Bureau of Local Government Finance Opinion

August 13, 2010 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 4th Indorsement Respectfully returned to the OIC-Regional Director for Local Government Finance, Region VII, Cebu City, the herein preceding indorsement relative to the 1st Indorsement dated February 23, 2010 of the City Treasurer, Tanjay City, regarding the letter dated February 2, 2010 of Innove Communications, Inc. claiming exemption from the local franchise tax by express provision of its legislative franchise (R.A. 7372), particularly Section 14 thereof which reads: "Section 14. The grantee, its successors or assigns shall be liable to pay the same taxes on real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, that the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto." That Office cited the opinion of this Bureau through letter dated December 19, 1997, addressed to Atty. R.A. Salalima, relative to Telecommunications Technologies Philippines, Inc. or Teletech, a grantee of Congressional franchise under R.A. 7617, as amended by RA 7674 which was approved on June 25, 1992, the pertinent portion of which reads: "Considering, therefore, that RA 7617 having been approved on June 25, 1992 is a later law, its provision should prevail over those of the LGC which took effect on January 1, 1992. "Accordingly, Teletech should be considered exempt from the franchise and business taxes that local governments may impose under Section 137 and 143, respectively, of the Code. However, all real properties of the corporation not directly, actually and exclusively used in its telecommunication operations and services shall be subject to the real property taxes that provinces and cities levy under the pertinent provisions of the Code." EcHIAC "Moreover, the corporation shall also be liable to pay the Mayor's permit and other regulatory fees or service charges that the local government concerned may have imposed under a duly-enacted tax ordinance, its exemption being applicable only to the local franchise and business taxes." In view of the foregoing, that Office is seeking clarification whether the above opinion applies to the request of Innove Communications, Inc. on their claim for exemption from local franchise/business tax. It must be noted that the "in lieu of all taxes" proviso of the legislative franchise of Innove Communications, Inc. is similar to that of SMART Communications, Inc. quoted hereunder: "Section 9. The grantee, its successors or assigns shall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto." In this connection, it is worth mentioning that the Supreme Court in the case of SMART Communications, Inc. vs. The City of Davao (G.R. No. 155491, September 16, 2008) denied the claim for exemption from the payment of local franchise tax, the pertinent portion of which is quoted as follows: ". . . . the 'in lieu of all taxes' clause applies only to national internal revenue taxes and not to local taxes. As appropriately pointed out in the separate opinion of Justice Antonio T. Carpio in a similar case involving a demand for exemption from local franchise taxes: [T]he 'in lieu of all taxes' clause in Smart's franchise refers only to taxes, other than income tax, imposed under the National Internal Revenue Code. The 'in lieu of all taxes' clause does not apply to local taxes. The proviso in the first paragraph of Section 9 of Smart's franchise states that the grantee shall 'continue to be liable for income taxes payable under Title II of National Internal Revenue Code.' Also, the second paragraph of Section 9 speaks of tax returns filed and taxes paid to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code." Moreover, the same paragraph declares that the tax returns 'shall be subject to audit by the Bureau of Internal Revenue.' Nothing is mentioned in Section 9 about local taxes. The clear intent is for the 'in lieu of all taxes' clause to apply only to taxes under the National Internal Revenue Code and not to local taxes. Even with respect to national internal revenue taxes, the 'in lieu of all taxes' clause does not apply to income tax." A Motion for Reconsideration of the Decision of the Court dated September 16, 2008 was filed by SMART Communications, Inc. which was denied by the Court with finality in a Resolution dated July 21, 2009. In view of the foregoing and considering that Innove Communications, Inc. is similarly situated as that of SMART Communications, Inc., it may be stated that Innove Communications, Inc. cannot validly claim tax exemption based on Section 14 of its franchise, hence the City of Tanjay may impose a local franchise tax on the gross receipts thereof pursuant to a duly enacted tax ordinance of the said City. SCaTAc Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA Executive Director ATTACHMENT BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Regional Office No. 7 Cebu City 3rd Indorsement March 5, 2010 Respectfully forwarded to Hon. MA. PRESENTACION R. MONTESA, Executive Director, Bureau of Local Government Finance , the herein 1st Indorsement dated February 23, 2010, of Ms. Virginia C. Reyes, City Treasurer, Tanjay City, this region, forwarding to this Office the letter dated February 2, 2010, of Innove Communications, Inc., claiming that said company is exempt/not liable for local franchise tax for reasons cited in the herein attached position paper. It is represented, that Innove is exempt from local franchise tax/business tax by express provision of Innove's legislative franchise (R.A. 7372, approved into law on April 10, 1992), particularly Section 14 thereof which reads: "Section 14. The grantee, its successors or assigns shall be liable to pay the same taxes on real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the grantee, its successors or assigns shall pay a franchise tax equivalent to (3%) of all gross receipts of the business transacted under this franchise by the grantee, its successors or assigns and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof: Provided, that the grantee, its successors or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed, in which case the amendment or repeal shall be applicable thereto." In a similar matter, this Bureau had rendered an opinion through letter dated December 19, 1997, addressed to Atty. R.A. Salalima, relative to Telecommunications Technologies Philippines, Inc. or Teletech, a grantee of Congressional franchise under R.A. 7617, as amended by RA 7674 which was approved on June 25, 1992, the pertinent portion of which reads: EHaCID "Considering, therefore, that RA 7617 having been approved on June 25, 1992 is a later law, its provision should prevail over those of the LGC which took effect on January 1, 1992. Accordingly, Teletech should be considered exempt from the franchise and business taxes that local governments may impose under Sections 137 and 143, respectively, of the Code. However, all real properties of the corporation not directly, actually and exclusively used in its telecommunication operations or services shall be subject to the real property taxes that provinces and cities levy under the pertinent provisions of the Code. Moreover, the corporation shall also be liable to pay the Mayor's permit and other regulatory fees or service charges that the local government concerned may have imposed under a duly-enacted tax ordinance, its exemption being applicable only to local franchise and business taxes. In light of the foregoing, this office seeks clarification whether the above stated opinion applies to the instant request of Innove Communications, Inc., on their claim of exemption from local franchise/business tax. (SGD.) LORNA C. ATEGA OIC-Regional Director