The CITY OF
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G.R. No. 167260
Present: QUISUMBING, J., Chairperson, carpio MORALES, VELASCO,
JR., NACHURA,* and BRION, JJ. Promulgated: February 27, 2009 |
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D E C I S I O N
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BRION, J.: |
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Before this Court is the appeal by certiorari filed by the City of
BACKGROUND
FACTS
The facts of the case are not in dispute. SMART received a letter of assessment dated
February 12, 2002 from petitioner requiring it to pay deficiency local
franchise and business taxes (in the amount of P764,545.29, plus
interests and surcharges) which it incurred for the years 1997 to 2001. SMART protested the assessment by sending a
letter dated
SMART similarly invoked R.A. No. 7925 or the
Public Telecommunications Policy Act (Public
Telecoms Act) whose Section 23 declares that any existing privilege,
incentive, advantage, or exemption granted under existing franchises shall ipso facto become part of previously
granted-telecommunications franchise. SMART
contends that by virtue of Section 23, tax exemptions granted by the
legislature to other holders of telecommunications franchise may be extended to
and availed of by SMART.
Through a letter dated
SMART objected to the petitioner’s
denial of its protest by instituting a case against petitioner before the RTC
of Iloilo City.[1] The trial court ruled in favour of SMART and
declared the telecommunications firm exempt from the payment of local franchise
and business taxes;[2] it agreed with SMART’s claim of exemption
under Section 9 of its franchise and Section 23 of the Public Telecoms Act.[3]
From this judgment, petitioner files
this petition for review on certiorari
raising the sole issue of whether SMART is exempt from the payment of local
franchise and business taxes.
THE
COURT’S RULING
SMART relies on two
provisions of law to support its claim for tax exemption: Section 9 of SMART’s
franchise and Section 23 of the Public Telecoms Act. After a review of pertinent laws and
jurisprudence – particularly of SMART
Communications, Inc. v. City of Davao,[4] a case which,
except for the respondent, involves the same set of facts and issues – we find
SMART’s claim for exemption to be unfounded. Consequently, we find the petition
meritorious.
The basic principle in
the construction of laws granting tax exemptions has been very stable. As early as 1916, in the case of Government of the Philippine Islands v.
Monte de Piedad,[5] this Court has declared
that he who claims an exemption from his share of the common burden of taxation
must justify his claim by showing that the Legislature intended to exempt him
by words too plain to be beyond doubt or mistake. This doctrine was repeated in the 1926 case
of Asiatic Petroleum v. Llanes,[6]
as well as in the case of Borja v. Commissioner
of Internal Revenue (CIR)[7] decided in 1961. Citing
American jurisprudence, the Court stated in E.
Rodriguez, Inc. v. CIR:[8]
The right of
taxation is inherent in the State. It is a prerogative essential to the
perpetuity of the government; and he who claims an exemption from the common
burden, must justify his claim by the clearest grant of organic or statute law
xxx When exemption is claimed, it must be shown indubitably to exist. At the
outset, every presumption is against it. A well-founded doubt is fatal to the
claim; it is only when the terms of the concession are too explicit to admit fairly
of any other construction that the proposition can be supported.
In the recent case of Digital Telecommunications, Inc. v. City Government of Batangas, et al.,[9]
we adhered to the same principle when we said:
A tax
exemption cannot arise from vague inference...Tax exemptions must be clear and
unequivocal. A taxpayer claiming a tax
exemption must point to a specific provision of law conferring on the taxpayer,
in clear and plain terms, exemption from a common burden. Any doubt whether a tax exemption exists is
resolved against the taxpayer.
The burden therefore is on SMART to prove that,
based on its franchise and the Public Telecoms Act, it is entitled to exemption
from the local franchise and business taxes being collected by the petitioner.
Claim for Exemption under
SMART’s franchise
Section 9 of SMART’s
franchise states:
Section
9. Tax provisions. — The grantee, its
successors or assigns shall be liable to pay the same taxes on their real
estate buildings and personal property, exclusive of' this franchise, as other
persons or corporations which are now or hereafter may be required by law to
pay. 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 business 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: Provided,
That the grantee, its successors or assigns shall continue to be liable for
income taxes payable under Title II of the National Internal Revenue Code
pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is
amended or repealed, in which case the amendment or repeal shall be applicable
thereto.
The
grantee shall file the return with and pay the tax due thereon to the
Commissioner of Internal Revenue or his duly authorized representative in
accordance with the National Internal Revenue Code and the return shall be
subject to audit by the Bureau of Internal Revenue. [Emphasis supplied.]
