Imposition of Tax on an Electric Company

April 23, 2007 DILG LEGAL OPINION NO. 037-07 Vice-Mayor Jovito E. Ellorin Santiago, Ilocos Sur Dear Vice-Mayor Ellorin : This has reference to your earlier letter requesting for this Department's legal opinion on the following queries, which we quoted herein in toto : "1) Although our local revenue code has no specific provision imposing taxes on electric companies, can the LGU impose tax on them by using the provision on "retailers" or "all other similar activities consisting essentially of the sales of services for a fee" instead of enacting a separate tax ordinance?" 2) Regarding the tax recovery adjustment of ISECO, are they correct in saying that only the consumers of this municipality will carry the burden of paying the situs of the tax instead of passing it on to the consumers of the other municipalities and cities of the province?" As stated in your letter, when your municipality started to impose taxes on the Ilocos Sur Electric Cooperative (ISECO), which has its main office in your municipality, said ISECO refused to pay the taxes contending that it is a cooperative, which is exempted by law from paying taxes. Not amenable with such contention of ISECO, the Sangguniang Bayan passed a resolution asking the Cooperative Development Authority (CDA) whether ISECO is registered therein and whether your municipality has the right to impose taxes on ISECO. The CDA replied by saying that ISECO has not registered therein and that your municipality has the right to impose taxes on said electric cooperative. Notwithstanding the reply of CDA, ISECO still refused to pay their taxes by invoking, this time, the absence of any provision in your local revenue code imposing such taxes and that a separate ordinance is still necessary for such imposition. You stated in your letter that the SB heeded with the suggestion of ISECO but during the public hearing of the separate tax, a disagreement arose concerning the situs of tax. Hence, your queries. TIDaCE At the outset, may we invite your attention to the following provisions of the Local Government Code of 1991 (RA 7160): "Section 133. Common limitations on the Taxing Powers of Local Government Units . Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: xxx xxx xxx (n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under RA 6810 and Republic Act Numbered 6938, otherwise known as the Cooperative Code of the Philippines " respectively." "Section 193. Withdrawal of Tax Exemption Privileges . Unless otherwise provided in this Code, tax exemptions or incentives granted to or presently enjoyed by all persons, whether natural or juridical, including government-owned or-controlled corporations, except local water districts, cooperatives duly registered under RA 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code." (Emphasis Supplied) Based on the foregoing, cooperatives, without distinction and thus includes electric cooperatives, shall be exempt from payment of taxes, fees or charges imposed by provinces, cities, municipalities and barangays, provided however, that these cooperatives are duly registered under RA 6938 or the Cooperative Code of the Philippines. In view thereof, we concur with the reply of the CDA that since ISECO was not duly registered under RA 6938, it cannot avail of the exemption provided for under the aforequoted provisions of the LGC of 1991. Since ISECO is not tax exempt, the Municipality of Santiago therefore may impose taxes, fees or charges on said electric cooperative. As a matter of fact, in the case of Philippine Rural Electric Cooperative Association, Inc. vs. DILG (G.R. No. 143076, 10 June 2003), the Supreme Court ruled that the Local Government Code only exempted from taxes electric cooperatives registered under RA 6938 and not electric cooperatives registered under Presidential Decree No. 269. However, before the Municipality of Santiago may impose and collect such taxes, fees or charges on ISECO, necessarily, the same must first be levied under a duly enacted tax ordinance. Coming now to your first query, perhaps your local revenue code has existing provisions imposing taxes on "retailers" and "all other similar activities consisting essentially of the sales of services for a fee" and you are now contemplating of using that provision to cover the imposition and collection of tax on ISECO. It is our considered view that you can use the provision on "all other similar activities consisting essentially of the sales of services for a fee" in order to collect tax on ISECO. This view was drawn from your representation that ISECO provides electric supply to the people in the Municipality of Santiago for a fee. Such being the case, it is clear that ISECO is involved in the sales of services for a fee and thus, may be imposed a tax on business pursuant to Section 143 (h) of the Local Government Code. With regard to your second query, considering that the same is within the technical expertise of the Department of Finance Bureau of Local Government Finance (DOF-BLGF),we deem it proper that you instead refer the matter to said agency. We hope that we have addressed your concern accordingly. Very truly yours, (SGD.) ASEC AUSTERE A. PANADERO OIC-OUSLG Department of Interior and Local Government PROVINCE OF ILOCOS SUR MUNICIPALITY OF SANTIAGO Office of the Sangguniang Bayan June 8, 2006 HON. RONALDO PUNO Secretary Department of the Interior and Local Government A. Francisco Gold Condominium II EDSA cor. Mapagmahal St.,Diliman, Quezon City Sir: We would like to seek legal opinion regarding the LGU's tax claims on Ilocos Sur Electric Cooperative (ISECO).Its main office is located in our municipality. HCEcAa When the LGU started to impose taxes from ISECO, the management refused to pay claiming that the electric company is a cooperative thus exempted from paying taxes. Not contented with the explanation, the SB passed a resolution asking the Cooperative Development Authority (CDA) if ISECO is indeed registered with them and if the LGU has the right to impose taxes from ISECO if it is not registered. The reply we got was that ISECO is not registered with the CDA and the LGU has the right to impose taxes from them. With the CDA's reply, ISECO still refuses to pay their taxes citing that there is no specific provision in our local revenue code regarding the imposition of taxes on electric companies. They suggested that the SB shall enact a separate tax ordinance regarding this. The SB heeded the suggestion. During the public hearing of this separate tax ordinance, a disagreement arose regarding the situs of the tax (Section 150 of RA 7160). Representatives of ISECO argued that if the situs of the tax will be included in the ordinance, they will be forced to pass on to the consumers only of this municipality the total equivalent of the situs of the tax to be collected from the whole province. Please enlighten us on the following: 1. Although our local revenue code has no specific provision imposing taxes on electric companies, can the LGU impose tax on them by using the provision on "retailers" or "all other similar activities consisting essentially of the sales of services for a fee" instead of enacting a separate tax ordinance? 2. Regarding the tax recovery adjustment of ISECO, are they correct in saying that only the consumers of this municipality will carry the burden of paying the situs of the tax instead of passing it on to the consumers of the other municipalities and cities of the province? Thank you and more power. Very Truly Yours, (SGD.) VICE MAYOR JOVITO E. ELLORIN, MD