Republic of the Philippines

SUPREME COURT
Manila

THIRD DIVISION

G.R. No. 155491 July 21, 2009

SMART COMMUNICATIONS, INC., Petitioner,

vs.
THE CITY OF DAVAO, represented herein by its Mayor Hon. RODRIGO DUTERTE, and the
SANGGUNIANG PANLUNSOD OF DAVAO CITY, Respondents.

RESOLUTION

NACHURA, J.:

Before the Court is a Motion for Reconsideration1 filed by Smart Communications, Inc. (Smart) of the
Decision2 of the Court dated September 16, 2008, denying its appeal of the Decision and Order of
the Regional Trial Court (RTC) of Davao City, dated July 19, 2002 and September 26, 2002,
respectively.

Briefly, the factual antecedents are as follows:

On February 18, 2002, Smart filed a special civil action for declaratory relief3 for the ascertainment of
its rights and obligations under the Tax Code of the City of Davao, which imposes a franchise tax on
businesses enjoying a franchise within the territorial jurisdiction of Davao. Smart avers that its
telecenter in Davao City is exempt from payment of franchise tax to the City.

On July 19, 2002, the RTC rendered a Decision denying the petition. Smart filed a motion for
reconsideration, which was denied by the trial court in an Order dated September 26, 2002. Smart
filed an appeal before this Court, but the same was denied in a decision dated September 16, 2008.
Hence, the instant motion for reconsideration raising the following grounds: (1) the "in lieu of all
taxes" clause in Smart’s franchise, Republic Act No. 7294 (RA 7294), covers local taxes; the rule of
strict construction against tax exemptions is not applicable; (2) the "in lieu of all taxes" clause is not
rendered ineffective by the Expanded VAT Law; (3) Section 23 of Republic Act No. 79254 (RA 7925)
includes a tax exemption; and (4) the imposition of a local franchise tax on Smart would violate the
constitutional prohibition against impairment of the obligation of contracts.

Section 9 of RA 7294 and Section 23 of RA 7925 are once again put in issue. Section 9 of Smart’s
legislative franchise contains the contentious "in lieu of all taxes" clause. The Section reads:

Section 9. 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.

xxx5

Section 23 of RA 7925, otherwise known as the most favored treatment clause or equality clause,
contains the word "exemption," viz.:

SEC. 23. Equality of Treatment in the Telecommunications Industry — Any advantage, favor,
privilege, exemption, or immunity granted under existing franchises, or may hereafter be granted,
shall ipso facto become part of previously granted telecommunications franchises and shall be
accorded immediately and unconditionally to the grantees of such franchises: Provided, however,
That the foregoing shall neither apply to nor affect provisions of telecommunications franchises
concerning territory covered by the franchise, the life span of the franchise, or the type of the service
authorized by the franchise.6

A review of the recent decisions of the Court on the matter of exemptions from local franchise tax
and the interpretation of the word "exemption" found in Section 23 of RA 7925 is imperative in order
to resolve this issue once and for all.

In Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan,7 Digitel used as

an argument the "in lieu of all taxes" clauses/provisos found in the legislative franchises of
Globe,8 Smart and Bell,9 vis-à-visSection 23 of RA 7925, in order to claim exemption from the
payment of local franchise tax. Digitel claimed, just like the petitioner in this case, that it was exempt
from the payment of any other taxes except the national franchise and income taxes. Digitel alleged
that Smart was exempted from the payment of local franchise tax.

However, it failed to substantiate its allegation, and, thus, the Court denied Digitel’s claim for
exemption from provincial franchise tax. Cited was the ruling of the Court in PLDT v. City of
Davao,10 wherein the Court, speaking through Mr. Justice Vicente V. Mendoza, held that in
approving Section 23 of RA No. 7925, Congress did not intend it to operate as a blanket tax
exemption to all telecommunications entities. Section 23 cannot be considered as having amended
PLDT’s franchise so as to entitle it to exemption from the imposition of local franchise taxes. The
Court further held that tax exemptions are highly disfavored and that a tax exemption must be
expressed in the statute in clear language that leaves no doubt of the intention of the legislature to
grant such exemption. And, even in the instances when it is granted, the exemption must be
interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.

