Cases on Local Taxation

7/28/2019 Cases on Local Taxation

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poles, wires, transformers, and insulators of the grantee from which taxes andassessments the grantee is hereby expressly exempted. (Emphasis supplied.)

On June 28, 1973, the Local Tax Code (P.D. No. 231) was promulgated, Section 9 ofwhich provides:

Sec. 9. Franchise Tax.Any provision of special laws to the contrary notwithstanding,the province may impose a tax on businesses enjoying franchise, based on the grossreceipts realized within its territorial jurisdiction, at the rate of not exceeding one-half ofone per cent of the gross annual receipts for the preceding calendar year.

In the case of newly started business, the rate shall not exceed three thousand pesos peryear. Sixty per cent of the proceeds of the tax shall accrue to the general fund of theprovince and forty per cent to the general fund of the municipalities serviced by thebusiness on the basis of the gross annual receipts derived therefrom by the franchiseholder. In the case of a newly started business, forty per cent of the proceeds of the taxshall be divided equally among the municipalities serviced by the business. (Emphasissupplied.)

Pursuant thereto, the Province of Misamis Oriental (herein petitioner) enacted ProvincialRevenue Ordinance No. 19, whose Section 12 reads:

Sec. 12. Franchise Tax.There shall be levied, collected and paid on businessesenjoying franchise tax of one-half of one per cent of their gross annual receipts for thepreceding calendar year realized within the territorial jurisdiction of the province ofMisamis Oriental. (p. 27, Rollo.)

The Provincial Treasurer of Misamis Oriental demanded payment of the provincialfranchise tax from CEPALCO. The company refused to pay, alleging that it is exemptfrom all taxes except the franchise tax required by R.A. No. 6020. Nevertheless, in view

of the opinion rendered by the Provincial Fiscal, upon CEPALCO's request, upholdingthe legality of the Revenue Ordinance, CEPALCO paid under proteston May 27, 1974the sum of P 4,276.28 and appealed the fiscal's ruling to the Secretary of Justice whoreversed it and ruled in favor of CEPALCO.

On June 26, 1976, the Secretary of Finance issued Local Tax Regulation No. 3-75adopting entirely the opinion of the Secretary of Justice.

On February 16, 1976, the Province filed in the Court of First Instance of MisamisOriental a complaint for declaratory relief praying, among others, that the Court exerciseits power to construe P.D. No. 231 in relation to the franchise of CEPALCO (R.A. No.

6020), and to declare the franchise as having been amended by P.D. No. 231. TheCourt dismissed the complaint and ordered the Province to return to CEPALCO the sumof P4,276.28 paid under protest.

The Province has appealed to this Court, alleging that the lower court erred in holdingthat:


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1) CEPALCO's tax exemption under Section 3 of Republic Act No. 6020 was notamended or repealed by P.D. No. 231;

2) the imposition of the provincial franchise tax on CEPALCO would subvert thepurpose of P.D. No. 231;

3) CEPALCO is exempt from paying the provincial franchise tax; and

4) petitioner should refund CEPALCO's tax payment of P4,276.28.

We find no merit in the petition for review.

There is no provision in P.D. No. 231 expressly or impliedly amending or repealingSection 3 of R.A. No. 6020. The perceived repugnancy between the two statutes shouldbe very clear before the Court may hold that the prior one has been repealed by thelater, since there is no express provision to that effect (Manila Railroad Co. vs. Rafferty,

40 Phil. 224). The rule is that a special and local statute applicable to a particular caseis not repealed by a later statute which is general in its terms, provisions and applicationeven if the terms of the general act are broad enough to include the cases in the speciallaw (id.) unless there is manifest intent to repeal or alter the special law.

Republic Acts Nos. 3247, 3570 and 6020 are special laws applicable only to CEPALCO,while P.D. No. 231 is a general tax law. The presumption is that the special statutes areexceptions to the general law (P.D. No. 231) because they pertain to a special chartergranted to meet a particular set of conditions and circumstances.

The franchise of respondent CEPALCO expressly exempts it from payment of "all taxes

of whatever authority" except the three per centum (3%) tax on its gross earnings.

In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied,established by, or collected by any authority" found in the franchise of the VisayanElectric Company was held to exempt the company from payment of the 5% tax oncorporate franchise provided in Section 259 of the Internal Revenue Code (VisayanElectric Co. vs. David, 49 O.G. [No. 4] 1385).

Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name andnature" in the franchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510)exempts the Manila Railroad from payment of internal revenue tax for its importations of

coal and oil under Act No. 2432 and the Amendatory Acts of the Philippine Legislature(Manila Railroad vs. Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No.1497) justified the exemption of the Philippine Railway Company from payment of thetax on its corporate franchise under Section 259 of the Internal Revenue Code, asamended by R.A. No. 39 (Philippine Railway Co. vs. Collector of Internal Revenue, 91Phil. 35).


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Those magic words: "shall be in lieu of all taxes" also excused the Cotabato Light andIce Plant Company from the payment of the tax imposed by Ordinance No. 7 of the Cityof Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231).

So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company

when it was required to pay the corporate franchise tax under Section 259 of theInternal Revenue Code, as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs.Collector of Internal Revenue, 53 O.G. [No. 4] 1068). This Court pointed out that suchexemption is part of the inducement for the acceptance of the franchise and therendition of public service by the grantee. As a charter is in the nature of a privatecontract, the imposition of another franchise tax on the corporation by the local authoritywould constitute an impairment of the contract between the government and thecorporation.

Recently, this Court ruled that the franchise (R.A. No. 3843) of the Lingayen GulfElectric Power Company which provided that the company shall pay:

tax equal to 2% per annum of the gross receipts . . . and shall be in lieu of any and alltaxes . . . now or in the future . . . from which taxes . . . the grantee is hereby expresslyexempted and . . . no other tax . . . other than the franchise tax of 2% on the grossreceipts as provided for in the original franchise shall be collected.

exempts the company from paying the franchise tax under Section 259 of theNational Internal Revenue Code (Commissioner of Internal Revenue vs.Lingayen Gulf Electric Power Co., Inc., G.R. No. 23771, August 4, 1988).

On the other hand, the Balanga Power Plant Company, Imus Electric Company, Inc.,Guagua Electric Company, Inc. were subjected to the 5% tax on corporate franchise

under Section 259 of the Internal Revenue Code, as amended, because Act No. 667 ofthe Philippine Commission and the ordinance or resolutions granting their respectivefranchises did not contain the "in-lieu-of-all-taxes" clause (Balanga Power Plant Co. vs.Commissioner of Internal Revenue, G.R. No. L-20499, June 30, 1965; Imus Electric Co.vs. Court of Tax Appeals, G.R. No. L-22421, March 18, 1967; Guagua Electric Light vs.Collector of Internal Revenue, G.R. No. L-23611, April 24, 1967).

Local Tax Regulation No. 3-75 issued by the Secretary of Finance on June 26, 1976,has made it crystal clear that the franchise tax provided in the Local Tax Code (P.D. No.231, Sec. 9) may only be imposed on companies with franchises that do not contain theexempting clause. Thus it provides:

The franchise tax imposed under local tax ordinance pursuant to Section 9 of the LocalTax Code, as amended, shall be collected from businesses holding franchise but notfrom business establishments whose franchise contain the "in-lieu-of-all-taxes-proviso".

Manila Electric Company vs. Vera, 67 SCRA 351, cited by the petitioner, is notapplicable here because what the Government sought to impose on Meralco in thatcase was not a franchise tax but a compensating taxon the poles, wires, transformersand insulators which it imported for its use.


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WHEREFORE, the petition for review is denied, and the decision of the Court of FirstInstance is hereby affirmed in toto. No costs.

SO ORDERED.

Narvasa, Cruz, Gancayco and Medialdea, JJ., concur.

THIRD DIVISION

[G.R. No. 127708. March 25, 1999]

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.

D E C I S I O N

GONZAGA-REYES,J.:

This is a petition under Rule 45 of the Rules of Court to review on a pure question of law the

decision of the Regional Trial Court (RTC) of San Pablo City, Branch 29 in Civil Case No. SP-4459(96), entitled Manila Electric Company vs. City of San Pablo, Laguna, City Treasurer of

San Pablo Laguna, and the Sangguniang Panglunsod of San Pablo City, Laguna. The RTC

declared the imposition of franchise tax under Section 2.09 Article D of Ordinance No. 56otherwise known as the Revenue Code of the City of San Pablo as ineffective and void insofar asthe respondent MERALCO is concerned for being violative of Act No. 3648, Republic Act No.

