In a dispute between the National Power Corporation (NAPOCOR) and the City of Cabanatuan, the Supreme Court addressed the proper computation of tax surcharges. The Court ruled that surcharges for late tax payments should be calculated based on the amount of tax due and unpaid for each year, and not cumulatively over multiple years. This decision ensures that penalties for late tax payments are fair and proportionate, preventing local governments from imposing excessive financial burdens on taxpayers.

Cabanatuan’s Taxing Interpretation: When Penalties Exceed the Original Debt

The City of Cabanatuan sought to collect franchise taxes from NAPOCOR for the years 1992 to 2002. When NAPOCOR delayed payment, the city assessed a 25% surcharge, but the method of calculating this surcharge became a point of contention. The City of Cabanatuan computed the surcharge cumulatively, adding unpaid taxes from previous years to the current year’s tax due, and then applying the 25% surcharge to the total. This resulted in a significantly higher penalty than NAPOCOR believed was appropriate. NAPOCOR argued that the surcharge should only be applied once to the total amount of taxes unpaid.

The Regional Trial Court initially sided with the City, but the Court of Appeals affirmed this decision, leading NAPOCOR to elevate the case to the Supreme Court. At the heart of the matter was the interpretation of Section 168 of the Local Government Code, which governs surcharges and penalties on unpaid taxes. The Supreme Court was tasked with determining whether the City’s cumulative computation of the surcharge was in accordance with the law.

The Supreme Court began its analysis by examining the dispositive portion of the Court of Appeals’ decision, which ordered NAPOCOR to pay the tax due every year, and “in all cases, to pay a surcharge of 25% of the tax due and unpaid.” The Court emphasized that the words “tax due and unpaid” should be interpreted in their plain and ordinary meaning. According to the Court, the term means the tax that is owed and has not been paid for a particular year. “The fallo says ‘tax due and unpaid,’ which simply means tax owing or owed or ‘tax due that was not paid.’ The ‘and’ is ‘a conjunction used to denote a joinder or union, ‘binding together,’ ‘relating the one to the other.’”

Building on this principle, the Supreme Court found that the City’s cumulative computation of the surcharge was not supported by the law or the Court of Appeals’ decision. The Court highlighted that **Section 168 of the Local Government Code** allows local governments to impose a surcharge “not exceeding twenty-five (25%) of the amount of taxes, fees, or charges not paid on time.” The Court emphasized the phrase “not paid on time,” indicating that the surcharge should be applied to the unpaid tax for each specific year, not cumulatively.

To further clarify its position, the Supreme Court provided a hypothetical calculation demonstrating the correct application of the surcharge. The Court stated that the 25% surcharge is imposed as an addition to the main tax required to be paid if the franchise tax due was not paid on time. This calculation ensures that the surcharge remains proportionate to the actual tax liability for each year.

The Court then addressed the City’s argument that a one-time imposition of the surcharge would be a “great transgression” of its rights, considering that the Court of Appeals did not award the 2% monthly interest that the City had requested. The City argued that Article 1226 of the Civil Code states that the penalty (25% surcharge) shall substitute the indemnity for damages and the payment of interest in case of non-compliance. “The appellate court allegedly did not award the 2% monthly interest, and the only probable reason why it did not do so notwithstanding the express provision of law was because of Article 1226 of the Civil Code stating that the ‘penalty [25% surcharge] shall substitute the indemnity for damages and the payment of interest in case of non-compliance.’” The Supreme Court rejected this argument, explaining that Article 1226 applies to penalties in contracts, not to penalties embodied in a judgment.

The Supreme Court further elucidated that a judgment directing the payment of a surcharge on taxes due and unpaid should be read in consonance with Section 168 of the Local Government Code. The Court stated that the surcharge is a civil penalty imposed once for late payment of a tax. This contrasts with the provision on interest, which is imposable at a rate not exceeding 2% per month of the unpaid taxes until fully paid. “The surcharge is imposed to hasten tax payments and to punish for evasion or neglect of duty, while interest is imposed to compensate the State ‘for the delay in paying the tax and for the concomitant use by the taxpayer of funds that rightfully should be in the government’s hands.’”

The Supreme Court also found the City’s computation of the surcharge to be oppressive and unconscionable. The cumulative imposition of the 25% surcharge resulted in an aggregate penalty that was significantly higher than NAPOCOR’s basic tax liabilities. Furthermore, the Court noted that the City’s computation effectively exceeded the prescribed 72% ceiling for interest under Section 168 of the Local Government Code. The Court concluded that the City’s computation of the surcharge was oppressive and unconscionable.

In light of these considerations, the Supreme Court held that the Regional Trial Court committed grave abuse of discretion in adopting the City’s computation of the surcharge. The Court emphasized that taxes, surcharges, and penalties should not be construed in a way that becomes oppressive and confiscatory. The Court warned that laws should be interpreted in a way that these burdens do not amount to a confiscatory outcome. “To a certain extent, a reasonable surcharge will provide incentive to pay; an unreasonable one delays payment and engages government in unnecessary litigation and expense.”

Ultimately, the Supreme Court emphasized that the role of the judiciary is to interpret the law as it is written. According to the Supreme Court, neither the Court nor the City has the power to modify the penalty. “When a law speaks unequivocally, it is not the province of this court to scan its wisdom or its policy.” The Court stated that if the legislative intent was to make the 25% surcharge proportionate to the period of delay, the law should have provided for the same in clear terms. This underscores the importance of adhering to the plain language of the law and avoiding interpretations that lead to unfair or oppressive outcomes.

FAQs

What was the key issue in this case?	The key issue was the proper method of computing the 25% surcharge for late payment of franchise taxes under the Local Government Code.
How did the City of Cabanatuan compute the surcharge?	The City computed the surcharge cumulatively, adding unpaid taxes from previous years to the current year’s tax due, and then applying the 25% surcharge to the total.
What did NAPOCOR argue regarding the surcharge?	NAPOCOR argued that the surcharge should only be applied once to the total amount of taxes unpaid for each specific year, not cumulatively.
What is Section 168 of the Local Government Code?	Section 168 governs surcharges and penalties on unpaid taxes, fees, or charges, allowing local governments to impose a surcharge not exceeding 25% of the amount of taxes not paid on time.
What did the Supreme Court decide?	The Supreme Court ruled that the surcharge should be calculated based on the amount of tax due and unpaid for each year, not cumulatively over multiple years.
Why did the Supreme Court reject the City’s computation?	The Court found the City’s computation to be oppressive and unconscionable, resulting in an aggregate penalty that was significantly higher than NAPOCOR’s basic tax liabilities.
What is the significance of this ruling?	This ruling ensures that penalties for late tax payments are fair and proportionate, preventing local governments from imposing excessive financial burdens on taxpayers.
What was the final outcome of the case?	The Supreme Court granted NAPOCOR’s petition, reversing the Court of Appeals’ decision and annulling the trial court’s order granting the writ of execution for the satisfaction of the disputed amount.

This Supreme Court decision clarifies the proper application of tax surcharges under the Local Government Code, preventing local governments from imposing unfair and excessive penalties. By ensuring that surcharges are calculated fairly and proportionately, the ruling protects taxpayers from undue financial burdens and promotes a more equitable tax system.

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: NATIONAL POWER CORPORATION vs. CITY OF CABANATUAN, G.R. No. 177332, October 01, 2014