Title
Smart Communications, Inc. vs. City of Davao
Case
G.R. No. 155491
Decision Date
Sep 16, 2008
Smart Communications contested Davao City's franchise tax, claiming exemption under its franchise's "in lieu of all taxes" clause. The Supreme Court ruled against Smart, holding tax exemptions must be strictly construed, and the clause did not clearly exempt it from local taxes.
franchise tax
exemption
national internal revenue taxes

Case Summary (G.R. No. 155491)

Factual Background

On February 18, 2002, Smart Communications, Inc. filed a petition seeking a declaratory ruling that its telecenter in Davao City is exempt from local franchise taxation under the City’s Tax Code. Petitioner invoked its legislative franchise under R.A. No. 7294, which contains a provision that a three percent (3%) franchise tax “shall be in lieu of all taxes on this franchise or earnings thereof.” Petitioner argued that this clause, together with the timing and subsequent statutory enactments, exempted it from the local franchise tax imposed by respondents. Respondents answered on March 2, 2002, contesting the claimed exemption and invoking the constitutional power of local government units to create their own sources of revenue under CONSTITUTION, Art. X, Sec. 5. The parties agreed at pre-trial that only legal issues remained and the RTC directed submission of memoranda.

Trial Court Proceedings and Ruling

The Regional Trial Court rendered judgment on July 19, 2002 denying Smart’s petition and concluded that the ambiguity of the “in lieu of all taxes” clause in R.A. No. 7294 must be resolved against the taxpayer. The RTC applied the well established rule that tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority, and held that those who assert an exemption must show it in language too plain to be mistaken. The RTC further reasoned that the city’s power to tax rests on authority granted by the Constitution and that legislated limitations must be consistent with local autonomy; it cited Mactan Cebu International Airport Authority v. Marcos. Petitioner’s motion for reconsideration was denied by order dated September 26, 2002.

Issues Presented on Appeal

The dispositive issue before the Court was whether Smart is liable to pay the franchise tax imposed by the City of Davao. Petitioner advanced multiple contentions: that the “in lieu of all taxes” clause in R.A. No. 7294 exempts it from local franchise taxation; that R.A. No. 7160 does not apply to franchises granted after its effectivity; that Section 23 of R.A. No. 7925 imports preferential tax treatment accorded to other telecommunications franchises into Smart’s franchise; that the Bureau of Local Government Finance had opined Smart was exempt; and that imposition of the local franchise tax would violate the constitutional prohibition against impairment of contracts.

Supreme Court Holding

The Supreme Court denied the petition and ruled that Smart is liable to pay the local franchise tax imposed by the City of Davao. The Court affirmed the RTC’s disposition and imposed costs against petitioner. The Court’s opinion was issued with the separate reasoning organized into discrete legal determinations addressing the temporal effect of R.A. No. 7160, the construction of the “in lieu of all taxes” clause, the weight of the Bureau of Local Government Finance’s opinion, the legal character of exclusions versus exemptions, the scope of Section 23 of R.A. No. 7925, and the non-impairment doctrine under the Constitution.

Reasoning — I. Prospective Effect of R.A. No. 7160

The Court noted that R.A. No. 7160 (Local Government Code) took effect on January 1, 1992, while petitioner’s franchise under R.A. No. 7294 lapsed into law on March 27, 1992. Section 193 of R.A. No. 7160 withdraws tax exemptions or incentives “granted to, or presently enjoyed by” persons upon the effectivity of the Code, and the Court construed that withdrawal as applicable only to exemptions granted prior to the Code’s effectivity. Accordingly, the Court agreed with petitioner that the withdrawal provision cannot apply to franchises granted after the Code’s effectivity and therefore Section 137, insofar as it withdraws prior exemptions, does not reach petitioner’s franchise as a prospective matter.

Reasoning — II. Construction of the “in lieu of all taxes” Clause

The Court applied established rules of statutory construction and held that Section 9 of R.A. No. 7294 must be read in full context. The clause stating that three percent (3%) of gross receipts “shall be in lieu of all taxes on this franchise or earnings thereof” is ambiguous as to whether it exempts petitioner from national taxes, local taxes, or both. Under the rule that tax exemptions are not presumed and must be expressed in plain and categorical language, the doubt was resolved against petitioner. The Court concluded that the “in lieu of all taxes” clause refers only to taxes imposed under the National Internal Revenue Code and does not apply to local taxes. The Court noted textual indicia in Section 9 referencing filing with, payment to, and audit by the Commissioner of Internal Revenue and observed that Congress did not expressly exempt petitioner from municipal and provincial taxes as it had in other franchises.

Reasoning — II (continued): Effect of VAT Law on Franchise Tax

The Court further observed that the specific franchise tax provision in R.A. No. 7294 became functus officio with the enactment of the Value-Added Tax regime and related amendments. The Court explained that telecommunications companies now pay the uniform value-added tax and that R.A. No. 7716, as amended and by subsequent legislation, expressly repealed special-law provisions relative to franchise tax rates. Nevertheless, any local franchise tax imposed by the City of Davao must comply with the rate limitations prescribed by Sections 137 and 151 of R.A. No. 7160.

Reasoning — III. Opinion of the Bureau of Local Government Finance

The Court rejected petitioner’s reliance on the opinion of the Department of Finance through the Bureau of Local Government Finance. The Court reiterated that the BLGF is a consultative body and that its conclusions on legal questions are not binding on the courts. The Court distinguished the BLGF from a specialized judicial body and held that there is no basis to defer to the BLGF’s statutory interpretations where the issue is one of law.

Reasoning — IV. Tax Exclusion Versus Tax Exemption

Petitioner’s argument that the “in lieu of all taxes” clause constitutes a tax exclusion rather than a tax exemption did not alter the rule of construction. The Court held there is no essential difference in nature or effect between an exemption and an exclusion for purposes of construing privileges from taxation; both are liberally construed in favor of the State and strictly against the taxpayer.

Reasoning — V. Section 23 of R.A. No. 7925 and the “Equality” Clause

The Court addressed petitioner’s reliance on Section 23 of R.A. No. 7925 as a vehicle to import Globe’s broader exemption from local taxes into petitioner’s franchise. The Court adhered to its prior decisions, including Philippine Long Distance Telephone Company, Inc. v. City of Davao and Digital Telecommunications Philippines, Inc. v. Province of Pangasinan, and held that Section

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