2340 and PD 551. The RTC also granted MERALCOS claim for refund of franchise taxes paid

under protest.

The following antecedent facts are undisputed:

Act No. 3648 granted the Escudero Electric Services Company, a legislative franchise to

maintain and operate an electric light and power system in the City of San Pablo and nearby

municipalities Section 10 of Act No. 3648 provides:

x x x In consideration of the franchise and rights hereby granted, the grantee shall pay unto themunicipal treasury of each municipality in which it is supplying electric current to the public

under this franchise, a tax equal to two percentum of the gross earnings from electric current sold

or supplied under this franchise in each said municipality. Said tax shall be due and payablequarterly and shall be in lieu of any and all taxes of any kind, nature or description levied,

established or collected by any authority whatsoever, municipal, provincial or insular, now or in

the future, on its poles, wires, insulators, switches, transformers, and structures, installations,


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conductors, and accessories place in and over and under all public property, including public

streets and highways, provincial roads, bridges and public squares, and on its franchise, rights,

privileges, receipts, revenues and profits from which taxes the grantee is hereby expresslyexempted.

Escuderos franchise was transferred to the plaintiff (herein respondent) MERALCO underRepublic Act No. 2340.

Presidential Decree No. 551 was enacted on September 11, 1974. Section 1 thereof provides thefollowing:

Section 1. Any provision of law or local ordinance to the contrary notwithstanding, the

franchise tax payable by all grantees of franchise to generate, distribute and sell electric current

for light, heat and power shall be two percent (2%) of their gross receipts received from the saleof electric current and from transactions incident to the generation, distribution and sale of

electric current.

Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly

authorized representative on or before the twentieth day of the month following the end of eachcalendar quarter or month as may be provided in the respective franchise or pertinent municipal

regulation and shall, any provision of the Local Tax Code or any other law to the contrary

notwithstanding, be in lieu of all taxes and assessments of whatever nature imposed by anynational or local authority on earnings, receipts, income and privilege of generation, distribution

and sale of electric current.

Republic Act No. 7160, otherwise known as the Local Government Code of 1991 (hereinafter

referred to as the LGC) took effect on January 1, 1992. The said Code authorizes the

province/city to impose a tax on business enjoying a franchise at a rate not exceeding fiftypercent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year

realized within its jurisdiction.

On October 5, 1992, the Sangguniang Panglunsod of San Pablo City enacted Ordinance No. 56,otherwise known as the Revenue Code of the City of San Pablo. The said Ordinance took effect

on October 30, 1992:i[1]

Section 2.09 Article D of said Ordinance provides:

Sec. 2.09. Franchise Tax There is hereby imposed a tax on business enjoying a franchise, at a

rate of fifty percent (50%) of one percent (1%) of the gross annual receipts, which shall includeboth cash sales and sales on account realized during the preceding calendar year within the city.

Pursuant to the above-quoted Section 2.09, the petitioner City Treasurer sent to private

respondent a letter demanding payment of the aforesaid franchise tax. From 1994 to 1996,private respondent paid under protest a total amount of P1,857,711.67.ii[2]


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The private respondent subsequently filed this action before the Regional Trial Court to declare

Ordinance No. 56 null and void insofar as it imposes the franchise tax upon private respondent

MERALCOiii[3] and to claim for a refund of the taxes paid.

The Court ruled in favor of MERALCO and upheld its argument that the LGC did not expressly

or impliedly repeal the tax exemption/incentive enjoyed by it under its charter. The dispositiveportion of the decision reads:

WHEREFORE, the imposition of a franchise tax under Sec. 2.09 Article D of Ordinance No. 56otherwise known as the Revenue Code of the City of San Pablo, is declared ineffective and null

and void insofar as the plaintiff MERALCO is concerned for being violative of Republic Act No.

2340, PD 551, and Republic Act No. 7160 and the defendants are ordered to refund to theplaintiff the amount of ONE MILLION EIGHT HUNDRED FIFTY SEVEN THOUSAND

SEVEN HUNDRED ELEVEN & 67/100 (P1,857,711.67) and such other amounts as may have

been paid by the plaintiff under said Revenue Ordinance No. 56 after the filing of the complaint.iv

[4]

SO ORDERED.

Its motion for reconsideration having been denied by the trial courtv[5] the petitioners filed the

instant petition with this Court raising pure questions of law based on the following grounds:

I. RESPONDENT JUDGE GRAVELY ERRED IN HOLDING THAT ACT NO. 3648,REPUBLIC ACT NO. 2340 AND PRESIDENTIAL DECREE NO. 551 AS AMENDED,

INSOFAR AS THEY GRANT TAX INCENTIVES, PRIVILEGES AND IMMUNITIES TO

PRIVATE RESPONDENT, HAVE NOT BEEN REPEALED BY REPUBLIC ACT NO.7160.

II. RESPONDENT JUDGE GRAVELY ERRED IN RULING THAT SECTION 193 OF

REPUBLIC ACT NO. 7160 HAS NOT WITHDRAWN THE TAX INCENTIVES,

PRIVILEGES AND IMMUNITIES BEING ENJOYED BY THE PRIVATERESPONDENT UNDER ACT NO. 3648, REPUBLIC ACT NO. 2340 AND

PRESIDENTIAL DECREE NO. 551, AS AMENDED.

III. RESPONDENT JUDGE GRAVELY ERRED IN HOLDING THAT THE FRANCHISE

TAX IN QUESTION CONSTITUTES AN IMPAIRMENT OF THE CONTRACTBETWEEN THE GOVERNMENT AND THE PRIVATE RESPONDENT.

Petitioners position is the RA 7160 (LGC) expressly repealed Act No. 3648, Republic Act No.

2340 and Presidential Decree 551 and that pursuant to the provisions of Sections 137 and 193 of

the LGC, the province or city now has the power to impose a franchise tax on a businessenjoying a franchise. Petitioners rely on the ruling in the case ofMactan Cebu International

Airport Authority vs. Marcosvi[6] where the Supreme Court held that the exemption from real

property tax granted to Mactan Cebu International Airport Authority under its charter has beenwithdrawn upon the effectivity of the LGC.


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In addition, the petitioners cite in their Memorandum dated December 8, 1997 an administrative

interpretation made by the Bureau of Local Government Finance of the Department of Finance in

its 3rd indorsement dated February 15, 1994 to the effect that the earlier ruling of the Departmentof Finance that holders of franchise which contain the phrase in lieu of all taxes proviso are

exempt from the payment of any kind of tax is no longer applicable upon the effectivity of the

LGC in view of the withdrawal of tax exemption privileges as provided in Sections 193 and 234thereof.

We resolve to reverse the court a quo.

The pivotal issue is 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 grossreceipts in lieu of all taxes and assessments of whatever nature imposed by any national or local

authority on savings or income.

It is necessary to reproduce the pertinent provisions of the LGC.

Section 137 Franchise Tax Notwithstanding any exemption granted by any law or other

special law, the province may impose a tax on business enjoying a franchise, at a rate notexceeding fifty percent 50% of one percent 1% of the gross annual receipts for the preceding

calendar year based on the incoming receipts, or realized, within its territorial jurisdiction. xxx

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

independent 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 provinceor municipality by not more than fifty percent (50%) except the rates of professional and

amusement taxes.

Section 193 Withdrawal of Tax Exemption Privileges. Unless otherwise provided in thisCode, 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 R.A. 6938, non-stock and non-profit hospitals and

educational institutions, are hereby withdrawn upon the effectivity of this Code.

Section 534 (f) Repealing Clause All general and special laws, acts, city charters, decrees,executive orders, proclamations and administrative regulations, or part or parts thereof which are

inconsistent with any of the provisions of this code are hereby repealed or modified accordingly.

Section 534 (f), the repealing clause of the LGC, provides that all general and special laws, acts,city charters, decrees, executive orders, proclamations and administrative regulations or parts

thereof which are inconsistent with any of the provisions of the Code are hereby repealed or

modified accordingly.


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This clause partakes of the nature of a general repealing clause.vii[7] It is certainly not an express

repealing clause because it fails to designate the specific act or acts identified by number or title,

that are intended to be repealed.viii[8]

Was there an implied repeal by Republic Act No. 7160 of the MERALCO franchise insofar as

the latter impose a 2% tax in lieu of all taxes and assessments of whatever nature?

We rule affirmatively.

