City Government of San Pablo, Laguna vs. Honorable Bienvenido V. Reyes

Sections 137 and 193 of the Local Government Code of 1991 constitute a clear legislative withdrawal of all existing tax exemptions and incentives, including the "in lieu of all taxes" provision in legislative franchises granted to public utilities, thereby authorizing local government units to impose franchise taxes on entities like MERALCO despite the contractual exemption in their charters; the constitutional prohibition against the impairment of contract obligations does not apply because the power to tax and police power are inherent governmental powers that cannot be contracted away, and franchises are expressly subject to amendment, alteration, or repeal by Congress when the public interest so requires.

Prior to the enactment of the Local Government Code of 1991, legislative franchises for public utilities frequently contained provisions granting comprehensive tax exemptions or imposing a single franchise tax "in lieu of all taxes" as an inducement for private investment in public service infrastructure. Act No. 3648 (1929) granted Escudero Electric Service Company (later transferred to MERALCO via Republic Act No. 2340) a franchise to operate in San Pablo City, imposing a 2% tax on gross earnings "in lieu of any and all taxes of any kind nature or description." Presidential Decree No. 551 (1974) similarly imposed a 2% franchise tax on electric utilities "in lieu of all taxes and assessments of whatever nature." The 1991 Local Government Code was enacted pursuant to the constitutional policy of local autonomy to enhance the financial capabilities and self-reliance of local government units by expanding their taxing powers and withdrawing tax exemptions that had resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises.

• Act No. 3648 granted Escudero Electric Service Company a legislative franchise to maintain and operate an electric light and power system in the City of San Pablo and nearby municipalities, providing in Section 10 that the grantee shall pay a tax equal to two percent of gross earnings "in lieu of any and all taxes of any kind nature or description levied, established or collected by any authority whatsoever, municipal, provincial or insular, now or in the future."
• The franchise granted under Act No. 3648 was transferred to Manila Electric Company (MERALCO) under Republic Act No. 2340.
• Presidential Decree No. 551, enacted on September 11, 1974, provides in Section 1 that the franchise tax payable by grantees of franchises to generate, distribute, and sell electric current shall be two percent of their gross receipts "in lieu of all taxes and assessments of whatever nature imposed by any national or local authority."
• Republic Act No. 7160, otherwise known as the Local Government Code of 1991, took effect on January 1, 1992, authorizing provinces and cities to impose a tax on business enjoying a franchise at a rate not exceeding fifty percent of one percent of the gross annual receipts realized within their jurisdiction.
• On October 5, 1992, the Sangguniang Panglungsod of San Pablo City enacted Ordinance No. 56 (Revenue Code of the City of San Pablo), which took effect on October 30, 1992, imposing under Section 2.09, Article D a franchise tax at the rate of fifty percent of one percent of the gross annual receipts within the city.
• Pursuant to Ordinance No. 56, the City Treasurer of San Pablo sent a letter to MERALCO demanding payment of the franchise tax.
• From 1994 to 1996, MERALCO paid a total amount of P1,857,711.67 under protest in compliance with the ordinance.
• MERALCO subsequently filed an action before the Regional Trial Court to declare Ordinance No. 56 null and void insofar as it imposed the franchise tax upon MERALCO and to claim a refund of the taxes paid under protest, arguing that the Local Government Code did not repeal the tax exemption provisions in its franchise.

• Republic Act No. 7160 expressly repealed Act No. 3648, Republic Act No. 2340, and Presidential Decree No. 551 insofar as these laws grant tax incentives, privileges, and immunities to MERALCO.
• Section 193 of the Local Government Code of 1991 has withdrawn the tax incentives and exemptions being enjoyed by MERALCO under its charter, as this section provides a general withdrawal of tax exemptions except for local water districts, cooperatives duly registered under Republic Act No. 6938, and non-stock and non-profit hospitals and educational institutions, with MERALCO falling under none of these exceptions.
• Section 137 of the Local Government Code, which authorizes the imposition of franchise tax "notwithstanding any exemption granted by any law or other special law," clearly manifests the legislative intent to subject all franchise holders to local taxation regardless of prior exemptions.
• The phrase "in lieu of all taxes" found in MERALCO's franchise constitutes a tax exemption that must give way to the peremptory language of the Local Government Code specifically providing for the withdrawal of such exemption privileges.
• The non-impairment clause of the Constitution cannot be invoked to uphold MERALCO's exemption because franchises are subject to amendment, alteration, or repeal by Congress when public interest requires, and the power to tax cannot be contracted away, especially where the Local Government Code was enacted to fulfill the constitutional mandate of local autonomy under Article X, Section 5.
• The Bureau of Local Government Finance of the Department of Finance issued an administrative interpretation in 1994 stating that the earlier ruling that holders of franchises containing the "in lieu of all taxes" proviso are exempt is no longer applicable upon the effectivity of the Local Government Code.

