The Supreme Court ruled that SMART Communications, Inc. is not exempt from paying local franchise and business taxes to the City of Iloilo. This decision clarifies that tax exemptions must be explicitly and unequivocally granted by law, and any ambiguity is construed against the claimant. The ruling underscores the principle that exemptions from taxation are strictly interpreted, ensuring that telecommunications companies contribute their fair share to local government revenues unless a clear legal provision states otherwise.

Unpacking Iloilo’s Tax Assessment: Did SMART’s Franchise Shield It from Local Levies?

This case arose from a tax assessment issued by the City of Iloilo against SMART for deficiency local franchise and business taxes from 1997 to 2001, totaling P764,545.29 plus interests and surcharges. SMART protested, claiming exemption under Section 9 of its legislative franchise (R.A. No. 7294) and Section 23 of the Public Telecommunications Policy Act (R.A. No. 7925). The central legal question was whether these provisions provided a clear and unequivocal exemption from local taxes, especially considering the Local Government Code’s (LGC) provisions on local taxation and the withdrawal of tax exemptions.

The legal framework governing tax exemptions in the Philippines is rooted in the principle that taxation is inherent to the State. This means that anyone claiming an exemption from taxes bears the burden of proving that the law clearly and explicitly grants such exemption. As the Supreme Court emphasized, “he who claims an exemption from his share of the common burden of taxation must justify his claim by showing that the Legislature intended to exempt him by words too plain to be beyond doubt or mistake.” This principle ensures that tax exemptions are not lightly granted and are strictly construed against the claimant.

SMART primarily relied on Section 9 of its franchise, which states:

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.

The City of Iloilo argued that this provision was not explicit enough to override the LGC’s grant of taxing power to local government units. Moreover, Section 193 of the LGC withdraws tax exemptions previously enjoyed by all persons, whether natural or juridical, unless otherwise provided in the Code. The Supreme Court addressed the applicability of Section 193, clarifying that while it withdrew existing tax exemptions upon the LGC’s effectivity, it did not affect exemptions granted after the LGC came into force. SMART’s franchise was granted after the LGC’s effectivity, so Section 193 did not automatically negate its tax provisions.

However, the Court found that Section 9 of SMART’s franchise lacked the unequivocal language required for a valid tax exemption. The phrase “in lieu of all taxes” was deemed ambiguous, as it was unclear whether it covered both national and local taxes. Citing jurisprudence, the Court reiterated that any uncertainty in a tax exemption clause must be construed strictly against the claimant. Furthermore, the Court highlighted that the franchise tax mentioned in Section 9 had been effectively abolished by the Expanded Value-Added Tax Law (E-VAT Law), which imposed a value-added tax on telecommunications companies. This rendered the “in lieu of all taxes” clause functus officio, or without effect, due to the absence of a franchise tax.

SMART also invoked Section 23 of the Public Telecommunications Policy Act, which provides for “equality of treatment” in the telecommunications industry:

SECTION 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 franchise 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 service authorized by the franchise.

SMART argued that any tax exemptions granted to telecommunications companies after its franchise should automatically extend to it under this provision. However, the Court rejected this argument, clarifying that the term “exemption” in Section 23 refers to exemptions from regulatory or reporting requirements, not tax exemptions. The intent of the Public Telecommunications Policy Act was to promote deregulation and level the playing field, not to grant blanket tax exemptions to all telecommunications entities. Therefore, SMART’s reliance on Section 23 to claim tax exemption was also deemed unfounded.

Since SMART could not validly claim tax exemption, the Court ruled that the City of Iloilo could impose and collect the assessed local franchise and business taxes. The Court also addressed the issue of surcharges and interests on the unpaid taxes. While good faith reliance on previous interpretations by government agencies can justify the deletion of surcharges and interests, the Court found that SMART’s reliance on a letter-opinion from the Bureau of Local Government and Finance (BLGF) was misplaced. The Court emphasized that the BLGF’s interpretation of local tax laws is not authoritative, unlike the Commissioner of Internal Revenue’s interpretation of national tax laws.

FAQs

What was the key issue in this case?	The central issue was whether SMART Communications, Inc. was exempt from paying local franchise and business taxes to the City of Iloilo based on its legislative franchise and the Public Telecommunications Policy Act.
What did the Supreme Court rule?	The Supreme Court ruled that SMART was not exempt from paying local franchise and business taxes, reversing the lower court’s decision. The Court found that the claimed tax exemptions were not explicitly and unequivocally granted by law.
What is the significance of the “in lieu of all taxes” clause?	The “in lieu of all taxes” clause in SMART’s franchise was interpreted narrowly, and the Court found it did not clearly encompass exemption from local taxes. Additionally, the franchise tax it referred to was later abolished, rendering the clause ineffective.
How did the Local Government Code (LGC) affect this case?	While the LGC generally withdrew existing tax exemptions, the Court clarified that this withdrawal did not apply to exemptions granted after the LGC’s enactment, such as SMART’s franchise.
What was SMART’s argument based on the Public Telecommunications Policy Act?	SMART argued that the “equality of treatment” provision in the Public Telecommunications Policy Act extended tax exemptions granted to other telecommunications companies to it.
Why did the Court reject SMART’s argument regarding the Public Telecommunications Policy Act?	The Court clarified that the term “exemption” in the Public Telecommunications Policy Act referred to regulatory exemptions, not tax exemptions, and that the law’s intent was not to grant blanket tax exemptions.
Did SMART have to pay surcharges and interests on the unpaid taxes?	Yes, the Court ruled that SMART had to pay surcharges and interests because its reliance on a Bureau of Local Government and Finance (BLGF) opinion was misplaced, as the BLGF’s interpretations are not authoritative.
What is the key principle regarding tax exemptions established in this case?	The key principle is that tax exemptions must be explicitly and unequivocally granted by law, and any ambiguity is construed against the claimant. The burden of proving the exemption lies with the party claiming it.

This case serves as a crucial reminder that tax exemptions are not lightly inferred and must be based on clear and unequivocal legal provisions. The ruling underscores the importance of telecommunications companies understanding their tax obligations and contributing their fair share to local government revenues.

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: THE CITY OF ILOILO vs. SMART COMMUNICATIONS, INC., G.R. No. 167260, February 27, 2009