Tax liability due to ambiguity

Tax exemptions are never presumed and are strictly construed against the taxpayer and liberally in favor of the taxing authority. This is the principle applied in this case of a communications company (SCI). Also raised and resolved here is the issue on the constitutional prohibition against impairment of contracts.

On March 27, 1992, SCI’s legislative franchise under R.A. 7294 took effect. Pursuant to the said R.A., SCI, its successors-in-interest or assigns shall pay a franchise tax equivalent to three percent of all gross receipts of the business transacted under its franchise and said percentage shall be in “lieu of all taxes” on the franchise or earnings thereof.

When SCI put up its Tele-center business in Davao City however, the city government also imposed a tax on its business under the same franchise. The city government relied on the provisions of the Local Government Code, passed two months earlier or on January 1, 1992 which allows the imposition by the local government units of a franchise tax at the rate not exceeding 50 percent of one percent of the gross annual receipts for the preceding calendar year.

Thus on Feb. 18, 2002 SCI filed a petition for declaratory relief to ascertain its rights and obligations under the Tax Code of Davao City. It contended among others (1) that the only taxes it may be made liable under its franchise are the national franchise tax (now VAT), income tax and real property tax. It claimed that it is exempted from the local franchise tax because the “in lieu of all taxes” clause found in its franchise (Sec. 9. R.A. 7294) does not distinguish between national and local taxes. Furthermore, SCI contended that its franchise is in the nature of a contract between the government and SCI, hence the imposition of the local franchise tax would violate the constitutional prohibition against the impairment of contracts. Was the SCI correct?

No. (1) It is not clear whether the “in lieu of all taxes” provision in SCI’s franchise would include exemption from local or national taxation. What is clear is that SCI shall pay a franchise tax equivalent to 3 percent of its gross receipts of the business transacted under its franchise. But whether the franchise tax exemption would include exemption from exactions by both the local and national government is not unequivocal.

This uncertainty must be construed strictly against SCI which claims the exemption. It has the burden of proving that aside from the imposed 3 percent franchise tax, Congress intended it to be exempt from all kinds of franchise taxes, whether local or national. SCI failed in this regard.

Tax exemptions can only be given force when the grant is clear and categorical. The surrender of the power to tax, when claimed, must be clearly shown by a language that will admit of no reasonable construction consistent with the reservation of power. If the intention of the legislature is open to doubt, then that intention must be resolved in favor of the State.

In this case the doubt must be resolved in favor of Davao City. The “in lieu of taxes” clause applies only to national internal revenue taxes and not to local taxes.

(2) There is also no violation of the prohibition against the impairment of contract because the franchise of SCI does not expressly provide for exemption from local taxes. Due to this ambiguity, the doubt must be resolved against the grant of such exemption.

Moreover under Article XII Section 11 of the Constitution, the grant of a   franchise, like the SCI franchise is subject to amendment alteration or repeal. Parties to a contract cannot, through exercise of prophetic discernment, fetter the exercise of the taxing power of the State. For, as a basic postulate of the legal order, not only are existing laws read into contracts in order to fix obligations as between the parties, but also the reservation of essential attributes of sovereign power. A contract clause, like that in the SCI franchise, has never been thought as a limitation on the exercise of the State’s power of taxation save only where a tax exemption has been granted for a valid consideration (Smart Communications Inc. vs. City of Davao etc. G.R. 155491, September 16, 2008).

Note: Books containing compilation of my articles on Labor Law and Criminal Law (Vols. I and II) are now available. Call tel. 7249445.

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