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NATIONAL POWER CORPORATION v. CITY OF CABANATUAN

FACTS:

This case involves a petition for review filed by the National Power Corporation (NPC) against the Court of Appeals' decision and resolution. NPC is a government-owned and controlled corporation tasked with the development of hydroelectric power and the transmission of electric power nationwide. NPC sells electric power to residents of Cabanatuan City.

The respondent, City of Cabanatuan, assessed NPC a franchise tax based on its gross receipts for the preceding year. NPC refused to pay, arguing that the respondent has no authority to impose tax on government entities and that it is exempted as a non-profit organization.

The respondent filed a collection suit, demanding payment of the assessed tax. The trial court dismissed the case, ruling that NPC's tax exemption privileges still subsist despite the passage of a general law, Republic Act No. 7160. The trial court based its ruling on the grounds that local governments have no power to tax instrumentalities of the national government.

The petitioner, NPC, argued that it is exempt from local taxes as a government instrumentality, citing the ruling in Basco vs. PAGCOR. It also invoked its Charter's declaration of policy to support its argument. However, the Court of Appeals reversed the trial court's decision and ordered NPC to pay the franchise tax.

NPC filed a motion for reconsideration, which was denied. In this petition for review, NPC raised several issues, including the applicability of the franchise tax and the alleged repeal of its tax exemptions by the Local Government Code. The respondent city government has the authority to impose the franchise tax, and the issue is whether NPC is exempt from this tax.

The petitioner argued that it should not be liable to pay the franchise tax because it is not a private entity engaged in trade or occupation for profit. NPC also claimed that it is an instrumentality of the National Government and, therefore, exempt from local taxes. It further argued that the withdrawal of tax privileges for government-owned or controlled corporations is in the nature of an implied repeal, and its exemption still subsists under its charter. However, the court found these arguments without merit.

The case highlights the expanding role of the state in utilizing taxation for social justice and equitable distribution of wealth. It recognizes the power of local legislative bodies to impose taxes, fees, and charges as part of local autonomy and decentralization of governance. This shift aims to empower local government units in generating their own sources of revenue for development.

ISSUES:

  1. Whether local legislative bodies have the authority to levy taxes, fees, and charges.

  2. Whether the Local Government Code grants LGUs the power to impose taxes on instrumentalities and agencies of the national government.

  3. Whether the respondent city government has the authority to impose franchise tax on the petitioner, an instrumentality of the national government.

  4. Whether the petitioner falls under the definition of a franchise as provided by the Local Government Code (LGC).

  5. Whether the petitioner corporation is subject to the franchise tax imposed by the respondent city government.

  6. Whether the ownership of the petitioner corporation by the National Government and its characterization as a "non-profit" organization exempt it from the franchise tax.

  7. Whether or not the petitioner, Manila Electric Company (MERALCO), is exempt from paying local taxes under its charter and other special laws.

  8. Whether or not Section 137 and 193 of the Local Government Code (LGC) have withdrawn the tax exemptions previously enjoyed by MERALCO.

  9. Whether the imposition of an annual franchise tax by the respondent city government is valid despite the petitioner being a government-owned and controlled corporation enjoying tax exemptions under its charter.

  10. Whether the Local Government Code (LGC) clearly withdrawing existing tax exemptions and privileges includes exemptions granted under special laws.

RULING:

  1. Yes, local legislative bodies have the authority to levy taxes, fees, and charges. Article X, section 5 of the 1987 Constitution grants each local government unit the power to create its own sources of revenue and to levy taxes, fees, and charges subject to the guidelines and limitations provided by Congress.

  2. The Local Government Code (LGC) allows LGUs to impose taxes, fees, or charges on the instrumentalities and agencies of the national government. The LGC removed the blanket exclusion of these entities from the coverage of local taxation. Section 133 of the LGC provides that the taxing powers of LGUs shall not extend to the levy of taxes, fees, or charges on the National Government, its agencies, and instrumentalities, unless otherwise provided.

  3. The respondent city government has the authority to impose franchise tax on the petitioner. Section 151 in relation to section 137 of the LGC authorizes the imposition of franchise tax, and it applies to instrumentalities or agencies of the government performing governmental functions.

  4. The petitioner falls under the definition of a franchise as provided by the LGC. The petitioner has both a primary and secondary franchise under Commonwealth Act No. 120, as amended by Republic Act No. 7395. The secondary franchise granted to the petitioner includes various powers not available to ordinary corporations, which qualify it as a franchise for the purposes of taxation.

