Re: Request for the Withdrawal or Modification of BLGF Memorandum Circular No. 48-2012

June 29, 2017 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Luis Manuel U. Bugayong General Counsel National Grid Corporation of the Philippines (NGCP) Quezon Avenue corner BIR Road Diliman, Quezon City SUBJECT : Re: Request for the Withdrawal or Modification of BLGF Memorandum Circular No. 48-2012 Dear Atty. Bugayong : This has reference to your letter dated 14 February 2017, requesting for this Bureau's withdrawal or modification of Memorandum Circular (MC) No. 48-2012 dated 22 June 2012. You also requested that this Bureau issues a circular to (i) declare and inform all the assessors and treasurers concerned of the exemption from the payment of real property tax on the properties of the National Grid Corporation of the Philippines (NGCP) used in connection with its franchise, (ii) instruct the assessors to desist from issuing new assessments, and (iii) instruct the assessors to withdraw previously issued assessments on the subject properties. The said request is anchored on the decision of the Supreme Court in NGCP vs. Ofelia Oliva , in her official capacity as City Treasurer of Cebu, docketed as G.R. Nos. 213157 and 213558, promulgated on 10 August 2016, wherein the high court upheld the NGCP's exemption from the payment of real property tax on properties used in connection with its franchise. As a course of action, we are presently studying your request, taking into consideration the said Supreme Court decision and the policy direction that may be made by the Department of Finance on the subject. Thank you. Very truly yours, (SGD.) NIO RAYMOND B. ALVINA OIC Executive Director ATTACHMENT National Grid Corporation of the Philippines Stronger Transmission for a Stronger Nation OGC-2017-01-324 February 14, 2017 MR. NIO RAYMOND B. ALVINA OIC-Executive Director Office of the Executive Director Bureau of Local Government Finance (BLGF) 8th Floor EDPC Building, BSP Complex Roxas Blvd., Manila Subject : BLGF MEMORANDUM CIRCULAR NO. 48-2012 Dear Executive Director Alvina: This refers to the abovementioned circular entitled "Real Property Tax Liability of the NATIONAL GRID CORPORATION OF THE PHILIPPINES (NGCP) pursuant to its legislative franchise, RA No. 9511" issued the BLGF on 22 June 2012 (Circular). Copy of the Circular is attached as Annex "A" for your easy reference. In said Circular, the BLGF provided guidelines to all Local Government Units on the tax liability status of NGCP's real properties as follows: "1. NGCP is subject to real property tax on their real estate, buildings, machinery and equipment and personal properties; 2. The Real Properties of NGCP shall be classified, valued and assessed as Industrial; 3. The Assessment Level (AL) for Land, Buildings and other Structures provided under Section 218 (a) (b) or that AL enacted under enabling Ordinance by the local Sanggunian, shall apply; 4. The machinery and equipment of NGCP used actually, directly and exclusively in the generation and transmission of electric power shall have an Assessment Level (AL) of 80% or that AL which was fixed under an enabling Ordinance enacted by the local Sanggunian, pursuant to Section 218 (c) of the LGC; 5. The machinery and equipment of NGCP used actually, directly and exclusively in the generation of electric power which ceased operations shall no longer be assessed, and should be transferred from the taxable roll to exempt roll of real properties." The BLGF cited the following LGC provisions and Supreme Court decisions in support of said guidelines: 1. NGCP is not a government owned or controlled corporation. Citing the case of National Power Corporation vs. Province of Quezon and Municipality of Pagbilao , 1 BLGF stated that "to successfully claim exemption under Section 234 (c) of the LGC, the claimant must prove two (2) elements: a. The machineries and equipment are actually, directly and exclusively used local water districts and government-owned or controlled corporations; b. The local water districts and government-owned and controlled corporations claiming exemption must be engaged in the supply and distribution of water and/or the generation and transmission of electric power. x x x" 2. Citing the case of Digitel Telecommunications Philippines, Inc. vs. City Government of Batangas , 2 BLGF likewise stated that the historical usage of the phrase "exclusive of this franchise" present in NGCP's franchise and in other franchise laws enacted by Congress shows that the phrase is not a grant of tax exemption, but an exclusion of one type of personal property subject to taxes, and the excluded personal property is the franchise. As a consequence