We are mindful of the established rule that repeals by implication are not favored as laws are

presumed to be passed with deliberation and full knowledge of all laws existing on the subject.A general law cannot be construed to have repealed a special law by mere implication unless the

intent to repeal or alter is manifestix[9] and it must be convincingly demonstrated that the two

laws are so clearly repugnant and patently inconsistent that they cannot co-exist.x[10]

It is our view that petitioners correctly rely on the provisions of Section 137 and 193 of the LGC

to support their position that MERALCOs tax exemption has been withdrawn. The explicitlanguage of Section 137 which authorizes the province to impose franchise tax notwithstanding

any exemption granted by any law or other special laws" is all-encompassing and clear. Thefranchise tax is imposable despite any exemption enjoyed under special laws.

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 corporationsexcept 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. It is a basic

precept of statutory construction that the express mention of one person, thing, act, orconsequence excludes all others as expressed in the familiar maxim expressio unius est exlcusio

alterius.xi[11] In the absence of any provision of the Code to the contrary, and we find no otherprovision of the Code to the contrary, and we find no other provision in point, any existing tax

exemption or incentive enjoyed by MERALCO under existing law was clearly intended to be

withdrawn.

Reading together Sections 137 and 193 of the LGC, we conclude that under the LGC the localgovernment 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. The legislative purpose to withdraw tax privileges enjoyed under existing

law or charter is clearly manifested by the language used in Section 137 and 193 categoricallywithdrawing such exemption subject only to the exceptions enumerated. Since it would be not

only tedious and impractical to attempt to enumerate all the existing statutes providing for

special tax exemptions or privileges, the LGC provided for an express, albeit general, withdrawalof such exemptions or privileges. No more unequivocal language could have been used.

It is true that the phrase in lieu of all taxes found in special franchises has been held in several

cases to exempt the franchise holder from payment of tax on its corporate franchise imposed by


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the Internal Revenue Code, as the charter is in the nature of a private contract and the exemption

is part of the inducement for the acceptance of the franchise, and that the imposition of another

franchise tax by the local authority would constitute an impairment of contract between thegovernment and the corporation.xii[12] But these magic words contained in the phrase shall be

in lieu of all taxes.xiii[13] Have to give way to the peremptory language of the LGC specifically

providing for the withdrawal of such exemption privileges.

Accordingly inMactan Cebu International Airport Authority vs. Marcos,xiv[14] this Court heldthat Section 193 of the LGC prescribes the general rule, viz., the tax exemptions or incentives

granted to or presently enjoyed by natural or juridical persons are withdrawn upon the effectivity

of the LGC except with respect to those entities expressly enumerated. In the same vein Wemust hold that the express withdrawal upon effectivity of the LGC of all exemptions only as

provided therein, can no longer be invoked by Meralco to disclaim liability for the local tax.

Private respondents further argue that the in lieu of provision contained in PD 551, Act No.

3648 and RA 2340 does not partake of the nature of an exemption, but is a commutative tax.

This contention was raised but was not upheld in Cagayan Electric Power and Light Co. Inc. vs.Commissioner of Internal Revenuexv[15] wherein the Supreme Court stated:

xxx Congress could impair petitioners legislative franchise by making it liable for income tax

from which heretofore it was exempted by virtue of the exemption provided for in section 3 of itsfranchise xxx

xxx Republic Act No. 5431, in amending section 24 of the Tax Code by subjecting to income tax

all corporate tax payers not expressly exempted therein and in section 27 of the Code, had theeffect ofwithdrawing petitioners exemption from income tax xxx

Private respondents invocation of the non-impairment clause of the Constitution is accordinglyunavailing. The LGC was enacted in pursuance of the constitutional policy to ensure autonomy

to local governmentsxvi[16] and to enable them to attain fullest development as self-reliantcommunities.xvii[17] Thus inMactan Cebu International Airport Authority vs. Marcos,supra,

this Court pointed out, in upholding the withdrawal of the real estate tax exemption previously

enjoyed by the Mactan Cebu International Airport Authority, as follows:

Note that as reproduced in Section 234(a) the phrase and any government owned or controlledcorporation so exempt by its charter was excluded. The justification for this restricted

exemption in Section 234(a) seems obvious: to limit further tax exemption privileges especially

in light of the general provision on withdrawal of tax exemption privileges in Section 193 and

the special provision on withdrawal of exemption from payment of real property taxes in the lastparagraph of Section 234. These policy considerations are consistent with the State policy to

ensure autonomy to local governments and the objective of the LGC that they enjoy genuine and

meaningful local autonomy to enable them to attain their fullest development as self-reliantcommunities and make them effective partners in attainment of national goals. The power to tax

is the most effective instrument to raise needed revenues to finance and support myriad activities

of local government units for the delivery of basic services essential to the promotion of thegeneral welfare and the enhancement of peace, progress, and prosperity of the people. It may


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also be relevant to recall that the original reasons for the withdrawal of tax exemption privileges

granted to government-owned or controlled corporations and all other units of government were

that such privilege resulted in serious tax base erosion and distortions in the tax treatment ofsimilarly situated enterprises, and there was a need for these entities to share in the requirements

of development, fiscal or otherwise, by paying the taxes and other charges due from them.xviii[18]

The Court therein concluded that:

nothing can prevent Congress from decreeing that even instrumentalities or agencies of theGovernment performing governmental functions may be subject to tax. Where it is done

precisely to fulfill a constitutional mandate and national policy, no one can doubt its

wisdom.xix[19]

The power to tax is primarily vested in Congress. However, in our jurisdiction, it may beexercised by local legislative bodies, no longer merely by virtue of a valid delegation as before,

but pursuant to direct authority conferred by Section 5, Article X of the Constitution.xx[20] Thus

Article X, Section 5 of the Constitution reads:

Section 5 Each Local Government unit shall have the power to create its own sources ofrevenue and to levy taxes, fees and charges subject to such guidelines and limitations as the

Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees and

charges shall accrue exclusively to the Local Governments.

The important legal effect of Section 5 is that henceforth, in interpreting statutory provisions onmunicipal fiscal powers, doubts will have to be resolved in favor of municipal corporations. xxi

[21]

There is further basis for the conclusion that the non-impairment of contract clause cannot beinvoked to uphold Meralco's exemption from the local tax. Escudero Electric Co. was originallygiven the legislative franchise under Act. 3648 to operate an electric light and power system in

the City of San Pablo and nearby municipalities. The term of the franchise under Act No. 3648

is a period of fifty years from the Acts approval in 1929. The said law provided that thefranchise is granted upon the condition that it shall be subject to amendment, or repeal by the

Congress of the United States.xxii[22] Under the 1935,xxiii[23] the 1973xxiv[24] and the 1987xxv[25]

Constitutions, no franchise or right shall be granted except under the condition that it shall besubject to amendment, alteration or repeal by the National Assembly when the public interest so

requires. With or without the reservation clause, franchises are subject to alterations through a

reasonable exercise of the police power; they are also subject to alteration by the power to tax,

which like police power cannot be contracted away.

xxvi

[26]

Finally, while the matter is not of controlling significance, the Court notes that whereas the

original Escudero franchise exempted the franchise holder from all taxes levied or collected

now or in the futurexxvii[27] this phrase is noticeably omitted in the counterpart provision ofP.D. 551 that said omission is intended not to foreclose future taxes may reasonably be deduced

by statutory construction.


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WHEREFORE, the instant petition is GRANTED. The decision of the Regional Trial Court of

San Pablo City, appealed from is hereby reversed and set aside and the complaint of MERALCO

is hereby DISMISSED.

No pronouncement as to costs.

SO ORDERED.

Romero, (Chairman), Vitug, Panganiban, and Purisima, JJ., concur.


