Ambiguity in legislative franchises

Written by Susan M. Aquino, on 26 March 2009

Who would have thought 10 years ago that owning a mobile phone would no longer be a mark of affluence, but would be a necessity for everyone.

Today, the mobile phone has become an indispensable tool in business and a vital instrument in initiating and maintaining social ties. This is also true with the Internet.

Such is the magic of technology — its ability to transform lifestyles and dictate the needs of the population in such a way that we feel incomplete without a gadget in our possession.

Due to the surge of information technology and the gargantuan increase in the number of consumers, many investors have invested their money in the telecommunications business. Starting with a few players in the industry just a few years ago, the number of telecommunication companies has dramatically increased, such that their concomitant responsibilities as well as privileges have spurred not a few controversies and enriched jurisprudence in the process.

Philippine laws grant the private sector the privilege of rendering telecommunications services to the public through legislative franchises. Said franchises define the scope and parameters of the franchise granted as well as the tax obligations and privileges of the grantees. A common general tax provision contained in most of the legislative franchises provide as follows:

"The granteeshall be liable to pay the same taxes on their real estate, buildings and personal property, exclusive of this franchise, as other persons or corporations which are now or hereafter may be required by law to pay. In addition thereto, the granteeshall pay a franchise tax equivalent to 3% of all gross receipts of the business transacted under this franchise by the grantee, its successors and assigns, and the said percentage shall be in lieu of all taxes on this franchise or earnings thereof."

This provision, more particularly the clauses such as "in lieu of all taxes" and "exclusive of this franchise," have been the subject of disagreement between the local governments and the franchise holders, leading to the filing of a number of cases seeking clarification as to the proper interpretation of this tax provision.

The Court of Tax Appeals and the Supreme Court have, in certain cases, rendered decisions favoring the franchise holders. In most cases, however, the Courts, adhering to the statutory rule on strict interpretation of tax exemptions, decided in favor of the government.

On the clause "in lieu of all other taxes," the Supreme Court rendered a decision in 2008 wherein the clause "in lieu of all taxes" was interpreted to apply only to national taxes and not to local taxes which in large part spelled victory for the local government units. In said decision, the Supreme Court also held that the "in lieu of all taxes" clause was rendered functus officio, or inoperative, by virtue of Republic Act 7716, otherwise known as the Expanded Value-Added Tax Law, which abolished the franchise tax on telecommunication companies and included among the services subject to VAT, services of franchises grantees of telephone and telegraph utilities.

According to the Supreme Court, since under said law telecommunication companies are no longer subject to franchise tax but to the VAT, the "in lieu of all taxes" clause which includes all tax exemptions covered by such clause, is also deemed to have been abolished.

The above decision was reiterated by the Supreme Court in a recent decision it issued in February 2009, involving a local tax assessment issued against the same telecommunication company. In this case, however, the Supreme Court implicitly stated that a waiver of the surcharge and interest on the assessment may be granted if the franchise grantee relied in good faith on the opinion of the government agency authorized to interpret the Tax Code and other national tax laws. Nevertheless, in this case, a waiver was not granted since the respondent relied on the interpretation given by the Bureau of Local Government and Finance, which, according to the Supreme Court, is merely tasked to provide consultative services and technical assistance to local governments.

Notwithstanding the unfavorable decision on the "in lieu of all taxes" clause, telecommunication companies have won favor in regard to the "exclusive of the franchise" clause, which the Supreme Court interpreted in more liberal terms. The above-quoted tax provision states that the grantee "shall be liable to pay the same taxes on their real estate, buildings, personal property, exclusive of this franchise" as other persons or corporations which are now or hereafter may be required by law to pay. Based on this provision, local governments assessed telecommunication franchisees’ real property tax on all their real properties, e.g., lands, buildings and equipment.

The Supreme Court rendered two decisions favoring the telecommunication companies in respect to the real property tax aspect of the above-quoted tax provision. In said decisions, the Supreme Court categorically ruled that the clause, "exclusive of the franchise," means that the liability of the franchise grantee to pay real property tax pertains exclusively to real properties which are not actually, directly and exclusively used by the grantee in its franchise. In other words, real properties owned and used actually, directly and exclusively by the franchise grantee in the pursuit of its telecommunication business are exempt from real property tax by virtue the "exclusive of the franchise" clause.

The Supreme Court, in these cases, must have deduced the real intention of the law in light of the fact that telecommunication companies use vast areas of lands and large numbers of equipment in the conduct of their business, and that imposing real property tax on these properties may not ultimately favor the public interest.

One may expect that the favorable interpretation of the clause, "exclusive of the franchise," would temper the adverse tax impact of the decision on the "in lieu of all other taxes" clause. Whether this is true or not, we cannot say for now. However, we can only hope that the varying interpretations of these two phrases would not adversely affect us in the long run.

Be that as it may, this is a wake-up call to our lawmakers to be more clear, specific and categorical in wording provisions of laws to reflect their real intention — more particularly laws granting tax exemptions — since ambiguity in the law gives rise to varying interpretations by contending parties, which may result in substantial losses to either the government or the taxpayer.