Internal Revenue Tax Case of the Ilmak Electric Company of Mataasnakahoy

December 11, 1958 BIR RULING NO. 711-58 The Municipal Treasurer Mataasnakahoy, Batangas S i r : This is in connection with the pending internal revenue tax case of the Ilmak Electric Company of Mataasnakahoy, Batangas, which was referred to this Office for resolution of the following question: cdti 1. What rate of franchise tax should be paid by the company the 1% franchise tax provided in the franchise granted by the municipal council of Mataasnakahoy, Batangas, or the 5% franchise tax prescribed in Section 259 of the National Internal Revenue Code as amended by Republic Acts Nos. 39 and 418? 2. Does the term "Corporate" franchise appearing in Section 259 of the Tax Code apply only to electric companies owned by a corporation or does it apply also to a single proprietorship? It appear from the records of this case that Lescano and Company was granted a franchise to construct, maintain, and operate an electric light, heat and power service for a period of thirty-five years beginning February 1, 1947. One of the conditions of the grant is that the grantee shall pay quarterly to the Provincial Treasurer of Batangas one per centum (1%) of its gross earning for the first twenty years and two per centum (2%) during the remaining fifteen years of the life of said franchise. Section 5 of Act 667, the law authorizing municipalities to grant franchises provides as follows: "SEC. 5. Every franchise granted hereunder shall contain a provision that it is granted subject to the power of Congress to alter, modify, or repeal the same in accordance with the Act of Congress entitled 'An Act Temporarily to Provide for the Administration of the Affairs of Civil Government in the Philippine Islands, approved July 1, 1902.'" cdt Pursuant to the above quoted provisions of Act 667, the Municipality of Mataasnakahoy, Batangas, imposed the following conditions in the franchise: "This franchise is granted with the understanding and upon the condition that it shall be subject to amendment, alteration or repeal by the Congress of the Philippines when the public interest so requires as provided in Section 8 of Article XIII of the Constitution of the Philippines, . . . ." On October 1, 1946, Congress increased the franchise tax due from corporations from 1% to 5% of their gross earnings (Republic Act No. 39). And on June 18, 1949, Republic Act 418 was passed making the increased rate of 5% applicable to both individuals and corporations who have been granted franchises. It appears, therefore, that at the time the franchise of the Ilmak Electric Company was granted (February 1, 1947), Congress had already increased the franchise tax of corporations to 5%. The fact that the franchise still provides for a 1% franchise tax for the first twenty years and 2% for the remaining fifteen years is, therefore, not in accordance with the limitations of the authority granted by Congress to municipalities to grant franchises as delineated in Act 667. Accordingly, the rate prescribed by Republic Act No. 39 (5%) shall prevail. The taxpayer cannot interpose the defense of "impairment of contract", inasmuch as the franchise itself provides that Congress shall have the power to amend, alter or repeal said grant. In view of the foregoing, this Office is of the opinion that Ilmak Electric Company is liable for the payment of the 5% franchise tax. As regards the second question, please be further informed that the provisions of Section 259 of the Tax Code applies to both individuals and corporations who have been granted franchises. cdll Very truly yours, (SGD.) MELECIO R. DOMINGO Acting Commissioner of Internal Revenue