  5. Yes, the petitioner corporation is subject to the franchise tax. The tax is imposed based on the exercise of a privilege to do business, regardless of ownership. The taxable entity is the corporation itself, and not the individual stockholders. As long as the corporation exercises the franchise, it is subject to the franchise tax. In this case, the petitioner corporation operates within the territorial jurisdiction of the respondent city government and has realized a gross income from its operations, thus it is subject to the franchise tax.

  6. No, the ownership of the petitioner corporation by the National Government does not exempt it from the franchise tax. The fact that the National Government owns the capital stock of the petitioner does not necessarily mean that it is not engaged in business. The charter of the petitioner corporation establishes it as a separate and distinct entity from the National Government, with the power to sue and be sued under its own name and exercise all the powers of a corporation. The petitioner corporation is engaged in purely private and commercial undertakings, such as the generation and sale of electricity, which are not considered sovereign functions of the government. Therefore, the petitioner is not exempt from the franchise tax.

  7. The Supreme Court held that the petitioner, MERALCO, is not exempt from paying local taxes under its charter and other special laws. The Court emphasized that tax exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions. While the petitioner's charter exempts it from paying income taxes, franchise taxes, and realty taxes to the national government and its instrumentalities, this exemption does not extend to local taxes imposed by local government units (LGUs).

  8. The Court ruled that Section 137 and 193 of the LGC have withdrawn the tax exemptions previously enjoyed by MERALCO. Section 137 of the LGC explicitly states that LGUs can impose franchise taxes "notwithstanding any exemption granted by any law or other special law." Thus, the franchise tax imposed by the LGUs is imposable despite any exemption enjoyed by MERALCO under special laws. Section 193 of the LGC further reinforces the withdrawal of tax exemption privileges, except for limited exceptions not applicable to MERALCO.

  9. The imposition of an annual franchise tax by the respondent city government is valid despite the petitioner being a government-owned and controlled corporation enjoying tax exemptions under its charter.

  10. The LGC clearly withdraws existing tax exemptions and privileges, including those granted under special laws. The purpose of the LGC is to withdraw tax privileges enjoyed under existing law or charter, as manifested by the language used in Sections 137 and 193 of the LGC. The withdrawal is subject only to the exceptions enumerated in the LGC.

PRINCIPLES:

  • Taxation is a fundamental attribute of sovereignty and is necessary for the government to fulfill its mandate of promoting the general welfare and well-being of the people.

  • The power to tax is no longer vested exclusively in Congress. Local government units now have direct authority to levy taxes, fees, and charges, pursuant to Article X, section 5 of the Constitution.

  • The LGC widens the tax base of LGUs and provides flexibility in determining tax rates.

  • The LGC removes the blanket exclusion of instrumentalities and agencies of the national government from the coverage of local taxation. LGUs may impose taxes, fees, or charges on these entities if specifically authorized by the LGC.

  • The taxing power of local governments may extend to instrumentalities or agencies of the government performing governmental functions, as provided by the Local Government Code.

  • A franchise, in the context of taxation, refers to a special or secondary franchise that grants specific rights or privileges to a corporation. The franchise tax is imposed on the exercise of these rights or privileges, and not on the corporation simply for existing as a corporation.

  • A franchise tax is imposed based on the exercise of a privilege to do business, regardless of ownership.

  • The taxable entity for the franchise tax is the corporation itself, and not the individual stockholders.

  • The ownership of a corporation by the National Government does not automatically exempt it from the franchise tax.

  • Government-owned or controlled corporations (GOCCs) can be classified as performing governmental functions or proprietary functions.

  • Proprietary functions of GOCCs are those that are undertaken by way of advancing the general interest of society and are optional on the government.

  • Commercial undertakings of GOCCs, even if imbued with public interest, are considered ministrant or proprietary functions of the government aimed at advancing the general interest of society.

  • Tax exemptions must be shown to exist clearly and categorically, and supported by clear legal provisions.

  • The express mention of one person, thing, act, or consequence in a statute excludes all others (expressio unius est exclusio alterius).

  • The local government unit may impose a local tax, including franchise tax, notwithstanding any exemption granted by any law or other special law (Section 137 of the LGC).

  • Unless otherwise provided in the LGC, tax exemptions granted to all persons, whether natural or juridical, are withdrawn upon the effectivity of the LGC (Section 193 of the LGC).

  • The power to tax is the most effective instrument to raise needed revenues to support the activities of local government units for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people.

  • Tax exemptions granted to government-owned or controlled corporations and other units of government can result in serious tax base erosion and distortions, thus justifying their withdrawal.

  • The LGC provides for an express, albeit general, withdrawal of tax exemptions or privileges granted under existing laws or charters. No more unequivocal language could have been used.