National Power Corporation vs. City of Cabanatuan; G.R. No. 149110. April 9, 2003

TOPIC:

Local and Property Taxation ; Franchise Tax (Sec. 137, LGC)

Doctrine: 

  • As commonly used, a franchise tax is “a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state.

FACTS: 

Petitioner is a government-owned and controlled corporation which sells electric power to the residents of Cabanatuan City.  The City of Cabanatuan pursuant to section 37 of Ordinance No. 165-92, assessed the petitioner a franchise tax amounting to P808,606.41, representing 75% of 1% of the latter’s gross receipts for the preceding year. 

Petitioner refused to pay the tax assessment on the ground that (a) the respondent has no authority to impose tax on government entities and (b) as a non-profit organization, it is exempted from the payment of all forms of taxes, charges, duties or fees in accordance with sec. 13 of Rep. Act No. 6395.

The City of Cabanatuan filed a collection suit in the RTC, demanding that the petitioner pay the assessed tax due, plus a surcharge and interest. Respondent alleged that petitioner’s exemption from local taxes has been repealed by section 193 of Rep. Act No. 7160. 

RTC dismissed the case. It ruled that the tax exemption privileges granted to petitioner subsist despite the passage of Rep. Act No. 7160 for the following reasons: (1) Rep. Act No. 6395 is a particular law and it may not be repealed by Rep. Act No. 7160 which is a general law; (2) local governments have no power to tax instrumentalities of the national government.

The Court of Appeals reversed the trial court’s Order.

ISSUES: 

(1) Whether the respondent has authority to impose franchise tax.

(2) Whether NPC is liable to pay an annual franchise tax to the respondent city government.

HELD:

(1) YES. Taxes are the lifeblood of the government, for without taxes, the government can neither exist nor endure. One of the most significant provisions of the LGC is the removal of the blanket exclusion of instrumentalities and agencies of the national government from the coverage of local taxation. In the case at bar, section 151 in relation to section 137 of the LGC clearly authorizes the respondent city government to impose on the petitioner the franchise tax in question.

Section 137. Franchise Tax. – Notwithstanding any exemption granted by any law or other special law, the province may impose a tax on businesses enjoying a franchise, at the rate not exceeding fifty percent (50%) of one percent (1%) of the gross annual receipts for the preceding calendar year based on the incoming receipt, or realized, within its territorial jurisdiction.

xxx

In the case of Meralco, the Court provided that the explicit language of section 137 which authorizes the province to impose franchise tax ‘notwithstanding any exemption granted by any law or other special law’ is all-encompassing and clear. The franchise tax is imposable despite any exemption enjoyed under special laws.

(2) YES. 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. NPC fulfills the requisite.  To stress, a franchise tax is imposed based not on the ownership but on the exercise by the corporation of a privilege to do business. The taxable entity is the corporation which exercises the franchise, and not the individual stockholders. By virtue of its charter, petitioner was created as a separate and distinct entity from the National Government.

Petitioner was created to “undertake the development of hydroelectric generation of power and the production of electricity from nuclear, geothermal and other sources, as well as the transmission of electric power on a nationwide basis.” Certainly, these activities do not partake of the sovereign functions of the government. They are purely private and commercial undertakings, albeit imbued with public interest. The public interest involved in its activities, however, does not distract from the true nature of the petitioner as a commercial enterprise. 

Notes: 

A franchise tax is “a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state.” It is not levied on the corporation simply for existing as a corporation, upon its property or its income, but on its exercise of the rights or privileges granted to it by the government. Hence, a corporation need not pay franchise tax from the time it ceased to do business and exercise its franchise. 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. 

Franchise may refer to a general or primary franchise, or to a special or secondary franchise.

General or Primary FranchiseSpecial or Secondary Franchise
The right to exist as a corporation, by virtue of duly approved articles of incorporation, or a charter pursuant to a special law creating the corporation. 
The right under a primary or general franchise is vested in the individuals who compose the corporation and not in the corporation itself.
It refers to the right or privileges conferred upon an existing corporation such as the right to use the streets of a municipality to lay pipes of tracks, erect poles or string wires. 
The rights under a secondary or special franchise are vested in the corporation and may ordinarily be conveyed or mortgaged under a general power granted to a corporation to dispose of its property, except such special or secondary franchises as are charged with a public use.

Section 131 (m) of the LGC defines a “franchise” as “a right or privilege, affected with public interest which is conferred upon private persons or corporations, under such terms and conditions as the government and its political subdivisions may impose in the interest of the public welfare, security and safety.”

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