The Court also clarified the meaning of the word "exemption" in Section 23 of RA 7925: that the word
"exemption" as used in the statute refers or pertains merely to an exemption from regulatory or
reporting requirements of the Department of Transportation and Communication or the National
Transmission Corporation and not to an exemption from the grantee’s tax liability.

In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna,11 PLDT was a
holder of a legislative franchise under Act No. 3436, as amended. On August 24, 1991, the terms
and conditions of its franchise were consolidated under Republic Act No. 7082, Section 12 of which
embodies the so-called "in-lieu-of-all taxes" clause. Under the said Section, PLDT shall pay a
franchise tax equivalent to three percent (3%) of all its gross receipts, which franchise tax shall be "in
lieu of all taxes." The issue that the Court had to resolve was whether PLDT was liable to pay
franchise tax to the Province of Laguna in view of the "in lieu of all taxes" clause in its franchise and
Section 23 of RA 7925. lawph!l

Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts are
resolved in favor of municipal corporations in interpreting statutory provisions on municipal taxing
powers, the Court held that Section 23 of RA 7925 could not be considered as having amended
petitioner's franchise so as to entitle it to exemption from the imposition of local franchise taxes.

In ruling against the claim of PLDT, the Court cited the previous decisions in PLDT v. City of
Davao12 and PLDT v. City of Bacolod,13 in denying the claim for exemption from the payment of local
franchise tax.

In sum, the aforecited jurisprudence suggests that aside from the national franchise tax, the
franchisee is still liable to pay the local franchise tax, unless it is expressly and unequivocally
exempted from the payment thereof under its legislative franchise. The "in lieu of all taxes" clause in
a legislative franchise should categorically state that the exemption applies to both local and national
taxes; otherwise, the exemption claimed should be strictly construed against the taxpayer and
liberally in favor of the taxing authority.

Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the
payment of local franchise tax. It merely replaced the national franchise tax that was previously paid
by telecommunications franchise holders and in its stead imposed a ten percent (10%) VAT in
accordance with Section 108 of the Tax Code. VAT replaced the national franchise tax, but it did not
prohibit nor abolish the imposition of local franchise tax by cities or municipaties.

The power to tax by local government units emanates from Section 5, Article X of the Constitution
which empowers them to create their own sources of revenues and to levy taxes, fees and charges
subject to such guidelines and limitations as the Congress may provide. The imposition of local
franchise tax is not inconsistent with the advent of the VAT, which renders functus officio the
franchise tax paid to the national government. VAT inures to the benefit of the national government,
while a local franchise tax is a revenue of the local government unit.

WHEREFORE, the motion for reconsideration is DENIED, and this denial is final.

SO ORDERED.

ANTONIO EDUARDO B. NACHURA

Associate Justice

WE CONCUR:

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson

MINITA V. CHICO-NAZARIO TERESITA J. LEONARDO-DE CASTRO*

Associate Justice Associate Justice

LUCAS P. BERSAMIN**
Associate Justice

ATTESTATION

I attest that the conclusions in the above Resolution were reached in consultation before the case
was assigned to the writer of the opinion of the Court’s Division.

CONSUELO YNARES-SANTIAGO
Associate Justice
Chairperson, Third Division

CERTIFICATION

Pursuant to Section 13, Article VIII of the Constitution and the Division Chairperson's Attestation, I
certify that the conclusions in the above Resolution had been reached in consultation before the
case was assigned to the writer of the opinion of the Court’s Division.

REYNATO S. PUNO
Chief Justice
Solon assails local tax exemption given to telco
By WENDELL VIGILIA
October 24, 2016

THE House legislative franchise committee in the previous 16th Congress managed to exempt Bell
Telecommunications Philippines (BellTel) from local taxes, a move unknown then to the members of the ways and
means committee chaired by Marikina Rep. Miro Quimbo.

