The Supreme Court has ruled that a broadcasting company’s franchise, which included an “in lieu of all taxes” provision, did not automatically exempt it from paying local franchise taxes. This decision emphasizes that tax exemptions must be explicitly stated in the law and interpreted narrowly against the taxpayer. For businesses operating under franchise agreements, this means carefully examining the specific wording of their franchise to determine if it offers genuine protection against local taxes. Additionally, it shows the relationship between the national government and local governments in taxation matters.

ABS-CBN vs. Quezon City: Is “In Lieu Of All Taxes” an Empty Promise?

This case revolves around a dispute between ABS-CBN Broadcasting Corporation and Quezon City over local franchise taxes. ABS-CBN claimed that its legislative franchise, Republic Act (R.A.) No. 7966, which stated that its franchise tax would be “in lieu of all taxes,” exempted it from paying local franchise taxes imposed by Quezon City. The City Treasurer of Quezon City insisted that it had the authority to collect taxes, given the local government’s powers and the national constitution. The core legal question was whether the “in lieu of all taxes” provision in ABS-CBN’s franchise indeed shielded the corporation from local franchise taxes, considering that tax exemptions are generally construed strictly against the claimant.

The power to tax is inherent in the State, but the Constitution allows local governments to exercise this power, subject to guidelines and limitations set by Congress. In this case, Quezon City’s power to impose a franchise tax stemmed from the Local Government Code (LGC), which authorizes cities to levy taxes on businesses operating within their jurisdiction. The LGC grants considerable autonomy to local governments, including fiscal independence, aiming to make them self-reliant.

At the heart of the matter was Section 8 of R.A. No. 7966, ABS-CBN’s franchise, which stipulated that the company would pay a franchise tax equivalent to three percent of all gross receipts, “and the said percentage tax shall be in lieu of all taxes on this franchise or earnings thereof.” The interpretation of this phrase was crucial. ABS-CBN argued that this provision exempted it from all other taxes, including local franchise taxes, while Quezon City maintained that it only pertained to national taxes. Tax exemptions are not favored in law, so the Supreme Court has consistently held that such claims must be based on explicit language, not mere implications.

Building on this principle, the Supreme Court emphasized the principle of strictissimi juris. This means that statutes granting tax exemptions are interpreted very strictly against the taxpayer and liberally in favor of the taxing authority. Any ambiguity in the exemption clause is resolved against the party claiming the exemption. In ABS-CBN’s case, the Court found that the “in lieu of all taxes” provision was vague. It did not specify which taxes were covered by the exemption, whether local or national. Furthermore, the legislative intent behind the exemption was not clearly expressed. Consequently, the Court held that ABS-CBN failed to demonstrate, with sufficient clarity, its entitlement to exemption from local franchise taxes.

The Court contrasted ABS-CBN’s situation with previous cases where similar clauses were explicitly stated to include exemption from municipal and provincial taxes. For instance, the franchises of Carcar Electric & Ice Plant and Manila Railroad explicitly exempted them from municipal and provincial taxes. Because ABS-CBN’s franchise lacked such specificity, its claim for exemption could not stand. Also, it is crucial to note that the Supreme Court acknowledged the power of Congress to grant tax exemptions, but also emphasized the importance of interpreting such exemptions narrowly and requiring clear, unambiguous language to support them. Therefore, businesses must carefully scrutinize their franchise agreements and ensure that any claimed exemptions are expressly stated.

Additionally, since the franchise tax on broadcasting companies with yearly gross receipts exceeding Ten Million Pesos has been abolished, the “in lieu of all taxes” clause has now become functus officio, meaning it’s rendered inoperative. Thus, ABS-CBN’s claim for exemption was doubly challenged. Not only was the exemption ambiguous to begin with, but also, due to changes in tax law, the company became liable for VAT rather than franchise tax. The court concluded that taxation is the rule, and exemption is the exception.

FAQs

What was the key issue in this case?	The central issue was whether the “in lieu of all taxes” provision in ABS-CBN’s franchise exempted it from paying local franchise taxes imposed by Quezon City. The court examined the scope and clarity of the tax exemption claim.
What does “strictissimi juris” mean in the context of tax exemptions?	“Strictissimi juris” means that tax exemption laws must be interpreted very narrowly against the party claiming the exemption. Any ambiguity is resolved in favor of the taxing authority.
What is the significance of the Local Government Code (LGC) in this case?	The LGC grants local government units the power to levy taxes and generate revenue, promoting fiscal autonomy. However, this power is subject to limitations and guidelines set by Congress.
Did the Supreme Court deny that Congress has the power to grant tax exemptions?	No, the Supreme Court affirmed that Congress has the power to grant tax exemptions, but it emphasized that such exemptions must be clearly and explicitly stated in the law. Ambiguous language will not suffice.
How did the Court distinguish this case from previous cases involving similar tax exemption clauses?	The Court distinguished this case by noting that in previous cases, the tax exemption clauses explicitly mentioned exemptions from municipal and provincial taxes. ABS-CBN’s franchise lacked this specificity.
What is meant by functus officio?	The term functus officio means “having performed his office.” As applied in this case, the “in lieu of all taxes” clause was deemed rendered inoperative after subsequent tax laws shifted the basis of ABS-CBN’s taxes to VAT instead of franchise tax.
What is the difference between Value-Added Tax (VAT) and franchise tax?	VAT is a consumption tax imposed on the value added to goods and services at each stage of production and distribution, collected from any person or entity who sells or renders services in the course of trade or business; a franchise tax is directly imposed on franchise holders.
What is the key takeaway for businesses with franchise agreements after this ruling?	Businesses should carefully review the tax provisions in their franchise agreements to determine the extent of any tax exemptions. If the language is ambiguous, they should seek legal clarification.
How has the Philippine tax law changed that affected the ABS-CBN Tax case?	The Philippine Tax Law shifted with radio and/or broadcasting companies having yearly gross receipts exceeding P10,000,000 being made subject to VAT. With this the “in lieu of all taxes” clause now becoming functus officio.

The ABS-CBN case serves as a reminder that tax exemptions are privileges, not rights, and must be grounded in clear and unequivocal legal provisions. For businesses, this means understanding the nuances of tax law and securing precise language in their franchise agreements to avoid costly disputes with local governments. With its final pronouncement, the Supreme Court underscored the supremacy of national taxation policies over ambiguous claims of local tax exemptions and with that ended the matter.

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: QUEZON CITY AND THE CITY TREASURER OF QUEZON CITY VS. ABS-CBN BROADCASTING CORPORATION, G.R. No. 166408, October 06, 2008