Bureau of Local Government Finance Opinion

May 28, 2012 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 2nd Indorsement Respectfully returned to the ICO-Regional Director for Local Government Finance, Department of Finance, Region III, Capitol Compound, Sto. Nio, San Fernando City, Pampanga, her within preceding Indorsement dated January 2, 2012, relative to the letter dated December 8, 2011 of the Municipal Assessor of Concepcion, Tarlac, requesting clarification on the following issues: 1. Whether Smart Communication, Inc. (SMART for brevity) is indeed exempt from real property taxes; and 2. Whether the assessment made by the said Municipal Assessor's Office on the properties of SMART situated in the Barangays of San Francisco; Sta. Monica; and Tinang, all of the same province can be modified to reflect the real values as reflected in the Sworn Statement. EDSHcT Atty. Rodolfo Arvin D. Agbayani, Senior Tax Manager of SMART, in his letter-reply dated November 21, 2011 to the Notice of Assessment sent by the abovementioned municipal assessor's office for SMART's real properties, averred that SMART is exempt from the payment of real property tax on all its properties that are used in its telecommunications business based on the Court of Appeals' Entry of Judgment dated August 16, 2010 in the case of "SMART vs. Central Board of Assessment Appeals of Surigao City (CBAA), Local Board of Assessment Appeals of Surigao City and City Assessor of Surigao City (CA-G.R. S.P. No. 75586)" which held that: "Accordingly, the respondent City Assessor of Surigao City's Motion for Reconsideration is DENIED. The dispositive portion of the Court's November 30, 2006 Decision is MODIFIED to read as follows: 'FOR THE REASONS STATED, the February 16, 2002 Decision of the Central Board of Assessment Appeals (CBAA) is partly REVERSED. The petitioner is exempt from the payment of real property taxes to the City of Surigao for its properties which are actually, directly, and exclusively used in the operation of its franchise. The case is REMANDED to the CBAA for further proceedings pursuant to the ruling above and for determination of the nature of its real properties that are subject of the disputed assessment in this petition. The CBAA is also ORDERED to REFUND the amount of real property tax paid under protest by the petitioner in the event that it finds that the petitioner's real properties are actually, directly and exclusively used in the operation of the petitioner's franchise.' 'SO ORDERED.' "xxx xxx xxx." Please be informed that the Supreme Court (SC), in the case of "Digital Telecommunications, Inc. (Digitel) vs. City Government of Batangas, et al.," (G.R. No. 156040), had issued an EN BANC Decision dated December 11, 2008, in contradiction with the said CA Decision. The SC ruled that "the phrase 'exclusive of this franchise' simply means that the petitioner's franchise shall not be subject to the taxes imposed in the first sentence of Section 5 (Digitel's franchise). The first sentence lists the properties that are subject to taxes, while excluding the franchise. Hence, the petitioner's franchise is excluded from the properties taxable under the first sentence of Section 5." Thus, Digitel's claim for exemption from realty taxes on the basis of the phrase "exclusive of this franchise" has no basis in the language of law. The Supreme Court states that there is no language in the first sentence of Section 5 expressly or even impliedly exempting petitioner from realty tax. A tax exemption cannot arise from vague inference. It must be clear and unequivocal. Corollary thereto, quoted hereunder are the pertinent portions of the opinion/ruling rendered by this Bureau embodied under its 1st Indorsement dated May 29, 2009 (copy attached), with respect to the Supreme Court's interpretation of the phrase "exclusive of this franchise" found in the tax provision of SMART and other telecommunications companies similarly situated, viz. : IACDaS "xxx xxx xxx. "This Bureau would like to dwell on the above-cited Decision of Supreme Court the (G.R. No. 162015) with respect to the interpretation of the phrase 'exclusive of this franchise' in the light of the EN BANC Decision of the Supreme Court promulgated on December 11, 2008 under G.R. No. 156040 in the case entitled DIGITAL TELECOMMUNICATIONS PHILIPPINES, INC. (Petitioner) VS. CITY GOVERNMENT OF BATANGAS represented by HON. ANGELITO DONDON A. DIMACUHA, Batangas City Mayor, MR. BENJAMIN S. PARGAS, Batangas City Treasurer, and ATTY. TEODULFO A. DEQUITO, Batangas City Legal Officer (Respondent). "The sole issue resolved by the Court in the abovementioned