National Power Corporation vs. City of Cabanatuan

Tax exemptions must be construed strictly against the claimant and cannot be presumed; Section 193 of the Local Government Code of 1991 constitutes an express, albeit general, withdrawal of all tax exemptions previously granted to government-owned and controlled corporations (except local water districts, cooperatives, and non-stock non-profit hospitals/educational institutions), rendering NPC liable for franchise tax under Sections 137 and 151 of the LGC despite its charter exemption, because NPC exercises proprietary functions and the tax is levied on the privilege of doing business, not on ownership or profit distribution.

The case arises from the constitutional mandate for local autonomy under the 1987 Constitution and the enactment of the Local Government Code of 1991 (RA 7160), which decentralized governance and granted local government units (LGUs) broader fiscal powers to generate their own revenue. Prior to the LGC, NPC enjoyed comprehensive tax exemptions under its charter (RA 6395) as a GOCC performing "governmental functions." The dispute reflects the tension between the national government's authority to grant tax exemptions to its instrumentalities and the LGC's paradigm shift withdrawing such exemptions to prevent tax base erosion and ensure LGUs have sufficient resources to deliver devolved services. The City of Cabanatuan sought to enforce its taxing authority under the LGC against NPC's claim of immunity based on statutory exemptions and its status as a national government instrumentality.

• NPC is a government-owned and controlled corporation (GOCC) created under Commonwealth Act No. 120, as amended by Republic Act No. 6395 and Presidential Decree No. 938, with its entire capital stock subscribed and paid wholly by the Philippine Government.
• NPC is mandated to develop hydroelectric generation, produce electricity from various sources, and transmit electric power on a nationwide basis, including selling power in bulk to industrial enterprises, government institutions, electric cooperatives, and franchise holders.
• Section 13 of RA 6395 declares NPC a "non-profit" corporation and exempts it from payment of all taxes, duties, fees, imposts, charges, costs, and service fees to the National Government, its provinces, cities, municipalities, and other government agencies and instrumentalities, including specifically "all income taxes, franchise taxes and realty taxes."
• For the year 1992, NPC realized gross receipts of P107,814,187.96 from its operations within the territorial jurisdiction of Cabanatuan City.
• Pursuant to Section 37 of Ordinance No. 165-92, which imposes an annual franchise tax at 75% of 1% of gross receipts "notwithstanding any exemption granted by law," the City of Cabanatuan assessed NPC a franchise tax of P808,606.41 plus a 25% surcharge and 2% monthly interest for non-payment.
• NPC refused to pay the assessment, asserting immunity based on its charter exemptions and its status as a government instrumentality performing governmental functions.
• The City of Cabanatuan relied on Section 193 of RA 7160 (LGC), which withdraws tax exemptions granted to all persons including GOCCs, except local water districts, cooperatives registered under RA 6938, and non-stock and non-profit hospitals and educational institutions.

• NPC contends that Section 137 of the LGC applies exclusively to "private persons or corporations" enjoying a franchise, arguing that Section 131(m) defines "franchise" as a right conferred upon private entities, and since NPC is a public corporation with an original charter, it falls outside the scope of the local franchise tax.
• NPC asserts that it is a "non-profit organization" under Section 13 of RA 6395, merely devoting all returns to expansion rather than distributing profits to stockholders, and therefore is not engaged in "business" as defined in Section 131(d) of the LGC (trade or commercial activity with a view to profit).
• NPC argues that as an instrumentality of the National Government performing governmental functions, it is immune from local taxation under the doctrine in Basco v. PAGCOR, citing the constitutional supremacy of the National Government over local governments and the principle that taxation of national instrumentalities by local governments impedes sovereign operations (citing McCulloch v. Maryland).
• NPC maintains that its tax exemption under RA 6395 (a special law) cannot be repealed by RA 7160 (a general law), and that Section 193 constitutes an implied repeal which is not favored in statutory construction; special laws prevail over general laws unless the latter expressly and specifically repeal the former.
• NPC submits that its charter exemption represents a valid exercise of police power intended to ensure total electrification of the Philippines, and that police power being the most pervasive and least limitable governmental power, should prevail over the LGC's general taxing provisions.

