BIR Ruling

August 10, 1966 1st Indorsement Returned to the Regional Director, BIR, Regional District No. 1, Baguio City, the papers bearing on the internal revenue tax case of U. Baez Electric Light Company, Bangued, Abra, which was referred to the Law Division for legal opinion on the question of whether or not the aforementioned company is subject to 2% franchise tax as ordained in its new franchise granted under Republic Act No. 4143. The records of this case show that U. Banez Electric Light Company, is a domestic corporation engaged in the distribution and sale of electric light, heat and power in the municipality of Bangued, Abra since 1927 when it was granted a legislative franchise (Act No. 3406). On June 20, 1964, Congress granted the company a legislative franchise under Republic Act No. 4143 which, among other, provides as follows: "Sec. 4. In consideration of the franchise and rights hereby granted, the grantee shall pay a franchise tax equal to two per centum of the gross earnings for electric current sold under this franchise: Provided, That the said franchise tax of two per centum of the gross earnings shall be in lieu of all taxes, fees and assessments of any kind levied, established, or collected by any authority whatsoever, now or in the future, upon privileges, earnings, income, franchise, electric generating sets, poles, wires, transformers, and insulators of the grantee, from which taxes and assessments the grantee is hereby expressly exempted. Effective upon the date the original franchise was granted to Urbano Banez by Act numbered thirty-four hundred six, no other tax upon the capital stock, franchise, right of way and earnings of and upon all other property owned or operated by the grantee under this concession or franchise shall be levied or assessed on the herein grantee except the franchise tax of two per centum of the gross earnings mentioned in the said original franchise ." (Emphasis supplied) cdt It may be noted from the aforesaid provision of the franchise that the 2% franchise tax shall be made retroactive as of the date of the approval of the original franchise. This Office, however, has taken the stand that such provision in the legislative grant of aforesaid franchise grantee is unconstitutional. Even granting arguendo that Section 4 of Republic Act No. 4143 is not unconstitutional, we maintain that it cannot be given retroactive effect for the following reasons: The provision in question is of the nature of a tax exemption. Tax exemptions operate prospectively not retroactively. This is so because taxes already collected are appropriated and spent for the operation of the Government. To make a tax exemption retroactive it will have to refund funds which were already appropriated and spent. Such situation could not have been intended by the law-making body. Moreover, it is well-established and time-honored legal principle that a new law ought to be prospective in its operations. These principles are imperative and should apply with greater force to tax exemptions if the stability of the government is to be attained. llcd In a similar cause, the issue of constitutionality of such a provision is pending resolution in the appeal made by the Government to the Supreme Court in the case of "The Commissioner of Internal Revenue vs. Lingayen Gulf Electric Power Company, Inc. and Court of Tax Appeals, G.R. No. L-83771." As a matter of policy, this Office effects tax enforcement in accordance with its position in cases pending before the courts. Pending resolution, therefore, by the Supreme Court, this Office holds that franchise grantees like the herein taxpayer, which are similarly situated as the Lingayen Gulf Electric Power Company, Inc. are subject to the franchise tax at the rate of 5% under Section 259 of the Tax Code, and not to the reduced rate provided for in their respective franchises, on their gross receipts for the period prior to the effective dates of said franchises. Accordingly, the collection of the deficiency franchise tax at the rate of 5% under Section 259 of the Tax Code on the gross earnings of U. Banez Electric Light Company for the period prior to the effective date of its new franchise must, therefore, have to be enforced promptly in the light of Section 305 of the same Code. As regards the question as to whether or not the tax above-mentioned accrues entirely to the said municipality, the Acting Undersecretary of Justice in his opinion dated December 17, 1965 stated as follows: "the franchise tax being paid by the Urbano Baez Electric Company of Bangued, Abra, should accrue in its entirety to the municipality of Bangued, in view of the express specific provision in Section 7 of its charter (Act No. 3406) to the effect that the grantee of the franchise ' shall pay quarterly into the municipal treasury of Bangued the tax imposed therein. prcd "The general provisions of Section 359 of the National Internal Revenue Code regarding the disposition of franchise taxes cannot prevail over the above-mentioned special statutory provisions." Please be guided accordingly. prll (SGD.) MISAEL P. VERA Commissioner of Internal Revenue