of the dissemination of the subject Circular to various Assessors and Treasurers all over the country, and pursuant to the directive of BLGF, NGCP has been assessed with real property taxes on its assets used in the transmission business such as lands, buildings and machineries, to include transmission lines and towers, transformers and all other transmission equipment and improvements. As a result of the incorrect interpretation of its franchise, NGCP was forced to pay real property taxes, not only from the time it assumed operation of National Transmission Corporation's (TransCo) transmission assets on 09 January 2009, but in some instances, even the period prior to such assumption. Thus, NGCP was constrained to question such assessments before various local assessment boards, including the courts. THE SUPREME COURT UPHELD NGCP's EXEMPTION FROM PAYMENT OF REAL PROPERTY TAX ON PROPERTIES USED IN CONNECTION WITH ITS FRANCHISE, RA 9511 Please be informed that in the recent case of NGCP vs. Ofelia M. Oliva, in her official capacity as City Treasurer of Cebu , 3 the Honorable Supreme Court took the opportunity to interpret Section 9 of RA No. 9511, the provision upon which NGCP anchors its claim for exemption from payment of real property tax. Speaking through Honorable Justice Carpio, the Supreme Court ruled as follows: "NGCP's tax provisions in RA 9511 contain an "in lieu of all taxes" clause. We reproduce Section 9 of RA No. 9511, the tax provisions of NGCP's franchise below: "SEC. 9. Tax Provisions. In consideration of the franchise and rights granted, the Grantee, its successors or assigns, shall pay a franchise tax equivalent to three percent (3%) of all gross receipts derived by the Grantee from its operation under this franchise. Said tax shall be in lieu of income tax and any and all taxes, duties, fees and charges of any kind, nature or description levied, established or collected by any authority whatsoever, local or national, on its franchise, rights, privileges, receipts, revenues and profits, and on properties used in connection with its franchise, from which taxes, duties and charges, the Grantee is hereby expressly exempted: Provided, That 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 corporations are now or hereby may be required by law to pay: Provided, further, That payment by Grantee of the concession fees due to PSALM under the concession agreement shall not be subject to income tax and value-added tax (VAT)." Back in 2003, this ponente discussed the "in lieu of all taxes" clause in a separate opinion in PLDT v. City of Davao. The Court struck down PLDT's argument that the "in lieu of all taxes" clause in Smart's franchise exempts PLDT from the payment of the local franchise tax imposed by the City of Davao. At first glance, it may seem that the "in lieu of all taxes" clause in Smart's franchise is similarly worded to that of NGCP. Smart's tax provisions in Section 9 of Republic Act No. 7294 read as follows: Tax Provisions. 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 three percent (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. 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. Under Republic Act No. 7294, Smart was liable to pay the following taxes: (1) the same taxes on real estate, buildings, and personal property exclusive of the franchise, as other persons or corporations are required by law to pay; (2) a franchise tax, which shall be in lieu of taxes on franchise or earnings; and (3) income taxes under the National Internal Revenue Code. Part of the discussion in the separate opinion went as follows: Tax exemptions must be clear and unequivocal. A taxpayer claiming a 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. Tax exemptions cannot arise by mere implication, much less by an implied re-enactment of a repealed tax exemption clause. x x x . xxx xxx xxx Smart's franchise states that the 3 percent "franchise tax" shall be in lieu of all taxes. Clearly, it is the franchise tax that shall be in lieu of all taxes referred to in Section 9, and not the VAT or any other tax. Following the rule on strict interpretation of tax exemptions, the in lieu of all taxes clause cannot apply when what is paid is a tax other than the franchise tax. Since the franchise tax on telecommunications companies has been abolished, the in lieu of all taxes clause has now become functus officio, rendered inoperative for lack of a franchise tax. Revenue Memorandum Circular No. 5-96 issued by the Commissioner of Internal Revenue stating that the VAT shall be in lieu of all taxes since it merely replaced the franchise tax is void for lack of a legal basis. x x x, [T]he in lieu of all taxes clause in Smarts 