It was Quimbo, who is now deputy speaker, who told reporters about the alleged violation of House rules, which he
said he himself did not know about. He said he learned of the violation only last Wednesday after Smart
Communications, which is in the process of renewing its 25-year legislative franchise, asked for the same privilege
during a hearing of the ways and means panel which is now chaired by Quirino Rep. Dakila Karlo Cua.

The local tax exemption of BellTel, which is owned by San Miguel Corp., breezed through the franchise committee
level and the plenary without Quimbo getting wind of it.

The franchise committee in the 16th Congress was chaired by then Marikina Rep. Marcelino Teodoro.

“It’s a requirement that all measures that contain tax provisions should pass through the (committee) on ways and
means and this (BellTel local tax) did not!” said Quimbo, an ex-officio member of the panel.

Quimbo said the tax privilege is “dubious and with deep legal infirmity; it violated basic procedures of our rules.”

Under House rules, tax incentives can be granted to companies only if approved by the committee on ways and
means.

Smart’s request was made by Ray Espinosa, head of the regulatory affairs of the Philippine Long Distance Telephone
Company (PLDT), the telco giant’s mother company, and fellow Smart executive lawyer Enrico Espanol.

The request for tax incentives reached the Cua panel upon the referral of the franchise panel now chaired by
Palawan Rep. Franz Alvarez.

Marcelino’s panel granted Bell Tel local tax exemption when it granted the telco a franchise on July 27, 2015 under
Republic Act 10900.

Deputy Speaker Raneo Abu of Batangas said the irregularity might have occurred in the plenary when tax incentives
and other provisions pertaining to revenue were inserted as an amendment prior to the franchise’s final approval.

Abu warned that the incentives given to BellTel would adversely affect local government units.

“These (tax) incentives should be uniform for all the telcos,” he said. “The approval of this (BellTel) franchise is highly
irregular.”

It is not yet clear if the Ayala-owned Globe Telecom will ask the House for the same tax privilege.

BellTel was supposed to operate in the country as a partner of the Australian-based Telstra to compete with Smart
and Globe as both companies are peppered with customers’ complaints of bad mobile and data services.

It is owned by SMC headed by Eduardo “Danding” Cojuangco Jr. and chief executive officer Ramon S. Ang while
Smart is owned by Manuel V. Pangilinan.

Sec. 9 of R.A 10900 on Tax Provisions states: “The grantee shall be liable to pay the same taxes on its real estate,
buildings and personal property exclusive of this franchise, except on its antennas, radios, base transceiver stations,
telecommunications and electronic communications equipment, machineries and spare parts needed in connection
with the business from the grantee, as well as the self-supporting, monopole and/or guyed towers, and other similar
structures and facilities on which said antennas, radios, telecommunications and electronic communications
equipment, machineries and spare parts are installed, which shall be exempt from real property taxes, customs
duties, tariffs, and other taxes and fees.”

Section 9 also provides: “In addition thereto, the grantee shall pay value-added tax on all gross receipts of the
business transacted under this franchise in the Philippines, in lieu of any and all taxes of any kind, nature or
description, including, but not limited to, local business taxes, local franchise taxes, tower fees, supervision fees, local
communication taxes levied, established or collected, or may be levied, established or collected, by any city,
municipality, provincial or national authority, from which the grantee is hereby expressly exempted effective from the
date of approval of this Act…”
After Supreme Court ruling on franchise
taxes: City eyeing deal with Smart
Updated August 12, 2009 - 12:00am

0 2 googleplus0 0

CEBU, Philippines - Mayor Tomas R. Osmeña said the city will evaluate whether it will compel Smart
Communications Inc. to pay the correct amount of franchise tax or just allow the telecommunications company
to enter into a compromise agreement.

