities. A franchise tax is "a tax on the privilege of transacting business in the state and exercising
corporate franchises granted by the state." It is not levied on the corporation simply for existing as a
corporation, upon its property or its income, but on its exercise of the rights or privileges granted to
it by the government. Hence, a corporation need not pay franchise tax from the time it ceased to do
business and exercise its franchise. It is within this context that the phrase "tax on businesses enjoying
a franchise" in section 137 of the LGC determine whether the petitioner is covered by the franchise
tax in question, the following requisites should concur: (1) that petitioner has a "franchise" in the
sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under this
franchise within the territory of the respondent city government. NPC fulfills both requisites. As a
rule, tax exemptions are construed strongly against the claimant. Exemptions must be shown to exist
clearly and categorically, and supported by clear legal provisions. In the case at bar, the petitioner's
sole refuge is section 13 of Rep. Act No. 6395 exempting from, among others, "all income taxes,
franchise taxes and realty taxes to be paid to the National Government, its provinces, cities,
municipalities and other government agencies and instrumentalities." It is worth mentioning that
section 192 of the LGC empowers the LGUs, through ordinances duly approved, to grant tax
exemptions, initiatives or reliefs.77 But in enacting section 37 of Ordinance No. 165-92 which imposes
an annual franchise tax "notwithstanding any exemption granted by law or other special law," the
respondent city government clearly did not intend to exempt the petitioner from the coverage
thereof.
CITY GOVERNMENT OF SAN PABLO, LAGUNA, CITY TREASURER OF SAN PABLO, LAGUNA and
THE SANGGUNIANG PANGLUNSOD OF SAN PABLO, LAGUNA, petitioners,
vs.
HONORABLE BIENVENIDO V. REYES, in his capacity as Presiding Judge, Regional Trial Court,
Branch 29, San Pablo City and the MANILA ELECTRIC COMPANY, respondents.
G.R. No. 127708
March 25, 1999
Issue: Whether the City of San Pablo may impose a local franchise tax pursuant to the LGC upon the
Manila Electric Company which pays a tax equal to two percent of its gross receipts in lieu of all
taxes and assessments of whatever nature imposed by any national or local authority on savings or
income.
HELD: Yes. The explicit language of Section 137 which authorizes the province to impose franchise
tax notwithstanding any exemption granted by any law or other special law is all encompassing and
clear. The franchise tax is imposable despite any exemption enjoyed under special laws. Moreover,
Section 193 buttresses the withdrawal of extant tax exemption privileges. By stating that 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 1) local water districts, 2) cooperatives duly registered under R.A. 6938, (3) non-stock and
non-profit hospitals and educational institutions, are withdrawn upon the effectivity of this code,
the obvious import is to limit the exemptions to the three enumerated entities. Thus, in the
absence of any provision of the Code to the contrary, and which the Court found no other provision
in point, private respondents tax exemption privileges under existing law were clearly intended to
be withdrawn. Reading together Sections 137 and 193 of the LGC, the Court concluded that under
the LGC, the local government unit may now impose a local tax at a rate not exceeding 50% of 1%
of the gross annual receipts for the preceding calendar year based on the incoming receipts
realized within its territorial jurisdiction.
MANILA ELECTRIC COMPANY, petitioner,
vs.
PROVINCE OF LAGUNA and BENITO R. BALAZO, in his capacity as Provincial Treasurer
of Laguna, respondents.
G.R. No. 131359
May 5, 1999
ISSUE: Whether or not the franchise tax imposed under the Ordinance violates the non-impairment
clause and Sec 1 of PD 551; Whether or not MERALCO is exempted from taxation under the LGC or
Local Tax Code; thus, should be taxed under PD 551.
RULE: There is no violation of the non-impairment clause. Franchise Taxes are beyond the purview of
the clause for it is not within contractual tax exemptions. In fact, The LGC expressly repeals laws which
are inconsistent with it. Tax exemptions contained in special franchises are not strictly contractual in
nature. Contractual tax exemptions, in the real sense of the term and where the non-impairment
clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in
contracts, such as those contained in government bonds or debentures, lawfully entered under
enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and
waives its governmental immunity (Because, government descends to be an ordinary person being a
party in a contract). Revocation of this kind of tax exemptions would impair the obligations of
contracts. However, it must not be confused with tax exemptions granted under franchises. A
franchise is in the nature of a grant which is beyond the purview of the non-impairment clause of the
Constitution. Article XII, Sec 11, of the 1987 Constitution, like its precursor provisions is explicit that
no franchise for the operation of a public utility shall be granted except under the condition that such
privilege shall be subject to amendment, alteration or repeal by Congress as and when the common
good so requires. As for the present, no law or amendment has been passed to exempt utilityproducing businesses from franchise taxes.
PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, INC., petitioner,
vs.
CITY OF DAVAO and ADELAIDA B. BARCELONA, in her capacity as the City Treasurer
of Davao, respondents.
G.R. No. 143867
August 22, 2001
Issue: Whether or not PLDT is exempted from franchise tax imposed by City of Davao.
Held: PLDT is not exempt from franchise tax imposed by City of Davao.
R.A. No. 7925 is a legislative enactment designed to set the national policy on telecommunications
and provide the structures to implement it to keep up with the technological advances in the industry
and the needs of the public. The thrust of the law is to promote gradually the deregulation of the
entry, pricing, and operations of all public telecommunications entities and thus promote a level
playing field in the telecommunications industry. There is nothing in the language of 23 nor in the
proceedings of both the House of Representatives and the Senate in enacting R.A. No. 7925 which
shows that it contemplates the grant of tax exemptions to all telecommunications entities, including
those whose exemptions had been withdrawn by the LGC. The tax exemption must be expressed in
the statute in clear language that leaves no doubt of the intention of the legislature to grant such
exemption. And, even if it is granted, the exemption must be interpreted in strictissimi juris against
the taxpayer and liberally in favor of the taxing authority.
In this case, the word exemption in 23 of R.A. No. 7925 could contemplate exemption
from certain regulatory or reporting requirements, bearing in mind the policy of the law.