The Supreme Court ruled that entities within special economic zones are not automatically exempt from paying business permit fees to local government units, even if they enjoy tax exemptions. Business permit fees are regulatory in nature, stemming from a local government’s police power, rather than being taxes for revenue generation. Therefore, tax-exempt entities cannot claim exemption from these fees, which are necessary for regulatory oversight and public welfare.

Baguio City’s Authority vs. Economic Zone Incentives: Who Regulates Businesses in Camp John Hay?

This case revolves around a dispute between the Bases Conversion and Development Authority (BCDA) and John Hay Management Corporation (JHMC) against the City Government of Baguio. The central question is whether businesses operating within the John Hay Special Economic Zone are exempt from securing business permits and paying corresponding fees to Baguio City. The BCDA and JHMC argued that Republic Act No. 7916, also known as the Special Economic Zone Act of 1995, provides tax exemptions to establishments operating within special economic zones, and Republic Act No. 9400, moreover, categorically granted tax exemptions to the John Hay Special Economic Zone. On the other hand, the Baguio City government argued that business permit fees are regulatory in nature and thus fall under its police power, from which no entity is exempt.

The legal framework governing this case involves an interplay of laws and proclamations. Republic Act No. 7227, or the Bases Conversion and Development Act of 1992, created the BCDA to develop former U.S. military bases. Camp John Hay was one such base, and the John Hay Poro Point Development Corporation, later renamed JHMC, was created as a subsidiary of BCDA to manage it. Proclamation No. 420 designated a portion of Camp John Hay as a special economic zone, granting it the same tax incentives as the Subic Special Economic Zone, created under Section 12 of Republic Act No. 7227.

However, this landscape was altered by the Supreme Court’s decision in John Hay Peoples Alternative Coalition v. Lim, which nullified the portion of Proclamation No. 420 that granted tax exemptions to businesses in the John Hay Special Economic Zone. The Court emphasized that tax exemptions must be explicitly stated in the law. In response, Congress enacted Republic Act No. 9399, providing a one-time tax amnesty, and Republic Act No. 9400, which aimed to clarify and reinforce the tax incentives available to the John Hay Special Economic Zone, aligning them with those provided under Republic Act No. 7916.

The Baguio City government, exercising its authority, issued Administrative Order No. 102, series of 2009, which created the John Hay Special Economic Zone Task Force to implement City Tax Ordinance No. 2000-001. This ordinance required all establishments within Baguio City, including those within the John Hay Special Economic Zone, to secure business permits and pay the corresponding fees. This led to the conflict at the heart of the case, with the BCDA and JHMC arguing that their locators were exempt from such fees due to the special economic zone’s tax incentives.

At the heart of the dispute lies the distinction between taxes and regulatory fees. The Supreme Court has consistently held that taxes are enforced contributions for the purpose of defraying public expenses, while fees are payments for specific services rendered by public officers. In the context of local government, this distinction is crucial because local government units derive their power to tax from the Constitution and the Local Government Code, while their authority to impose fees stems from their police power, which is the power to regulate activities for the promotion of public welfare.

Building on this principle, the Court emphasized that the nomenclature used in a statute is not determinative of whether an exaction is a tax or a fee. Instead, the purpose of the charge is the key factor. If the primary purpose is revenue generation, it is a tax; if it is regulation, it is a fee. Furthermore, the Court highlighted that tax exemptions are construed strictly against the claimant, especially when it comes to local taxes, due to Section 193 of the Local Government Code, which withdraws tax exemption privileges unless otherwise provided.

The Court examined whether the fees required by Baguio City’s ordinance were primarily for revenue generation or for regulation. It noted that the fees were relatively minimal and were intended to defray the expenses of regulatory activities. Furthermore, the Court emphasized that the issuance of business permits is an exercise of police power, aimed at ensuring compliance with laws and ordinances, and promoting the general welfare. Thus, the fees were deemed regulatory in nature, and the tax exemptions granted to establishments in the John Hay Special Economic Zone did not extend to these regulatory fees.