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 Smarts franchise states that the grantee shall continue to be liable for income taxes payable under Title II of the 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. If Congress intended the in lieu of all taxes clause in Smarts franchise to also apply to local taxes, Congress would have expressly mentioned the exemption from municipal and provincial taxes . Congress could have used the language in Section 9 (b) of Clavecillas old franchise, as follows: x x x in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authority whatsoever, municipal, provincial or national, from which the grantee is hereby expressly exempted, x x x. However, Congress did not expressly exempt Smart from local taxes. Congress used the in lieu of all taxes clause only in reference to national internal revenue taxes. The only interpretation, under the rule on strict construction of tax exemptions, is that the in lieu of all taxes clause in Smarts franchise refers only to national and not to local taxes . PLDT cites Philippine Railway Co. v. Nolting to support its claim that the in lieu of all taxes clause includes exemption from local taxes. However, in Philippine Railway the franchise of the railway company expressly exempted it from municipal and provincial taxes, as follows: 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. If anything, Philippine Railway shows the need to avoid ambiguity by specifying the taxing authority municipal, provincial or national from whose jurisdiction the taxing power is withheld to create the tax exemption . This is not the case in Smarts franchise, where the in lieu of all taxes clause refers only to national internal revenue taxes." We take note of the pronouncements made in the separate opinion, and apply them to the present set of facts. First. Tax exemptions must be clear and unequivocal, and must be directly stated in a specific legal provision. In the present case, Section 9 of RA 9511 provided for NGCP's tax liabilities and exemptions. Second. The "in lieu of all taxes" clause is strictly limited to the kind of taxes, taxing authority, and object of taxes specified in the law. Section 9 of RA 9511 states that NGCP's payment of franchise tax is in lieu of payment of "income tax and any and all taxes, duties, fees and charges of any kind, nature or description levied, established or collected by any authority whatsoever, local or national , on its franchise, rights, privileges, receipts, revenues and profits, and on properties used in connection with its franchise." Thus, in contrast to Smart's franchise as quoted above, Section 9 of RA 9511 clearly stated that the NGCP's "in lieu of all taxes" clause includes taxes imposed by the local government on properties used in connection with NGCP's franchise . x x x x x x Although laws on real property taxes are prescribed by the Local Government Code, it is imperative to examine the applicable tax provision in NGCP's franchise. Section 9 of RA 9511 provides that NGCP shall pay "a franchise tax equivalent to three percent (3%) of all gross receipt derived by the Grantee from its operation under this franchise." This franchise tax is " in lieu of income tax and any and all taxes , duties, fees and charges of any kind, nature or description levied, established or collected by any authority whatsoever, local or national , on its franchise, rights, privileges, receipts, revenues and profits, and on properties used in connection with its franchise, from which taxes , duties and charges, the Grantee is hereby expressly exempted . It is very clear that NGCP's payment of franchise tax exempts it from payment of real property taxes on properties used in connection with its franchise . However, NGCP's tax exempt status on real property due to the "in lieu of all taxes" clause is qualified: NGCP shall be liable to pay the same tax as other corporations on real estate, buildings and personal property exclusive of their franchise. The phrase "exclusive of this franchise" means that real estate, buildings, and personal property used in the exercise of the franchise are not subject to the same tax as other corporations . The CBAA should determine whether the subject properties are properties used in connection with NGCP's franchise. If the subject properties are used in connection with NGCP's franchise, the NGCP is exempt from paying real property taxes on the subject properties . If the subject properties are not used in connection with NGCP's franchise, then the assessment level should be based on actual use, in accordance with Section 218(a-c) of the Local Government Code." (Emphasis and underscoring supplied) The aforesaid