Davao City wins franchise tax case versus Smart

DAVAO CITY, Oct. 6 (PNA) -- The city government of Davao represented by Mayor Rodrigo R. Duterte won its case recently against Smart Communications, Incorporated involving the franchise tax the city had imposed on the telecom company.

The Supreme Court’s Third Division affirmed lower court’s decision denying Smart’s petition asking the court to stop the city government from collecting franchise tax on them since they had already paid taxes to the national government.

In a decision penned by Associate Justice Antonio Eduardo Nachura, the High Court favored the city government in imposing local franchise taxes on Smart as it dismissed the Smart’s declaratory relief case.

Smart first questioned the imposition of local franchise taxes by the city government before the Regional Trial Court (RTC) which on July 19, 1992 rendered a decision against the telecom company.

Based on the tax code of Davao, the city imposed a tax on businesses enjoying franchise at a rate of 75 percent of one percent of the gross annual receipts for the preceding calendar year based on the income or receipts realized within the territorial jurisdiction of Davao City.

But Smart argued that its telecenter in the city is exempt from the payment of franchise tax to the city, since the company was exempted from paying such tax pursuant to their legislative franchise.

Smart further contended that Section 137 of RA 7260 or the Local Government Code which the city insisted can only apply to exemptions already existing at the time of its effectivity and not to future exemptions; and the power of the city to impose a franchise tax is subject to statutory limitations such as the “in lieu of all taxes” clause in section 9 of RA 7294, the Smart’s franchise; and the imposition of the franchise tax by the city would amount to a violation of the constitutional provision against impairment of contracts.

But the city government invoked its power granted by the Constitution to local government units to create their own sources of revenue.

Assessing the evidence on record, the lower court ruled against Smart citing the ambiguity of the phrase “in lieu of all taxes” on Smart’s congressional franchise RA 7294.

Citing an earlier SC ruling, the RTC said that tax exemptions are construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority and, thus, those who assert a tax exemption must justify it with words too plain to be mistaken and too categorical not to be misinterpreted.

The RTC further declared that the city’s power to tax is based not merely on a valid delegation of legislative power but on the direct authority granted to it by the fundamental law.

Aggrieved by the RTC decision, Smart filed a motion for reconsideration but was denied by the trial court on September 26, 2002, thus, Smart elevated the issue to SC since it was a question of law.

But in a decision promulgated on September 16, 2008, the High Court upheld the lower court’s decision.

The SC also said the Smart’s franchise “does not expressly provide what kind of taxes Smart is exempted from. “In is not clear whether the ‘in liue of all taxes’ provision in the franchise of Smart would include exemption from local or national taxation,” the SC said.

“What is clear is that Smart shall pay franchise tax equivalent to three percent of all gross receipts of the buinesses transacted under its franchise,” the SC added.

The High Court added that Smart failed to show proof that Congress intended exempt the company from all kinds of franchise taxes except from the three percent stated in its franchise.

“The uncertainty in the ‘in lieu if all taxes” clause in RA 7294 on whether Smart is exempted from both local and national franchise tax must be construed strictly against Smart which claims exemption. Smart has the burden of proving that…. However, Smart failed in this regard,” the SC ruled.