The Supreme Court ruled that a municipality lacks the authority to impose a franchise tax; only provinces and cities possess this power. Consequently, any franchise tax levied by a municipality is deemed null and void, and this defect cannot be rectified even by the municipality’s subsequent conversion into a city. This decision clarifies the limits of local government taxing powers and safeguards businesses from unlawful tax impositions, ensuring that only authorized local entities can levy franchise taxes.

Pasig’s Quest for Franchise Tax: Can a City Inherit a Municipality’s Taxing Ordinance?

In the case of City of Pasig v. Manila Electric Company, the central question revolves around the legality of Pasig City’s demand for franchise tax payments from MERALCO for the years 1996 to 1999. This demand was based on Ordinance No. 25, enacted in 1992 when Pasig was still a municipality. The critical issue is whether the conversion of Pasig into a city in 1995 retroactively validated the ordinance, allowing the city to collect franchise taxes under its provisions. The Supreme Court was tasked to determine if the Court of Appeals erred in ruling that the City of Pasig had no valid basis for imposing the franchise tax during that period.

The power to impose franchise tax is explicitly granted to provinces under Section 137 of the Local Government Code (LGC), which states:

Section 137. Franchise Tax. – Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction.

Municipalities, however, are restricted from levying taxes specifically allocated to provinces. Section 142 of the LGC defines the scope of taxing powers for municipalities, noting:

Section 142. Scope of Taxing Powers. – Except as otherwise provided in this Code, municipalities may levy taxes, fees, and charges not otherwise levied by provinces.

Cities, as empowered by Section 151 of the LGC, are allowed to levy taxes, fees, and charges granted to both provinces and municipalities. This hierarchy of taxing powers is crucial in understanding the legal framework within which Pasig’s ordinance was evaluated. The LGC mandates that any local government unit’s power to impose taxes must be exercised through an appropriate ordinance, underscoring that an ordinance is the concrete legal basis for tax imposition and collection. This ordinance must adhere to constitutional and legal standards to be valid, as highlighted in Ferrer, Jr. v. Bautista.

In this case, Pasig’s Ordinance No. 25, enacted when it was a municipality, directly contravened Section 142 of the LGC, rendering it void from its inception. Article 5 of the Civil Code emphasizes this point, stating that acts against mandatory or prohibitory laws are void unless the law itself authorizes their validity. The nullity of the ordinance meant that any assessment or collection of taxes under it was legally flawed. Thus, the pivotal question became whether Pasig’s subsequent conversion into a city could retroactively validate the defective ordinance. The city argued that R.A. No. 7829, which converted Pasig into a city, authorized it to collect the franchise tax, distinguishing its case from Arabay and San Miguel Corporation (SMC), where taxes were paid before the municipalities became cities.

However, the Supreme Court was not persuaded. The Court emphasized the doctrine that the conversion of a municipality into a city does not cure the original infirmity of an ordinance enacted without proper authority. This principle, established in Arabay and SMC, remains relevant. The cityhood law of Pasig, R.A. No. 7829, could not infuse life into Section 32 of Municipal Ordinance No. 25. A void ordinance remains a nullity, producing no legal effect, and cannot be enforced, irrespective of Pasig’s cityhood. Even if Pasig sought to collect taxes only after becoming a city, the ordinance’s inherent invalidity persisted. The Court found no substantive difference between this case and Arabay and SMC, reinforcing the principle that a void act cannot be validated by subsequent events.

Pasig also argued that Section 45 of R.A. No. 7829 gave curative effect to Section 32 of Municipal Ordinance No. 25. Section 45 states:

Section 45. Municipal Ordinances Existing at the Time of the Approval of this Act. – All municipal ordinances of the municipality of Pasig existing at the time of the approval of this Act shall continue to be in force within the City of Pasig until the Sangguniang Panlungsod shall, by ordinance, provide otherwise.

