Case Digest: MERALCO v. Province of Laguna, G.R. No. 131359, May 5, 1999

Taxation | Constitutional Limitation: Non-impairment of Contract Clause

Facts:

• Certain municipalities in Laguna granted franchise to Manila Electric Company (MERALCO) for supplying electric light, heat, and power within their areas.
• In 1983, MERALCO was also granted a franchise granted by the National Electrification Administration to operate an electric light and power service in Calamba, Laguna.
• In 1991, Republic Act No. 7160, the Local Government Code of 1991, enjoined local government units to create revenue sources and levy taxes.
• Pursuant thereto, Province of Laguna enacted Laguna Provincial Ordinance No. 01-92, imposing a tax on businesses enjoying a franchise, at a rate of 50% of 1% of the gross annual receipts.
• MERALCO paid the franchise tax imposed by the ordinance, amounting to P19,520,628.42, under protest.
• MERALCO cited Presidential Decree No. 551, which mandated a franchise tax of 2% of gross receipts in lieu of other taxes.
• MERALCO filed a formal claim for refund, which was denied by the Laguna Governor based on Republic Act No. 7160.
• MERALCO then filed a complaint for refund with the RTC-Laguna, against the Province of Laguna and the Provincial Treasurer, challenging the validity of the ordinance.
• RTC-Laguna: Dismissed the complaint, upholding the validity of Laguna Provincial Tax Ordinance No. 01-92.

Issue: Whether the imposition of a franchise tax under Section 2.09 of Laguna Provincial Ordinance No. 01-92, insofar as petitioner is concerned, is violative of the non-impairment clause of the Constitution and Section 1 of Presidential Decree No. 551. YES

Held:

The petition lacks merit.

Prefatorily, it might be well to recall that local governments do not have the inherent power to tax 4 except to the extent that such power might be delegated to them either by the basic law or by statute. Presently, under Article X of the 1987 Constitution, a general delegation of that power has been given in favor of local government units. Thus:

Sec. 3. The Congress shall enact a local government code which shall provide for a more responsive and accountable local government structure instituted through a system of decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the different local government units their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and removal, term, salaries, powers and functions, and duties of local officials, and all other matters relating to the organization and operation of the local units.

xxx xxx xxx

Sec. 5. Each local government unit shall have the power to create its own sources of revenues and to levy taxes, fees, and charges subject to such guidelines and limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments.

The 1987 Constitution has a counterpart provision in the 1973 Constitution which did come out with a similar delegation of revenue making powers to local governments.  

Under regime of the 1935 Constitution no similar delegation of tax powers was provided, and local government units instead derived their tax powers under a limited statutory authority. Whereas, then, the delegation of tax powers granted at that time by statute to local governments was confined and defined (outside of which the power was deemed withheld), the present constitutional rule (starting with the 1973 Constitution), however, would broadly confer such tax powers subject only to specific exceptions that the law might prescribe.

Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist although Congress may provide statutory limitations and guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. 

Nevertheless, the fundamental law did not intend the delegation to be absolute and unconditional; the constitutional objective obviously is to ensure that, while the local government units are being strengthened and made more autonomous, the legislature must still see to it that  

1. the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; 
2. each local government unit will have its fair share of available resources;
3. the resources of the national government will not be unduly disturbed; and
4. local taxation will be fair, uniform, and just.

The Local Government Code of 1991 has incorporated and adopted, by and large, the provisions of the now repealed Local Tax Code, which had been in effect since 01 July 1973, promulgated into law by Presidential Decree

No. 2317 pursuant to the then provisions of Section 2, Article XI, of the 1973 Constitution. The 1991 Code explicitly authorizes provincial governments, notwithstanding "any exemption granted by any law or other special law, . . . (to) impose a tax on businesses enjoying a franchise." Section 137 thereof provides:

Sec. 137. Franchise Tax — Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at a rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction. In the case of a newly started business, the tax shall not exceed one-twentieth (1/20) of one percent (1%) of the capital investment. In the succeeding calendar year, regardless of when the business started to operate, the tax shall be based on the gross receipts for the preceding calendar year, or any fraction thereof, as provided herein.  

Indicative of the legislative intent to carry out the Constitutional mandate of vesting broad tax powers to local government units, the Local Government Code has effectively withdrawn under Section 193 thereof, tax exemptions or incentives theretofore enjoyed by certain entities. This law states:

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

The Code, in addition, contains a general repealing clause in its Section 534; thus:

Sec. 534. Repealing Clause. — . . .

