Case Summary (G.R. No. 155491)
Background and Initial Claims
On February 18, 2002, Smart filed a special civil action for declaratory relief in the Regional Trial Court (RTC) of Davao City, challenging the imposition of a local franchise tax as mandated by the city’s Tax Code. Smart contended that its operations were exempt from this franchise tax under the "in lieu of all taxes" clause of its legislative franchise provided by Republic Act No. 7294 (RA 7294). The RTC rendered a decision on July 19, 2002, denying Smart’s petition, which was subsequently upheld on appeal by the Supreme Court on September 16, 2008.
Issues Raised in the Motion for Reconsideration
In the motion for reconsideration, Smart argued that the "in lieu of all taxes" clause in their franchise covers local taxes and emphasized that the principle of strict construction against tax exemptions should not apply. Furthermore, Smart asserted that such clause was not rendered ineffective by the Expanded VAT Law, and that it was entitled to exemption based on Section 23 of Republic Act No. 7925 (RA 7925), which allegedly includes a tax exemption. They also contended that imposing a local franchise tax would violate the constitutional prohibition against the impairment of contracts.
Legislative Franchise Tax Provisions
Section 9 of RA 7294 stipulates that franchise holders should pay a franchise tax of 3% on gross receipts, which is meant to be "in lieu of all taxes" on the earnings from such a franchise. Despite this clause, Smart was arguing that the intended exemption should also encompass local taxes, asserting that no explicit language in RA 7294 or RA 7925 limited exemptions to national taxes only.
Review of Relevant Jurisprudence
The court's previous rulings were extensively reviewed to determine the status of local franchise tax exemptions within legislative franchises. In the case of Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan, similar arguments concerning in lieu of all taxes clauses had been made and rejected; the Court ruled that such clauses did not inherently grant blanket exemptions from local franchise taxes. The understanding was that the term "exemption" in Section 23 of RA 7925 referred to exemptions from regulatory obligations, not from fiscal liabilities due to local taxes.
Interpretation of Tax Exemptions
Citing multiple precedents, including PLDT v. City of Davao and PLDT v. Province of Laguna, the Court pointed out that exemptions from local taxes must be expressed in clear and unambiguous language within the legislative franchise. It affirmed that any ambiguity would be resolved in favor of taxing authorities, maintaining that a franchisee remains liable for local taxes unless explicitly exempted. The ruling stated that even with the introduction of the Expanded VAT Law, local franchise taxes could not be considered abolished, as the legislative intent did not eliminate local taxation powers granted to local government units.
Constitutional Basis for Local Taxation
The power of local government units to
...continue readingCase Syllabus (G.R. No. 155491)
Case Background
- Smart Communications, Inc. (Smart) initiated a special civil action for declaratory relief on February 18, 2002, to clarify its rights and obligations under the Tax Code of Davao City.
- The core issue revolved around the franchise tax imposed on businesses operating within Davao City, which Smart contended it was exempt from paying.
- The Regional Trial Court (RTC) of Davao City rendered a Decision on July 19, 2002, denying Smart’s petition, followed by a denial of the motion for reconsideration on September 26, 2002.
- Smart subsequently appealed to the Supreme Court, which denied the appeal in a decision dated September 16, 2008.
Legal Issues Raised
- Smart’s motion for reconsideration presented several key arguments:
- The "in lieu of all taxes" clause in Smart's franchise (Republic Act No. 7294) is claimed to cover local taxes.
- The strict construction rule against tax exemptions does not apply to Smart's case.
- The "in lieu of all taxes" clause remains effective despite the enactment of the Expanded VAT Law.
- The imposition of local franchise tax is argued to violate the constitutional prohibition against the impairment of contracts.
Relevant Legislative Provisions
Section 9 of RA 7294 contains the "in lieu of all taxes" clause:
- Mandates Smart and its successors to pay a franchise tax of 3% of gross receipts, which is to be considered as fulfilling all tax obligations concerning the franchise.
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