PLDT vs. City of Davao

Section 23 of Republic Act No. 7925 does not operate as a blanket tax exemption or "most favored nation" clause that extends tax exemptions to all telecommunications entities; tax exemptions are highly disfavored in law and must be granted in clear and unambiguous language, construed strictly against the taxpayer and liberally in favor of the taxing authority, with all doubts resolved in favor of municipal corporations when interpreting local taxing powers.

The case arises from the interplay between the Local Government Code of 1991 (LGC), which withdrew tax exemptions previously enjoyed by entities and authorized local government units to impose franchise taxes notwithstanding any exemption granted by law, and the Public Telecommunications Policy Act of the Philippines (RA 7925), which sought to promote equality of treatment in the telecommunications industry. The dispute centers on whether the LGC's general withdrawal of exemptions or RA 7925's equality provision controls the tax liability of franchise holders, specifically addressing the common limitation on LGU taxing powers regarding the strict construction required for tax exemptions to be valid against local taxation.

• In January 1999, PLDT applied for a Mayor's Permit to operate its Davao Metro Exchange, but respondent City of Davao withheld action pending payment of local franchise tax amounting to P3,681,985.72 for the first to fourth quarters of 1999.
• In a letter dated May 31, 1999, PLDT protested the assessment and requested a refund of franchise taxes paid for 1997 and the first to third quarters of 1998, citing a Bureau of Local Government Finance (BLGF) opinion dated June 2, 1998, which stated that Section 23 of RA 7925 entitled PLDT to exemption from local franchise taxes by virtue of the "most favored clause" extending exemptions from subsequent franchises.
• In a letter dated September 27, 1999, respondent Adelaida B. Barcelona, City Treasurer of Davao, denied the protest and claim for refund, citing the legal opinion of the City Legal Officer and Ordinance No. 230, Series of 1991, as amended by Ordinance No. 519, Series of 1992, which imposes a franchise tax on businesses enjoying a franchise notwithstanding any exemption granted by any law or other special law.
• PLDT filed its petition with the Regional Trial Court limiting its refund claim to taxes paid for 1998 only, as the claim for 1997 had already prescribed under Section 196 of the Local Government Code which requires claims for refund to be made within two years from date of payment.
• The Regional Trial Court ruled that Section 193 of the Local Government Code clearly withdrew all tax exemptions unless the law granting the exemption expressly states it applies to local taxes, that the BLGF opinion is not binding, and that PLDT failed to prove that Globe and Smart were actually exempt from local taxes.

• PLDT contended it was exempt from local franchise taxes based on Section 12 of its franchise under RA 7082, as allegedly amended and expanded by Section 23 of RA 7925, arguing that the "equality of treatment" provision automatically extended to it any tax exemptions granted to subsequently franchised telecommunications entities such as Globe Telecom and Smart Communications.
• PLDT argued that Section 23 of RA 7925 effectively restored its tax exemptions previously withdrawn by Section 193 of the Local Government Code by operation of the "most favored nation" clause, thereby exempting it from the payment of franchise and business taxes imposable by local government units.
• PLDT asserted that the opinion of the Bureau of Local Government Finance interpreting Section 23 as granting exemption should be given weight and deference by courts because the BLGF possesses expertise on local taxation matters and enjoys a presumption of regularity in the performance of its duties.
• PLDT argued that the lower court erred in applying Sections 137 and 193 of the Local Government Code, which allow cities to impose franchise taxes and withdraw exemptions, contending that these provisions do not cover future exemptions and that Congress retains the power to grant exemptions pursuant to national policy.

