National Power Corporation vs. Province of Isabela

A government-owned and controlled corporation engaged in proprietary functions is liable for franchise tax under the Local Government Code, as Section 193 thereof expressly withdrew prior tax exemption privileges granted by special charters, and Section 137 authorizes local government units to impose such tax notwithstanding any exemption.

The National Power Corporation (NPC) is a government-owned and controlled corporation engaged in the generation and sale of electric power, created under Commonwealth Act No. 120, as amended by Republic Act No. 6395. Section 13 of its charter declares NPC a non-profit corporation exempt from all forms of taxes, duties, fees, and imposts. The Province of Isabela and the Province of Ifugao are embroiled in a boundary dispute concerning the location of NPC's Magat River Hydro-Electric Plant, which forms the basis for the imposition of local franchise tax under Section 137 of Republic Act No. 7160, the Local Government Code of 1991.

The Province of Isabela filed an action for sum of money against the National Power Corporation (NPC), alleging that NPC's Magat River Hydro-Electric Plant is located within its territorial jurisdiction. Pursuant to Section 137 of the Local Government Code (LGC), Isabela imposed a franchise tax on NPC. NPC paid the franchise tax for 1992 and 1993, amounting to ₱9,473,275.00, but failed and refused to pay the 1994 franchise tax of ₱7,116,949.00 despite demands, prompting Isabela to seek payment plus legal interest and damages.

In its answer, NPC claimed the power plant is constructed on land owned by the National Irrigation Administration, situated in Potia, Ifugao. NPC admitted paying the tax for 1992 and 1993 but only upon Isabela's representation that the plant was within its territory. Citing the boundary dispute between Isabela and Ifugao, NPC argued it was unsure to whom it should pay and proposed an interpleader. NPC also asserted that the RTC lacked jurisdiction under Presidential Decree No. 242 and that administrative remedies were not exhausted.

With leave of court, the Province of Ifugao filed a complaint-in-intervention, claiming the principal structures of the power plant are within its territory and that it maintains the watershed ensuring the continuous flow of water. Ifugao alleged Isabela received the 1992 and 1993 payments through misrepresentation and sought the 1994 tax from NPC and a refund from Isabela. Isabela countered that the power plant is an expansion of the Magat River Irrigation System located in Ramon, Isabela, and that NPC and Ifugao were guilty of laches and estoppel for not asserting their claims earlier.

NPC further asserted in its answer to the intervention that it is a non-profit corporation under Section 13 of its charter, exempt from local taxes. The RTC ruled in favor of Isabela and Ifugao, ordering NPC to immediately deposit in escrow with the Land Bank of the Philippines the amount of ₱7,116,949.00 representing the 1994 franchise tax, plus legal interest. NPC appealed to the Court of Appeals, which affirmed the RTC decision, citing National Power Corporation vs. City of Cabanatuan to rule that NPC is not exempt from franchise tax as Section 193 of the LGC withdrew the tax exemption in its charter. The appellate court clarified that the RTC merely ordered an escrow deposit pending final determination of the boundary dispute.

• Tax Exemption under Charter: Petitioner argued that Section 193 of the LGC did not expressly or impliedly repeal the tax exemption under Section 13 of its charter, Rep. Act No. 6395, stressing that repeals by implication are not favored and a general law cannot repeal a special law.
• Non-applicability of Franchise Tax: Petitioner maintained that Section 137 of the LGC applies only to private individuals and corporations, asserting it is neither a private corporation nor a business created for profit, as it is a non-profit government corporation.
• Exemption as Government Instrumentality: Petitioner contended that under Section 133(o) of the LGC, local government units cannot tax the National Government, its agencies, and instrumentalities, claiming it is an instrumentality of the National Government.
• Deleterious Effects: Petitioner posited that requiring it to pay franchise tax would compel it to borrow money for operational expenses and taxes, ultimately burdening the National Government and the Filipino people.

• Strict Construction of Exemptions: Respondent maintained that petitioner failed to overcome the presumption of taxability, stressing that tax exemptions are highly disfavored and construed strictissimi juris against the taxpayer.
• Express Repeal by LGC: Respondent argued that the tax exemption privilege in petitioner's charter was expressly repealed by the LGC, citing Sections 137 and 193 which categorically withdrew such exemptions subject only to enumerated exceptions.
• Proprietary Function: Respondent averred that petitioner's status as a non-profit government corporation does not exempt it, as it undertakes ministrant or proprietary functions akin to a private commercial corporation.

• Liability for Franchise Tax: Whether the National Power Corporation is subject to franchise tax under the Local Government Code despite the tax exemption provided in its charter.

• Liability for Franchise Tax: Yes. Section 193 of the LGC expressly withdrew the tax exemption privileges of government-owned and controlled corporations, and Section 137 authorizes the imposition of franchise tax notwithstanding any exemption granted by any law.

