Imposition of Local Business Tax by the City Government of Makati to Japanese Contractors Working on ODA Projects

DOJ OPINION NO. 010 , s. 2012 February 20, 2012 Secretary Albert F. del Rosario Department of Foreign Affairs Roxas Boulevard, Pasay City Manila Attention : Ma. Theresa P. Lazaro Assistant Secretary Office of Asian and Pacific Affairs Dear Sec. Del Rosario : This refers to your request for this Department's counterarguments on the additional arguments conveyed by the Makati City Officials to the Embassy of Japan regarding the imposition made by the Government of Makati of local business tax on Japanese Contractors working on Official Development Assistance (ODA) Projects. You state that the Makati City Government has put forward the following arguments and proposals: 1. That Makati would be "collecting the amount due not from the Japanese companies, but directly from the national government;" 2. That Makati City's practice is based on a "precedent" of a Japanese contractor who allegedly agreed to the prescribed tax albeit at a lower rate and that it was necessary for the City "to be consistent"; 3. That the ODA Projects are "between the National Government (NG) and the Japanese Government" and do not cover LGUs, who should be free to levy taxes; DcHSEa 4. That both the NG and the Japanese Government are aware of the existence of a tax liability as borne out by the Exchange of Notes' provisions pertaining to the assumption of all fiscal levies and taxes on Japanese nationals; 5. That LGUs are vested with the power to tax and that tax exemptions are granted only through a law or ordinance enacted by Congress or of the local council. You are also requesting for advice on the legal remedies/courses of action available to the NG to compel the Makati City Government to desist from taxing the Japanese contractors. We cannot agree with the "peculiar" proposal of the Government of the City of Makati of collecting the amount from the NG instead of from the Japanese contractors. As we have discussed in our previous letter, Makati City shall not extend any levy of taxes, fees or charges of any kind to the NG, its agencies and instrumentalities. To do otherwise is in defiance of the law. The law is clear and leaves no room for any statutory construction. Again, as the NG assumes all fiscal levies and taxes imposable on these Japanese nationals, the LGU cannot therefore collect the same from the NG pursuant to the limitations set forth in the LGC. While it may be true that the LGUs were given the power to levy taxes, this does not mean that they are more superior to the NG. The Government of Makati cannot insist that the ODA Projects are "between the National Government (NG) and the Japanese Government" and do not cover LGUs, who should be free to levy taxes. Municipal governments are only agents of the national government. The delegate cannot be superior to the principal or exercise powers higher than those of the latter. Furthermore, Section 5 (b) of the Local Government Code proceeds to assert that "[i]n case of doubt, any tax ordinance or revenue measure shall be construed strictly against the local government unit enacting it, and liberally in favor of the taxpayer." This latter qualification has to be respected as a constitutionally authorized limitation which Congress has seen fit to provide. Evidently, local fiscal autonomy should not necessarily translate into abject deference to the power of local government units to impose taxes. Indeed, the provision is the explicit statutory impediment to the enjoyment of absolute taxing power by local government units, not to mention the reality that such power is a delegated power. 1 In interpretation of statutes, nothing is more basic than the doctrine that when the law is clear, plain and free from ambiguity, it must be given its literal meaning and applied without attempted interpretation. Anent the Government of Makati's insistence of a "precedent",we are of the opinion that the same would not hold water in the case at hand because we are not aware of the facts of the case surrounding the "precedent" that they were citing. In the first place, the Japanese contractor that they were citing may not have been granted a tax exemption as in this case of Japanese contractors who have been explicitly granted the privilege as contained in the Exchange of Notes relating to the ODA Projects. In the fourth and fifth arguments, the Government of Makati pointed out that both the NG and the Japanese Government are aware of the existence of a tax liability as borne out by the Exchange of Notes provisions pertaining to the assumption of all fiscal levies and taxes on Japanese nationals and also questioning the entitlement of these Japanese contractors to tax exemptions, contending that there is no law granting the Japanese contractors the privilege of tax exemption and that the Exchange of Notes, not having been ratified by Congress is not a valid grant of exemption. aEIcHA We also find no merit in this contention. While treaties are required to be ratified by the Senate under the Constitution, less formal types of international agreements may be entered into by the Chief Executive and become binding without the concurrence of the legislative body. 2 The Exchange of Notes comes within the latter category. It is a valid and binding international agreement even without the concurrence of Congress. The privileges of tax exemption granted to the concerned Japanese contractors under the Exchange of Notes should be recognized in any forum as legally binding on Philippine authorities 3 pursuant to the generally accepted principles of international law. Moreover, there should be no conflict between the domestic law on one hand, and customary international law on the other, because the Constitution when formulated, accepted the general principles of international law as part of the law of the land. Every State has the duty to carry out in good faith its obligations arising from treaties and other sources of international law, and it may not invoke provisions in its constitutions or its laws as an excuse for failure to perform its duty. 4 As regards the legal remedies/courses of action available to the NG to compel the Makati City Government to desist from taxing the Japanese contractors, we believe that this is now a case for the Department of the Interior and Local Government (DILG) to resolve as the final arbiter to the issue. And if the same fails, a case may be brought within the jurisdiction of the court to issue affirmative reliefs on the matter. Please be guided accordingly. Very truly yours, (SGD.) LEILA M. DE LIMA Secretary Footnotes 1. Petron Corp. vs. Tobias M. Tiangco, et al., G.R. No. 158881, April 16, 2008. 2. Usaffe Veterans Association, Inc. vs. Treasurer of the Philippines, et al., 105 Phil. 1030. 3. World Health Organization and Dr. Leonce Verstuyft v. Hon. Benjamin Aquino, etc., et al., 48 SCRA 242. 4. Article 13, Declaration of Rights and Duties adopted by the International Law Commission in 1949.