Bureau of Local Government Finance Opinion

May 15, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully returned to the Provincial Treasurer, Province of Bukidnon, her letter dated April 7, 2015 relative to the Franchise Tax Bill No. 14-02 dated June 24, 2014 of said province amounting to P660,417.28 CY 2014, for the bulk water production venture of Rio Verde Consortium, Inc. (Rio Verde for brevity) at the Municipality of Baungon, Bukidnon which was denied payment by Rio Verde for reason that they are exempt from paying franchise. It appears that Rio Verde was given a tax holiday for four (4) years from years 2007-2010 by the Board of Investments. In 2012-2013, Rio Verde paid franchise taxes to the province amounting to P239,672.55 and P461,429.22, respectively. As additional information, Rio Verde is supplying the bulk water to Cagayan de Oro Water District (CDOWD) and being sourced out from the municipality of Baungon, Bukidnon. Similarly, CDOWD distributes water to the residents of said City. AaCTcI In behalf of its client, Gambe Law and Realty, cited the following to support the exception from the imposition of franchise tax upon Rio Verde: 1. Letter (j) Section 3 of Article III DEFINITION OF TERMS AND RULES OF CONSTRUCTION of Provincial Ordinance 92-03 clearly defines what a Franchise as follows: "Franchise" is a right or privilege, affected with public interest which is conferred upon private persons or corporations, under such terms and conditions as the government and its political subdivisions may impose in the interest of public welfare, security and safety." 2. In the case of JG Summit Holdings, Inc. vs. Court of Appeals , G.R. No. 124293 the Supreme Court had occasion to shed light on the meaning of the term "public utility" as a: "business or service engaged in regularly supplying the public with some commodity or service of public consequence such as electricity, gas, water, transportation, telephone or telegraph service. As it name indicates, the term public utility implies public use and service to the public. The principal determinative characteristic of a public utility is that of service to, or readiness to serve, an indefinite public or portion of the public as which has a legal right to demand and receive its services or commodities." 3. The Department of Justice Opinion No. 80, Series of 2004 dated August 27, 2004 also clarified that "a private business operated under private contracts with selected customers and not devoted to public use cannot, by legislative fiat or by order of a public service commission, be declared a public utility." EcTCAD 4. The foregoing authorities are further affirmed by the National Water Resources Board (NWRB) in its Resolution No. 009-0906 dated September 20, 2006, the pertinent portion of which states: ". . . the Board agreed that bulk water suppliers, although not classified as public utilities and therefore not required to secure CPC's . . ." In view of the foregoing, this Bureau finds no merit in disturbing the judicial interpretation made by competent authorities regarding the term "public utility". Accordingly and as clearly defined above, it may be stated that Rio Verde is not a grantee of any franchise thus, cannot be validly classified as public utility as it does not sell directly to consumer or the general public but supply the bulk water to CDOWD. Hence, Rio Verde is not subject to Section 137 of the LGC as implemented under Provincial Ordinance 92-03. However, considering that the 4-year tax holiday of Rio Verde has lapsed in 2010, the company is subject to local business tax (LBT) for providing the bulk water to CDOWD in case of a city or a municipality, as may be provided under its duly-enacted revenue code or tax ordinance. On the other hand, since CDOWD is the one selling water directly to consumers or the general public at large hence, it may be classified as public utility, provided it is issued a franchise for such operation by the proper regulating agency of the government. Be guided accordingly. (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director