Bureau of Local Government Finance Opinion

February 3, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Adulfo A. Llagas City Treasurer Office of the City Treasurer Butuan City Sir : This refers to your letter dated July 30, 2010 addressed to the Secretary of Finance, forwarded to this Bureau on September 24, 2010 for appropriate action/disposition. The above query is in relation to Local Finance Circular (LFC) No. 1-07 dated June 28, 2010 entitled "PRESCRIBING THE GUIDELINES GOVERNING THE POWER OF LOCAL GOVERNMENT UNITS TO IMPOSE TAXES, FEES AND CHARGES ON ELECTRIC COOPERATIVES (ECs) REGISTERED, SUPERVISED AND CONTROLLED BY THE NATIONAL ELECTRIFICATION ADMINISTRATION (NEA)". Representations are made that the Agusan del Norte Electric Cooperative, Inc. (ANECO for brevity), even before the issuance of LFC 1-07, has been paying its local business taxes (LBT) to Butuan City since 1992 up to the present by virtue of the Supreme Court Decision declaring ANECO as taxable. 1 Based on said Decision, the basis of computing the LBT due from ANECO is the total Gross Sales or Receipts as defined in Section 131 (n) of R.A. No. 7160, otherwise known as the Local Government Code (LGC) of 1991, which provides that "Gross Sales or Receipts" include the total amount of money or its equivalent . . . actually or constructively received during the taxable quarter . . . excluding discounts if determinable at the time of sales, sales return, excise tax and value-added tax (VAT)." cCHETI It is submitted that with the issuance of LFC 1-07, a controversy arose between ANECO and that City, more specifically in the computation of Gross Sales or Receipts ("GSR") of ANECO as basis of computing the tax due as defined in Section 3.b (1) and (2) of said LFC 1-07. In this connection Section 3 of LFC 1-07 is quoted as follows: "Section 3. Tax on Gross Receipts of ECs. a) The tax on ECs may be levied on their gross receipts for the preceding calendar year, as follows: xxx xxx xxx For purposes of assessing the electric cooperatives of business tax and for the equitable distribution of its benefits derived therefrom, the gross receipts shall be based on the sales made to end-users within the respective jurisdiction of each local government unit (LGU). b) For this purpose the franchise and business taxes shall be based on ECs' gross receipts as follows: 1) Before the effectivity of the EPIRA Law (1997-2001), franchise and business taxes shall be based on the total gross receipts pursuant to Section 131 (n) of the LGC; STECAc 2) Upon the effectivity of the EPIRA Law (2002), the basis shall be as follows: ( Boldfacing and underscoring supplied for emphasis ) Gross receipts: Less: NPC Charges TransCo Charges Reinvestment Fund Universal Charges xxx xxx xxx" Based on the abovequoted provisions of Section 3.b (1) and (2) of LFC 1-07, ANECO made its own re-computation of its GSR retroactively from 2002 to 2008, which naturally, resulted in an apparent overpayment considering that the tax base from which the tax due was computed had been lowered by the amounts credited to the accounts of NPC and TransCo charges, including the Reinvestment Fund and Universal Charges. Thus, ANECO is demanding a refund for the alleged overpayment. In view of the above controversy, Section 8 of LFC 1-07 is quoted as follows: "Section 8. Conflicting Resolution In case of conflict between an electric cooperative and a-local government unit, the issue shall be submitted to the Department of Finance (DOF) through the Bureau of Local Government Finance (BLGF) for resolution." Further, Article 287 of the Implementing Rules and Regulations (IRR) implementing the LGC, provides that: "Article 287. Administrative Authority of the Secretary of Finance. The Secretary of Finance shall, in consultation with the various leagues, formulate and prescribe, from time to time, procedures and guidelines as may be necessary for the proper, efficient and effective implementation of the provisions of Title I, Book II of the Code." Premises considered, this Bureau expresses the following views: 1) We agree on the view that the provision of LFC 1-07 was not meant to amend or modify any particular provision of the LGC. It partakes of the nature of rules and regulations promulgated for the effective enforcement of the law/s. Specifically, it is meant to give guidance to all concerned on the basis of computation of franchise and local business taxes of ECs before and after the implementation of the EPIRA Law; 2) It is a well-settled rule in jurisprudence that a law or statute cannot be given retroactive effect in the absence of a statutory statement for retroactivity. In fact, Article 4 of the New Civil Code states that a law shall have no retroactive effect unless the contrary is provided. Consequently, the LFC, implementing/enforcing the law, cannot be given retroactive effect; 3) There is nothing in the law and the LFC which provides for a retroactive effect. In contrast, Section 10 ( Effectivity clause ) thereof provides that the "Circular shall take effect immediately" which presupposes prospective application. Such being the case, ANECO has to point to a provision/s in the law/LFC to be able to avail of a tax credit; EcaDCI 4) The taxable gross receipts of ECs, lowered by NPC and TransCo charges, Reinvestment Fund, and Universal Charges, upon the effectivity of LFC 1-07 is in accordance with the intent of the EPIRA law. Such charges will have to be excluded from the gross receipts considering that the collections are temporarily held in trust by ECs and eventually, will be remitted to said GOCCs (TransCo and NPC), and therefore ECs will not benefit therewith; ( Section 1.3, ERC CASE NO. 2005-18 RM ) 5) The request to amend Section 3 of LFC 1-07 is of no moment. The provision itself (Section 3) provides LGUs the method of collecting tax liabilities of TransCo and NPC, thus: "Section 3. Tax on Gross Receipts of ECs. a) The tax on ECs may be levied on their gross receipts for the preceding calendar year, as follows: xxx xxx xxx On the charges being remitted by ECs to NPC and TransCo, the local government units may impose local taxes considering that both Companies are Government-owned and Controlled Corporations (GOCCs), whose tax exemptions have been withdrawn under Section 193 of the LGC. Said charges pertain to their gross receipts and therefore, the LGUs concerned may directly bill said Corporation ( sic ) for taxation purposes ." ( Boldfacing and underscoring supplied for emphasis ) Further, the proposition for TransCo and NPC to pay their local taxes to the LGUs, making as basis Section 133 (n), will only complicate the imposition and collection of taxes. The proposed amendatory provision if implemented will shift back the burden to ECs of paying the franchise and business tax liabilities which are the statutory liabilities of NPC and TransCo. The situation will give unwarranted advantage to TransCo and NPC as the proposed amendment will give them the options of whether "to pay" or "not to pay". Given this possible scenario, in the event that either or both the NPC and TransCo will not pay their tax liabilities the only remaining option of the LGUs is to collect the same directly from ECs like ANECO. The situation will be most unfair to ECs to be encumbered with the responsibility for which TransCo and NPC are liable. The foregoing premises and discussions considered, we regret that we cannot, as of the moment, give due course to the request to amend Section 3 of LFC 1-07, considering that the proposed amendment will not resolve, but will rather complicate the issue. We hope that this will help clarify matters. EaTCSA Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director Footnotes 1. Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA) et al., versus The Secretary of DILG and The Secretary of Finance, G.R. No. 143076, June 10, 2003