decision of the Supreme Court was promulgated on 10 August 2016, and already became final and executory as well as recorded in the Book of Entries of Judgment on 26 September 2016. A copy of the Decision and Entry of Judgment are attached for your ready reference. Thus, with the above decision of the Supreme Court categorically interpreting Section 9, RA No. 9511, NGCP franchise, NGCP respectfully request the BLGF to withdraw or modify Memorandum Circular No. 48-2012 dated 22 June 2012 and issue a new one declaring and informing all assessors and treasurers throughout the country that NGCP is exempt from payment of real property on properties used in connection with its franchise and for them to desist from issuing new assessment on such properties and to withdraw previously issued assessments. We hope that this request will merit your due consideration and favorable action. Sincerely, (SGD.) LUIS MANUEL U. BUGAYONG General Counsel ANNEX A BLGF Memorandum Circular No. 048-12 June 22, 2012 Republic of the Philippines Supreme Court Manila SECOND DIVISION G.R. No. 213157 NATIONAL GRID CORPORATION OF THE PHILIPPINES , Petitioner, - versus - OFELIA M. OLIVA, in her official capacity as the CITY TREASURER OF CEBU CITY , Respondent. G.R. No. 213558 OFELIA M. OLIVA, in her official capacity as the CITY TREASURER OF CEBU CITY , Petitioner, - versus - NATIONAL GRID CORPORATION OF THE PHILIPPINES , Respondent. August 16, 2016 NOTICE OF JUDGMENT Sir/Madam: Please take notice that on August 10, 2016 a Decision, copy attached herewith, was rendered by the Supreme Court in the above-entitled case, the original of which was received by this Office on August 16, 2016 at 9:45 a.m. Very truly yours, (SGD.) MA. LOURDES C. PERFECTO Division Clerk of Court By: (SGD.) TERESITA AQUINO TUAZON Deputy Division Clerk of Court YANGCO LAW OFFICES (reg) Counsel for NGCP Unit 1102-A, West Tower Philippine Stock Exchange Centre Building Exchange Road, Ortigas Center 1605 Pasig City OFFICE OF THE CITY ATTORNEY (reg) Ground Floor, Legislative Building City Hall Compound, M.C. Briones Street 6000 Cebu City CENTRAL BOARD OF ASSESSMENT APPEALS (reg) 7th Floor, EPDC Bldg., BSP Complex Roxas Blvd., Ermita, Manila OFFICE OF THE SOLICITOR GENERAL (reg) 134 Amorsolo Street 1229 Legaspi Village Makati City COURT OF TAX APPEALS (reg) National Government Center Agham Road, 1104 Diliman Quezon City C.T.A. EB No. 849 (CBAA Case No. V-31; LBAA Case No. 6730A-B-C) G.R. Nos. 213157 and 213558 August 10, 2016 Republic of the Philippines Supreme Court Manila SECOND DIVISION G.R. No. 213157 NATIONAL GRID CORPORATION OF THE PHILIPPINES, Petitioner, versus OFELIA M. OLIVA, IN HER OFFICIAL CAPACITY AS THE CITY TREASURER OF CEBU CITY, Respondent. G.R. No. 213558 OFELIA M. OLIVA, IN HER OFFICIAL CAPACITY AS THE CITY TREASURER OF CEBU CITY, Petitioner, versus NATIONAL GRID CORPORATION OF THE PHILIPPINES, Respondent. ENTRY OF JUDGMENT This is to certify that on August 10, 2016 a decision rendered in the above-entitled cases was filed in this Office, the dispositive part of which reads as follows: " WHEREFORE , we GRANT the petitions. The Decision promulgated on 13 November 2013 and the Resolution promulgated on 23 June 2014 by the Court of Tax Appeals En Banc in CTA EB Case No. 849 are SET ASIDE . We REMAND this case to the Central Board of Assessment Appeals which is directed to determine the following: 1. whether the properties covered by RPT-DS-FNOD0909-16-020, RPT-DS-FNOD0909-21-030, and RPT-DS-FNOD0909-21-002 belong to the special classes of real property described in Section 216 of the Local Government Code, and assess the * * Note from the Publisher: Copied verbatim from the official copy. With Missing Portion. 2. whether the properties covered by RPT-DS-FNOD0909-16-020, RPT-DS-FNOD0909-21-030, and RPT-DS-FNOD0909-21-002 are used by the National Grid Corporation of the Philippines in connection with its franchise. If the subject properties are not used in connection with NGCP's franchise, then the CBAA should assess the appropriate amount of real property taxes for the year 2009. The City Treasurer of Cebu City shall refund to the NGCP any payment which it made in excess of the correct amount. SO ORDERED ." and that the same has, on September 26, 2016 become final and executory and is hereby recorded in the Book of Entries of Judgments . Manila, Philippines. Clerk of Court By: (SGD.) PAGWADAN S. FONACIER SC Assistant Chief Judicial Records Office BLGF Opinion October 2, 2014 Footnotes 1. G.R. No. 171586, July 15, 2009. 2. G.R. No. 156040, December 11, 2008. 3. Docketed as G.R. Nos. 213157 and 213558, promulgated on 10 August 2016 which became final and executory on 26 September 2016.