G.R. No. 155491 - Smart Communications, Inc. vs. City of Davao

Smart Communications, Inc. (Smart) filed a special civil action for declaratory relief on February 18, 2002.

The petition sought the ascertainment of its rights and obligations under the Tax Code of the City of Davao, which imposes a franchise tax on businesses with a franchise within its jurisdiction.
Smart contended that its telecenter in Davao City was exempt from the payment of the local franchise tax.

Subsequently, on July 19, 2002, the Regional Trial Court (RTC) of Davao City rendered a Decision denying Smart’s petition.
A motion for reconsideration was filed by Smart, but it was denied by the RTC on September 26, 2002.

After the RTC’s denial, Smart appealed the decision before the Court.
The Court confirmed the RTC decision on September 16, 2008, rejecting its appeal.
Following this, Smart filed a Motion for Reconsideration, which raised several issues regarding the interpretation of its franchise provisions and the applicability of local franchise tax.

The "in lieu of all taxes" clause in Smart’s legislative franchise (Republic Act No. 7294) should be interpreted to cover local taxes as well as national taxes.

Smart argued that the rule of strict construction against tax exemptions should not apply in this case.

The "in lieu of all taxes" clause remains unaffected by the Expanded VAT Law (Republic Act No. 7716), which replaced the national franchise tax with a value-added tax (VAT) but did not eliminate local franchise tax.
Section 23 of Republic Act No. 7925, known as the equality or most favored treatment clause, was argued to include a tax exemption that should extend to local franchise tax.
Imposition of a local franchise tax on Smart would, as argued, contravene the constitutional prohibition against the impairment of the obligation of contracts.

Section 9 of RA 7294 contains the contentious “in lieu of all taxes” clause, which states that the franchise tax (3% of all gross receipts) is paid in lieu of all taxes on the franchise or its earnings, except for income taxes as provided under specific conditions.
Section 23 of RA 7925 provides that any advantage, favor, privilege, or exemption granted under existing or future telecommunications franchises shall become immediately part of previously granted franchises, with limitations regarding territory, life span, and type of service.
Previous cases with similar issues were cited, including:

Digitel v. Province of Pangasinan, wherein the Digital Telecommunications Philippines, Inc. (Digitel) claimed exemption from local franchise tax using similar arguments.
PLDT v. City of Davao and PLDT v. City of Bacolod, where the Court held that tax exemptions must be expressly and unequivocally stated.
PLDT v. Province of Laguna, where the Court applied the rule of strict construction to tax exemptions and held that the “in lieu of all taxes” clause did not exempt PLDT from local franchise tax.

Whether the clause in Section 9 of RA 7294 encompasses an exemption from local franchise tax, or if it strictly applies only to national taxes.
Whether the rule of strict construction regarding tax exemptions should be applied in this instance.

Whether the implementation of Republic Act No. 7716 (Expanded VAT Law) renders the “in lieu of all taxes” clause inoperative regarding the local franchise tax.

Whether Section 23, with its reference to “exemption,” confers upon Smart an exemption from local franchise tax as part of the most favored treatment provision.

Whether the imposition of a local franchise tax on Smart would violate the constitutional principle that prohibits the impairment of the obligation of contracts.