Local Government’s Power to Tax Extends to Government-Owned Corporations Despite Tax Exemptions

TLDR: This case clarifies that local government units (LGUs) in the Philippines can impose franchise taxes on government-owned and controlled corporations (GOCCs), even if those GOCCs have tax exemptions in their charters. The Local Government Code (LGC) effectively withdrew many of those exemptions, granting LGUs broader taxing powers. This ruling emphasizes the importance of understanding the LGC’s impact on previously held tax privileges and complying with local tax obligations.

G.R. NO. 165827, June 16, 2006

Introduction

Imagine a local government struggling to fund essential services like schools, roads, and healthcare. One potential source of revenue is franchise taxes on businesses operating within its jurisdiction. But what happens when a major entity, like a government-owned power corporation, claims it’s exempt from these taxes? This scenario highlights the tension between national development goals and the autonomy of local governments to generate revenue. This case, National Power Corporation vs. Province of Isabela, delves into this very issue, clarifying the extent to which local governments can tax GOCCs, even when those corporations have tax exemptions enshrined in their charters.

The Province of Isabela sued the National Power Corporation (NPC) to collect unpaid franchise taxes. NPC argued that its charter exempted it from such taxes and that the Local Government Code (LGC) didn’t repeal this exemption. The Supreme Court had to determine whether the LGC effectively withdrew NPC’s tax exemption, thereby subjecting it to the province’s franchise tax.

Legal Context: Taxation and Local Autonomy

In the Philippines, the power to tax is primarily vested in the national government. However, the Constitution and the LGC empower local government units to levy certain taxes to fund their operations and development projects. This decentralization of fiscal authority is intended to promote local autonomy and self-reliance.

Franchise tax, as defined under Section 137 of the LGC, is a tax imposed on businesses enjoying a franchise, levied by the province. The LGC grants this power “notwithstanding any exemption granted by any law or other special law.” This seemingly simple phrase carries significant weight, as it signals the legislature’s intent to broaden the taxing powers of LGUs.

A crucial provision in this case is Section 193 of the LGC, which states:

“Sec. 193. Withdrawal of Tax Exemption Privileges.- Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code.”

This section expressly withdraws tax exemptions previously granted, subject to specific exceptions. The interpretation of this section is central to understanding the court’s decision. The legal principle at play here is that taxation is the rule, and exemption is the exception. Tax exemptions are construed strictissimi juris against the taxpayer and liberally in favor of the taxing power.

Case Breakdown: NPC vs. Isabela

The legal battle between the National Power Corporation and the Province of Isabela unfolded as follows:

1. The Claim: The Province of Isabela sued NPC for unpaid franchise taxes for 1994, amounting to P7,116,949.00, plus legal interest.
2. NPC’s Defense: NPC argued that its Magat Hydro-Electric Plant was actually located in Ifugao, not Isabela, and that its charter, Republic Act No. 6395, Section 13, exempted it from all taxes. They also contended that the RTC had no jurisdiction due to a boundary dispute and that they were not a private corporation subject to franchise tax.
3. Ifugao’s Intervention: The Province of Ifugao intervened, claiming the plant was within its territory and that Isabela had misrepresented the plant’s location to collect taxes.
4. RTC Decision: The Regional Trial Court ruled in favor of Isabela, ordering NPC to deposit the franchise tax amount in escrow with the Land Bank of the Philippines.
5. CA Appeal: NPC appealed to the Court of Appeals, which affirmed the RTC’s decision, citing the Supreme Court’s ruling in National Power Corporation v. City of Cabanatuan.
6. Supreme Court Review: NPC elevated the case to the Supreme Court, arguing that the CA erred in holding it liable for franchise tax under the LGC.

The Supreme Court ultimately sided with the Province of Isabela, affirming the CA’s decision. The Court emphasized that Section 193 of the LGC expressly withdrew NPC’s tax exemption, and that Section 137 of the LGC allows LGUs to impose franchise taxes “notwithstanding any exemption granted by any law or other special law.”

The Court quoted its previous ruling in National Power Corporation v. City of Cabanatuan:

“[S]ection 193 of the LGC withdrew, subject to limited exceptions, the sweeping tax privileges previously enjoyed by private and public corporations… It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius.”

The Court also addressed NPC’s argument that it wasn’t a “business enjoying a franchise,” stating:

“Petitioner was created to ‘undertake the development of hydroelectric generation of power and the production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis… Certainly, these activities do not partake of the sovereign functions of the government. They are purely private and commercial undertakings, albeit imbued with public interest.”

Practical Implications: Understanding the Scope of LGU Taxing Powers

This ruling has significant implications for GOCCs and other entities with previously granted tax exemptions. It underscores the broad taxing powers granted to LGUs under the LGC and the limited scope of tax exemptions. Businesses and corporations, especially those with special charters or historical tax privileges, must carefully review their tax obligations in light of the LGC.

This case also serves as a reminder of the importance of complying with local tax laws and regulations. Failure to do so can result in legal action, penalties, and interest charges. In cases of territorial disputes, as was initially raised in this case, the proper course of action is to seek resolution through administrative channels rather than withholding tax payments altogether.

Key Lessons:

• Review Tax Obligations: Businesses must regularly review their tax obligations, especially in light of changes in legislation or jurisprudence.
• Comply with Local Laws: Compliance with local tax laws is crucial to avoid penalties and legal disputes.
• Seek Legal Advice: When in doubt about tax obligations or exemptions, seek advice from a qualified legal professional.

Frequently Asked Questions

Q: Can LGUs tax national government agencies?

A: Generally, no. However, the LGC provides exceptions, allowing LGUs to tax certain government instrumentalities engaged in proprietary functions.

Q: What is a franchise tax?

A: A franchise tax is a tax on the privilege of transacting business and exercising corporate franchises granted by the state.

Q: Does the LGC automatically withdraw all tax exemptions?

A: Yes, Section 193 of the LGC withdraws most tax exemptions, except for those specifically mentioned in the Code, such as local water districts and registered cooperatives.

Q: What should a business do if it believes it is wrongly assessed for local taxes?

A: The business should file a protest with the local government and, if necessary, seek judicial review of the assessment.

Q: How does this case affect other government-owned corporations?

A: This case reinforces the principle that GOCCs are generally subject to local taxes unless specifically exempted by the LGC or other laws.

Q: What is the meaning of expressio unius est exclusio alterius?

A: It’s a Latin legal maxim meaning “the express mention of one thing excludes all others.” In this context, it means that the LGC’s express enumeration of exceptions to the withdrawal of tax exemptions implies that all other entities not listed are not exempt.

Q: Is NPC still exempt from any taxes?

A: NPC’s exemption from local taxes was largely withdrawn by the LGC, although it may still be exempt from certain national taxes if specifically provided by law.

ASG Law specializes in local government taxation and corporate law. Contact us or email hello@asglawpartners.com to schedule a consultation.