The petitioners also argued that they had an income-sharing arrangement with Baguio City, wherein a portion of their gross income was remitted to the city. They claimed that this arrangement should preclude the city from imposing business taxes. The Court rejected this argument, pointing out that Republic Act No. 7916 mandates that 5% of the gross income of businesses within economic zones be remitted to the national government. Of this, only a small percentage is allocated for the local government unit. The additional financial assistance voluntarily provided by the BCDA to Baguio City did not waive the city’s right to collect regulatory fees.

In conclusion, the Supreme Court upheld the Baguio City government’s authority to require business permits and collect fees from establishments within the John Hay Special Economic Zone. The Court clarified that the tax exemptions granted to these establishments do not extend to regulatory fees imposed under the city’s police power. This decision reinforces the principle that local government units have the power to regulate businesses within their jurisdictions, even within special economic zones, to promote public welfare and ensure compliance with local laws.

FAQs

What was the key issue in this case?	The central issue was whether businesses within the John Hay Special Economic Zone are exempt from paying business permit fees to the City Government of Baguio. The case hinged on the distinction between taxes and regulatory fees.
Are businesses in economic zones automatically exempt from local taxes?	No, the Supreme Court clarified that tax exemptions typically apply only to taxes levied for revenue generation, not to regulatory fees imposed under a local government’s police power. The court emphasized that local government units retain the power to regulate businesses within their jurisdictions, even within special economic zones, to promote public welfare and ensure compliance with local laws.
What is the difference between a tax and a regulatory fee?	A tax is an enforced contribution to defray public expenses, while a regulatory fee is a payment for specific services rendered by public officers or for the regulation of an activity. Taxes are primarily for revenue generation, while fees are for regulation and promotion of public welfare.
What is ‘police power’ in the context of this case?	Police power is the inherent authority of a government to enact laws and regulations that promote public order, health, safety, morals, and the general welfare of society. In this case, it allows Baguio City to regulate businesses through permits, ensuring they comply with local laws and standards.
What did Republic Act No. 9400 change for the John Hay Special Economic Zone?	Republic Act No. 9400 aimed to reinforce the tax incentives available to the John Hay Special Economic Zone, aligning them with those provided under Republic Act No. 7916. However, the act did not exempt businesses from regulatory fees imposed under the local government’s police power.
Does PEZA registration affect the need for a Baguio City business permit?	The court noted that only businesses registered with the Philippine Economic Zone Authority (PEZA) are entitled to the tax and duty exemption privileges under Republic Act No. 7916 and Republic Act No. 9400. Businesses not registered with PEZA are still required to obtain business permits and pay the necessary fees to the Baguio City government.
What was the significance of the John Hay Peoples Alternative Coalition v. Lim case?	This case nullified the portion of Proclamation No. 420 that granted tax exemptions to businesses in the John Hay Special Economic Zone, emphasizing that tax exemptions must be explicitly stated in the law. This ruling prompted Congress to enact Republic Act No. 9400.
Did Baguio City waive its right to collect fees due to its revenue-sharing agreement?	No, the Court clarified that the financial assistance and revenue-sharing agreements between BCDA/JHMC and Baguio City did not constitute a waiver of the city’s right to collect regulatory fees. These were considered voluntary contributions and did not alter the city’s authority to impose regulatory measures.

This case underscores the balance between promoting economic development through special economic zones and preserving the regulatory powers of local government units. While economic zones offer incentives to attract investment, they are not entirely exempt from local oversight necessary for public welfare. Therefore, businesses operating within these zones must comply with both national and local regulations.

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: BASES CONVERSION AND DEVELOPMENT AUTHORITY AND JOHN HAY MANAGEMENT CORPORATION VS. CITY GOVERNMENT OF BAGUIO CITY, G.R. No. 192694, February 22, 2023