• The City of Davao, through the City Treasurer, maintained that Section 137 of the Local Government Code explicitly authorizes the city to impose a tax on businesses enjoying a franchise notwithstanding any exemption granted by any law or special law, and Section 193 withdrew all tax exemptions previously enjoyed unless otherwise provided in the Code.
• The respondents argued that the BLGF opinion is not binding on the City Treasurer or the courts because the BLGF merely provides consultative services and technical assistance, not adjudicatory or regulatory functions requiring judicial deference.
• The respondents contended that PLDT failed to present any proof that Globe Telecom and Smart Communications were actually enjoying exemptions from local franchise and business taxes, and that the franchises of these companies did not contain explicit exemptions that would trigger the "most favored clause" in Section 23 of RA 7925.
• The respondents asserted that the term "exemption" in Section 23 of RA 7925, when read in the context of the entire law which focuses on deregulation and democratization of ownership, refers to regulatory or reporting exemptions rather than tax exemptions.

• Procedural Issues: Whether the opinion of the Bureau of Local Government Finance (BLGF) regarding tax exemption interpretation is binding on the courts and local government units; whether the Regional Trial Court properly denied PLDT's claim for tax refund.
• Substantive Issues: Whether Section 23 of Republic Act No. 7925 operates as a blanket tax exemption or "most favored nation" clause that extends tax exemptions to all telecommunications entities including PLDT; whether PLDT is exempt from local franchise taxes imposed by the City of Davao under Sections 137 and 193 of the Local Government Code.

• Procedural: The Court ruled that the Bureau of Local Government Finance is not an administrative agency whose findings on questions of fact are given weight and deference by courts; it was created merely to provide consultative services and technical assistance to local governments on local taxation matters, not to perform adjudicatory or regulatory functions. The question raised involves purely legal interpretation of Section 23 of RA 7925, for which the BLGF possesses no special expertise. While the BLGF enjoys a presumption of regularity in the performance of its duties, this presumption does not extend to the correctness of its legal interpretations, which are not binding on courts.
• Substantive: The Court held that Section 23 of RA 7925 does not grant tax exemptions to telecommunications entities; the term "exemption" is too general and, when read in the context of the entire statute which promotes deregulation, fair rates, and democratization of ownership, refers to regulatory or reporting exemptions rather than tax exemptions. Even if construed as referring to tax exemptions, tax exemptions are highly disfavored and must be strictly construed against the taxpayer and liberally in favor of the taxing authority; the claimant must justify exemption by the clearest grant of law, and any doubt must be resolved in favor of the State. The grant of taxing powers to local government units under the Constitution and the LGC does not affect Congress's power to grant exemptions, but doubts must be resolved in favor of municipal corporations when interpreting statutory provisions on municipal taxing powers. The Court rejected PLDT's theory that Section 23 amended its franchise to restore tax exemptions withdrawn by Section 193 of the LGC, holding that such interpretation would lead to absurd consequences and administrative chaos. Consequently, PLDT is liable to pay local franchise taxes for the period covering the first to fourth quarter of 1999 and is not entitled to a refund of taxes paid for 1998.

• Strictissimi Juris (Strict Construction of Tax Exemptions) — Tax exemptions are highly disfavored and odious to the law; they must be expressly granted in clear and unambiguous language and construed strictly against the taxpayer and liberally in favor of the taxing authority. The claimant must point to a positive provision of law creating the right and justify the claim by the clearest grant of organic or statute law.
• Presumption Against Surrender of Taxing Power — The right of taxation is inherent in the State and essential to government perpetuity; the power will not be held to have been surrendered unless the intention to surrender is manifested by words too plain to be mistaken, and any ambiguity must be resolved in favor of the State's reservation of the power and against the exemption claimed.
• Interpretation of Municipal Taxing Powers in Favor of Local Government Units — In interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations and against the taxpayer, consistent with the constitutional grant of autonomy to local government units under the Local Government Code.
• Rejection of Implied Tax Exemptions via Most Favored Nation Clauses — General provisions purporting to grant "equality of treatment" or extending "advantages, favors, privileges, exemptions, or immunity" do not automatically extend tax exemptions across similar entities unless the statutory language explicitly and unequivocally provides for such extension, and such interpretation would not lead to absurd consequences or administrative impossibility.

