G.R. No. 182193 - People vs. Canete

Case Summary (G.R. No. 182193)

Relevant Dates and Procedural History

The tax assessment letter was issued on February 12, 2002.
SMART protested this assessment on February 15, 2002.
The Regional Trial Court (RTC) Iloilo City ruled in favor of SMART on January 19, 2005.
The Supreme Court decision was rendered on February 27, 2009.

Applicable Legal Provisions and Laws

Republic Act No. 7294 (SMART’s franchise)
Republic Act No. 7925 (Public Telecommunications Policy Act)
Republic Act No. 7160 (Local Government Code)
Republic Act No. 7716 (Expanded Value-Added Tax Law)
National Internal Revenue Code (NIRC)

Issue Presented

Whether SMART Communications, Inc. is exempt from the payment of local franchise and business taxes imposed by the City of Iloilo.

Claim of Tax Exemption under SMART’s Franchise

Section 9 of SMART’s franchise mandates payment of a 3% franchise tax on gross receipts “in lieu of all taxes” and stipulates that SMART is liable for income taxes under the NIRC. Petitioner argued that the “in lieu of all taxes” clause is ambiguous and insufficient to override local government taxing powers granted under Sections 137 and 151 of the Local Government Code (LGC). Section 193 of the LGC revoked tax exemptions, effective January 1, 1992, unless expressly provided otherwise.

The Court found Section 193 inapplicable since SMART’s franchise took effect after the LGC’s enactment. Nonetheless, the phrase “in lieu of all taxes” in R.A. No. 7294 was not explicitly clear or unequivocal to cover exemption from local taxes. The Court noted that the franchise provision only clearly requires payment of the 3% franchise tax to the Bureau of Internal Revenue (BIR) and makes no mention of local taxes.

Moreover, franchise taxes for telecommunications companies were abolished by the Expanded VAT Law (R.A. No. 7716) starting January 1, 1996. This law replaced franchise taxes with a 10% value-added tax, rendering the “in lieu of all taxes” provision functionally obsolete with respect to franchise taxes.

Thus, the Court concluded SMART’s claim for exemption based on Section 9 of its franchise is unfounded and cannot absolve it from local franchise and business taxes.

Claim of Tax Exemption under the Public Telecommunications Policy Act

SMART invoked Section 23 of the Public Telecommunications Policy Act, which provides for “equality of treatment” among telecommunications franchises and purportedly extends privileges—including exemptions—granted to newer franchisees to all existing franchise holders.

The Court rejected this interpretation, citing precedent in PLDT v. City of Davao. It held that “exemptions” under Section 23 do not pertain to tax exemptions but rather refer to regulatory or administrative exemptions like those involving compliance requirements or reporting obligations. The intent of the statute is to promote deregulation and ensure a level playing field, not to grant tax exemptions.

No clear legislative intent to confer tax exemptions through the “equality clause” was found, and the general term “exemption” cannot be construed to include tax exemptions especially when such grants must be explicit and unequivocal.

Burden of Proof and Construction of Exemption Laws

The Court reaffirmed the well-established doctrine that tax exemptions are strictly construed against the claimant. The burden is on the taxpayer asserting an exemption to demonstrate the legislated intent in clear and unambiguous terms. Any doubt is resolved against the claimant.

Payment of Surcharge and Interest

Since SMART’s exemption claims were denied, the City of Iloilo is entitled to collect the assessed unpaid local franchise and business taxes amounting to Php 764,545.29, plus the corresponding surcharges and interest.

The Court considered whether SMART’s reliance on a 1998 letter-opinion fro

Case Syllabus (G.R. No. 182193)

Background of the Case

The City of Iloilo, represented by its Treasurer Mr. Romeo V. Manikan, filed an appeal by certiorari under Rule 45 of the Rules of Court seeking to overturn the Regional Trial Court (RTC) of Iloilo City’s decision.
The RTC declared SMART Communications, Inc. (SMART) exempt from the payment of local franchise and business taxes assessed against it.
SMART received a letter of assessment dated February 12, 2002, requiring payment of deficiency local franchise and business taxes amounting to ₱764,545.29, including interests and surcharges, for the years 1997 to 2001.
SMART protested the assessment, claiming exemption under Section 9 of its legislative franchise (Republic Act No. 7294) and Section 23 of the Public Telecommunications Policy Act (R.A. No. 7925).
Under Section 9 of its franchise, SMART is required to pay a franchise tax of 3% of gross receipts “in lieu of all taxes,” which it argued includes exemption from local franchise and business taxes.
Section 23 of the Public Telecommunications Policy Act provides that privileges or exemptions granted under existing or future franchises automatically become part of previously granted franchises.
The petitioner denied SMART’s protest on the basis that SMART failed to comply with Section 252 of the Local Government Code (LGC), which requires payment before protest.
SMART filed suit before the RTC to enforce its claimed exemption, which the RTC granted.

Issue Presented

The sole issue for resolution is whether SMART is exempt from payment of local franchise and business taxes levied by the City of Iloilo.

Legal Framework and Applicable Provisions

Section 9 of SMART’s franchise (RA No. 7294) provides:
- SMART shall pay taxes on real estate, buildings, and personal property as other persons do.
- In addition, SMART shall pay a franchise tax equivalent to 3% of all gross receipts “in lieu of all taxes” on this franchise or its earnings.
- The clause is subject to liability for income taxes payable pursuant to the National Internal Revenue Code (NIRC).
Section 23 of the Public Telecommunications Policy Act (RA No. 7925):
- Grants that any advantage, exemption, or privilege granted under existing or future franchises shall automatically form part of all pre-existing telecommunications franchises.
Section 252 of the LGC requires payment of the disputed tax prior to protest.
Section 137 and Section 193 of the LGC (RA No. 7160):
- Section 137 authorizes local government units to impose a franchise tax on businesses with franchises within their jurisdiction.
- Section 193 withdraws tax exemptions or incentives previously granted unless otherwise provided.

The Court’s Construction on Tax Exemptions

The Court emphasized the long-standing principle that tax exemptions must be clearly and unequivocally stated by t