• Liability for Franchise Tax: Taxation is the rule and exemption is the exception; the burden of proof rests on the party claiming exemption. Relying on National Power Corporation vs. City of Cabanatuan, it was found that Section 193 of the LGC expressly, albeit generally, repealed all statutes granting tax exemptions from local taxes, subject to limited exceptions (local water districts, cooperatives, non-stock/non-profit hospitals and educational institutions). NPC does not fall under these exceptions. Furthermore, Section 137 of the LGC allows provinces to impose franchise tax "notwithstanding any exemption granted by any law or other special law." NPC qualifies as a "business enjoying a franchise" because its charter (CA 120, as amended by RA 6395) serves as its primary and secondary franchise, and it exercises its rights within the local government unit's territory. NPC's activities of generating power and selling electricity are purely private and commercial undertakings (ministrant or proprietary functions), not sovereign functions. Finally, while Section 133(o) of the LGC generally prohibits LGUs from taxing national government instrumentalities, Section 137 serves as a specific exception authorizing such taxation, rendering the doctrine in Basco vs. Philippine Amusements and Gaming Corporation no longer applicable post-LGC.

• Strictissimi Juris Construction of Tax Exemptions — Tax exemptions are highly disfavored and construed strictly against the taxpayer and liberally in favor of the taxing power. The burden of proof rests upon the party claiming exemption to prove that it is covered by the exemption, which must be granted only by clear and unequivocal provision of law.
• Withdrawal of Tax Exemption Privileges under the LGC — Section 193 of the Local Government Code expressly, albeit generally, repealed all statutes granting tax exemptions from local taxes for all persons, including government-owned and controlled corporations, except for local water districts, cooperatives under R.A. No. 6938, and non-stock and non-profit hospitals and educational institutions.
• Franchise Tax on GOCCs — A government-owned and controlled corporation exercising proprietary functions is liable for franchise tax under Section 137 of the LGC if it fulfills two requisites: (1) it has a "franchise" in the sense of a secondary or special franchise; and (2) it is exercising its rights or privileges under this franchise within the territory of the local government unit.
• Overturning of Basco Doctrine — The doctrine in Basco vs. Philippine Amusements and Gaming Corporation, which held that GOCCs owned by the national government are exempt from local taxes, is no longer applicable after the effectivity of the Local Government Code, which empowers LGUs to impose certain taxes even on instrumentalities of the National Government.

• "x x x [S]ection 193 of the LGC withdrew, subject to limited exceptions, the sweeping tax privileges previously enjoyed by private and public corporations. Contrary to the contention of petitioner, Section 193 of the LGC is an express, albeit general, repeal of all statutes granting tax exemptions from local taxes." — This passage articulates the ratio decidendi regarding the withdrawal of NPC's charter-based tax exemption by the Local Government Code.
• "It is within this context that the phrase 'tax on businesses enjoying a franchise' in Section 137 of the LGC should be interpreted and understood. Verily, to determine whether the petitioner is covered by the franchise tax in question, the following requisites should concur: (1) that petitioner has a 'franchise' in the sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under this franchise within the territory of the respondent city government." — This defines the controlling two-part test for imposing franchise tax on a corporation under the LGC.
• "Although as a general rule, LGUs cannot impose taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, this rule admits of an exception, i.e., when specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the aforementioned entities." — This clarifies the interaction between the general limitation on local taxing powers in Section 133(o) and the specific authorization in Section 137 of the LGC.

• National Power Corporation vs. City of Cabanatuan, 449 Phil. 233 (2003) — Controlling precedent. The Court applied the same ruling that NPC is not exempt from paying franchise tax under the LGC, as Section 193 withdrew its charter exemption and Section 137 applies to it as a business enjoying a franchise.
• City Government of San Pablo, Laguna vs. Reyes, 364 Phil. 842 (1999) — Followed. Cited to support the proposition that the legislative purpose to withdraw tax privileges under existing laws is clearly manifested by Sections 137 and 193 of the LGC.
• Basco vs. Philippine Amusements and Gaming Corporation, 274 Phil. 323 (1991) — Distinguished/Overturned. The Court noted this case, which exempted GOCCs from local taxes, was decided prior to the effectivity of the LGC and its doctrine is no longer true under the new law.
• Maceda vs. Macaraig, Jr., G.R. No. 88291 (1993) — Cited by petitioner to show legislative intent to exempt NPC from all forms of taxes, but rejected by the Court in favor of the LGC's express withdrawal.

• Section 137, Republic Act No. 7160 (Local Government Code of 1991) — Authorizes provinces to impose a tax on businesses enjoying a franchise, "notwithstanding any exemption granted by any law or other special law." Applied to hold NPC liable for franchise tax.
• Section 193, Republic Act No. 7160 (Local Government Code of 1991) — Withdraws tax exemption privileges enjoyed by all persons, including government-owned and controlled corporations, except for specific enumerated entities. Applied to expressly repeal the tax exemption in NPC's charter.
• Section 133(o), Republic Act No. 7160 (Local Government Code of 1991) — Common limitations on the taxing powers of local government units, prohibiting taxes on the National Government, its agencies, and instrumentalities. Construed as subject to specific exceptions in the LGC, such as Section 137.
• Section 13, Republic Act No. 6395 (NPC Charter) — Declares NPC a non-profit corporation exempt from all forms of taxes, duties, fees, and imposts. Held to have been expressly withdrawn by Section 193 of the LGC.
• Section 131(d) and (m), Republic Act No. 7160 — Defines "business" and "franchise" under the LGC. Used to determine that NPC qualifies as a business enjoying a secondary or special franchise.

Artemio V. Panganiban (Chief Justice, Chairperson), Consuelo Ynares-Santiago, Ma. Alicia Austria-Martinez, Minita V. Chico-Nazario.