Tuesday, February 21, 2012

City of Iloilo vs. SMART Communications Inc., [G.R. No. 167260]

Facts: SMART received a letter of assessment dated February 12, 2002 from petitioner requiring it to pay deficiency local franchise and business taxes (in the amount of P764,545.29, plus interests and surcharges) which it incurred for the years 1997 to 2001. SMART protested the assessment by sending a letter dated February 15, 2002 to the City Treasurer. It claimed exemption from payment of local franchise and business taxes based on Section 9 of its legislative franchise under Republic Act (R.A.) No. 7294 (SMART’s franchise). Under SMART’s franchise, it was required to pay a franchise tax equivalent to 3% of all gross receipts, which amount shall be in lieu of all taxes. SMART contends that the “in lieu of all taxes” clause covers local franchise and business taxes. SMART similarly invoked R.A. No. 7925 or the Public Telecommunications Policy Act (Public Telecoms Act) whose Section 23 declares that any existing privilege, incentive, advantage, or exemption granted under existing franchises shall ipso facto become part of previously granted-telecommunications franchise. SMART contends that by virtue of Section 23, tax exemptions granted by the legislature to other holders of telecommunications franchise may be extended to and availed of by SMART. Petitioner denied SMART’s protest, citing the failure of SMART to comply with Section 252 of R.A. No. 7160 or the Local Government Code (LGC) before filing the protest against the assessment. Section 252 of the LGC requires payment of the tax before any protest against the tax assessment can be made. SMART objected to the petitioner’s denial of its protest by instituting a case against petitioner before the RTC of Iloilo City. The trial court ruled in favor of SMART and declared the telecommunications firm exempt from the payment of local franchise and business taxes; it agreed with SMART’s claim of exemption under Section 9 of its franchise and Section 23 of the Public Telecoms Act.

Issue: Whether SMART is exempt from the payment of local franchise and business taxes. 

Held: SMART’s claim for exemption under its franchise is not equivocal enough to prevail over the specific grant of power to local government units to exact taxes from businesses operating within its territorial jurisdiction under Section 137 in relation to Section 151 of the LGC. More importantly, it claimed that exemptions from taxation have already been removed by Section 193 of the LGC: 

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 No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code. 

The BLGF opined that SMART should be considered exempt from the franchise tax that the local government may impose under Section 137 of the LGC. SMART, relying on the letter-opinion of the BLGF, invoked the same in the administrative protest it filed against petitioner on February 15, 2002, as well as in the petition for prohibition that it filed before the RTC of Iloilo on April 30, 2002. However, in the 2001 case of PLDT v. City of Davao, we declared that we do not find BLGF’s interpretation of local tax laws to be authoritative and persuasive. The BLGF’s function is merely to provide consultative services and technical assistance to the local governments and the general public on local taxation, real property assessment, and other related matters. Unlike the Commissioner of Internal Revenue who has been given the express power to interpret the Tax Code and other national tax laws, no such power is given to the BLGF. SMART’s dependence on BLGF’s interpretation was thus misplaced.

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