The Supreme Court ruled that the Philippine Long Distance Telephone Company (PLDT) is not exempt from paying local franchise taxes to the City of Davao, despite holding a franchise and citing an “equality clause” in telecommunications law. This decision clarified that the Local Government Code (LGC) of 1991 effectively withdrew prior tax exemptions unless explicitly provided otherwise within the Code. Moreover, the “equality clause” in Republic Act No. 7925 does not automatically extend tax exemptions to franchises granted before its enactment, particularly if those franchises had their exemptions withdrawn by the LGC. Therefore, local governments have the authority to impose franchise taxes on telecommunications companies operating within their jurisdiction.

PLDT’s Quest for Tax Exemption: Can an ‘Equality Clause’ Trump Local Taxing Power?

The heart of the matter lies in PLDT’s challenge to the City of Davao’s imposition of a local franchise tax. PLDT argued that Section 23 of Republic Act No. 7925, the Public Telecommunications Policy Act, entitled them to an exemption from local taxes. This section provides that “any advantage, favor, privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises.” PLDT contended that because franchises granted to Globe and Smart contained “in lieu of all taxes” clauses, this exemption should automatically extend to PLDT’s franchise as well. This argument hinges on whether the term “exemption” in R.A. No. 7925 includes tax exemptions and whether this provision overrides the taxing power granted to local governments under the Local Government Code (LGC).

The Supreme Court, however, disagreed with PLDT’s interpretation. The Court emphasized that tax exemptions must be granted by clear and unequivocal provisions of law. Justice Mendoza stated plainly that:

“Tax exemptions should be granted only by clear and unequivocal provision of law “expressed in a language too plain to be mistaken.””

The Court found that R.A. No. 7925 did not explicitly grant tax exemptions. Instead, the Court suggested that the term “exemption” referred to exemptions from certain regulations and requirements imposed by the National Telecommunications Commission (NTC). These exemptions, according to the Court, were intended to promote deregulation within the telecommunications industry. Furthermore, the Court noted that Congress had granted subsequent franchises containing both an “equality clause” and an “in lieu of all taxes” clause. The Court reasoned that if the equality clause automatically extended tax exemptions, there would be no need for a separate “in lieu of all taxes” clause in the same statute.

Moreover, the Court addressed PLDT’s argument that the LGC did not repeal the “in lieu of all taxes” provision in its franchise, but only excluded local taxes. The Court acknowledged that some franchises granted to Globe and Smart contained “in lieu of all taxes” provisions, leading to a situation where holders of pre-LGC franchises had to pay local franchise taxes while newer franchises did not. However, the Court found that R.A. No. 7925 did not seek to rectify this disparity by granting tax exemptions to all telecommunications companies. Instead, the Court viewed the law as promoting healthy competition by breaking up monopolies and granting new entrants protection against dominant carriers.

The Court also rejected PLDT’s argument that the rule of strict construction of tax exemptions should not apply because the “in lieu of all taxes” provision was a tax exclusion rather than a tax exemption. The Court clarified that “in lieu of all taxes” provisions are considered tax exemptions, and therefore subject to strict interpretation against the taxpayer. The Court also addressed PLDT’s reliance on a prior case, Cagayan Electric Power & Light Co., Inc. v. Commissioner of Internal Revenue. In that case, a tax exemption was restored by a subsequent law re-enacting the exemption in an amendment to the company’s charter. However, the Supreme Court distinguished the PLDT case from the previous ruling because there was no amendment to PLDT’s charter that re-enacted the previous tax exemption. The court reaffirmed its stance that:

“Tax exemptions should be granted only by clear and unequivocal provision of law on the basis of language too plain to be mistaken. They cannot be extended by mere implication or inference.”

The Court underscored that after the LGC withdrew PLDT’s tax exemption under R.A. No. 7082, no amendment was made by Congress to re-enact the previous tax exemption. Considering the taxing power granted to local government units under R.A. No. 7160 and the Constitution, PLDT bore a substantial burden to justify its claim with a clear grant of exemption. The taxing power is one of the three necessary attributes of sovereignty. Statutes in derogation of sovereignty, such as those containing exemption from taxation, should be strictly construed in favor of the state.

Finally, the Court dismissed PLDT’s argument that a special law prevails over a general law and that its franchise, being a special law, should prevail over the LGC, which is a general law. The Court cited City Government of San Pablo, Laguna v. Reyes, stating that the phrase “in lieu of all taxes” must yield to the LGC’s specific provision for the withdrawal of such exemptions. The Court emphasized that the legislative intent to withdraw tax privileges under existing laws or charters is clear from the express provisions of §§ 137 and 193 of the LGC. For all these reasons, the Supreme Court upheld the City of Davao’s authority to impose the local franchise tax on PLDT.

FAQs

What was the key issue in this case?	The key issue was whether PLDT was exempt from paying local franchise taxes to the City of Davao, based on an “equality clause” in telecommunications law.
What is the “equality clause” in this context?	The “equality clause” in R.A. No. 7925 states that any advantage, favor, privilege, exemption, or immunity granted to one telecommunications company should automatically extend to others.
What is an “in lieu of all taxes” clause?	An “in lieu of all taxes” clause in a franchise agreement means that the grantee pays a certain tax, usually a percentage of gross receipts, which takes the place of all other taxes.
Why did PLDT claim it was exempt from local taxes?	PLDT argued that because Globe and Smart had “in lieu of all taxes” clauses in their franchises, the equality clause should extend that exemption to PLDT.
What did the Supreme Court decide?	The Supreme Court ruled that PLDT was not exempt from local franchise taxes because the LGC withdrew prior tax exemptions, and the equality clause did not automatically restore them.
What is the significance of the Local Government Code (LGC) in this case?	The LGC withdrew all tax exemptions previously granted unless specifically stated otherwise in the Code, giving local governments the power to tax businesses within their jurisdictions.
Does this ruling affect other telecommunications companies?	Yes, this ruling clarifies the taxing authority of local governments over telecommunications companies operating within their areas, regardless of franchise agreements.
What was the basis for the dissenting opinion?	The dissenting opinion argued that the equality clause should be interpreted broadly to promote a level playing field in the telecommunications industry, including tax exemptions.

This case underscores the principle that tax exemptions are not easily implied and must be grounded in clear legal provisions. It also confirms the broad taxing powers granted to local government units by the Local Government Code. The Supreme Court’s decision reinforces the idea that telecommunications companies are subject to local taxes unless a clear and specific exemption is explicitly provided by law.

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: Philippine Long Distance Telephone Company, Inc. vs. City of Davao and Adelaida B. Barcelona, G.R. No. 143867, March 25, 2003