• The City of Cabanatuan argues that Section 193 of the LGC expressly and unequivocally withdrew all tax exemptions or incentives granted to "all persons, whether natural or juridical, including government-owned or controlled corporations," except only local water districts, cooperatives, and non-stock non-profit hospitals/educational institutions, and NPC is not among these exceptions.
• The City contends that Section 137 of the LGC explicitly authorizes the imposition of franchise tax "notwithstanding any exemption granted by any law or other special law," which clearly manifests legislative intent to subject even previously exempt entities like NPC to local franchise taxation.
• The City asserts that the LGC embodies a constitutional mandate for local autonomy under Article X of the 1987 Constitution, empowering LGUs to tax GOCCs to address tax base erosion and ensure fiscal resources necessary for devolved governmental functions.
• The City argues that NPC performs proprietary functions (generating and selling electricity for consideration) rather than purely governmental functions, placing it in the category of "business-like" entities subject to taxation, and that the "non-profit" label does not negate the commercial nature of its activities.

• Procedural Issues: N/A
• Substantive Issues: (1) Whether NPC, as a GOCC with an original charter and claimed non-profit status, constitutes a "business" exercising a "franchise" subject to local tax under Sections 137 and 151 of the LGC; (2) Whether Section 193 of the LGC expressly withdrew NPC's tax exemption privileges under Section 13 of RA 6395; (3) Whether the doctrine prohibiting local governments from taxing national government instrumentalities bars the City from imposing franchise tax on NPC; (4) Whether the LGC, as a general law, can repeal the special law granting NPC's tax exemptions.

• Procedural: N/A
• Substantive: The Supreme Court denied the petition and affirmed the Court of Appeals' decision with finality. The Court ruled that Section 193 of the LGC constitutes an express, albeit general, repeal of all existing tax exemptions granted to GOCCs, including NPC, as evidenced by the categorical withdrawal of exemptions from "all persons... including government-owned or controlled corporations" except those specifically enumerated (local water districts, cooperatives, and non-stock non-profit hospitals/educational institutions). Applying the maxim expressio unius est exclusio alterius, the Court held that NPC's exclusion from these exceptions confirms its exemption was withdrawn. The Court further held that Section 137's phrase "notwithstanding any exemption granted by any law or other special law" clearly subjects NPC to franchise tax regardless of its charter provisions. The Court rejected NPC's argument that the LGC is merely a general law incapable of repealing its special charter, ruling that the repeal is express and not implied. The Court distinguished Basco v. PAGCOR, holding that the LGC now expressly authorizes LGUs to tax government instrumentalities, and that Congress has the power to decree such taxation to prevent tax base erosion and support local autonomy. Finally, the Court held that NPC exercises proprietary functions (selling electricity for profit, albeit capped at 12%, with proceeds devoted to expansion), not governmental functions, and that franchise tax is levied on the privilege of exercising corporate rights, not on ownership or profit distribution, rendering NPC's non-profit status irrelevant to its tax liability.

• Strict Construction of Tax Exemptions — Tax exemptions must be construed strongly against the claimant and must be shown to exist clearly and categorically; exemptions are not presumed and any doubt must be resolved against the taxpayer.
• Expressio Unius Est Exclusio Alterius — The express mention of specific exceptions in Section 193 of the LGC (local water districts, cooperatives, non-stock and non-profit hospitals/educational institutions) necessarily excludes all other entities, including NPC, from enjoying tax exemptions.
• Nature and Scope of Franchise Tax — A franchise tax is a tax on the privilege of transacting business and exercising corporate franchises granted by the state; it is imposed on the exercise of rights or privileges, not on the corporation's property, income, or ownership structure, and applies regardless of whether the entity is non-profit or government-owned.
• Proprietary vs. Governmental Functions — Governmental functions are those pertaining to the administration of government treated as absolute obligations of the state, while proprietary functions are optional "business-like" activities undertaken to advance public interest; NPC's generation and sale of electricity constitute proprietary functions subject to local taxation.
• Express Repeal by General Law — A general law (the LGC) may expressly repeal special laws (NPC's charter) through unequivocal language withdrawing all exemptions without specifically enumerating each statute being repealed; the "notwithstanding any exemption" clause evidences clear legislative intent to withdraw privileges.
• Local Autonomy and Withdrawal of Exemptions — The 1987 Constitution and the LGC represent a paradigm shift granting LGUs direct authority to levy taxes on previously exempt entities to prevent tax base erosion and ensure fiscal viability for decentralized governance.