The
petitioner posits that SMART’s claim for exemption under its franchise is not
equivocal enough to prevail over the specific grant of power to local
government units to exact taxes from businesses operating within its
territorial jurisdiction under Section 137 in relation to Section 151 of the
LGC. More importantly, it claimed that exemptions
from taxation have already been removed by Section 193 of the LGC:
Section
193. Withdrawal of Tax Exemption Privileges. — Unless otherwise provided
in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons, whether natural or
juridical, including government-owned or controlled corporations, except
local water districts, cooperatives duly registered under RA No. 6938,
non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity
of this Code. [Emphasis supplied.]
The petitioner argues, too, that SMART’s
claim for exemption from taxes under Section 9 of its franchise is not couched
in plain and unequivocal language such that it restored the withdrawal of tax
exemptions under Section 193 above. It
claims that “if Congress intended that the tax exemption privileges withdrawn
by Section 193 of RA 7160 [LGC] were to be restored in respondent’s [SMART’s]
franchise, it would have so expressly provided therein and not merely [restored
the exemption] by the simple expedient of including the ‘in lieu of all taxes’
provision in said franchise.”[10]
We
have indeed ruled that by virtue of Section 193 of the LGC, all tax exemption
privileges then enjoyed by all persons, save those expressly mentioned, have
been withdrawn effective January 1, 1992 – the date of effectivity of the LGC.[11] The first clause of Section 137 of the LGC
states the same rule.[12] However, the withdrawal of exemptions, whether
under Section 193 or 137 of the LGC, pertains only to those already existing when
the LGC was enacted. The intention of
the legislature was to remove all tax exemptions or incentives granted prior to the LGC.[13] As SMART’s franchise was made effective on
But
while Section 193 of the LGC will not affect the claimed tax exemption under
SMART’s franchise, we fail to find a categorical and encompassing grant of tax
exemption to SMART covering exemption from both
national and local taxes:
R.A. No 7294 does not expressly
provide what kind of taxes SMART is exempted from. It is not clear whether the
“in lieu of all taxes” provision in the franchise of SMART would include
exemption from local or national taxation. What
is clear is that SMART shall pay franchise tax equivalent to three percent (3%)
of all gross receipts of the business transacted under its franchise. But
whether the franchise tax exemption would include exemption from exactions by
both the local and the national government is not unequivocal.
The
uncertainty in the “in lieu of all taxes” clause in R.A. No. 7294 on whether SMART
is exempted from both local and national franchise tax must be construed
strictly against SMART which claims the exemption. [Emphasis supplied.][14]
Justice Carpio, in his Separate Opinion in PLDT v. City of Davao,[15]
explains why:
The proviso
in the first paragraph of Section 9 of Smart’s franchise states that the
grantee shall “continue to be liable for income taxes payable under Title II of
the National Internal Revenue Code.” Also, the second paragraph of Section 9
speaks of tax returns filed and taxes paid to the “Commissioner of Internal
Revenue or his duly authorized representative in accordance with the National
Internal Revenue Code.” Moreover, the same paragraph declares that the tax
returns “shall be subject to audit by the Bureau of Internal Revenue.” Nothing
is mentioned in Section 9 about local taxes. The clear intent is for the “in
lieu of all taxes” clause to apply only to taxes under the National Internal
Revenue Code and not to local taxes.
Nonetheless, even if
Section 9 of SMART’s franchise can be construed as covering local taxes as well,
reliance thereon would now be unavailing.
The “in lieu of all taxes” clause basically exempts SMART from paying
all other kinds of taxes for as long as it pays the 3% franchise tax; it is the
franchise tax that shall be in lieu of all taxes, and not any other form of
tax.[16]
Franchise taxes on telecommunications
companies, however, have been abolished by R.A. No. 7716 or the Expanded
Value-Added Tax Law (E-VAT Law), which
was enacted by Congress on
SMART’s
claim for exemption from local business and franchise taxes based on Section 9
of its franchise is therefore unfounded.
Claim for Exemption
Under Public Telecoms Act
SMART additionally invokes the “equality clause” under Section 23
of the Public Telecoms Act:
SECTION
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 facto
become part of previously granted telecommunications franchise 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 service authorized by the franchise. [Emphasis supplied.]
As in the case of SMART v. City of Davao,[21] SMART posits that
since the franchise of telecommunications companies granted after the enactment
of its franchise contained provisions exempting these companies from both
national and local taxes, these privileges should extend to and benefit SMART,
applying the “equality clause” above. The
petitioner, on the other hand, believes that the claimed exemption under
Section 23 of the Public Telecoms Act is similarly unfounded.
We agree with the petitioner.
