BIR Ruling No. 249-61

June 12, 1961 BIR RULING NO. 249-61 MEMORANDUM FOR: The Revenue Operations Executive (Assessment) Attached is the entire docket (consisting of 37 pages) of the PHILIPPINE POWER & DEVELOPMENT COMPANY in connection with the latter's deficiency franchise tax liability in the total amount of P201,627.21 for the period from January 1, 1947 to June 30, 1960, with the following comment on the legal issued involved. It appears that the Philippine Power & Development Company (hereinafter referred to as PPDC for brevity) is a holder of municipal franchises, covering the towns of Calamba, Los Baos, Sta. Cruz, Pila, Lilio, Majayjay, Nagcarlan, Bay, Magdalena, and Rizal, Province of Laguna, and the towns of Sto. Tomas and Tanauan, Province of Batangas, granted by the respective municipal councils under the provisions of Act No. 667, as amended by Acts Nos. 1022 and 3108. It has been noted that these franchises follow a standard form, a copy of which is found on pages 18 to 23 of the attached docket, and it is stipulated therein that ". . . The said grantee, in consideration of the franchise hereby granted, shall pay quarterly into the Provincial Treasury of Laguna, one per centum of the gross earnings obtained thru this privilege during the first twenty years (20) and two per centum during the remaining fifteen (15) years of the life of said franchise." (par. 10, Resolution No. 81 of the Municipal Council of Bay, Laguna; page 20, BIR rec.). However, it is so provided in the same Resolution, supra , that "This franchise is granted with the understanding and upon the condition that it shall be subject to amendment, alteration, repeal by the Congress of the United States as provided in Section 28 of the Act of Congress approved August 29, 1916, entitled 'AN ACT TO DECLARE THE PURPOSE OF THE PEOPLE OF THE UNITED STATES AS TO FUTURE POLITICAL STATUS OF THE PEOPLE OF THE PHILIPPINE ISLANDS, AND TO PROVIDE A MORE AUTONOMOUS GOVERNMENT FOR THOSE ISLANDS' and that it shall be subject moreover to the provisions of Act No. 3108 as amended, . . ." (par. 13, same Resolution, supra ; page 19, BIR rec.; emphasis supplied). In other words, the franchise in question may be subject to amendment, alteration, or repeal by any subsequent Act of Congress of the Philippines. cdtech Section 259 of the National Internal Revenue Code (Commonwealth Act No. 466), as amended by Republic Act No. 39 on October 1, 1946 and later by Republic Act No. 418 on June 18, 1949, provides as follows: " Tax on corporate franchises . There shall be collected in respect to all existing and future franchises , upon the gross earnings or receipts from the business covered by the law granting the franchise a tax of five per centum or such taxes, charges, and percentages are specified in the special charters of the grantees upon whom such franchises are conferred, whichever is higher, unless the provisions thereof precludes the imposition of a higher tax . . ." (Emphasis supplied) The Supreme Court, in applying the rate (5%) prescribed in Section 259 of the Tax Code, as amended, to a franchise grantee, the franchise of which is contained no provisions precluding the imposition of a higher tax, rules as follows: ". . . Section 259 of the National Internal Revenue Code, as amended, provides that 'whichever is higher' between the rate imposed by the special charter of the grantee and the National Internal Revenue Code, shall apply to and be imposed upon, and paid by, the grantee of the franchise. The rate imposed by Section 259 of the National Internal Revenue Code, as amended, being higher than that imposed in the petitioner's charter, Act No. 1256, the petitioner has to pay the rate imposed by Section 259 of the National Internal Revenue Code, as amended. The rule in Manila Railroad Company vs. Rafferty, 40 Phil. 224; Philippine Railway Company vs. Collector of Internal Revenue, G.R. No. L-3859, 25 March, 1952; Visayan Electric Company vs. David, 49 Off. Gaz. 1385; and Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 Off. Gaz. 1068, cannot be invoked by the petitioner, because in the grantee's respective franchises there is a provision that 'such annual payments, when promptly and fully made by the grantee, shall be in lieu of all taxes of every name and nature municipal, provincial or central upon its capital stock, franchises, right of way, earnings, and all other property owned or operated by the grantee under this concession or franchise'. The petitioner's franchise, Act No. 1256, does not embody such exemption clause" (Hoa Hin Co., Inc. vs. Saturnino David, etc., G. R. Nos. L-9616 & L-11783, prom. on May 25, 1959) There is no doubt that the rate imposed by the law (Sec. 259) is "higher" than the rate imposed by the municipal charter of the PPDC. Furthermore, the franchise in question does not embody any provision precluding the imposition of a higher tax. Accordingly, the rate of 5% shall apply to and be imposed upon, and paid by, the PPDC to the National Government. cdt Premises considered, the PPDC must be informed for the last time of its deficiency franchise tax, plus surcharges, of P201,627.21. Otherwise, we will be forced to collect the same by summary remedies prescribed by law. No further reconsideration of our decision, as above explained, is necessary, it appearing that this case, with respect to the deficiency franchise tax and surcharge, merely involves question of law. In this connection, it may likewise be ascertained whether or not the PPDC has paid the corresponding income tax due the Government. It must be borne in mind that grantees of municipal franchise granted under Act No. 667, as amended, are not exempt from the payment of the income tax. (Guagua Electric Light Plant Co., Inc. vs. Collector of Internal Revenue, C.T.A. Case No. 616, decided on May 23, 1960) Please be guided accordingly. LexLib (SGD.) MELECIO R. DOMINGO Commissioner of Internal Revenue