Commissioner of Internal Revenue vs. PLDT

The "in lieu of all taxes" clause in a franchise grant exempts the franchise holder only from direct taxes imposed on its franchise or earnings, not from indirect taxes (such as VAT, compensating tax, and advance sales tax), unless the exempting statute expressly and unmistakably includes indirect taxes.

PLDT operates under a legislative franchise (R.A. No. 7082) imposing a 3% franchise tax on gross receipts. The dispute centers on whether this franchise exempts PLDT from indirect taxes on importations of equipment and spare parts.

• PLDT filed a claim for tax credit/refund with the BIR on December 2, 1994 — not acted upon
• PLDT filed a petition for review with the CTA (C.T.A. Case No. 5178)
• CTA rendered decision on February 18, 1998, granting refund of P223,265,276.00 (Justice De Veyra, with Justice Acosta concurring; Justice Saga dissenting)
• CTA denied the BIR Commissioner's motion for reconsideration on May 7, 1998
• CIR filed petition for review with the CA (CA-G.R. No. 47895)
• CA dismissed the petition on September 17, 1999, affirming the CTA based on stare decisis from its earlier decision in CA-G.R. SP No. 40811 (same parties, same issue)
• CIR filed petition for review on certiorari with the SC

• PLDT is a grantee of a franchise under R.A. No. 7082 to install, operate, and maintain telecommunications systems
• From October 1, 1992 to May 31, 1994, PLDT imported equipment, machineries, and spare parts
• Taxes paid: P126,713,037.00 (compensating tax); P12,460,219.00 (advance sales tax); P25,337,697.00 (other internal revenue taxes); P116,041,333.00 (VAT for March–May 1994)
• Section 12 of R.A. 7082 states the 3% franchise tax on gross receipts is "in lieu of all taxes on this franchise or earnings thereof"
• BIR issued Ruling No. UN-140-94 on April 19, 1994, confirming PLDT's exemption from VAT on importations based on the franchise provision
• PLDT filed claim for refund of P280,552,286.00 on December 2, 1994
• EO 273 (VAT law) took effect on January 1, 1988, replacing advance sales tax and compensating tax with VAT

• The "in lieu of all taxes" clause covers only direct taxes, not indirect taxes
• For indirect taxes to be included in the exemption, the legislative intent must be specific and unmistakable
• VAT, compensating tax, and advance sales tax are indirect taxes on the privilege of importing, not taxes on PLDT's franchise or earnings
• The CA erred in applying stare decisis from CA-G.R. SP No. 40811 because the CIR withdrew the petition in that case (G.R. No. 134386) before the SC could rule on the merits

• The phrase "in lieu of all taxes" in Section 12 of R.A. 7082 covers all taxes, whether direct or indirect
• The word "all" encompasses any and all taxes collectible under the NIRC, except income and real property taxes specifically mentioned in the franchise
• The CA correctly applied stare decisis based on its earlier decision in CA-G.R. SP No. 40811
• Compensating tax and advance sales tax were no longer collectible when assessed because EO 273 had replaced them with VAT

• Procedural Issues:
  • Whether the SC is bound by the doctrine of stare decisis regarding the CA's previous decision in CA-G.R. SP No. 40811
  • Whether the government is estopped by the BIR's erroneous ruling granting exemption
• Substantive Issues:
  • Whether the "in lieu of all taxes" clause in Section 12 of R.A. 7082 exempts PLDT from indirect taxes (VAT, compensating tax, advance sales tax) on its importations
  • Whether PLDT is entitled to refund of compensating tax and advance sales tax paid for the period 1992–1994

• Procedural:
  • The SC is not bound by the CA's interpretation in CA-G.R. SP No. 40811 because the CIR withdrew the petition in that case before the SC could render a decision on the merits; stare decisis applies only to SC decisions, not lower court rulings
  • The government is not estopped by acts or errors of its agents, particularly in tax matters; erroneous application of tax laws by public officers does not preclude subsequent correct application
• Substantive:
  • The "in lieu of all taxes" clause exempts PLDT only from direct taxes on its franchise or earnings, not from indirect taxes
  • The qualifying clause "on this franchise or earnings thereof" limits the exemption to direct taxes; applying redendo singula singulis, each phrase must be given effect
  • VAT, compensating tax, and advance sales tax are indirect taxes imposed on the privilege of importing, not taxes on the franchise or earnings
  • However, compensating tax and advance sales tax were abolished by EO 273 effective January 1, 1988, making their collection from October 1992 to May 1994 erroneous
  • PLDT is entitled to refund of P94,673,422.00 (compensating tax and advance sales tax only), subject to proof of payment of corresponding VAT on said transactions
  • The refund of VAT and other internal revenue taxes is denied

• Direct vs. Indirect Taxes — Direct taxes are exacted from the person intended to pay them (taxpayer is directly liable on the transaction); Indirect taxes are demanded from one person with the expectation that the burden can be shifted to another (e.g., VAT, compensating tax, advance sales tax); The liability for indirect taxes lies with the seller, but the burden falls on the final purchaser
• Strictissimi Juris in Tax Exemptions — Taxation is the rule, exemption is the exception; Statutes granting tax exemptions must be construed strictly against the taxpayer and liberally in favor of the taxing authority; The burden rests on the claimant to prove exemption by words too plain to be mistaken and too categorical to be misinterpreted
• Redendo Singula Singulis — Words must be taken distributively; Each word or phrase must be given proper connection to render none useless or superfluous; The phrase "on this franchise or earnings thereof" qualifies and limits "in lieu of all taxes" to direct taxes only
• Stare Decisis — The SC is not bound by decisions of lower courts (CA, CTA); The doctrine applies only to decisions of the SC on questions of law
• Government Estoppel — The government is not estopped by acts or errors of its agents, particularly on matters involving taxes; The erroneous application of tax laws by public officers does not preclude the subsequent correct application thereof

• "Taxation is the rule, exemption is the exception."
• "To him, therefore, who claims a refund or exemption from tax payments rests the burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted."
• "The government is not estopped by acts or errors of its agents, particularly on matters involving taxes."
• "More important than anything else is that the court is right, thus its duty to abandon any doctrine found to be in violation of the law in force."
• "The errors of certain administrative officers, if that be the case, should never be allowed to jeopardize the government's financial position."

• Manila Electric Company [Meralco] vs. Vera — Controlling precedent holding that "in lieu of all taxes" clause does not cover indirect taxes like compensating tax; exemption must be specific to include indirect taxes
• Maceda vs. Macaraig, Jr. — Distinguished; held that NPC's exemption from "all taxes" included indirect taxes only because the charter was specifically couched to include them ("all forms of taxes")
• Borja vs. Collector of Internal Revenue — Upheld denial of refund for compensating tax; exemption must be clear and expressed
• Philippine Acetylene Co, Inc. vs. Commissioner of Internal Revenue — Cited for the principle that indirect taxes can be shifted and the economic burden laid on the purchaser
• Commissioner of Internal Revenue vs. Visayan Electric Co. — Cited for strict construction of tax exemptions against the taxpayer

• Section 12 of R.A. No. 7082 — Franchise provision stating the 3% franchise tax is "in lieu of all taxes on this franchise or earnings thereof"
• Section 105 of the NIRC (as amended) — Defines VAT as an indirect tax that may be shifted or passed on to the buyer
• Section 169 of the 1986 NIRC — Provision on compensating tax
• Executive Order No. 273 — Adopted the VAT system effective January 1, 1988, replacing advance sales tax and compensating tax
• Section 2 of Executive Order No. 72 — Preserves income tax liability under Title II of the NIRC