entitled case is whether, under the first sentence of Section 5 of R.A. 7678 (DIGITEL's Legislative Franchise) as quoted hereunder, petitioner's real properties used in its telecommunications business are exempt from realty tax based on the proper interpretation of the phrase 'exclusive of this franchise'; "Section 5 of R.A. 7678 states : 'Sec. 5. Tax Provisions . The grantee shall be liable to pay the same taxes on its real estate, buildings, and personal property exclusive of this franchise as other persons or corporations are now or hereafter may be required by law to pay . In addition thereto, the grantee shall pay to the Bureau of Internal Revenue each year, within thirty (30) days after the audit and approval of the accounts, a franchise tax as may be prescribed by law of all gross receipts of the telephone or other telecommunications businesses transacted under this franchise by the grantee; Provided, That the grantee 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 . LibLex 'The grantee shall file the return with and pay the tax due thereon to the Commissioner of Internal Revenue or his duly authorized representative in accordance with the National Internal Revenue Code and the return shall be subject to audit by the Bureau of Internal Revenue. (Boldfacing and underscoring supplied)' "The contention of the Petitioner on the said Case states that its exemption from realty tax is based on the first sentence of Section 5 of R.A. 7678. Claiming that the evident purpose of the phrase 'exclusive of this franchise' is to limit the real properties that are subject to realty tax only to properties that are not used in Petitioner's telecommunications business. "The Court EN BANC Ruled that the petition has no merit. "Ruling of the Court in DIGITEL states that the phrase 'exclusive of this franchise' simply means that the petitioner's franchise shall not be subject to the taxes imposed in the first sentence of Section 5. That the first sentence lists the properties that are subject of taxes and the list excludes the franchise . Explaining further that the first sentence provides: 'The grantee shall be liable to pay the same taxes on its real estate, buildings, and personal property exclusive of this franchise as other persons or corporations are now or hereafter may be required by law to pay. (Emphasis supplied)' "The Court further states that the phrase 'exclusive of this franchise' is meant to exclude the legislative franchise from the properties subject to taxes under the first sentence. That in effect, petitioner's franchise, which is a personal property, is not subject to the taxes imposed on properties under the first sentence of Section 5. "Clearly, the Court stresses the exclusion of the legislative franchise from the properties taxable under the first sentence of Section 5. The Court further explained that the first sentence of Section 5 imposes on the franchisee the 'same taxes' that non-franchisees are subject to with respect to real and personal properties. That as explained, the clear intent of the law is to put the franchisees and non-franchisees 'in parity' in taxation of their real and personal properties. That since non-franchisees have obviously no franchises, the franchise must be excluded from the list of properties subject to tax to maintain the parity between the franchisees and non-franchisees. CcTHaD "Moreover, the Court made it clear, as quoted hereunder, that there is no language in the first sentence of Section 5 expressly or even impliedly exempting petitioner from the realty tax : 'xxx xxx xxx. 'Second, there is no language in the first sentence of Section 5 expressly or even impliedly exempting petitioner from realty tax . The phrases 'exemption from real estate tax,' 'free from real estate tax' or 'not subject to real estate tax' do not appear in the first sentence. No matter how one reads the first sentence, there is no grant of exemption, express or implied, from realty tax. In fact, the first sentence expressly imposes taxes on both real and personal properties, excluding only the intangible personal property that is the franchise." "The Court further clarified that the heading of Section 5 is 'Tax Provisions,' not Tax Exemption. That the phrase 'exemption from real estate tax' or other words conveying exemption from real property tax do not appear in the first sentence of Section 5. That the phrase 'exclusive of this franchise' merely qualifies the phrase 'personal property' to exclude petitioner's legislative franchise, which is an intangible personal property that is subject to tax under the second sentence of Section 5, which imposes