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i[1] Petitioner for review, p. 3

ii[2]Ibid., p. 4 and Respondents Memorandum, p. 3.

iii[3] Petition for Review, p. 4 and Respondents Memorandum, p. 4.

iv[4]Ibid

v[5] Order of January 10, 1996, p. 41,Rollo

vi[6] 261 SCRA 667, (1996).

vii[7] Ty vs. Trampe, 250 SCRA 500 at 512 (1995).

viii[8] Mecano vs. Commission on Audit, 216 SCRA 500 at 504 [1992]; Berces Sr., vs. Guingona, Jr.,

241 SCRA 539 at 544 [1995].

ix[9] Laguna Lake Development Authority vs. Court of Appeals, 251 SCRA 42 at 56 (1995).

x[10] Villegas vs. Subido, 41 SCRA 190 at 197 (1971); Mecano vs. Commission on Audit, Supra.

xi[11] Commissioner of Customs vs. Court of Tax Appeals, 224 SCRA 665 at pp. 669-670, (1993)

xii[12] Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231; Commissioner of InternalRevenue vs. Lingayen Gulf Electric Power Co. 164 SCRA 27 at 34 (1988), Province of Misamis

Oriental vs. Cagayan Electric Power and Light Co., Inc., 181 SCRA 38 at 43 (1990).

xiii[13] Province of Misamis Oriental vs. Cagayan Electric Power and Light Co. Inc. supra, at p. 42.

xiv[14] Supra.

xv[15] 138 SCRA 629 at p. 631.

xvi[16] Section 25, Art. II and 2, Art. X Constitution.

xvii[17] 2(a) Local Government Code of 1991.

xviii[18] Mactan Cebu International Airport Authority vs. Marcos, p. 690.

xix[19]Ibid., p. 692.

xx[20] Isagani A. Cruz, Constitutional Law, (1991), at p. 84.

xxi[21] Bernas, The Constitution of the Philippines, 1st ed. p. 381.

xxii[22] Act No. 3648, 12.

xxiii[23] Article XIV, 8.


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xxiv[24] Article XIV, 5.

xxv[25] Article XII, 11.

xxvi[26] Bernas, Supra, p. 341.

xxvii[27] 10, Act No. 3648.

THIRD DIVISION

[G.R. No. 131359. May 5, 1999]

MANILA ELECTRIC COMPANY,petitioner vs. PROVINCE OF LAGUNA and BENITO R.

BALAZO, in his capacity as Provincial Treasurer of Laguna, respondents.

D E C I S I O N

VITUG,J.:

On various dates, certain municipalities of the Province of Laguna including, Bian, Sta Rosa, San

Pedro, Luisiana, Calauan and Cabuyao, by virtue of existing laws then in effect, issued resolutionsthrough their respective municipal councils granting franchise in favor of petitioner Manila Electric

Company (MERALCO) for the supply of electric light, heat and power within their concerned areas.

On 19 January 1983, MERALCO was likewise granted a franchise by the National ElectrificationAdministration to operate an electric light and power service in the Municipality of Calamba, Laguna.

On 12 September 1991, Republic Act No. 7160, otherwise known as the Local Government Code of

1991, was enacted to take effect on 01 January 1992 enjoining local government units to create their

own sources of revenue and to levy taxes, fees and charges, subject to the limitations expressed therein,

consistent with the basic policy of local autonomy. Pursuant to the provisions of the Code, respondentprovince enacted Laguna Provincial Ordinance No. 01-92, effective 01 January 1993, providing, in

part, as follows:

Sec. 2.09. Franchise Tax. There is hereby imposed a tax on businesses enjoying a franchise, at arate of fifty percent (50%) of one percent (1%) of the gross annual receipts, which shall include both

cash sales and sales on account realized during the preceding calendar year within this province,

including the territorial limits on any city located in the province[1]


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On the basis of the above ordinance, respondent Provincial Treasurer sent a demand letter toMERALCO for the corresponding tax payment. Petitioner MERALCO paid the tax, which then

amounted to P19,520,628.42, under protest. A formal claim for refund was thereafter sent by

MERALCO to the Provincial Treasurer of Laguna claiming that the franchise tax it had paid andcontinued to pay to the National Government pursuant to P.D. 551 already included the franchise tax

imposed by the Provincial Tax Ordinance. MERALCO contended that the imposition of a franchisetax under Section 2.09 of Laguna Provincial Ordinance No. 01-92, insofar as it concerned MERALCO,contravened the provisions of Section 1 of P.D. 551 which read:

Any provision of law or local ordinance to the contrary notwithstanding, the franchise tax payable by

all grantees of franchises to generate, distribute and sell electric current for light, heat and power shall

be two per cent (2%) of their gross receipts received from the sale of electric current and fromtransactions incident to the generation, distribution and sale of electric current.

Such franchise tax shall be payable to the Commissioner of Internal Revenue or his duly authorized

representative on or before the twentieth day of the month following the end of each calendar quarter or

month, as may be provided in the respective franchise or pertinent municipal regulation and shall, anyprovision of the Local Tax Code or any other law to the contrary notwithstanding, be in lieu of all taxes

and assessments of whatever nature imposed by any national or local authority on earnings, receipts,

income and privilege of generation, distribution and sale of electric current.

On 28 August 1995, the claim for refund of petitioner was denied in a letter signed by Governor JoseD. Lina. In denying the claim, respondents relied on a more recent law, i.e., Republic Act No. 7160 or

the Local Government Code of 1991, than the old decree invoked by petitioner.

On 14 February 1996, petitioner MERALCO filed with the Regional Trial Court of Sta Cruz, Laguna, a

complaint for refund, with a prayer for the issuance of a writ of preliminary injunction and/ortemporary restraining order, against the Province of Laguna and also Benito R. Balazo in his capacity

as the Provincial Treasurer of Laguna. Aside from the amount of P19,520,628.42 for which petitioner

MERALCO had priority made a formal request for refund, petitioner thereafter likewise madeadditional payments under protest on various dates totaling P27,669,566.91.

The trial court, in its assailed decision of 30 September 1997, dismissed the complaint and concluded:

WHEREFORE, IN THE LIGHT OF ALL THE FOREGOING CONSIDERATIONS, JUDGMENT is

hereby rendered in favor of the defendants and against the plaintiff, by:

1. Ordering the dismissal of the Complaint; and

2. Declaring Laguna Provincial Tax Ordinance No. 01-92 as valid, binding, reasonable andenforceable.[2]

In the instant petition, MERALCO assails the above ruling and brings up the following issues; viz:

1. Whether the imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance

No. 01-92, insofar as petitioner is concerned, is violative of the non-impairment clause of theConstitution and Section 1 of Presidential Decree No. 551.


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2. Whether Republic Act. No. 7160, otherwise known as the Local Government Code of 1991, hasrepealed, amended or modified Presidential Decree No. 551.

3. Whether the doctrine of exhaustion of administrative remedies is applicable in this case.[3]

The petition lacks merit.

Prefatorily, it might be well to recall that local governments do not have the inherent power to tax[4]

except to the extent that such power might be delegated to them either by the basic law or by statute.Presently, under Article X of the 1987 Constitution, a general delegation of that power has been given

in favor of local government units. Thus:

Sec. 3. The Congress shall enact a local government code which shall provide for a more responsive

and accountable local government structure instituted through a system of decentralization witheffective mechanisms of recall, initiative, and referendum, allocate among the different local

government units their powers, responsibilities, and resources, and provide for the qualifications,

election, appointment and removal, term, salaries, powers and functions, and duties of local officials,and all other matters relating to the organization and operation of the local units.

x x x x x x x x x

Sec. 5. Each local government shall have the power to create its own sources of revenues and to levy

taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide,consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue

exclusively to the local governments.

The 1987 Constitution has a counterpart provision in the 1973 Constitution which did come out with a

similar delegation of revenue making powers to local governments.[5]

Under the regime of the 1935 Constitution no similar delegation of tax powers was provided, and localgovernment units instead derived their tax powers under a limited statutory authority. Whereas, then,

the delegation of tax powers granted at that time by statute to local governments was confined and

defined (outside of which the power was deemed withheld), the present constitutional rule (startingwith the 1973 Constitution), however, would broadly confer such tax powers subject only to specific

exceptions that the law might prescribe.

Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute, the

tax power must be deemed to exist although Congress may provide statutory limitations and guidelines.The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local

government units by directly granting them general and broad tax powers. Nevertheless, the

fundamental law did not intend the delegation to be absolute and unconditional; the constitutionalobjective obviously is to ensure that, while the local government units are being strengthened and made

more autonomous,[6]the legislature must still see to it that (a) the taxpayer will not be over-burdened or

saddled with multiple and unreasonable impositions; (b) each local government unit will have its fairshare of available resources; (c) the resources of the national government will not be unduly disturbed;

and (d) local taxation will be fair, uniform, and just.


