In a ruling favoring Philippine Airlines (PAL), the Supreme Court affirmed that PAL’s tax exemptions, as granted under its original franchise (Presidential Decree No. 1590), remain valid despite subsequent changes in the National Internal Revenue Code (NIRC). This means PAL continues to benefit from tax exemptions on imported goods essential for its operations, specifically commissary and catering supplies, subject to certain conditions such as the non-availability of these items locally. The decision provides clarity and stability for PAL’s financial planning, ensuring that its tax obligations are determined by its franchise terms rather than conflicting general tax laws.

Navigating the Tax Code: Can General Laws Override a Specific Franchise Agreement?

The central legal question revolves around whether later, more general tax laws (like amendments to the NIRC) can override specific tax exemptions granted in an earlier, special law—in this case, PAL’s franchise under PD 1590. This issue arises because, over time, the Philippine government has modified its tax laws, potentially conflicting with the tax privileges originally given to PAL. The court’s decision clarifies the relationship between these types of laws, establishing a hierarchy that protects the benefits conferred by specific franchise agreements.

The case originated from assessments of excise taxes on PAL’s importations of alcohol and tobacco products, essential for its in-flight commissary supplies. PAL contested these assessments, arguing that Section 13 of PD 1590 provided it with comprehensive tax exemptions. The Commissioner of Internal Revenue (CIR) countered that Republic Act No. 9334 (RA 9334), which amended Section 131 of the NIRC, effectively revoked PAL’s tax privileges on these specific imported items. This set the stage for a legal battle that would ultimately reach the Supreme Court, requiring a careful examination of statutory interpretation and legislative intent.

The legal framework hinges on interpreting the interplay between PD 1590 and subsequent tax laws. Section 13 of PD 1590 states that PAL shall pay either the basic corporate income tax or a franchise tax of two percent of gross revenues, whichever is lower. Crucially, this payment is “in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges.” This broad language suggests a comprehensive tax exemption, designed to support the airline’s operations.

However, RA 9334 amended Section 131 of the NIRC to state that, “the provision of any special or general law to the contrary notwithstanding, the importation of cigars and cigarettes, distilled spirits, fermented liquors and wines into the Philippines, even if destined for tax and duty-free shops, shall be subject to all applicable taxes, duties, charges, including excise taxes due thereon.” The CIR argued that this effectively removed PAL’s exemption on imported alcohol and tobacco, but the court disagreed.

The Supreme Court anchored its decision on the principle that a later general law does not automatically repeal or amend a prior special law unless there is an express repeal or an irreconcilable conflict. The court emphasized that PD 1590, as a special law governing PAL’s franchise, prevails over the general provisions of the NIRC, as amended by RA 9334. This principle of statutory construction is crucial in maintaining the integrity of specific agreements and ensuring that broad legislative changes do not inadvertently disrupt established rights and obligations.

Quoting from prior decisions, the court reiterated that the legislature’s decision not to amend or repeal PD 1590, even after PAL’s privatization, indicates an intent to allow PAL to continue enjoying its original rights and privileges. The court also highlighted that the phrase “notwithstanding any special or general law to the contrary” in RA 9334, by itself, does not constitute an express repeal of PAL’s exemptions because it fails to specifically identify PD 1590 as one of the laws intended to be repealed. The Supreme Court has stated:

While it is true that Sec. 6 of RA 9334 as previously quoted states that “the provisions of any special or general law to the contrary notwithstanding,” such phrase left alone cannot be considered as an express repeal of the exemptions granted under PAL’s franchise because it fails to specifically identify PD 1590 as one of the acts intended to be repealed.

Furthermore, the court addressed the conditions set by Section 13 of PD 1590, requiring that the imported supplies be for PAL’s use and not locally available in reasonable quantity, quality, and price. The court deferred to the Court of Tax Appeals’ (CTA) finding that PAL had, in fact, complied with these conditions. This deference to the CTA’s factual findings underscores the importance of specialized expertise in tax matters and the court’s reluctance to overturn such findings absent substantial evidence to the contrary.

Adding another layer of complexity, Republic Act No. 9337 (RA 9337) further amended the NIRC, abolishing the franchise tax and subjecting PAL and similar entities to corporate income tax and value-added tax (VAT). However, Section 22 of RA 9337 explicitly stated that franchisees would “otherwise remain exempt from any taxes, duties, royalties, registration, license, and other fees and charges, as may be provided by their respective franchise agreement.” This provision reinforced the continued validity of PAL’s tax exemptions, subject to the payment of corporate income tax.