• "Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure."
• "Tax exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions."
• "The franchise tax is imposable despite any exemption enjoyed under special laws."
• "Section 193 of the LGC is an express, albeit general, repeal of all statutes granting tax exemptions from local taxes."
• "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."
• "A franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege to do business."
• "The doctrine in Basco v. Philippine Amusement and Gaming Corporation relied upon by the petitioner to support its claim no longer applies... nothing prevents Congress from decreeing that even instrumentalities or agencies of the government performing governmental functions may be subject to tax."
• "The legislative purpose to withdraw tax privileges enjoyed under existing law or charter is clearly manifested by the language used on (sic) Sections 137 and 193 categorically withdrawing such exemption subject only to the exceptions enumerated."

• Basco v. Philippine Amusement and Gaming Corporation, 197 SCRA 52 (1991) — Previously held that local governments have no power to tax national government instrumentalities; distinguished and held no longer applicable after the LGC's enactment which expressly authorizes such taxation.
• Mactan Cebu International Airport Authority (MCIAA) v. Marcos, 261 SCRA 667 (1996) — Held that Congress may decree that government instrumentalities performing governmental functions may be subject to tax, and interpreted Sections 133, 232, and 234 of the LGC regarding the taxation of government entities.
• City Government of San Pablo, Laguna v. Reyes, 305 SCRA 353 (1999) — Applied the interpretation that Sections 137 and 193 of the LGC withdrew tax exemptions for franchise tax purposes, serving as controlling precedent for the construction of the LGC's "notwithstanding any exemption" clause.
• Manila Electric Company v. Province of Laguna, 306 SCRA 750 (1999) — Reinforced the ruling in San Pablo regarding the imposition of franchise tax on entities previously enjoying exemptions under special laws.
• McCulloch v. Maryland, 4 Wheat 316 (U.S.) — Cited by NPC for the principle that states cannot tax federal instrumentalities; distinguished by the Court as inapplicable where Congress expressly authorizes local taxation of such instrumentalities.

• 1987 Constitution, Article X, Sections 3 and 5 — Mandate Congress to enact a local government code consistent with local autonomy and grant LGUs power to create their own sources of revenue subject to Congressional guidelines.
• Republic Act No. 7160 (Local Government Code of 1991), Section 131(d) — Defines "business" as trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit.
• Republic Act No. 7160, Section 131(m) — Defines "franchise" as a right or privilege conferred upon private persons or corporations under such terms as the government may impose.
• Republic Act No. 7160, Section 133 — General limitation on taxing powers prohibiting taxes on national government agencies unless otherwise provided in the Code.
• Republic Act No. 7160, Section 137 — Authorizes provinces and cities to impose a tax on businesses enjoying a franchise "notwithstanding any exemption granted by any law or other special law."
• Republic Act No. 7160, Section 151 — Grants cities the scope of taxing powers similar to provinces, including franchise taxes at rates exceeding provincial limits by not more than 50%.
• Republic Act No. 7160, Section 193 — Withdraws tax exemptions or incentives granted to all persons whether natural or juridical, including GOCCs (except local water districts, cooperatives under RA 6938, and non-stock non-profit hospitals/educational institutions), upon the effectivity of the Code.
• Republic Act No. 6395, Section 13 — NPC's charter provision declaring it a non-profit corporation and exempting it from all taxes, duties, fees, and charges to the National Government and its political subdivisions.
• Commonwealth Act No. 120 — Original charter creating NPC as a government-owned and controlled corporation.
• Presidential Decree No. 2029, Section 2 — Defines government-owned or controlled corporations as those performing either governmental or proprietary functions.
• Presidential Decree No. 40 — Nationalized the electric power industry and strengthened NPC's monopoly position.