The Supreme Court ruled that Radio Communications of the Philippines, Inc. (RCPI) is liable for real property tax on its radio station building, machinery shed, and relay station tower, despite its franchise containing an “in lieu of all taxes” clause. The court clarified that while RCPI’s franchise exempted it from certain taxes, it did not exempt it from real estate taxes on properties like buildings and towers. This decision underscores that tax exemptions are strictly construed against the taxpayer, ensuring that telecommunications companies contribute their fair share in real property taxes.

Towering Taxes: When Franchise Exemptions Don’t Reach Real Property

In this case, the central issue revolves around whether RCPI, a telecommunications company, is exempt from paying real property taxes on its radio station building, machinery shed, and relay station tower located in Tupi, South Cotabato. The respondents, the Provincial Assessor and Treasurer of South Cotabato and the Municipal Assessor and Treasurer of Tupi, assessed RCPI for real property taxes from 1981 to 1985. RCPI contested this assessment, arguing that its franchise, granted under Republic Act No. 2036 and amended by Republic Act No. 4054, contained an “in lieu of all taxes” clause, which should exempt it from paying any taxes other than the franchise tax. This clause, RCPI contended, effectively replaced all other forms of taxation, including real property tax.

The legal framework for resolving this issue lies primarily within the interpretation of Section 14 of RA 2036, as amended by RA 4054. This section outlines the tax obligations and exemptions granted to RCPI under its franchise. The relevant portion of this section states:

“Sec. 14. In consideration of the franchise and rights hereby granted and any provision of law to the contrary notwithstanding, the grantee shall pay the same taxes as are now or may hereafter be required by law from other individuals, copartnerships, private, public or quasi-public associations, corporations or joint stock companies, on real estate, buildings and other personal property except radio equipment, machinery and spare parts needed in connection with the business of the grantee, which shall be exempt from customs duties, tariffs and other taxes, as well as those properties declared exempt in this section. In consideration of the franchise, a tax equal to one and one-half per centum of all gross receipts from the business transacted under this franchise by the grantee shall be paid to the Treasurer of the Philippines each year, within ten days after the audit and approval of the accounts as prescribed in this Act. Said tax shall be in lieu of any and all taxes of any kind, nature or description levied, established or collected by any authority whatsoever, municipal, provincial or national, from which taxes the grantee is hereby expressly exempted.”

RCPI argued that the “in lieu of all taxes” provision should be interpreted broadly to exempt it from all taxes, including real property taxes. However, the local and central boards of assessment appeals, as well as the Court of Appeals, did not fully agree with RCPI’s interpretation. The initial assessments from the local authorities detailed the specific properties subject to the tax:

1. Tax Declaration No. 7639	–	Radio station building
2. Tax Declaration No. 7640	–	Machinery shed
3. Tax Declaration No. 7641	–	Radio relay station tower and accessories (100 feet high)
4. Tax Declaration No. 7642	–	Two (2) units machinery [lister generating set]

The Supreme Court, in its analysis, addressed RCPI’s arguments and the conflicting interpretations of the franchise agreement. The Court emphasized that the initial part of Section 14 of RA 2036 explicitly states that RCPI shall pay the same taxes on real estate and buildings as other entities. This provision directly contradicts RCPI’s claim of complete exemption based on the “in lieu of all taxes” clause. The Court resolved this conflict by stating that the real estate tax is an exception to the “in lieu of all taxes” clause. To emphasize its point, the Supreme Court quoted directly from the franchise agreement, highlighting that the explicit language of the law required RCPI to pay taxes on real estate and buildings.

Furthermore, the Court noted that subsequent legislative changes, such as the Local Government Code of 1991, withdrew many existing tax exemptions, including RCPI’s, with respect to local taxes like real property tax. The Court also highlighted that Republic Act No. 7716 abolished the franchise tax on telecommunications companies and imposed a value-added tax instead. The Supreme Court referenced the concurring opinion of Justice Antonio T. Carpio in PLDT v. City of Davao to illustrate the modern legislative policy on the “in lieu of all taxes” clause:

“The existing legislative policy is clearly against the revival of the “in lieu of all taxes” clause in franchises of telecommunications companies. After the VAT on telecommunications companies took effect on January 1, 1996, Congress never again included the “in lieu of all taxes” clause in any telecommunications franchise it subsequently approved…”

In considering RCPI’s invocation of the equality of treatment clause under Section 23 of Republic Act No. 7925, the Court found that the franchises of other telecommunications companies like Smart, Islacom, and TeleTech also explicitly required the payment of real estate taxes. This further reinforced the Court’s decision that RCPI should not be an exception. The Court emphasized that tax exemptions are strictly construed against the taxpayer, and RCPI had not sufficiently justified its claim for exemption.

The Court also addressed RCPI’s argument that the tax declarations and assessments were void due to the non-inclusion of depreciation allowance. It clarified that under the Real Property Tax Code, depreciation allowance applies only to machinery and not to real property. The Court, therefore, found no basis to invalidate the assessments on this ground. Therefore, the Supreme Court denied RCPI’s petition and affirmed the decision of the Court of Appeals, holding RCPI liable for real property taxes on its radio station building, machinery shed, and relay station tower. This ruling underscores the principle that tax exemptions must be clearly and unequivocally granted, and that the “in lieu of all taxes” clause does not automatically exempt entities from real property taxes.

FAQs

What was the key issue in this case?	The key issue was whether RCPI’s franchise agreement, containing an “in lieu of all taxes” clause, exempted it from paying real property taxes on its buildings and towers. The court had to interpret the scope and limitations of this exemption clause.
What properties were being taxed in this case?	The properties being taxed were RCPI’s radio station building, machinery shed, and radio relay station tower located in Tupi, South Cotabato. These were assessed as real properties subject to real property tax.
What did RCPI argue in its defense?	RCPI argued that the “in lieu of all taxes” clause in its franchise exempted it from all taxes, including real property taxes. They claimed this clause replaced all other tax obligations.
What was the Court’s ruling on the “in lieu of all taxes” clause?	The Court ruled that the “in lieu of all taxes” clause did not exempt RCPI from real property taxes. It clarified that the franchise agreement explicitly stated RCPI was liable for taxes on real estate and buildings.
Did subsequent laws affect RCPI’s tax exemption?	Yes, the Local Government Code of 1991 withdrew many existing tax exemptions, including RCPI’s, for local taxes like real property tax. This further supported the Court’s decision.
What is the significance of the equality of treatment clause?	The equality of treatment clause ensures that similarly situated telecommunications companies are treated equally under the law. The Court noted that other companies also paid real estate taxes.
Why was depreciation allowance not considered in the assessment?	Depreciation allowance, under the Real Property Tax Code, applies only to machinery, not to real property like buildings and towers. Therefore, it was not a factor in the real property tax assessment.
What is the current legislative policy on tax exemptions for telecommunications companies?	The current policy, as highlighted by the Court, is against granting broad tax exemptions to telecommunications companies. Most new franchises explicitly state the franchisee is subject to all taxes under the National Internal Revenue Code.

This case serves as a reminder that tax exemptions are not granted lightly and are interpreted strictly against the claimant. Telecommunications companies, like all other businesses, must comply with their tax obligations unless a clear and specific exemption is provided by law. The decision highlights the importance of understanding the scope and limitations of franchise agreements and the impact of subsequent legislative changes on tax liabilities.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: RCPI vs. Provincial Assesor, G.R. No. 144486, April 13, 2005