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The Local Government Code of 1991 has incorporated and adopted, by and large the provisions of thenow repealed Local Tax Code, which had been in effect since 01 July 1973, promulgated into law by

Presidential Decree No. 231[7] pursuant to the then provisions of Section 2, Article XI, of the 1973

Constitution. The 1991 Code explicitly authorizes provincial governments, notwithstanding anyexemption granted by any law or other special law, x x x (to) impose a tax on businesses enjoying a

franchise. Section 137 thereof provides:

Sec. 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 a 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. In the case of a newly started business,

the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In thesucceeding calendar year, regardless of when the business started to operate, the tax shall be based on

the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein.

(Underscoring supplied for emphasis)

Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad tax powersto local government units, the Local Government Code has effectively withdrawn under Section 193

thereof, tax exemptions or incentives theretofore enjoyed by certain entities. This law states:

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 R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are

hereby withdrawn upon the effectivity of this Code. (Underscoring supplied for emphasis)

The Code, in addition, contains a general repealing clause in its Section 534; thus:

Section 534. Repealing Clause. x x x.

(f) All general and special laws, acts, city charters, decrees, executive orders, proclamations and

administrative regulations, or part or parts thereof which are inconsistent with any of the provisions of

this Code are hereby repealed or modified accordingly. (Underscoring supplied for emphasis)[8]

To exemplify, inMactan Cebu International Airport Authority vs. Marcos,[9] the Court upheld thewithdrawal of the real estate tax exemption previously enjoyed by Mactan Cebu International Airport Authority. The Court

ratiocinated:

x x x These policy considerations are consistent with the State policy to ensure autonomy to local

governments and the objective of the LGC that they enjoy genuine and meaningful local autonomy toenable them to attain their fullest development as self-reliant communities and make them effective

partners in the attainment of national goals. The power to tax is the most effective instrument to raiseneeded revenues to finance and support myriad activities of local government units for the delivery of

basic service essential to the promotion of the general welfare and the enhancement of peace, progress,

and prosperity of the people. It may also be relevant to recall that the original reasons for the

withdrawal of tax exemption privileges granted to government-owned and controlled corporations andall other units of government were that such privilege resulted in serious tax base erosion and

distortions in the tax treatment of similarly situated enterprises, and there was a need for these entities


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to share in the requirements of development, fiscal or otherwise, by paying the taxes and other chargesdue from them.[10]

Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court in Province of

Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc.;[11] thus:

In an earlier case, the phrase shall be in lieu of all taxes and at any time levied, established by, orcollected by any authority found in the franchise of the Visayan Electric Company was held to exempt

the company from payment of the 5% tax on corporate franchise provided in Section 259 of the

Internal Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385)

Similarly, we ruled that the provision: shall be in lieu of all taxes of every name and nature in thefranchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila Railroad

from payment of internal revenue tax for its importations of coal and oil under Act No. 2432 and the

Amendatory Acts of the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497)justified the exemption of the Philippine Railway Company from payment of the tax on its corporate

franchise under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine

Railway Co vs. Collector of Internal Revenue, 91 Phil. 35).

Those magic words, shall be in lieu of all taxes also excused the Cotabato Light and Ice PlantCompany from the payment of the tax imposed by Ordinance No. 7 of the City of Cotabato (Cotabato

Light and Power Co. vs. City of Cotabato, 32 SCRA 231).

So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it was

required to pay the corporate franchise tax under Section 259 of the Internal Revenue Code as amendedby R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4] 1068).

This Court pointed out that such exemption is part of the inducement for the acceptance of the

franchise and the rendition of public service by the grantee. [12]

In the recent case of the City Government of San Pablo, etc.,et al. vs. Hon. Bienvenido V. Reyes, et al.,

[13]the Court has held that the phrase in lieu of all taxes have to give way to the peremptory language

of the Local Government Code specifically providing for the withdrawal of such exemptions,

privileges, and that upon the effectivity of the Local Government Code all exemptions except onlyas provided therein can no longer be invoked by MERALCO to disclaim liability for the local tax. Infine, the Court has viewed its previous rulings as laying stress more on the legislative intent of the

amendatory law whether the tax exemption privilege is to be withdrawn or not rather than on

whether the law can withdraw, without violating the Constitution, the tax exemption or not.

While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as

being in the nature ofcontracts and a part of the inducement for carrying on the franchise, these

exemptions, nevertheless, are far from being 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 into by them under

enabling laws in which the government, acting in its private capacity, sheds its cloak of authority

and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked


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without impairing the obligations of contracts.[14] These contractual tax exemptions, however, are notto be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant

which is beyond the purview of the non-impairment clause of the Constitution.[15] Indeed, Article XII,

Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973Constitutions, 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 Congressas and when the common good so requires.

WHEREFORE, the instant petition is hereby DISMISSED. No costs.

SO ORDERED.

Romero, Panganiban, Purisima, and Gonzaga-Reyes, JJ., concur.

EN BANC

[G.R. No. 143867. March 25, 2003]

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.

R E S O L U T I O N

Mendoza,J.:


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Petitioner seeks a reconsideration of the decision of the Second Division in this case. Because thedecision bears directly on issues involved in other cases brought by petitioner before other Divisions of

the Court, the motion for reconsideration was referred to the Court en banc for resolution. [1] The parties

were heard in oral arguments by the Court en banc on January 21, 2003 and were later granted time tosubmit their memoranda. Upon the filing of the last memorandum by the City of Davao on February

10, 2003, the motion was deemed submitted for resolution.

To provide perspective, it will be helpful to restate the basic facts.

Petitioner PLDT paid a franchise tax equal to three percent (3%) of its gross receipts. The franchise tax

was paid in lieu of all taxes on this franchise or earnings thereof pursuant to R.A. No. 7082 amendingits charter, Act. No. 3436. The exemption from all taxes on this franchise or earnings thereof was

subsequently withdrawn by R.A. No. 7160 (Local Government Code of 1991), which at the same time

gave local government units the power to tax businesses enjoying a franchise on the basis of incomereceived or earned by them within their territorial jurisdiction. The Local Government Code (LGC)

took effect on January 1, 1992.

The pertinent provisions of the LGC state:

Sec. 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 a 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. . . .

Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, taxexemptions 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 R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, arehereby withdrawn upon the effectivity of this Code.

Pursuant to these provisions, the City of Davao enacted Ordinance No. 519, Series of 1992, which in

pertinent part provides:

Notwithstanding any exemption granted by any law or other special law, there is hereby imposed a tax

on businesses enjoying a franchise, at a rate of Seventy-five percent (75%) of one percent (1%) of thegross annual receipts for the preceding calendar year based on the income or receipts realized within

the territorial jurisdiction of Davao City.

Subsequently, Congress granted in favor of Globe Mackay Cable and Radio Corp. (Globe)[2] and Smart

Information Technologies, Inc. (Smart)[3] franchises which contained in lieu of all taxes provisos. In1995, it enacted R.A. No. 7925 (Public Telecommunications Policy of the Philippines), 23 of which

provides that Any advantage, favor, privilege, exemption, or immunity granted under existing

franchises, or may hereafter be granted, shall ipso facto become part of previously grantedtelecommunications franchises and shall be accorded immediately and unconditionally to the grantees

of such franchises. The law took effect on March 16, 1995.

In January 1999, when PLDT applied for a mayors permit to operate its Davao Metro Exchange, it

was required to pay the local franchise tax for the first to the fourth quarter of 1999 which then had


21/41

amounted to P3,681,985.72. PLDT challenged the power of the city government to collect the localfranchise tax and demanded a refund of what it had paid as local franchise tax for the year 1997 and for

the first to the third quarters of 1998. For this reason, it filed a petition in the Regional Trial Court of

Davao. However, its petition was dismissed and its claim for exemption under R.A. No. 7925 wasdenied. The trial court ruled that the LGC had withdrawn tax exemptions previously enjoyed by

persons and entities and authorized local government units to impose a tax on businesses enjoyingfranchises within their territorial jurisdictions, notwithstanding the grant of tax exemption to them.Petitioner, therefore, brought this appeal.

In its decision of August 22, 2001, this Court, through its Second Division, held that R.A. No. 7925,

23 cannot be so interpreted as granting petitioner exemption from local taxes because the word

exemption, taking into consideration the context of the law, does not mean tax exemption. Hencethis motion for reconsideration.

The question is whether, by virtue of R.A. No. 7925, 23, PLDT is again entitled to exemption from

the payment of local franchise tax in view of the grant of tax exemption to Globe and Smart.

