In a dispute over excise taxes, the Supreme Court affirmed that Philippine Airlines (PAL) is exempt from certain taxes due to its unique franchise agreement. The court ruled that Presidential Decree No. 1590 (PD 1590), PAL’s special charter, takes precedence over the general tax provisions of Republic Act No. 9334 (RA 9334). This means PAL continues to benefit from tax exemptions outlined in its franchise, provided it complies with the specific conditions, such as paying basic corporate income tax and importing goods not readily available locally. The decision underscores the principle that specific laws governing particular entities can outweigh general tax regulations, shaping how businesses with special charters are taxed in the Philippines.

When a Special Franchise Trumps General Tax Laws: The PAL Tax Exemption Case

The heart of the legal battle revolves around whether Sections 6 and 10 of RA 9334 effectively repealed Section 13 of PD 1590. The Commissioner of Customs and the Commissioner of Internal Revenue argued that the later general law, RA 9334, amended PAL’s tax exemptions. However, the Supreme Court, siding with the Court of Tax Appeals, emphasized that a later general law does not automatically override a prior special law unless there is an express repeal. This principle of statutory construction is crucial in understanding the Court’s decision. In this case, PAL sought a refund of P4,469,199.98, representing alleged erroneously paid excise taxes from July 2005 to February 2006. This claim ignited the dispute, bringing into focus the interplay between PAL’s franchise agreement and the broader tax code.

The Court anchored its decision on the established principle that a special law, like PD 1590, which specifically governs PAL’s franchise, prevails over a general law such as RA 9334, which amends the National Internal Revenue Code. The Court quoted CIR v. PAL, stating:

That the Legislature chose not to amend or repeal [PD] 1590 even after PAL was privatized reveals the intent of the Legislature to let PAL continue to enjoy, as a private corporation, the very same rights and privileges under the terms and conditions stated in said charter.

This quote highlights the legislative intent to maintain PAL’s unique status even after its privatization. Crucially, Section 24 of PD 1590 mandates that any modification, amendment, or repeal of PAL’s franchise must be done expressly through a special law or decree. The Court emphasized that RA 9334 did not specifically identify PD 1590 as one of the acts intended to be repealed. Thus, RA 9334’s general repealing clause was deemed insufficient to override the specific provisions of PD 1590.

To further illustrate the legal framework, here are the pertinent provisions of both PD 1590 and RA 9334:

PRESIDENTIAL DECREE NO. 1590

SECTION 13. The tax paid by the grantee under either of the above alternatives shall be in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind, nature, or description, imposed, levied, established, assessed, or collected by any municipal, city, provincial, or national authority or government agency, now or in the future, including but not limited to the following:

(2) All taxes, including compensating taxes, duties, charges, royalties, or fees due on all importations by the grantee of aircraft, engines, equipment, machinery, spare parts, accessories, commissary and catering supplies, aviation gas, fuel, and oil, whether refined or in crude form and other articles, supplies, or materials; provided, that such articles or supplies or materials are imported for the use of the grantee in its transport and nontransport operations and other activities incidental thereto and are not locally available in reasonable quantity, quality, or price.

SECTION 24. This franchise, as amended, or any section or provision hereof may only be modified, amended, or repealed expressly by a special law or decree that shall specifically modify, amend, or repeal this franchise or any section or provision thereof.

REPUBLIC ACT NO. 9334

SECTION 10. Repealing Clause. — All laws, decrees, ordinances, rules and regulations, executive or administrative orders, and such other presidential issuances as are inconsistent with any of the provisions of this Act are hereby repealed, amended or otherwise modified accordingly.

The Court also considered the impact of Republic Act No. 9337 (RA 9337), which amended the National Internal Revenue Code of 1997. Section 22 of RA 9337 abolished the franchise tax and subjected PAL to corporate income tax and value-added tax (VAT). Despite this change, PAL remains exempt from certain taxes, duties, royalties, registrations, licenses, and other fees and charges, provided it pays corporate income tax as granted in its franchise agreement. Consequently, PAL can claim exemption from taxes, duties, charges, royalties, or fees on importations of commissary and catering supplies if they are for its operations and are not locally available.