Whether Section 23 of
the cited law extends tax exemptions granted by Congress to new franchise
holders to existing ones has been answered in the negative in the case of PLDT v. City of Davao.[22] The term “exemption” in Section 23 of the
Public Telecoms Act does not mean tax exemption; rather, it refers to exemption
from certain regulatory or reporting requirements imposed by government
agencies such as the National Telecommunications Commission. The thrust of the Public Telecoms Act 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. The
language of Section 23 and the proceedings of both Houses of Congress are
bereft of anything that would signify the grant of tax exemptions to all
telecommunications entities.[23] Intent to grant
tax exemption cannot therefore be discerned from the law; the term “exemption”
is too general to include tax exemption and runs counter to the requirement
that the grant of tax exemption should be stated in clear and unequivocal language
too plain to be beyond doubt or mistake.
Surcharge and Interests
Since
SMART cannot validly claim any tax exemption based either on Section 9 of its
franchise or Section 23 of the Public Telecoms Act, it follows that petitioner
can impose and collect the local franchise and business taxes amounting to P764,545.29
it assessed against SMART. Aside from
these, SMART should also be made to pay surcharge and interests on the taxes
due.
The settled rule is that
good faith and honest belief that one is not subject to tax on the basis of
previous interpretation of government agencies tasked to implement the tax laws
are sufficient justification to delete the imposition of surcharges and
interest.[24] In refuting liability for the local franchise
and business taxes, we do not believe SMART relied in good faith in the
findings and conclusion of the Bureau of Local Government and Finance (BLGF).
In a letter dated
WHEREFORE,
we hereby GRANT the petition and REVERSE
the decision of the RTC dated January 19, 2005 in Civil Case No. 02-27144 and
find SMART liable to pay the local franchise and business taxes amounting to P764,545.29,
assessed against it by petitioner, plus the surcharges and interest due thereon.
SO
ORDERED.
ARTURO D. BRION
Associate Justice
WE CONCUR:
LEONARDO A. QUISUMBING
Associate Justice Chairperson |
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CONCHITA CARPIO
MORALES Associate Justice |
PRESBITERO J.
VELASCO, JR. Associate Justice |
ANTONIO EDUARDO B. NACHURA
Associate Justice
I
attest that the conclusions in the above Decision had been reached in
consultation before the case was assigned to the writer of the opinion of the
Court’s Division.
LEONARDO
A. QUISUMBING
Associate Justice
Chairperson
REYNATO S. PUNO
Chief Justice
* Designated additional member of the Second Division per Special
Order No. 571 dated
[1] Civil Case No.
02-27144.
[2] Decision dated
[3]
[4] G.R. No. 155491,
[5] 35 Phil. 42 (1916).
[6] 49 Phil. 466 (1926).
[7] G.R.
No. L-12134,
[8] G.R.
No. L-23041 , July 31, 1969, 28 SCRA 1119, citing Memphis v. U & P Bank, 91 Tenn. 546, 550, and Farrington v. Tennessee and County of Shelby,
95 U.S. 679, 686.
[9] G.R. No. 156040,
[10] Rollo, p. 20.
[11] Philippine Long Distance Telephone Company,
Inc. (PLDT) v. City of Bacolod, et al., G.R. No. 149179, July 15, 2005, 463 SCRA 528; Mactan Cebu International Airport Authority
v. Marcos, G.R. No. 120082, September 11, 1986, 261 SCRA 667.
[12] Section 137. Franchise Tax. – Notwithstanding any exemption granted by any law or other special law,
the province may impose a tax on businesses enjoying a franchise,
at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross
annual receipts for the preceding calendar year based on the incoming receipt,
or realized within its territorial jurisdiction. x x x. [Emphasis supplied.]
[13] SMART
v. City of
[14]
[15] G.R. No. 143867,
[16]
[17] Amended by R.A. No. 9337
or the Revised Value-Added Tax Law (R-VAT
Law).
[18] The tax rate is now 12% per R-VAT Law.
[19] Radio Communications of the Philippines, Inc.
(RCPI) v. Provincial Assessor of
[20] Digital Telecommunications Philippines, Inc. v.
Province of Pangasinan, G.R.
No. 152534, February 23, 2007, 516 SCRA 541.
[21] Supra note 15.
[22]
G.R. No. 143867,
[23] SMART
v. City of
[24] Michel J. Lhuillier Pawnshop,
Inc. v. Commissioner of Internal Revenue, G.R. No. 166786, September 11,
2006, 501 SCRA 450, citing Connell Bros. Co. (Phil.) v. Collector of Internal Revenue, 119 Phil. 40 (1963).
[25] Rollo, p. 48.
[26] Supra note 22; see also note 15.
[27] ADMINISTRATIVE CODE, Title II, Chapter 4,
Section 33 (4)
[28] SEC. 4. Power
of the Commissioner to Interpret Tax Laws and to Decide Cases. – The power
to interpret the provisions of this Code [NIRC] and other tax laws shall be
under the exclusive and original jurisdictions of the Commissioner, subject to
review by the Secretary of Finance. xxx.