The Supreme Court rejected this argument, clarifying that Section 45 applies only to ordinances that were valid from their inception. The provision contemplates ordinances that are already legal and effective. A void ordinance, such as Section 32 of Municipal Ordinance No. 25, cannot be ‘continued’ because it never legally existed. The Court dismissed Pasig’s claim that Section 45 was necessary to prevent paralysis in delivering basic services, finding the argument insubstantial and unsupported by evidence. The argument of the City of Pasig is at best flimsy and insubstantial. The records, it should be noted, bear no evidence to demonstrate the resulting paralysis claimed by the City of Pasig. An unsupported allegation it is, no better than a mere conjecture and speculation.

Finally, Pasig argued that an ambiguity in Section 42 of R.A. No. 7829 should be resolved in favor of local autonomy. The Court found no ambiguity, reiterating that the provision does not validate void ordinances. While the principle of local autonomy generally favors resolving doubts in favor of local taxing powers, this principle cannot override the fundamental nullity of Section 32 of Municipal Ordinance No. 25. The constitutional policy of local fiscal autonomy is not absolute and is subject to limitations set by Congress. The Supreme Court also noted the doctrine that any doubt arising from the grant of taxing power must be resolved against the local government unit.

In summary, the Supreme Court upheld the Court of Appeals’ decision, affirming that the City of Pasig could not legally demand tax payments under the challenged ordinance, which was void from the outset, even after its conversion into a city. The Supreme Court decision underscored the principle that a local government unit cannot enforce an ordinance that was invalid at its inception, regardless of subsequent changes in its status. The importance of adhering to the established legal framework is essential to preserving the balance between local autonomy and adherence to statutory provisions.

FAQs

What was the key issue in this case?	The key issue was whether the City of Pasig could legally demand franchise tax payments from MERALCO based on an ordinance enacted when Pasig was a municipality and lacked the authority to impose such taxes.
Why was the original ordinance considered invalid?	The original ordinance was invalid because, at the time of its enactment, Pasig was a municipality, and the Local Government Code grants the power to levy franchise taxes exclusively to provinces and cities, not municipalities.
Did Pasig’s conversion into a city validate the ordinance?	No, the Supreme Court held that the conversion of Pasig into a city did not retroactively validate the ordinance. The ordinance was void from the beginning, and its invalidity was not cured by the subsequent change in Pasig’s status.
What is the significance of Section 45 of R.A. No. 7829?	Section 45 of R.A. No. 7829 states that existing municipal ordinances would remain in force in the new city. However, the Supreme Court clarified that this provision only applies to ordinances that were valid from their inception, not to those that were initially void.
How did the Court address Pasig’s argument about local autonomy?	The Court acknowledged the principle of local autonomy but emphasized that it is not absolute. The power to tax is subject to limitations set by Congress, and any ambiguity in the grant of taxing power must be resolved against the local government unit.
What previous cases influenced the Court’s decision?	The Court relied on the principles established in Arabay, Inc. v. Court of First Instance and San Miguel Corporation v. Municipal Council, which held that the conversion of a municipality into a city does not validate a previously invalid ordinance.
What was the final ruling in this case?	The Supreme Court denied the petition and affirmed the Court of Appeals’ decision, declaring the demand for payment of franchise tax from MERALCO as invalid due to the lack of legal basis.
What is the practical implication of this ruling?	The practical implication is that local government units cannot enforce ordinances that were invalid at their inception, even if their status changes. This ensures that businesses are not subjected to unlawful tax demands.

This case serves as a crucial reminder of the importance of adhering to the legal framework governing local taxing powers. It underscores the principle that a local government unit cannot enforce an ordinance that was invalid from the outset, even if its status changes. Moreover, it balances the constitutional grant of local fiscal autonomy with the need to prevent abuses of taxing power.

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: CITY OF PASIG VS. MANILA ELECTRIC COMPANY, G.R. No. 181710, March 07, 2018