The Supreme Court has ruled that Smart Communications is not exempted from the payment of local franchise
taxes to the local government units where it operates.

The power to tax by local government units emanates from the Constitution, which empowers them to create
their own sources of revenues and to levy taxes, fees and charges subject to such guidelines and limitations as
the Congress may provide, the Supreme Courts said.

Osmeña said, Smart is not paying franchise taxes to the city, but he said there are ongoing talks for a
compromise agreement between the city and the telecommunications company.

Close ad X
Smart was ordered by a regional trial court in Davao City to pay franchise tax to the city, but it ignored the court
order and instead went to the Supreme Court to question such order.

Smart avers that its telecenter in Davao City is exempt from payment of franchise tax to the city, but the High
Tribunal ruled otherwise.

Freeman ( Article MRec ), pagematch: 1, sectionmatch:

“In sum, the aforecited jurisprudence suggests that aside from the national franchise tax, the franchisee is still
liable to pay the local franchise tax, unless it is expressly and unequivocally exempted from the payment
thereof under its legislative franchise.

“The ‘in lieu of all taxes’ clause in a legislative franchise should categorically state that the exemption applies to
both local and national taxes; otherwise, the exemption claimed should be strictly construed against the
taxpayer and liberally in favor of the taxing authority,” the SC ruled.

Osmeña said “With this development we have to find out where we stand, we want to find out whether to push
through the compromise agreement or not.”

He admitted that he cannot really comment in details of the case yet, because it is a legal issue.

“I represent the city so we should maximize what we could get for the city. If they will let us buy pre-paid cards
at 50 percent discount, fine,” the mayor said.

In the case of Globe Telecom, the latter has entered a compromise agreement with the city and gave P25
million, without admitting that it has the obligation to pay franchise tax to the city. – Rene U.
Borromeo/NLQ (THE FREEMAN)
Supreme Court rules
telecommunications firms not exempt
from franchise tax
By Edu Punay | Updated July 29, 2009 - 12:00am

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MANILA, Philippines - The Supreme Court (SC) has affirmed its earlier ruling declaring that
telecommunications firms are not exempt from payment of franchise tax imposed by local governments.

This, after the third division of the Court junked the motion for reconsideration filed by Smart Communications
Inc. seeking the reversal of the CA decision issued last year.

In a seven-page decision penned by Associate Justice Antonio Eduardo Nachura, the SC dismissed the claim
of Smart that Section 23 of R.A. 7925 (Public Telecommunications Police Act) should have been considered as
having amended its franchise so as to entitle it to an exemption from the imposition of local franchise tax.

The law states that: “Any advantage, favor, privilege, exemption or immunity granted under existing franchises,
or may hereafter be granted, shall ipso facto become part of previously granted telecommunications franchises
and shall be accorded immediately and unconditionally to the grantees of such franchises.”

Close ad X
But the Court explained, citing its ruling in PLDT v. City of Davao, that the word “exemption” in R.A. 7925
covers only the regulatory or reporting requirements of the Department of Transportation and Communication
or the National Transmission Corp. and not to an exemption from the grantee’s tax liability.

The Court further noted that in approving the provision, Congress did not intend to give a blanket tax exemption
to all telecommunication entities.

Business ( Article MRec ), pagematch: 1, sectionmatch: 1

Smart argued that the “in lieu of all taxes” provision in the franchise of its rival Globe Telecom, which exempts it
from payment of local franchise tax, should have been deemed incorporated in its franchise by virtue of Section
23 of R.A. 7925.

But the Court did not give weight to the said argument saying that a franchisee is liable to pay local franchise
tax unless it is expressly exempted from the payment under its legislative franchise.

Unlike Globe Telecom, Inc., the Court noted there is ambiguity in the “in lieu of all taxes” provision in the
legislative franchise of Smart as it failed to categorically state whether it covers both national and local taxes.

As such, the SC said the lower court was correct when it resolved the case against the taxpayer.