the 'franchise tax'. The Court ruled that there is no grant of tax exemption in the first sentence of Section 5. "Thus, dictum of the Court states that tax exemption must be clear and unequivocal. A taxpayer claiming tax exemption must point to a specific provision of law conferring on the taxpayer, in clear and plain terms, exemption from a common burden. Any doubt whether a tax exemption exists is resolved against the taxpayer. "In the light therefore of the Supreme Court's ruling in the case of DIGITEL based on its interpretation of the phrase 'exclusive of this franchise' which is exactly the same defining phrase in the Bayantel's franchise (Section 11 of R.A. 7633), that the petitioner, as the franchisee, shall pay the same taxes on its real estate, buildings, and personal property exclusive of the franchise, that office is hereby advised to maintain the assessment of real properties of IRIGATEL under the taxable roll. "xxx xxx xxx." Further, this Bureau, on its letter dated September 29, 2010 addressed to the ICO-Regional Director, CAR Administrative Region, Baguio City , rendered a ruling on the taxability of SMART, pertinent portion of which is quoted hereunder: "xxx xxx xxx "In the above-mentioned case, the SC explained that the phrase 'exclusive of this franchise' does not mean that Petitioner (Digitel) is exempt from the realty tax on its real properties used in its telecommunications business. Apparently, the Court states that the first sentence of Section 5 of R.A. No. 7678 makes the petitioner liable to pay the same taxes on its real estate, buildings, and personal property exclusive of this franchise as other persons or corporations are or hereafter may be required by law to pay.' Hence, this shows the clear intent of Congress to tax petitioner's real and personal properties. "The Court further explained that the legislative franchises granted to all other telecommunications companies contain the same phrase thus, it is clear that the intent of Congress is to make the franchisees liable for realty tax rather than exempt them even if such real properties are used in their telecommunications business. "In sum, the first sentence of Digitel's legislative franchise lists the properties that are subject to taxes, and the list excludes the franchise. Hence, the petitioner's franchise is excluded from the list of properties taxable under the first sentence of said Section. Thus, the Court declared that the claim of Digitel for exemption from realty tax has no basis in the language of law. "In the light of all the foregoing, this Bureau believes that SMART, pursuant to its legislative franchise (Section 9 of R.A. No. 7294), the provision of which is similar to that of Digitel, shall be liable to pay real property tax on its real properties used in its telecommunications business . "All previous rulings, decisions or opinions of the BLGF inconsistent with this ruling are hereby reversed and/or modified accordingly. ITScHa "xxx xxx xxx." Consequently, therefore SMART having the same tax provision as that of Digitel shall likewise be subject to the payment of the above-mentioned taxes. Similarly, the subject real properties of SMART located in the Municipality of Concepcion are likewise subject to the payment of real property tax. Hence, the answer to item 1 is in the negative. With regard to the second issue, it appears from the attached letter dated December 8, 2011 of the Municipal Assessor of Concepcion, Tarlac, addressed to the ICO-Regional Director thereat, that after his office conducted an assessment on all the real properties of telecommunication companies located within his jurisdiction, the owner's copy of tax declaration and Notice of Assessment had correspondingly been issued to SMART on September 26, 2011. Relatedly, attention is invited to BLGF Memorandum Circular No. 04-2008 dated January 7, 2008, the pertinent portion of which provides, viz. : "Thus, it is clear in the Callanta Case that once a Notice of Assessment has already been issued and sent to a property owner, assessment/reassessment is already beyond the authority of the local assessor to correct or rectify, the same being within the jurisdiction of the LBAA. As soon as the notice of assessment is served and received by the taxpayer, an obligation to pay the amount assessed and demanded arises. ( CIR vs. Island Garment Manufacturing Corp. 153 SCRA 665 ). What the Supreme Court abhors and therefore proscribes is the review/readjustment by the assessor after the latter has already issued a notice of assessment." Be guided accordingly. (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director