• "Exemptions from taxation are highly disfavored, so much so that they may almost be said to be odious to the law. He who claims an exemption must be able to point to some positive provision of law creating the right."
• "When exemption is claimed, it must be shown indubitably to exist. At the outset, every presumption is against it. A well-founded doubt is fatal to the claim. It is only when the terms of the concession are too explicit to admit fairly of any other construction that the proposition can be supported."
• "The tax exemption must be expressed in the statute in clear language that leaves no doubt of the intention of the legislature to grant such exemption. And, even if it is granted, the exemption must be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority."
• "The grant of taxing powers to local government units under the Constitution and the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy. The legal effect of the constitutional grant to local governments simply means that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations."
• "The acceptance of petitioner's theory would result in absurd consequences. To illustrate: In its franchise, Globe is required to pay a franchise tax of only one and one-half percentum (1½%) of all gross receipts from its transactions while Smart is required to pay a tax of three percent (3%) on all gross receipts from business transacted. Petitioner's theory would require that, to level the playing field, any 'advantage, favor, privilege, exemption, or immunity' granted to Globe must be extended to all telecommunications companies, including Smart."

• Asiatic Petroleum Co. v. Llanes, 49 Phil. 466 (1926) — Controlling precedent establishing the doctrine that tax exemptions are highly disfavored, must be shown indubitably to exist, and that every presumption is against them; cited for the strict construction rule and the principle that a well-founded doubt is fatal to the claim.
• Philippine Airlines, Inc. v. Edu, 164 SCRA 320 (1988) — Cited to support the principle that a subsequent amendment to a franchise granting tax exemption can restore an exemption withdrawn by an earlier law, but distinguished to show that Section 23 of RA 7925 does not constitute such a clear and explicit grant of tax exemption to PLDT.
• Manila Electric Company v. Province of Laguna, 306 SCRA 750 (1999) — Cited for the rule that in interpreting statutory provisions on municipal taxing powers, doubts must be resolved in favor of municipal corporations.
• City Government of San Pablo, Laguna v. Reyes, 305 SCRA 353 (1999) — Cited for the same rule regarding resolution of doubts in favor of local government units in tax matters.
• Commissioner of Internal Revenue v. Court of Appeals, 298 SCRA 83 (1998) — Cited for the rule on strict construction of tax exemptions against the taxpayer.
• People v. Purisima, 86 SCRA 542 (1978) — Cited for the principle that legislative intent must be ascertained from a consideration of the statute as a whole and not merely of a particular provision.

• Section 137, Local Government Code (R.A. No. 7160) — Allows provinces (and cities by virtue of Section 151) to impose a tax on businesses enjoying a franchise at a rate not exceeding fifty percent of one percent of gross annual receipts, explicitly providing that such tax applies "notwithstanding any exemption granted by any law or other special law."
• Section 193, Local Government Code (R.A. No. 7160) — Withdraws tax exemptions or incentives granted to or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, unless otherwise provided in the Code.
• Section 23, Republic Act No. 7925 (Public Telecommunications Policy Act) — Provides for equality of treatment in the telecommunications industry, stating that any advantage, favor, privilege, exemption, or immunity granted under existing or future franchises shall ipso facto become part of previously granted franchises, except provisions concerning territory, life span, or type of service.
• Section 12, Republic Act No. 7082 — PLDT's franchise provision requiring payment of a franchise tax equivalent to three percent of gross receipts, with a proviso that such percentage shall be in lieu of all taxes on the franchise or earnings thereof.
• Section 151, Local Government Code (R.A. No. 7160) — Provides that cities may levy taxes which provinces or municipalities may impose, with rates that may exceed provincial maximum rates by not more than fifty percent.
• Section 195 and Section 196, Local Government Code (R.A. No. 7160) — Provisions governing protests of local tax assessments and claims for refunds, with Section 196 specifically requiring claims for refund to be made within two years from date of payment.
• Section 33(4), Administrative Code — Defines the functions of the Bureau of Local Government Finance as providing consultative services and technical assistance to local governments and the general public on local taxation, distinguishing it from adjudicatory agencies.