Smart vs City of Davao

G.R. No. 155491

July 21, 2009

SMART COMMUNICATIONS, INC., Petitioner, vs. THE CITY OF DAVAO, represented herein by its Mayor Hon. RODRIGO DUTERTE, and the SANGGUNIANG PANLUNSOD OF DAVAO CITY, Respondents. FACTS: 1. On February 18, 2002, Smart filed a special civil action for declaratory relief3 for the ascertainment of its rights and obligations under the Tax Code of the City of Davao (DAVAO). 2. The tax being imposed is a tax on businesses enjoying a franchise, at the rate of seventy-five 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. 3. Among the objections raised by Smart were: a. The issuance of its franchise under RA No. 7294, which is subsequent to RA 7160 (Local Government Code) shows the clear legislative intent to exempt it from the provisions of RA 7160 b. Sec. 137 of the LGC is meant to apply to exemptions already existing at the time of its effectivity and not to future exemption c. The power of the City of Davao to impose a franchise tax is subject to statutory limitation such as the “in lieu of all taxes” clause found in RA 7294 d. The imposition of franchise tax by the City of Davao would amount to a violation of the constitutional provision against impairment of contract. 4. Davao, however, invoked the power granted by the Constitution to local government units (LGU) to create their own sources of revenue. 5. The RTC held a decision in favor of Davao stating that the ambiguity in RA 7294 regarding “in lieu of all taxes” must be resolved against the taxpayer. Tax exemptions are construed in strictly against the taxpayer and liberally in favor of the taxing authority. 6. The RTC also held that there was no violation of the non-impairment clause of the Constitution since the 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. It added that while such power may be subject to restrictions or conditions imposed by Congress, any such legislative limitation must be consistent with the basic policy of local autonomy. ISSUES: Whether Smart is liable to pay the franchise tax imposed by the City of Davao- YES

HELD: 1. Smart alleges that the “in lieu of all taxes” clause of its franchise exempts it from all taxes, both local and national, except the national franchise tax (now VAT), income tax and real property tax. The uncertainty in the “in lieu of all taxes” clause in RA No. 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 providing that, aside from the imposed 3% franchise tax, Congress intended it to be exempt from all kinds of franchise taxes-whether local or national. Smart, failed in this regard. 2. Tax exemptions can only be given force if they are clear and categorical. If Congress intended Smart to be exempted from municipal and provincial taxes, it could have used the same language as the Clavecilla franchise which stated: “in lieu of any and all taxes of any kind, nature or description levied, established ot collected by any authority whatsoever, municipal, provincial or national, from which the grantee is hereby expressly exempted. The interpretation of the franchise granted to Smart is that it refers only to national and not to local taxes. 3. Smart also claims that the clause “in lieu of all taxes” is in the nature of a tax exclusion and not a tax exemption. The distinction between the two: Tax Exemption- This means that the taxpayer does not pay any tax at all. An exemption is an immunity or privilege, it is the freedom from a charge or burden to which others are subjected. Tax Exclusion- The removal of otherwise taxable items from the reach of taxation e.g exclusions from gross income and allowable deductions. An exclusion is also an immunity or privilege which frees a taxpayer from a charge to which others are subjected. The rule that a tax exemption should be applied strictly against the taxpayer and liberally in favor of the government applies equally to tax exclusion. Smart pays VAT, income tax and real property tax. Thus, what it enjoys it more accurately a tax exclusion. 4. Smart posits that the franchise of GLOBE contains a provision exempting it from municipal or local franchise tax, and that Smart should like benefit by these. In granting the franchise of GLOBE under RA No. 7925, Congress did not intend it to operate as a blanket tax exemption to all telecommunications entities. GLOBE pays only 1.5% of its gross receipts in lieu of any and all taxes of any kind, nature or description levies, established or collected by any authority whatsoever, municipal, provincial or national. This grant to GLOBE is clear and categorical. No such provision is found in the franchise of Smart, the kind of tax from which it is exempted is not clearly specified. 5. If the contention of Smart is to be followed. The Government will be burdened of having to keep track of all granted telecommunications franchises, lest some companies be treated

unequally. It is different if Congress enacts a law specifically granting uniform advantages, favor, privilege, exemption or immunity to all telecommunication entities. 6. Smart likewise claims a violation of the non-impairment clause since the franchise is in the nature of the contract between the government and Smart. Smart’s franchise was granted with the express condition that it is subject to amendment, alteration or repeal. As held in Tolentino vs. Secretary of Finance: “Existing laws are read into contracts in order to fix obligations as between parties, the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society. In truth, the Contract Clause was never been though 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 xxx.” Dispositive: Wherefore, the instant petition is denied for lack of merit. Costs against petitioner.