SMART COMMUNICATIONS, INC., Petitioner, v.

THE CITY OF DAVAO, represented herein by its

RESOLUTION

NACHURA, J.:

Before the Court is a Motion for Reconsideration1 filed by Smart Communications, Inc. (Smart) of the
Decision2 of the Court dated September 16, 2008, denying its appeal of the Decision and Order of the
Regional Trial Court (RTC) of Davao City, dated July 19, 2002 and September 26, 2002, respectively.

Briefly, the factual antecedents are as follows:

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, which imposes a franchise tax on businesses
enjoying a franchise within the territorial jurisdiction of Davao. Smart avers that its telecenter in Davao City
is exempt from payment of franchise tax to the City.

On July 19, 2002, the RTC rendered a Decision denying the petition. Smart filed a motion for
reconsideration, which was denied by the trial court in an Order dated September 26, 2002. Smart filed an
appeal before this Court, but the same was denied in a decision dated September 16, 2008. Hence, the
instant motion for reconsideration raising the following grounds: (1) the "in lieu of all taxes" clause in
Smart's franchise, Republic Act No. 7294 (RA 7294), covers local taxes; the rule of strict construction
against tax exemptions is not applicable; (2) the "in lieu of all taxes" clause is not rendered ineffective by
the Expanded VAT Law; (3) Section 23 of Republic Act No. 79254 (RA 7925) includes a tax exemption; and
(4) the imposition of a local franchise tax on Smart would violate the constitutional prohibition against
impairment of the obligation of contracts.

Section 9 of RA 7294 and Section 23 of RA 7925 are once again put in issue. Section 9 of Smart's legislative
franchise contains the contentious "in lieu of all taxes" clause. The Section reads:

Section 9. Tax provisions. - The grantee, its successors or assigns shall 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 grantee, its
successors or assigns shall pay a franchise tax equivalent to three percent (3%) of all gross receipts of the
business transacted under this franchise by the grantee, its successors or assigns and the said percentage
shall be in lieu of all taxes on this franchise or earnings thereof: Provided, That the grantee, its successors
or assigns shall continue to be liable for income taxes payable under Title II of the National Internal Revenue
Code pursuant to Section 2 of Executive Order No. 72 unless the latter enactment is amended or repealed,
in which case the amendment or repeal shall be applicable thereto.

xxx5

Section 23 of RA 7925, otherwise known as the most favored treatment clause or equality clause, contains
the word "exemption," viz.:

SEC. 23. Equality of Treatment in the Telecommunications Industry - Any advantage, favor, privilege,
exemption, or immunity granted under existing franchises, or may hereafter be granted, shall ipso facto
become part of previously granted telecommunications franchises and shall be accorded immediately and
unconditionally to the grantees of such franchises: Provided, however, That the foregoing shall neither apply
to nor affect provisions of telecommunications franchises concerning territory covered by the franchise, the
life span of the franchise, or the type of the service authorized by the franchise.6

A review of the recent decisions of the Court on the matter of exemptions from local franchise tax and the
interpretation of the word "exemption" found in Section 23 of RA 7925 is imperative in order to resolve this
issue once and for all.

In Digital Telecommunications Philippines, Inc. (Digitel) v. Province of Pangasinan,7 Digitel used as an

However, it failed to substantiate its allegation, and, thus, the Court denied Digitel's claim for exemption
from provincial franchise tax. Cited was the ruling of the Court in PLDT v. City of Davao,10 wherein the
Court, speaking through Mr. Justice Vicente V. Mendoza, held that in approving Section 23 of RA No. 7925,
Congress did not intend it to operate as a blanket tax exemption to all telecommunications entities. Section
23 cannot be considered as having amended PLDT's franchise so as to entitle it to exemption from the
imposition of local franchise taxes. The Court further held that tax exemptions are highly disfavored and that
a tax exemption must be expressed in the statute in clear language that leaves no doubt of the intention of
the legislature to grant such exemption. And, even in the instances when it is granted, the exemption must
be interpreted in strictissimi juris against the taxpayer and liberally in favor of the taxing authority.

The Court also clarified the meaning of the word "exemption" in Section 23 of RA 7925: that the word
"exemption" as used in the statute refers or pertains merely to an exemption from regulatory or reporting
requirements of the Department of Transportation and Communication or the National Transmission
Corporation and not to an exemption from the grantee's tax liability.

In Philippine Long Distance Telephone Company (PLDT) v. Province of Laguna,11 PLDT was a holder of a
legislative franchise under Act No. 3436, as amended. On August 24, 1991, the terms and conditions of its
franchise were consolidated under Republic Act No. 7082, Section 12 of which embodies the so-called "in-
lieu-of-all taxes" clause. Under the said Section, PLDT shall pay a franchise tax equivalent to three percent
(3%) of all its gross receipts, which franchise tax shall be "in lieu of all taxes." The issue that the Court had
to resolve was whether PLDT was liable to pay franchise tax to the Province of Laguna in view of the "in lieu
of all taxes" clause in its franchise and Section 23 of RA 7925. ςη αñ rοbl ε š νιr⠀ υαl lαω l ιbrαrÿ

Applying the rule of strict construction of laws granting tax exemptions and the rule that doubts are resolved
in favor of municipal corporations in interpreting statutory provisions on municipal taxing powers, the Court
held that Section 23 of RA 7925 could not be considered as having amended petitioner's franchise so as to
entitle it to exemption from the imposition of local franchise taxes.

In ruling against the claim of PLDT, the Court cited the previous decisions in PLDT v. City of Davao12 and
PLDT v. City of Bacolod,13 in denying the claim for exemption from the payment of local franchise tax.

In sum, the aforecited jurisprudence suggests that aside from the national franchise tax, the franchisee is
still liable to pay the local franchise tax, unless it is expressly and unequivocally exempted from the payment
thereof under its legislative franchise. The "in lieu of all taxes" clause in a legislative franchise should
categorically state that the exemption applies to both local and national taxes; otherwise, the exemption
claimed should be strictly construed against the taxpayer and liberally in favor of the taxing authority.

Republic Act No. 7716, otherwise known as the "Expanded VAT Law," did not remove or abolish the payment
of local franchise tax. It merely replaced the national franchise tax that was previously paid by
telecommunications franchise holders and in its stead imposed a ten percent (10%) VAT in accordance with
Section 108 of the Tax Code. VAT replaced the national franchise tax, but it did not prohibit nor abolish the
imposition of local franchise tax by cities or municipaties.

The power to tax by local government units emanates from Section 5, Article X of the Constitution which
empowers them to create their own sources of revenues and to levy taxes, fees and charges subject to such
guidelines and limitations as the Congress may provide. The imposition of local franchise tax is not
inconsistent with the advent of the VAT, which renders functus officio the franchise tax paid to the national
government. VAT inures to the benefit of the national government, while a local franchise tax is a revenue of
the local government unit.

WHEREFORE, the motion for reconsideration is DENIED, and this denial is final.

SO ORDERED.