The Court emphasized the importance of factual determinations made by the Court of Tax Appeals (CTA). The CTA, as a specialized body, is best positioned to review tax cases and conduct trials. In this case, the CTA found that PAL had complied with the conditions set by Section 13 of P.D. 1509 for the imported supplies to be exempt from excise tax. The Supreme Court generally defers to the CTA’s findings unless there is a clear showing that those findings are unsupported by substantial evidence. The Supreme Court referenced the importance of specialized bodies such as the CTA, further cementing the idea that determinations of fact are best left to those with the experience.

This ruling reinforces the significance of specific franchise agreements and their interplay with general tax laws. Businesses operating under special charters must carefully examine the provisions of their agreements to understand their tax obligations and potential exemptions. Simultaneously, tax authorities must respect the specific terms of these charters, ensuring that any changes to tax laws do not inadvertently infringe upon the rights and privileges granted to these entities. The decision serves as a reminder of the principle that laws should be interpreted harmoniously, giving effect to both general and special provisions whenever possible.

FAQs

What was the key issue in this case?	The central issue was whether Republic Act No. 9334 (RA 9334), a general tax law, repealed Section 13 of Presidential Decree No. 1590 (PD 1590), which granted tax exemptions to Philippine Airlines (PAL) under its franchise. The court had to determine if the general law superseded the specific provisions of PAL’s franchise agreement.
What is Presidential Decree No. 1590?	Presidential Decree No. 1590 (PD 1590) is a special law that grants a franchise to Philippine Airlines (PAL) to establish, operate, and maintain air transport services in the Philippines and other countries. It includes specific provisions regarding PAL’s tax obligations and exemptions.
What is Republic Act No. 9334?	Republic Act No. 9334 (RA 9334) is a general law that increases the excise tax rates on alcohol and tobacco products. It also amends several sections of the National Internal Revenue Code of 1997, as amended, including provisions related to excise taxes on imported articles.
What does it mean for PAL to have a franchise agreement?	Having a franchise agreement grants PAL specific rights and privileges, including certain tax exemptions, in exchange for providing air transport services. These agreements are typically governed by special laws or decrees that outline the terms and conditions of the franchise.
Did Republic Act No. 9334 repeal PAL’s tax exemptions under Presidential Decree No. 1590?	No, the Supreme Court ruled that Republic Act No. 9334 (RA 9334) did not repeal PAL’s tax exemptions under Presidential Decree No. 1590 (PD 1590). The Court held that a later general law does not automatically override a prior special law unless there is an express repeal.
What is the significance of the phrase “in lieu of all other taxes” in PAL’s franchise agreement?	The phrase “in lieu of all other taxes” means that PAL’s payment of either basic corporate income tax or franchise tax (whichever is lower) serves as a substitute for all other taxes, duties, royalties, registrations, licenses, and other fees and charges. However, this exemption does not include real property tax and, after the amendment by R.A. 9337, value-added tax (VAT).
What conditions must PAL meet to claim tax exemption on imported supplies?	To claim tax exemption on imported supplies, PAL must show that: (1) the articles, supplies, or materials are imported for use in its transport and non-transport operations and other activities incidental thereto; and (2) they are not locally available in reasonable quantity, quality, or price.
What role did the Court of Tax Appeals (CTA) play in this case?	The Court of Tax Appeals (CTA) initially ruled in favor of PAL, granting the refund of erroneously paid excise taxes. The Supreme Court upheld the CTA’s decision, emphasizing that the CTA is a specialized body with expertise in tax matters, and its factual findings are generally binding unless unsupported by substantial evidence.

In conclusion, this case highlights the importance of understanding the interplay between general and special laws, especially in the context of tax obligations for businesses with specific franchise agreements. The ruling provides clarity on how tax exemptions are to be interpreted and applied, ensuring that both the government and private entities adhere to the established legal framework.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: REPUBLIC OF THE PHILIPPINES VS. PHILIPPINE AIRLINES, INC., G.R. Nos. 209353-54, July 06, 2015