• Act No. 3648, Republic Act No. 2340, and Presidential Decree No. 551 have not been expressly or impliedly repealed by Republic Act No. 7160, and the tax exemptions granted under these special franchise laws remain valid and enforceable.
• Section 193 of the Local Government Code has not withdrawn the tax incentives, privileges, and immunities enjoyed by MERALCO under its charter, as the "in lieu of all taxes" provision does not constitute a tax exemption but rather a commutative tax arrangement.
• The imposition of the franchise tax under Ordinance No. 56 constitutes an impairment of the contractual obligation between the Government and MERALCO as embodied in its legislative franchise, in violation of the constitutional prohibition against the impairment of contracts.
• The phrase "in lieu of all taxes" should be interpreted to exempt MERALCO from any additional tax impositions by local authorities, consistent with prior jurisprudence holding that such provisions exempt franchise holders from payment of taxes on their corporate franchise.
• The reservation clause in the franchise (subject to amendment or repeal) does not apply to defeat the contractual tax exemption because the "in lieu of all taxes" provision was a fundamental inducement for the acceptance of the franchise and investment in public infrastructure.

• Procedural Issues: Whether the petition for review under Rule 45 was proper given that the case involved pure questions of law regarding statutory interpretation and constitutional provisions, with no disputed issues of fact.
• Substantive Issues: Whether Republic Act No. 7160 (Local Government Code of 1991) repealed or modified the tax exemption provisions contained in Act No. 3648, Republic Act No. 2340, and Presidential Decree No. 551; whether Section 193 of the Local Government Code withdrew MERALCO's tax exemption privileges; and whether the imposition of the local franchise tax constitutes an unconstitutional impairment of the contract between the Government and MERALCO.

• Procedural: The Supreme Court held that the petition was properly filed under Rule 45 as it involved pure questions of law regarding the interpretation of Sections 137, 193, and 534(f) of the Local Government Code in relation to prior franchise laws and constitutional provisions on local autonomy and non-impairment of contracts, with the antecedent facts being undisputed by the parties.
• Substantive: The Supreme Court ruled that the Local Government Code of 1991 impliedly repealed the tax exemption provisions in Act No. 3648, Republic Act No. 2340, and Presidential Decree No. 551 because Sections 137 and 193 are manifestly repugnant to and inconsistent with the "in lieu of all taxes" provision, satisfying the requirements for implied repeal despite the general rule that repeals by implication are not favored. The Court held that Section 193 withdrew MERALCO's tax exemption because MERALCO is not among the three enumerated exceptions (local water districts, cooperatives duly registered under Republic Act No. 6938, and non-stock and non-profit hospitals and educational institutions), and under the principle of expressio unius est exclusio alterius, the express mention of these exceptions excludes all others. The Court further held that the imposition of the local franchise tax does not constitute an impairment of contract because franchises are subject to amendment, alteration, or repeal by Congress when public interest requires under the 1935, 1973, and 1987 Constitutions, and the power to tax, like police power, cannot be contracted away; the Local Government Code was enacted pursuant to the constitutional policy of local autonomy under Article X, Section 5, and the power to tax is the most effective instrument to raise revenues for local development, with doubts resolved in favor of municipal corporations.

• Withdrawal of Tax Exemptions under the Local Government Code — Section 193 of the Local Government Code of 1991 establishes the general rule that all tax exemptions previously granted to or presently enjoyed by natural or juridical persons, including government-owned or controlled corporations, are withdrawn upon the effectivity of the Code, except those specifically retained for local water districts, cooperatives duly registered under Republic Act No. 6938, and non-stock and non-profit hospitals and educational institutions; the Court applied this doctrine to hold that MERALCO's "in lieu of all taxes" exemption was effectively withdrawn because it did not fall within any of the enumerated exceptions.
• Expressio Unius Est Exclusio Alterius — This maxim of statutory construction holds that the express mention of one person, thing, act, or consequence excludes all others; the Court applied this principle to conclude that since Section 193 of the Local Government Code expressly preserved tax exemptions only for the three enumerated entities, all other existing tax exemptions, including MERALCO's franchise exemption, were intended to be withdrawn by Congress.
• Non-impairment of Contracts Limitation — While the Constitution prohibits the passage of any law impairing the obligation of contracts, this prohibition does not apply to the State's exercise of inherent powers such as police power and the power to tax, which cannot be contracted away; the Court held that legislative franchises are subject to amendment, alteration, or repeal by Congress when public interest requires, and thus the non-impairment clause cannot be invoked to defeat the State's power to tax enacted pursuant to the constitutional mandate of local autonomy.
• Implied Repeal — Repeals by implication are generally not favored and require a clear showing that the later law is so repugnant and patently inconsistent with the earlier law that they cannot stand together; the Court found that Sections 137 and 193 of the Local Government Code are clearly repugnant to the "in lieu of all taxes" exemption in MERALCO's franchise, resulting in an implied repeal of the exemption provisions in the prior special franchise laws.
• Power to Tax of Local Government Units — Under Article X, Section 5 of the Constitution, local government units have the power to create their own sources of revenue and to levy taxes, fees, and charges subject to guidelines by Congress, consistent with the basic policy of local autonomy; the Court emphasized that this power is the most effective instrument to raise needed revenues to finance local government activities and that doubts in interpreting statutory provisions on municipal fiscal powers must be resolved in favor of municipal corporations.

