The Supreme Court has ruled that the “in lieu of all taxes” clause in a franchise agreement does not automatically exempt a company from indirect taxes like VAT, compensating taxes, and advance sales taxes on imports. While the franchise tax covers direct taxes related to the franchise or earnings, it does not extend to indirect taxes that are ultimately borne by the consumer. This decision clarifies the scope of tax exemptions for franchise holders, emphasizing that exemptions must be explicitly stated and narrowly construed against the taxpayer.

PLDT’s Franchise: Does ‘In Lieu of All Taxes’ Really Mean ALL?

This case revolves around the interpretation of Section 12 of Republic Act (R.A.) No. 7082, which grants PLDT a franchise to operate telecommunications services. The core issue is whether the phrase “in lieu of all taxes” in PLDT’s franchise exempts it from paying value-added tax (VAT), compensating taxes, advance sales taxes, and other internal revenue taxes on its importations of equipment, machinery, and spare parts. The Commissioner of Internal Revenue (CIR) argued that the exemption only covers direct taxes, while PLDT claimed it encompassed all taxes, both direct and indirect.

The legal framework for understanding this issue lies in the classification of taxes as either direct or indirect. Direct taxes are levied directly on the person or entity intended to pay them, such as income tax or real property tax. Indirect taxes, on the other hand, are initially paid by one party but are expected to be passed on to another, such as VAT or excise taxes. The ability to shift the tax burden is a key characteristic that differentiates indirect taxes from direct taxes. The Supreme Court emphasized that exemptions from taxation are strictly construed against the taxpayer, citing the principle that taxation is the rule and exemption is the exception.

Sec. 12. The grantee … shall be liable to pay the same taxes on their real estate, buildings, and personal property, exclusive of this franchise, as other persons or corporations are now or hereafter may be required by law to pay.  In addition thereto, the grantee, … shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee, its successors or assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof… (Emphasis supplied).

The Court of Tax Appeals (CTA) initially ruled in favor of PLDT, granting a refund for erroneously paid taxes. However, Associate Judge Amancio Q. Saga dissented, arguing that the “in lieu of all taxes” provision only applied to direct taxes. The Court of Appeals (CA) affirmed the CTA’s decision, relying on the doctrine of stare decisis, which dictates that courts should follow established precedents. However, the Supreme Court noted that it is not bound by the CA’s previous ruling, especially if it finds the ruling to be in violation of the law.

Building on this principle, the Supreme Court examined the nature of the taxes in question. It noted that VAT is explicitly classified as an indirect tax in the National Internal Revenue Code (NIRC). Similarly, advance sales tax and compensating tax are also considered indirect taxes. The Court reasoned that because these taxes are shifted to the consumer, they are not taxes “on the franchise or earnings thereof,” as stated in PLDT’s franchise agreement. Therefore, the “in lieu of all taxes” clause does not exempt PLDT from these indirect taxes.

This approach contrasts with the ruling in Maceda vs. Macaraig, Jr., where the Court held that an exemption from “all taxes” granted to the National Power Corporation (NPC) included both direct and indirect taxes. However, the Supreme Court distinguished the PLDT case, emphasizing that the NPC’s charter was specifically couched to include indirect taxes within the exemption. In the PLDT case, the limiting clause “on this franchise or earnings thereof” restricts the scope of the exemption to direct taxes. The Court applied the legal maxim redendo singula singulis, which means taking the words distributively and applying the reference accordingly. This ensures that each word or phrase is given its proper connection to give it proper force and effect, rendering none of them useless or superfluous.

The Supreme Court also addressed PLDT’s claim that the Bureau of Customs erroneously assessed advance sales tax and compensating tax when the VAT system was already in place. The Court agreed that these taxes were no longer collectible during the period in question. Based on this understanding, the Supreme Court partially granted the petition, ordering the CIR to refund the erroneously collected advance sales tax and compensating tax, but only after deducting any uncollected VAT due on the importations.

This decision has significant implications for franchise holders in the Philippines. It clarifies that a general “in lieu of all taxes” clause does not automatically exempt them from all forms of taxation. To secure exemptions from indirect taxes, such as VAT and other import taxes, the franchise agreement must explicitly state such exemptions. This ruling reinforces the principle that tax exemptions are strictly construed against the taxpayer and liberally in favor of the taxing authority.

FAQs

What was the key issue in this case?	The key issue was whether the “in lieu of all taxes” clause in PLDT’s franchise agreement exempted it from paying VAT, compensating taxes, and advance sales taxes on its importations.
What is the difference between direct and indirect taxes?	Direct taxes are levied directly on the person or entity intended to pay them, while indirect taxes are initially paid by one party but are expected to be passed on to another.
What does “in lieu of all taxes” mean in a franchise agreement?	It means that the payment of a specific tax, like the franchise tax, substitutes for all other taxes directly related to the franchise or its earnings.
Does the “in lieu of all taxes” clause exempt a company from VAT?	Not automatically. The Supreme Court ruled that it typically only covers direct taxes unless the franchise agreement explicitly includes indirect taxes like VAT.
What is the principle of stare decisis?	Stare decisis is a legal doctrine that dictates courts should follow established precedents when deciding similar cases to ensure consistency in the application of the law.
What is the principle of redendo singula singulis?	Redendo singula singulis means taking the words distributively and applying the reference accordingly, ensuring each word or phrase is given its proper connection and effect.
Why did the Supreme Court rule against PLDT’s claim for a full refund?	The Court ruled against PLDT because the “in lieu of all taxes” clause in its franchise agreement did not explicitly exempt it from indirect taxes like VAT on importations.
What taxes was PLDT entitled to a refund for?	PLDT was entitled to a refund for advance sales tax and compensating tax erroneously collected by the Bureau of Customs, but subject to deducting any uncollected VAT due on the importations.

In conclusion, this case serves as a reminder of the importance of clearly defining the scope of tax exemptions in franchise agreements. The Supreme Court’s decision underscores the principle that tax exemptions are narrowly construed and must be explicitly stated to include indirect taxes. Franchise holders should carefully review their agreements to ensure they understand the extent of their tax obligations and exemptions.

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: COMMISSIONER OF INTERNAL REVENUE vs. PHILIPPINE LONG DISTANCE TELEPHONE COMPANY, G.R. NO. 140230, December 15, 2005