(f) All general and special laws, acts, city charters, decrees, executive orders, proclamations and administrative regulations, or part or parts thereof which are inconsistent with any of the provisions of this Code are hereby repealed or modified accordingly. (Underscoring supplied for emphasis) 8

To exemplify, in Mactan Cebu International Airport Authority vs. Marcos,   the Court upheld the withdrawal of the real estate tax exemption previously enjoyed by Mactan Cebu International Airport Authority. The Court ratiocinated:

. . . These policy considerations are consistent with the State policy to ensure autonomy to local governments and the objective of the LGC that they enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant communities and make them effective partners in the attainment of national goals. The power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities if local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people. It may also be relevant to recall that the original reasons for the withdrawal of tax exemption privileges granted to government-owned and controlled corporations and all other units of government were that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarity situated enterprises, and there was a need for these entities to share in the requirements of development, fiscal or otherwise, by paying the taxes and other charges due from them.  

Petitioner in its complaint before the Regional Trial Court cited the ruling of this Court in Province of Misamis Oriental vs. Cagayan Electric Power and Light Company, Inc.;   thus:

In an earlier case, the phrase "shall be in lieu of all taxes and at any time levied, established by, or collected by any authority" found in the franchise of the Visayan Electric Company was held to exempt the company from payment of the 5% tax on corporate franchise provided in Section 259 of the Internal Revenue Code (Visayan Electric Co. vs. David, 49 O.G. [No. 4] 1385)

Similarly, we ruled that the provision: "shall be in lieu of all taxes of every name and nature" in the franchise of the Manila Railroad (Subsection 12, Section 1, Act No. 1510) exempts the Manila Railroad from payment of internal revenue tax for its importations of coal and oil under Act No. 2432 and the Amendatory Acts of the Philippine Legislature (Manila Railroad vs. Rafferty, 40 Phil. 224).

The same phrase found in the franchise of the Philippine Railway Co. (Sec. 13, Act No. 1497) justified the exemption of the Philippine Railway Company from payment of the tax on its corporate franchise under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Philippine Railway Co vs. Collector of Internal Revenue, 91 Phil. 35).

Those magic words, "shall be in lieu of all taxes" also excused the Cotabato Light and Ice Plant Company from the payment of the tax imposed by Ordinance No. 7 of the City of Cotabato (Cotabato Light and Power Co. vs. City of Cotabato, 32 SCRA 231).

So was the exemption upheld in favor of the Carcar Electric and Ice Plant Company when it was required to pay the corporate franchise tax under Section 259 of the Internal Revenue Code, as amended by R.A. No. 39 (Carcar Electric & Ice Plant vs. Collector of Internal Revenue, 53 O.G. [No. 4]. 1068). This Court pointed out that such exemption is part of the inducement for the acceptance of the franchise and the rendition of public service by the grantee. 2

In the recent case of the City Government of San Pablo, etc., et al. vs. Hon. Bienvenido V. Reyes, et al., the Court has held that the phrase in lieu of all taxes "have to give way to the peremptory language of the Local Government Code specifically providing for the withdrawal of such exemptions, privileges," and that "upon the effectivity of the Local Government Code all exemptions except only as provided therein can no longer be invoked by MERALCO to disclaim liability for the local tax." In fine, the Court has viewed its previous rulings as laying stress more on the legislative intent of the amendatory law — whether the tax exemption privilege is to be withdrawn or not — rather than on whether the law can withdraw, without violating the Constitution, the tax exemption or not.

While the Court has, not too infrequently, referred to tax exemptions contained in special franchises as being in the nature of contracts and a part of the inducement for carrying on the franchise, these exemptions, nevertheless, are far from being strictly contractual in nature. Contractual tax exemptions, in the real sense of the term and where the non-impairment clause of the Constitution can rightly be invoked, are those agreed to by the taxing authority in contracts, such as those contained in government bonds or debentures, lawfully entered into by them under enabling laws in which the government, acting in its private capacity, sheds its cloak of authority and waives its governmental immunity. Truly, tax exemptions of this kind may not be revoked without impairing the obligations of contracts. These contractual tax exemptions, however, are not to be confused with tax exemptions granted under franchises. A franchise partakes the nature of a grant which is beyond the purview of the non-impairment clause of the Constitution. Indeed, Article XII, Section 11, of the 1987 Constitution, like its precursor provisions in the 1935 and the 1973 Constitutions, is explicit that no franchise for the operation of a public utility shall be granted except under the condition that such privilege shall be subject to amendment, alteration or repeal by Congress as and when the common good so requires.

WHEREFORE, the instant petition is hereby DISMISSED. No costs.1âwphi1.nêt

SO ORDERED.