• "The explicit language of Section 137 which authorizes the province to impose franchise tax 'notwithstanding any exemption granted by any law or other special law' is all-encompassing and clear. The franchise tax is imposable despite any exemption enjoyed under special laws." — The Court emphasized the broad taxing authority granted to local government units under the Local Government Code, which overrides prior statutory exemptions.
• "It is a basic precept of statutory construction that the express mention of one person, thing, act, or consequence excludes all others as expressed in the familiar maxim expressio unius est exclusio alterius." — The Court applied this principle to justify the conclusion that MERALCO's tax exemption was withdrawn because it was not among the three exceptions enumerated in Section 193 of the Local Government Code.
• "These 'magic words' contained in the phrase 'shall be in lieu of all taxes' have to give way to the peremptory language of the LGC specifically providing for the withdrawal of such exemption privileges." — The Court characterized the traditional "in lieu of all taxes" provisions in legislative franchises as giving way to the clear legislative intent manifested in the Local Government Code to withdraw such exemptions.
• "With or without the reservation clause, franchises are subject to alterations through a reasonable exercise of the police power; they are also subject to alteration by the power to tax, which like police power cannot be contracted away." — The Court underscored the inherent limitations on the non-impairment clause regarding legislative franchises and the State's power to tax.
• "The power to tax is the most effective instrument to raise needed revenues to finance and support myriad activities of 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." — The Court explained the constitutional and policy basis for upholding the broad taxing powers of local government units under the Local Government Code.

• Mactan Cebu International Airport Authority v. Marcos (1996) — Cited as controlling precedent establishing that Section 193 of the Local Government Code prescribes the general rule withdrawing tax exemptions and incentives, and that only entities expressly enumerated in the Code retain their exemptions; the Court followed this ruling to hold that MERALCO's exemption was withdrawn and that the State policy to ensure local autonomy justifies such withdrawal.
• Cagayan Electric Power and Light Co. Inc. v. Commissioner of Internal Revenue — Cited for the proposition that Congress has the power to impair a legislative franchise by withdrawing tax exemptions, and that the "in lieu of all taxes" provision constitutes a tax exemption that can be withdrawn by subsequent legislation, rejecting the argument that it is merely a "commutative tax."
• Cotabato Light and Power Co. v. City of Cotabato — Cited as prior jurisprudence holding that the phrase "in lieu of all taxes" exempts the franchise holder from payment of taxes on its corporate franchise, but effectively distinguished or superseded by the Court's ruling that the Local Government Code has withdrawn such exemptions.
• Province of Misamis Oriental v. Cagayan Electric Power and Light Co., Inc. — Cited regarding the interpretation of "in lieu of all taxes" provisions in public utility franchises and the characterization of such provisions as tax exemptions.
• Ty v. Trampe — Cited for the principle that a general repealing clause partakes of the nature of a general repealing clause and is not an express repealing clause because it fails to designate specific acts by number or title.
• Laguna Lake Development Authority v. Court of Appeals — Cited for the established rule that repeals by implication are not favored as laws are presumed to be passed with deliberation and full knowledge of all laws existing on the subject.

• Article X, Section 5 of the 1987 Constitution — Confers upon local government units the power to create their own sources of revenue and to levy taxes, fees, and charges subject to guidelines by Congress, consistent with the basic policy of local autonomy; cited as the constitutional basis for the expansion of LGU taxing powers and the withdrawal of tax exemptions to ensure meaningful local autonomy.
• Section 137 of Republic Act No. 7160 (Local Government Code of 1991) — Authorizes provinces to impose a tax on business enjoying a franchise at a rate not exceeding fifty percent of one percent of gross annual receipts, explicitly providing that such tax may be imposed "notwithstanding any exemption granted by any law or other special law"; cited as the statutory basis for the City of San Pablo's power to tax MERALCO despite the exemption in its franchise.
• Section 193 of Republic Act No. 7160 (Local Government Code of 1991) — Provides for the withdrawal of tax exemption privileges upon the effectivity of the Code, except for local water districts, cooperatives duly registered under Republic Act No. 6938, and non-stock and non-profit hospitals and educational institutions; cited as the provision that expressly withdrew MERALCO's tax exemption.
• Section 534(f) of Republic Act No. 7160 (Repealing Clause) — Provides that all general and special laws, acts, city charters, decrees, executive orders, proclamations, and administrative regulations inconsistent with the Local Government Code are hereby repealed or modified accordingly; cited as the general repealing clause that effectuated the withdrawal of prior tax exemptions inconsistent with the Code.
• Section 10 of Act No. 3648 — The original franchise provision granting Escudero Electric Service Company (and subsequently MERALCO) a 2% tax on gross earnings "in lieu of any and all taxes of any kind nature or description"; cited as the statutory provision containing the tax exemption that was withdrawn by the Local Government Code.
• Section 1 of Presidential Decree No. 551 — Imposes a 2% franchise tax on electric utilities "in lieu of all taxes and assessments of whatever nature imposed by any national or local authority"; cited as the provision containing the exemption that was withdrawn by the Local Government Code.