Petitioner contends that because their existing franchises contain in lieu of all taxes clauses, the same

grant of tax exemption must be deemed to have become ipso factopart of its previously grantedtelecommunications franchise. But the rule is that tax exemptions should be granted only by clear and

unequivocal provision of law expressed in a language too plain to be mistaken.[4] If, as PLDT

contends, the word exemption in R.A. No. 7925 means tax exemption and assuming for the noncethat the charters of Globe and of Smart grant tax exemptions, then this runabout way of granting tax

exemption to PLDT is not a direct, clear and unequivocal way of communicating the legislative

intent.

But the best refutation of PLDTs claim that R.A. No. 7925, 23 grants tax exemption is the fact thatafter its enactment on March 16, 1995, Congress granted several franchises containing both an

equality clause similar to 23 and an in lieu of all taxes clause. If the equality clause

automatically extends the tax exemption of franchises with in lieu of all taxes clauses, there would beno need in the same statute for the in lieu of all taxes clause in order to extend its tax exemption to

other franchises not containing such clause. For example, the franchise of Island Country

Telecommunications, Inc., granted under R.A. No. 7939 and which took effect on March 22, 1995,contains the following provisions:

Sec. 8. Equality Clause. If any subsequent franchise for telecommunications service is awarded or

granted by the Congress of the Philippines with terms, privileges and conditions more favorable and

beneficial than those contained in this Act, then the same privileges or advantages shall ipso factoaccrue to the herein grantee and be deemed part of this Act.

Sec. 10. Tax Provisions. The grantee shall be liable to pay the same taxes on their real estate,

buildings and personal property exclusive of this franchise, as other persons or telecommunications

entities are now or hereafter may be required by law to pay. In addition hereto, the grantee, itssuccessors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts

transacted under this franchise, and the said percentage shall be in lieu of all taxes on this franchise or

earnings thereof; Provided, That the grantee shall continue to be liable for income taxes payable underTitle II of the National Internal Revenue Code. The grantee shall file the return with and pay the taxes

due thereon to the Commissioner of Internal Revenue or his duly authorized representatives in


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accordance with the National Revenue Code and the return shall be subject to audit by the Bureau ofInternal Revenue. (Emphasis added)

Similar provisions (in lieu of all taxes and equality clauses) are also found in the franchises of Cruz

Telephone Company, Inc.,[5] Isla Cellular Communications, Inc.,[6] and Islatel Corporation.[7]

We shall now turn to the other points raised in the motion for reconsideration of PLDT.

First. Petitioner contends that the legislative intent to promote the development of thetelecommunications industry is evident in the use of words as development, growth, and financial

viability, and that the way to achieve this purpose is to grant tax exemption or exclusion to franchises

belonging in this industry. Furthermore, by using the words advantage, favor, privilege,exemption, and immunity and the terms ipso facto, immediately, and unconditionally,

Congress intended to automatically extend whatever tax exemption or tax exclusion has been granted to

the holder of a franchise enacted after the LGC to the holder of a franchise enacted prior thereto, suchas PLDT.

The contention is untenable. The thrust of the law is to promote the gradual deregulation of entry,

pricing, and operations of all public telecommunications entities and thus to level the playing field in

the telecommunications industry. An intent to grant tax exemption cannot even be discerned from thelaw. The records of Congress are bereft of any discussion or even mention of tax exemption. To the

contrary, what the Chairman of the Committee on Transportation, Rep. Jerome V. Paras, mentioned in

his sponsorship of H.B. No. 14028, which became R.A. No. 7925, were equal access clauses in

interconnection agreements, not tax exemptions. He said:

There is also a need to promote a level playing field in the telecommunications industry. New entities

must be granted protection against dominant carriers through the encouragement of equitable access

charges and equal access clauses in interconnection agreements and the strict policing of predatorypricing by dominant carriers. Equal access should be granted to all operators connecting into the

interexchange network. There should be no discrimination against any carrier in terms of priorities

and/or quality of service.[8]

Nor does the term exemption in 23 of R.A. No. 7925 mean tax exemption. The term refers toexemption from certain regulations and requirements imposed by the National Telecommunications

Commission (NTC). For instance, R.A. No. 7925, 17 provides: The Commission shall exempt any

specific telecommunications service from its rate or tariff regulations if the service has sufficient

competition to ensure fair and reasonable rates or tariffs. Another exemption granted by the law inline with its policy of deregulation is the exemption from the requirement of securing permits from the

NTC every time a telecommunications company imports equipment.[9]

Second. PLDT says that the policy of the law is to promote healthy competition in thetelecommunications industry.[10] According to PLDT, the LGC did not repeal the in lieu of all taxes

provision in its franchise but only excluded from it local taxes, such as the local franchise tax.

However, some franchises, like those of Globe and Smart, which contain in lieu of all taxes

provisions were subsequently granted by Congress, with the result that the holders of franchisesgranted prior to January 1, 1992, when the LGC took effect, had to pay local franchise tax in view of

the withdrawal of their local tax exemption. It is argued that it is this disparate situation which R.A.

No. 7925, 23 seeks to rectify.


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One can speak of healthy competition only between equals. For this reason, the law seeks to break upmonopoly in the telecommunications industry by gradually dismantling the barriers to entry and

granting to new telecommunications entities protection against dominant carriers through equitable

access charges and equal access clauses in interconnection agreements and through the strict policingof predatory pricing by dominant carriers.[11] Interconnection among carriers is made mandatory to

prevent a dominant carrier from delaying the establishment of connection with a new entrant and todeter the former from imposing excessive access charges.[12]

That is also the reason there are franchises[13] granted by Congress after the effectivity of R.A. No.7925 which do not contain the in lieu of all taxes clause, just as there are franchises, also granted

after March 16, 1995, which contain such exemption from other taxes.[14] If, by virtue of 23, the tax

exemption granted under existing franchises or thereafter granted is deemed applicable to previouslygranted franchises (i.e., franchises granted before the effectivity of R.A. No. 7925 on March 16, 1995),

then those franchises granted after March 16, 1995, which do not contain the in lieu of all taxes

clause, are not entitled to tax exemption. The in lieu of all taxes provision in the franchises of Globe

and Smart, which are relatively new entrants in the telecommunications industry, cannot thus bedeemed applicable to PLDT, which had virtual monopoly in the telephone service in the country for a

long time,[15] without defeating the very policy of leveling the playing field of which PLDT speaks.

Third. Petitioner argues that the rule of strict construction of tax exemptions does not apply to this casebecause the in lieu of all taxes provision in its franchise is more a tax exclusion than a tax exemption.

Rather, the applicable rule should be that tax laws are to be construed most strongly against the

government and in favor of the taxpayer.

This is contrary to the uniform course of decisions[16] of this Court which consider in lieu of all taxesprovisions as granting tax exemptions. As such, it is a privilege to which the rule that tax exemptions

must be interpreted strictly against the taxpayer and in favor of the taxing authority applies. Along

with the police power and eminent domain, taxation is one of the three necessary attributes of

sovereignty. Consequently, statutes in derogation of sovereignty, such as those containing exemptionfrom taxation, should be strictly construed in favor of the state. A state cannot be stripped of this most

essential power by doubtful words and of this highest attribute of sovereignty by ambiguous language.[17]

Indeed, both in their nature and in their effect there is no difference between tax exemption and tax

exclusion. Exemption is an immunity or privilege; it is freedom from a charge or burden to which

others are subjected.[18] Exclusion, on the other hand, is the removal of otherwise taxable items fromthe reach of taxation, e.g., exclusions from gross income and allowable deductions.[19] Exclusion is

thus also an immunity or privilege which frees a taxpayer from a charge to which others are subjected.

Consequently, the rule that tax exemption should be applied instrictissimi juris against the taxpayer

and liberally in favor of the government applies equally to tax exclusions. To construe otherwise thein lieu of all taxes provision invoked is to be inconsistent with the theory that R.A. No. 7925, 23

grants tax exemption because of a similar grant to Globe and Smart.

Petitioner cites Cagayan Electric Power & Light Co., Inc. v. Commissioner of Internal Revenue[20] insupport of its argument that a tax exemption is restored by a subsequent law re-enacting the tax

exemption. It contends that by virtue of R.A. No. 7925, its tax exemption or exclusion was restored by

the grant of tax exemptions to Globe and Smart. Cagayan Electric Power & Light Co., Inc., however,

is not in point. For there, the re-enactment of the exemption was made in an amendment to the charter


24/41

of Cagayan Electric Power and Light Co.

Indeed, petitioners justification for its claim of tax exemption rests on a strained interpretation of R.A.

