Fiscal Autonomy and Self Reliance of LGU’s d.

the imposition of franchise tax by the City of Davao would amount to a

G.R. no.155491 – September 16, 2008 violation of the constitutional provision against impairment of contracts.
Smart Communications vs City of Davao 3. The City of Davao, in its Answer, contested the tax exemption claimed by Smart. They
NACHURA, J. invoked the power granted by the Constitution to local government units to create
their own sources of revenue.
Smart filed a petition for declaratory relief before the court, claiming that the in lieu of all 4. The RTC denied the petition of Smart, noting the ambiguity of the in lieu of all taxes
taxes clause under its legislative franchise grants it an exemption from local franchise tax provision in the franchise.
that Davao City is collecting from it. The Court reiterated the power of local government a. Tax exemptions are construed strictissimi juris against the taxpayer, and
units to collect local taxes, including franchises. It also found that the language of its liberally in favor of the taxing authority. Those who assert a tax exemption
franchise is not clear what type of taxes Smart is exempted from. This uncertainty must be must justify it with words too plain to be mistaken and too categorical not to
construed strictly against the taxpayer, and liberally in favor of the government. be misinterpreted.
b. the city’s power to tax is based not merely on a valid delegation of legislative
power but on the direct authority granted to it by the fundamental law.
DOCTRINE 5. Thus this case to the SC.
Section 137, in relation to Section 151 of the LGC, allowed the imposition of franchise
tax by the local government units (see Other Notes for the exact language of the law). ISSUE with HOLDING
1. WoN Smart is liable to pay the franchise tax imposed by the city of Davao. YES.
Section 193 thereof provided for the withdrawal of tax exemption privileges granted a. Section 137, in relation to Section 151 of the LGC, allowed the imposition
prior to the issuance of R.A. No. 7160 except for those expressly mentioned therein. of franchise tax by the local government units; while Section 193 thereof
provided for the withdrawal of tax exemption privileges granted prior to
FACTS the issuance of R.A. No. 7160 except for those expressly mentioned therein.
1. Smart filed a special civil action for declaratory relief for the ascertainment of its b. Smart is correct in arguing that the withdrawal of tax exemptions under the
rights and obligations under the Tax Code of the City of Davao, which reads: LGC can only affect those franchises granted prior to the effectivity of the
a. “Notwithstanding any exemption granted by any law or other special law, law.
there is hereby imposed a tax on businesses enjoying a franchise, at a rate c. However, Smart is wrong in saying that their franchise exempts them from
of seventy-five percent (75%) of one percent (1%) of the gross annual local taxation.
receipts for the preceding calendar year based on the income or receipts i. Their legislative franchise under RA 7294 imposes a franchise tax
realized within the territorial jurisdiction of Davao City.” of 3% of all gross receipts transacted under the franchise, and the
2. Smart argues that: said percentage shall be in lieu of all taxes on the franchise or
a. Its legislative franchise was issued after the LGC was enacted. This shows earnings thereof.
the clear legislative intent of Congress to exempt it from the provisions of the ii. It does not expressly provide what kind of taxes Smart is
LGC. exempted from. It is not clear whether the in lieu of all taxes
b. Sec. 137 of the LGC, which allows for the imposition of franchise tax by provision in the franchise of Smart would include exemption
LGU’s, can only apply to exemptions already existing at the time of its from local or national taxation. What is clear is that Smart shall
effectivity, and not to future exemptions. pay franchise tax.
c. The power of the City of Davao to impose a franchise tax is subject to iii. This uncertainty must be construed strictly against Smart which
statutory limitations such as the in lieu of all taxes clause1 in the franchise claims the exemption. Smart has the burden of proving that,
of Smart. aside from the imposed 3% franchise tax; Congress intended it to
be exempt from all kinds of franchise taxes whether local or
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national. However, Smart failed in this regard.
Section 9. Tax provisions. The grantee, its successors or assigns shall be liable to pay the d. Thus, the doubt must be resolved in favor of the City of Davao. The in lieu of
same taxes on their real estate buildings and personal property, exclusive of this franchise, as all taxes clause applies only to national internal revenue taxes and not to
other persons or corporations which are now or hereafter may be required by law to pay. In
local taxes.
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
i. If Congress intended the "in lieu of all taxes" clause in Smart's
this franchise by the grantee, its successors or assigns and the said percentage shall be franchise to also apply to local taxes, Congress would have
in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its expressly mentioned the exemption from municipal and provincial
successors or assigns shall continue to be liable for income taxes payable under Title II of the taxes.
National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the e. However, the in lieu of all taxes clause in R.A. No. 7294 has become functus
latter enactment is amended or repealed, in which case the amendment or repeal shall be officio (of no legal effect) with the abolition of the franchise tax on
applicable thereto. telecommunications companies.
i. The LGC, as amended by the Expanded Value Added Tax Law
The grantee shall file the return with and pay the tax due thereon to the Commissioner of (RA 8241) expressly repealed the provisions of all special laws