In summary, the Supreme Court’s decision rests on several key legal principles: the precedence of special laws over general laws, the requirement of express repeal for overriding specific franchise agreements, and deference to the factual findings of the CTA. These principles collectively safeguard the rights and obligations established in PAL’s franchise, providing a stable framework for its tax obligations.

A critical point is that the “in lieu of all taxes” provision remains a cornerstone of PAL’s tax benefits, but only when the imported items satisfy the requirements of its franchise agreement. This means that PAL must still demonstrate that its importations meet certain criteria—they must be for operational use and not readily available within the Philippines—to qualify for the exemption. Therefore, meticulous record-keeping and compliance with these stipulations are essential for PAL to continue availing of its tax privileges.

Here’s a table summarizing the key laws and their impact on PAL’s tax obligations:

Law	Description	Impact on PAL
PD 1590	PAL’s original franchise, granting tax exemptions	Established the “in lieu of all taxes” provision
RA 9334	Amended the NIRC, potentially conflicting with PAL’s exemptions	Supreme Court ruled it did not override PD 1590
RA 9337	Further amended the NIRC, abolishing franchise tax	PAL subjected to corporate income tax but retains other exemptions

FAQs

What was the central issue in this case?	The main issue was whether PAL’s tax exemptions under its franchise (PD 1590) were revoked by later general tax laws (RA 9334 and RA 9337) amending the National Internal Revenue Code. The court had to determine if these amendments superseded the specific tax privileges granted to PAL in its franchise.
What is the significance of the “in lieu of all taxes” provision?	This provision in PAL’s franchise means that PAL’s payment of either basic corporate income tax or franchise tax (whichever is lower) covers all other taxes, duties, and charges, with certain exceptions. This ensures that PAL is not subject to multiple layers of taxation, as long as they satisfy other requirements for exemption.
What are the conditions for PAL’s tax exemption on imported goods?	To be exempt from taxes on imported goods, PAL must demonstrate that these supplies are imported for its transport and non-transport operations, and that they are not locally available in reasonable quantity, quality, or price. Meeting these conditions is essential for PAL to claim its tax privileges.
How did the court address the conflict between the special law (PD 1590) and the general law (NIRC)?	The court applied the principle that a special law prevails over a general law, unless there is an express repeal or an irreconcilable conflict. Since the amendments to the NIRC did not expressly repeal PD 1590, the court ruled that PAL’s franchise remained valid.
Did RA 9337 completely abolish PAL’s tax exemptions?	No, RA 9337 abolished the franchise tax but explicitly stated that franchisees would “otherwise remain exempt from any taxes, duties, royalties, registration, license, and other fees and charges.” Thus, PAL remains exempt from certain taxes, provided it pays corporate income tax.
Why did the Supreme Court defer to the Court of Tax Appeals’ findings?	The Supreme Court deferred to the CTA’s findings because the CTA is a specialized body that reviews tax cases and conducts trial de novo. The court found no substantial evidence to overturn the CTA’s findings that PAL had complied with the conditions for tax exemption.
What practical steps should PAL take to ensure continued tax benefits?	PAL should maintain meticulous records of its importations, ensuring they are used for operational purposes and are not locally available in suitable quantity, quality, or price. Compliance with these stipulations is crucial for PAL to continue availing of its tax privileges.
What was the impact of RA 9334 on PAL’s tax exemptions?	RA 9334, which amended Section 131 of the NIRC, initially raised concerns about the potential revocation of PAL’s tax exemptions on imported alcohol and tobacco products. However, the Supreme Court clarified that RA 9334 did not override PAL’s franchise, preserving its tax benefits.
What is the key difference between a general law and a special law in this context?	A general law applies broadly to all entities, while a special law applies specifically to a particular entity or situation. In this case, the NIRC is a general law, whereas PD 1590 is a special law that governs PAL’s franchise. The court prioritized the special law to protect the specific benefits granted to PAL.

This case underscores the importance of carefully examining franchise agreements and understanding the interplay between general and special laws. The ruling provides a degree of certainty for PAL, but also highlights the need for ongoing compliance and diligent record-keeping to maintain its tax benefits.

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 AND COMMISSIONER OF CUSTOMS, PETITIONERS, VS. PHILIPPINE AIRLINES, INC., RESPONDENT., G.R. Nos. 215705-07, February 22, 2017