No. 7925, 23. For petitioners claim for exemption is not based on an amendment to its charter but

on a circuitous reasoning involving inquiry into the grant of tax exemption to other telecommunications

companies and the lack of such grant to others,[21]

when Congress could more clearly and directly havegranted tax exemption to all franchise holders or amend the charter of PLDT to again exempt it from

tax if this had been its purpose.

The fact is that after petitioners tax exemption by R.A. No. 7082 had been withdrawn by the LGC,[22]

no amendment to re-enact its previous tax exemption has been made by Congress. Considering that thetaxing power of local government units under R.A. No. 7160 is clear and is ordained by the

Constitution, petitioner has the heavy burden of justifying its claim by a clear grant of exemption.[23]

Tax exemptions should be granted only by clear and unequivocal provision of law on the basis oflanguage too plain to be mistaken.[24] They cannot be extended by mere implication or inference.

Thus, it was held inHome Insurance & Trust Co. v. Tennessee[25]

that a law giving a corporation allthe powers, rights reservations, restrictions, and liabilities of another company does not give an

exemption from taxation which the latter may possess. InRochester R. Co. v. Rochester,[26] the U.S.Supreme Court, after reviewing cases involving the effect of the transfer to one company of the powers

and privileges of another in conferring a tax exemption possessed by the latter, held that a statute

authorizing or directing the grant or transfer of the privileges of a corporation which enjoysimmunity from taxation or regulation should not be interpreted as including that immunity. Thus:

We think it is now the rule, notwithstanding earlier decisions and dicta to the contrary, that a statute

authorizing or directing the grant or transfer of the privileges of a corporation which enjoys

immunity from taxation or regulation should not be interpreted as including that immunity. We,therefore, conclude that the words the estate, property, rights, privileges, and franchises did not

embrace within their meaning the immunity from the burden of paving enjoyed by the Brighton

Railroad Company. Nor is there anything in this, or any other statute, which tends to show that thelegislature used the words with any larger meaning than they would have standing alone. The meaning

is not enlarged, as faintly suggested, by the expression in the statute that they are to be held by the

successor fully and entirely, and without change and diminution, words of unnecessary emphasis,without which all included in estate, property, rights, privileges, and franchises would pass, and with

which nothing more could pass. On the contrary, it appears, as clearly as it did in the Phoenix Fire

Insurance Company Case, that the legislature intended to use the words rights, franchises, and

privileges in the restricted sense. . . .[27]

Fourth. It is next contended that, in any event, a special law prevails over a general law and that the

franchise of petitioner giving it tax exemption, being a special law, should prevail over the LGC, giving

local governments taxing power, as the latter is a general law. Petitioner further argues that as between

two laws on the same subject matter which are irreconcilably inconsistent, that which is passed laterprevails as it is the latest expression of legislative will.

This proposition flies in the face of settled jurisprudence. In City Government of San Pablo, Laguna v.

Reyes,[28] this Court held that the phrase in lieu of all taxes found in special franchises should giveway to the peremptory language of 193 of the LGC specifically providing for the withdrawal of such

exemption privileges. Thus, the rule that a special law must prevail over the provisions of a later
http://sc.judiciary.gov.ph/jurisprudence/2003/mar2003/..%5C..%5C1999%5Cmar99%5C127708.htmhttp://sc.judiciary.gov.ph/jurisprudence/2003/mar2003/..%5C..%5C1999%5Cmar99%5C127708.htmhttp://sc.judiciary.gov.ph/jurisprudence/2003/mar2003/..%5C..%5C1999%5Cmar99%5C127708.htmhttp://sc.judiciary.gov.ph/jurisprudence/2003/mar2003/..%5C..%5C1999%5Cmar99%5C127708.htm


25/41

general law does not apply as the legislative purpose to withdraw tax privileges enjoyed under existinglaws or charters is apparent from the express provisions of 137 and 193 of the LGC.

As to the alleged inconsistency between the LGC and R.A. No. 7925, this Court has already explained

in the decision under reconsideration that no inconsistency exists and that the rule that the later law is

the latest expression of the legislature does not apply. The matter need not be further discussed.

In any case, it is contended, the ruling of the Bureau of Local Government Finance (BLGF) that

petitioners exemption from local taxes has been restored is a contemporaneous construction of 23

and, as such, it is entitled to great weight.

The ruling of the BLGF has been considered in this case. But unlike the Court of Tax Appeals, whichis a special court created for the purpose of reviewing tax cases, the BLGF was created merely to

provide consultative services and technical assistance to local governments and the general public on

local taxation and other related matters.[29] Thus, the rule that the Court will not set aside conclusionsrendered by the CTA, which is, by the very nature of its function, dedicated exclusively to the study

and consideration of tax problems and has necessarily developed an expertise on the subject, unlessthere has been an abuse or improvident exercise of authority [30] cannot apply in the case of BLGF.

WHEREFORE, the motion for reconsideration is DENIED and this denial is final.

SO ORDERED.

Davide, Jr., C.J., Quisumbing, Corona, Carpio-Morales, Callejo, Sr., and Azcuna, JJ., concur.

Bellosillo, Ynares-Santiago, Sandoval-Gutierrez, and Austria-Martinez, JJ., join the dissent of J. Puno.

Puno, J., please see dissent.

Vitug, J., I concur; a statute effectively limiting the constitutionally-delegated tax powers of LGUs can

only be done in a clear and express manner.

Panganiban, J., no part. Same reason given in original decision.

Carpio, J., see separate opinion.
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THIRD DIVISION

[G.R. No. 149179. July 15, 2005]

PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, INC.,petitioner, vs. CITY OF

BACOLOD, FLORENTINO T. GUANCO, in his capacity as the City Treasurer of Bacolod City, and

ANTONIO G. LACZI, in his capacity as the City Legal Officer of Bacolod City, respondents.

D E C I S I O N

GARCIA,J.:

In this appeal by way of a petition for review on certiorari under Rule 45 of the Rules of Court,

petitioner Philippine Long Distance Telephone Company (PLDT), seeks the reversal and setting aside

of the July 23, 2001 decision[1]

of the Regional Trial Court at Bacolod City, Branch 42, dismissing itspetition in Civil Case No. 99-10786, an action to declare petitioner as exempt from the payment of

franchise and business taxes sought to be imposed and collected by the respondent City of Bacolod.

The material facts are not at all disputed:

PLDT is a holder of a legislative franchise under Act No. 3436, as amended, to render local andinternational telecommunications services. On August 24, 1991, the terms and conditions of its

franchise were consolidated under Republic Act No. 7082,[2] Section 12 of which embodies the so-

called in-lieu-of-all-taxes clause, whereunder PLDT shall pay a franchise tax equivalent to threepercent (3%) of all its gross receipts, which franchise tax shall be in lieu of all taxes. More

specifically, the provision pertinently reads:

SEC. 12. xxx In addition thereto, the grantee, its successors or assigns shall pay a franchise tax

equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunicationsbusinesses transacted under this franchise by the grantee, its successors or assigns, and the said

percentage shall be in lieu of all taxes on this franchise or earnings thereof. xxx (Italics ours).

Meanwhile, or on January 1, 1992, Republic Act No. 7160, otherwise known as theLocal Government

Code, took effect. Section 137 of the Code, in relation to Section 151 thereof, grants cities and otherlocal government units the power to impose local franchise tax on businesses enjoying a franchise,

thus:

SEC. 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 a 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.

xxx xxx xxx
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SEC. 151. Scope of Taxing Powers. Except as otherwise provided in this Code, the city, may levy thetaxes, 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 independent 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 ormunicipality by not more than fifty percent (50%) except the rates of professional and amusement

taxes.

By Section 193 of the same Code, all tax exemption privileges then enjoyed by all persons, whether

natural or juridical, save those expressly mentioned therein, were withdrawn, necessarily includingthose taxes from which PLDT is exempted under the in-lieu-of-all-taxes clause in its charter. We

quote Section 193:

SEC. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, taxexemptions 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 dulyregistered under R.A. 6938, non-stock and non-profit hospitals and educational institutions, are hereby

withdrawn upon the effectivity of this Code.