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
1
 relative to rate of franchise taxes, and other laws, orders, No. 7229, no other franchise tax may be collected from Globe regardless of
issuances, rules and regulations inconsistent with it. who the taxing power is.
ii. As admitted by Smart in its pleadings, it is no longer paying the 3% i. No such provision is found in the franchise of Smart; the kind of tax
franchise tax mandated in its franchise. Currently, Smart along from which it is exempted is not clearly specified.
with other telecommunications companies pays the uniform 10%
value-added tax. 5. WoN the imposition of local franchise tax by the City of Davao would violate the
iii. In effect, the in lieu of all taxes clause in R.A. No. 7294 was constitutional prohibition against impairment of contracts. NO.
rendered ineffective by the advent of the VAT Law. a. As already mentioned, the franchise of Smart does not expressly provide for
exemption from local taxes.
2. WoN the Opinion of the Bureau of Local Government and Finance (BLGF) is b. Moreover, Smarts franchise was granted with the express condition that it is
conclusive on the court. NO. subject to amendment, alteration, or repeal.
a. The BLGF is not an administrative agency whose findings on questions of c. The parties to a contract cannot fetter the exercise of the taxing power of the
fact are given weight and deference in the courts. State.
b. The BLGF was created merely to provide consultative services and i. Not only are existing laws read into contracts in order to fix
technical assistance to local governments and the general public on local obligations as between parties, but the reservation of essential
taxation, real property assessment, and other related matters, among attributes of sovereign power is also read into contracts as a basic
others. postulate of the legal order.
c. The question before the court however is a legal question pertaining to the
interpretation of Smart’s legislative franchise. There is, therefore, no basis
for claiming expertise for the BLGF that administrative agencies are said to DISPOSITIVE PORTION
possess in their respective fields. WHEREFORE, the instant petition is DENIED for lack of merit. Costs against
petitioner.
3. WoN the in lieu of all taxes clause in the franchise partakes of the nature of a tax
exclusion. There is no essential difference. SO ORDERED.
a. Smart argues that it is given a tax exclusion, and not an exemption, since it
still pays other taxes (like income tax or real property tax). OTHER NOTES
b. An exemption is an immunity or a privilege; it is the freedom from a charge Section 137. Franchise Tax. Notwithstanding any exemption granted by any law or other
or burden to which others are subjected. special law, the province may impose a tax on businesses enjoying a franchise, at the rate
c. An exclusion on the other hand, is the removal of otherwise taxable items not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the
from the reach of taxation, e.g., exclusions from gross income and allowable preceding calendar year based on the incoming receipt, or realized, within its territorial
deductions. jurisdiction.
i. An exclusion is, thus, still an immunity which frees a taxpayer from
a charge to which others are subjected. It is still interpreted In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of
strictissimi juris against the taxpayer and liberally in favor of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of
the government. when the business started to operate, the tax shall be based on the gross receipts for the
preceding calendar year, or any fraction thereon, as provided herein.
4. WoN the local tax exemption in the legislative franchise of Globe (RA 7925)2 is
automatically incorporated in the franchise of Smart. NO.
a. Congress, in approving the tax exemption in R.A. No. 7925, did not intend it Section 151. Scope of Taxing Powers. Except as otherwise provided in this Code, the city
to operate as a blanket tax exemption to all telecommunications entities. may levy the taxes, fees, and charges which the province or municipality may impose:
b. The language of the law and the proceedings of Congress have nothing that Provided, however, That the taxes, fees and charges levied and collected by highly
would signify the grant of tax exemptions to all telecomm entities. urbanized and independent component cities shall accrue to them and distributed in
c. The grant of exemption to Globe from municipal, provincial, or national is accordance with the provisions of this Code.
clear and categorical. Aside from the franchise tax collected by virtue of R.A.
The rates of taxes that the city may levy may exceed the maximum rates allowed for the
province or municipality by not more than fifty percent (50%) except the rates of
professional and amusement taxes.
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“(b) The grantee shall further pay to the Treasurer of the Philippines each year after the audit
and approval of the accounts as prescribed in this Act, one and one-half per centum of all gross
receipts from business transacted under this franchise by the said grantee in the Philippines, in Section 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this
lieu of any and all taxes of any kind, nature or description levied, established or collected by any Code, tax exemptions or incentives granted to, or presently enjoyed by all persons,
authority whatsoever, municipal, provincial or national, from which the grantee is hereby whether natural or juridical, including government-owned or controlled corporations, except
expressly exempted, effective from the date of the approval of Republic Act Numbered Sixteen local water districts, cooperatives duly registered under RA No. 6938, non-stock and non-
hundred eighteen”
2
profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of
this Code. (Emphasis supplied.)

DIGESTER: Xave Libardo