Aiming to level the playing field among telecommunication companies, Congress enacted Republic

Act No. 7925, otherwise known as thePublic Telecommunications Policy Act of the Philippines, which

took effect on March 16, 1995. To achieve the legislative intent, Section 23 thereof, also known as the

most-favored- treatment clause, provides for an equality of treatment in the telecommunicationsindustry, thus:

SEC. 23. Equality of Treatment in the Telecommunications Industry Any advantage, favor, privilege,

exemption, or immunity granted under existing franchises, or may hereafter be granted shall ipso factobecome part of previously granted telecommunications franchises and shall be accorded immediately

and unconditionally to the grantees of such franchises:Provided, however, That the foregoing shall

neither apply to nor affect provisions of telecommunications franchises concerning territory covered by

the franchise, the life span of the franchise, or the type of the service authorized by the franchise.

In August 1995, the City of Bacolod, invoking its authority under Section 137, in relation to Section

151 and Section 193,supra, of theLocal Government Code, made an assessment on PLDT for the

payment of franchise tax due the City.

Complying therewith, PLDT began paying the City franchise tax from the year 1994 until the thirdquarter of 1998, at which time the total franchise tax it had paid the City already amounted to

P2,770,696.37.

On June 2, 1998, the Department of Finance through its Bureau of Local Government Finance (BLGF),

issued a ruling to the effect that as of March 16, 1995, the effectivity date of the PublicTelecommunications Policy Act of the Philippines (Rep. Act. No. 7925), PLDT, among other

telecommunication companies, became exempt from local franchise tax. Pertinently, the BLGF ruling

reads:


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It appears that RA 7082 further amending ACT No. 3436 which granted to PLDT a franchise to install,operate and maintain a telephone system throughout the Philippine Islands was approved on August 3,

1991. Section 12 of said franchise, likewise, contains the in lieu of all taxes proviso.

In this connection, Section 23 of RA 7925, quoted hereunder, which was approved on March 1, 1995

provides for the equality of treatment in the telecommunications industry:

xxx xxx xxx

On the basis of the aforequoted Section 23 of RA 7925, PLDT as a telecommunications franchise

holder becomes automatically covered by the tax exemption provisions of RA 7925, which took effect

on March 16, 1995.

Accordingly, PLDT shall be exempt from the payment of franchise and business taxes imposable byLGUs under Sections 137 and 143, respectively, of the LGC [Local Government Code], upon the

effectivity of RA 7925 on March 16, 1995. However, PLDT shall be liable to pay the franchise and

business taxes on its gross receipts realized from January 1, 1992 up to March 15, 1995, during whichperiod PLDT was not enjoying the most favored clause proviso of RA 7025 [sic].[3]

Invoking the aforequoted ruling, PLDT then stopped paying local franchise and business taxes to

Bacolod City starting the fourth quarter of 1998.

The controversy came to a head-on when, sometime in 1999, PLDT applied for the issuance of aMayors Permit but the City of Bacolod withheld issuance thereof pending PLDTs payment of its

franchise tax liability in the following amounts: (1) P358,258.30 for the fourth quarter of 1998; and (b)

P1,424,578.10 for the year 1999, all in the aggregate amount of P1,782,836.40, excluding surcharges

and interest, about which PLDT was duly informed by the City Treasurervia a 5th Indorsement datedMarch 16, 1999 for PLDTs appropriate action.[4]

In time, PLDT filed a protest[5] with the Office of the City Legal Officer, questioning the assessment

and at the same time asking for a refund of the local franchise taxes it paid in 1997 until the thirdquarter of 1998.

In a reply-letter dated March 26, 1999,[6] City Legal Officer Antonio G. Laczi denied the protest and

ordered PLDT to pay the questioned assessment.

Hence, on May 14, 1999, in the Regional Trial Court at Bacolod City, PLDT filed its petition[7] in Civil

Case No. 99-10786, therein praying for a judgment declaring it as exempt from the payment of localfranchise and business taxes; ordering the respondent City to henceforth cease and desist from

assessing and collecting said taxes; directing the City to issue the Mayors Permit for the year 1999;

and requiring it to refund the amount of P2,770,606.37, allegedly representing overpaid franchise taxesfor the years 1997 and 1998 with interest until fully paid.

In time, the respondent City filed its Answer/Comment to the petition,[8]basically maintaining that

Section 137 of theLocal Government Code remains as the operative law despite the enactment of the

Public Telecommunications Policy Act of the Philippines (Rep. Act No. 7925), and accordingly prayedfor the dismissal of the petition.
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In the ensuing pre-trial conference, the parties manifested that they would not present any testimonialevidence, and merely requested for time to file their respective memoranda, to which the trial court

acceded.

Eventually, in the herein assailed decision dated July 23, 2001,[9]the trial court dismissed PLDTs

petition, thus:

WHEREFORE, premises considered, the petition should be, as it is hereby DISMISSED. No costs.

SO ORDERED.

Therefrom, PLDT came to this Court via the present recourse, imputing the following errors on the part

of the trial court:

5.01.a. THE LOWER COURT ERRED IN SUSTAINING RESPONDENTS POSITION THATSECTION 137 OF THE LOCAL GOVERNMENT CODE, WHICH, IN RELATION TO SECTION

151 THEREOF, ALLOWS RESPONDENT CITY TO IMPOSE THE FRANCHISE TAX, ISAPPLICABLE IN THIS CASE.

5.01.b. THE LOWER COURT ERRED IN NOT HOLDING THAT UNDER PETITIONERSFRANCHISE (REPUBLIC ACT NO. 7082), AS AMENDED AND EXPANDED BY SECTION 23

OF REPUBLIC ACT NO. 7925 (PUBLIC TELECOMMUNICATIONS POLICY ACT), TAKING

INTO ACCOUNT THE FRANCHISES OF GLOBE TELECOM, INC., (GLOBE) (REPUBLIC ACTNO. 7229) AND SMART COMMUNICATIONS, INC. (SMART) (REPUBLIC ACT NO. 7294),

WHICH WERE ENACTED SUBSEQUENT TO THE LOCAL GOVERNMENT CODE, NO

FRANCHISE TAXES MAY BE IMPOSED ON PETITIONER BY RESPONDENT CITY.

5.01.c. THE LOWER COURT ERRED IN NOT GIVING WEIGHT TO THE RULING OF THEDEPARTMENT OF FINANCE, THROUGH ITS BUREAU OF LOCAL GOVERNMENT FINANCE,

THAT PETITIONER IS EXEMPT FROM THE PAYMENT OF FRANCHISE AND BUSINESS

TAXES IMPOSABLE BY LOCAL GOVERNMENT UNITS UNDER THE LOCAL GOVERNMENTCODE.

5.01.d. THE LOWER COURT ERRED IN DISMISSING THE PETITION BELOW.

As we see it, the only question which commends itself for our resolution is, whether or not Section 23

of Rep. Act No. 7925, also called the most-favored-treatment clause, operates to exempt petitioner

PLDT from the payment of franchise tax imposed by the respondent City of Bacolod.

Contrary to petitioners claim, the issue thus posed is not one of first impression insofar as this Court

is concerned. For sure, this is not the first time for petitioner PLDT to invoke the jurisdiction of this

Court on the same question, albeitinvolving another city.

InPLDT vs. City of Davao,[10] this Court has had the occasion to interpret Section 23 of Rep. Act No.7925. There, we ruled that Section 23 does not operate to exempt PLDT from the payment of franchise

tax imposed upon it by the City of Davao:
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In sum, it does not appear that, in approving 23 of R.A. No. 7925, Congress intended it to operate as ablanket tax exemption to all telecommunications entities. Applying the rule of strict construction of

laws granting tax exemptions and the rule that doubts should be resolved in favor of municipal

corporations in interpreting statutory provisions on municipal taxing powers, we hold that 23 of R.A.No. 7925 cannot be considered as having amended petitioner's franchise so as to entitle it to exemption

from the imposition of local franchise taxes. Consequently, we hold that petitioner is liable to pay localfranchise taxes in the amount of P3,681,985.72 for the period covering the first to the fourth quarter of1999 and that it is not entitled to a refund of taxes paid by it for the period covering the first to the third

quarter of 1998.[11]

Explains this Court in the same case:

To begin with, tax exemptions are highly disfavored. The reason for this was explained by this Court

inAsiatic Petroleum Co. v. Llanes, in which it was held:

. . . Exemptions from taxation are highly disfavored, so much so that they may almost be said to be

odious to the law. He who claims an exemption must be able to point to some positive provision of lawcreating the right. . . As was said by the Supreme Court of Tennessee inMemphis vs. U. & P. Bank(91

Tenn., 546, 550), The right of taxation is inherent in the State. It is a prerogative essential to theperpetuity of the government; and he who claims an exemption from the common burden must justify

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Cases on Local Taxation