NPC v CITY OF CABANATUAN (b) From all income taxes, franchise taxes and realty taxes to be

Common Limitations on the Taxing Powers of Local Government Units paid to the National Government, its provinces, cities,
| April 9, 2003 | Puno, J. municipalities and other government agencies and instrumentalities;
● The City filed a collection suit in the RTC of Cabanatuan City
SUMMARY: The NPC is a GOCC tasked to undertake the development of  Demanded that NPC pay the assessed tax due, plus a surcharge equivalent
hydroelectric generations of power, the production of electricity, and the transmission to 25% of the amount of tax, and 2% monthly interest
of electric power on a nationwide basis. For many years, the NPC had been selling  It alleged that petitioner's exemption from local taxes has been repealed by
electric power to the residents of Cabanatuan City. Cabanatuan assessed the NPC a Section 193 of Rep. Act No. 7160 (LGC of 1991), which reads as follows:
franchise tax which the NPC refused to pay, Franchise tax is imposed based on the o Sec. 193. Withdrawal of Tax Exemption Privileges. — Unless
exercise by the corporation of a privilege to do business NPC claimed that otherwise provided in this Code, tax exemptions or incentives
Cabanatuan City, as an LGU, had no authority to impose tax on government entities. granted to, or presently enjoyed by all persons, whether natural or
Cabanatuan filed a collection suit with the RTC. RTC dismissed the case, claiming juridical, including government owned or controlled corporations,
that local governments have no power to tax instrumentalities of the National except local water districts, cooperatives duly registered under R.A.
Government. CA reversed, ordering NPC to pay the franchise tax to Cabanatuan. SC No. 6938, non-stock and non-profit hospitals and educational
held that the 1991 Local Government Code removed the blanket exclusion of institutions, are hereby withdrawn upon the effectivity of this
instrumentalities and agencies of the National Government from the coverage of local Code.
taxation. ● January 25, 1996: RTC ruled in favor of NPC
DOCTRINE: LGUs cannot impose taxes, fees or charges of any kind on the National  Ruled that the tax exemption privileges granted to NPC subsist despite the
Government, its agencies and instrumentalities. However, LGUs can impose taxes, passage of the LGC for the following reasons:
fees or charges of any kind on the National Government, its agencies and o (1) Rep. Act No. 6395 is a particular law and it may not be repealed by
instrumentalities when specific provisions of the LGC authorize the LGUs to impose Rep. Act No. 7160 which is a general law;
taxes, fees or charges on the aforementioned entities. Section 151 in relation to o (2) Section 193 of Rep. Act No. 7160 is in the nature of an implied
Section 137 of the LGC clearly authorizes city governments to impose franchise tax repeal which is not favored; and
on businesses enjoying a franchise, such as NPC. o (3) local governments have no power to tax instrumentalities of the
national government.
FACTS: ● The CA reversed the trial court's Order, ruling in favor of the City
● National Power Corporation (NPC) is a GOCC created under Commonwealth Act  Held that Section 193, in relation to Sections 137 and 151 of the LGC,
No. 120 expressly withdrew the exemptions granted to the petitioner
 Its capital stock was subscribed and paid wholly by the Philippine  Ordered NPC to pay the respondent city government the sum of
Government P808,606.41 representing the franchise tax due based on gross receipts for
● NPC sells electric power to the residents of Cabanatuan City, posting a gross the year 1992
income of P107,814,187.96 in 1992 ● April 4, 2001: The petitioner led a Motion for Reconsideration on the Court of
 Pursuant to Section 37 of Ordinance No. 165-92, the City of Cabanatuan Appeal's Decision
assessed NPC a franchise tax amounting to P808,606.41, representing  This was denied by the CA
75% of 1% of the latter's gross receipts for the preceding year ● NPC filed a petition for review on certiorari with the SC
● NPC refused to pay the tax assessment  It reiterated that as a non- profit organization, it is exempted from the
 It argued that the City has no authority to impose tax on government entities payment of all forms of taxes, charges, duties or fees in accordance with
 It also contended that as a non- profit organization, it is exempted from the Sec. 13 of Rep. Act No. 6395
payment of all forms of taxes, charges, duties or fees in accordance with
Sec. 13 of Rep. Act No. 6395, as amended, viz: ISSUE/S & RATIO:
o Sec. 13. Non-profit Character of the Corporation; Exemption from all 1. W/N NPC is liable to pay the franchise taxes, as assessed by the City of
Taxes, Duties, Fees, Imposts and Other Charges by Government and Cabanatuan in accordance with Ordinance No. 165-92 – YES
Governmental Instrumentalities. — The Corporation shall be non- ● One of the most significant provisions of the LGC is the removal of the blanket
profit and shall devote all its return from its capital investment, as well exclusion of instrumentalities and agencies of the national government from the
as excess revenues from its operation, for expansion. To enable the coverage of local taxation.
Corporation to pay its indebtedness and obligations and in furtherance ● GENERAL RULE: LGUs cannot impose taxes, fees or charges of any kind on
and effective implementation of the policy enunciated in Section one of the National Government, its agencies and instrumentalities
this Act, the Corporation is hereby exempt: ● EXCEPTION: LGUs can impose taxes, fees or charges of any kind on the
XXX-XXX-XXX National Government, its agencies and instrumentalities when specific provisions
of the LGC authorize the LGUs to impose taxes, fees or charges on the
aforementioned entities
● [TOPIC] Sec. 133 of the LGC provides: o The former relates to the right to exist as a corporation, by virtue of
 Section 133. Common Limitations on the Taxing Powers of the Local duly approved articles of incorporation, or a charter pursuant to a
Government Units. — Unless otherwise provided herein, the exercise of special law creating the corporation
the taxing powers of provinces, cities, municipalities, and barangays shall ▪ The right under a primary or general franchise is vested in the
not extend to the levy of the following: individuals who compose the corporation and not in the
xxx xxx xxx corporation itself
(o) Taxes, fees, or charges of any kind on the National Government, its o On the other hand, the latter refers to the right or privileges conferred
agencies and instrumentalities, and local government units upon an existing corporation such as the right to use the streets of a
● In view of the afore-quoted provision of the LGC, the doctrine in Basco vs. municipality to lay pipes of tracks, erect poles or string wires.
Philippine Amusement and Gaming Corporation, relied upon by the NPC to ▪ The rights under a secondary or special franchise are vested in
support its claim no longer applies the corporation and may ordinarily be conveyed or mortgaged
 The Basco case was decided prior to the effectivity of the LGC, when no under a general power granted to a corporation to dispose of its
law empowering the local government units to tax instrumentalities of the property, except such special or secondary franchises as are
National Government was in effect charged with a public use.
 However, as this Court ruled in the case of MCIAA vs. Marcos, nothing ● RULE: To determine whether an entity is covered by the franchise tax in
prevents Congress from decreeing that even instrumentalities or agencies question, the following requisites should concur:
of the government performing governmental functions may be subject to tax (1) It has a "franchise" in the sense of a secondary or special franchise; and
o In enacting the LGC, Congress exercised its prerogative to tax (2) It is exercising its rights or privileges under this franchise within the territory
instrumentalities and agencies of government as it sees fit of the respondent city government
o Thus, after reviewing the specific provisions of the LGC, this Court ● APPLICATION IN THE CASE AT BAR:
held that MCIAA, although an instrumentality of the national (1) NPC has a "franchise" in the sense of a secondary or special franchise
government, was subject to real property tax  Commonwealth Act No. 120, as amended by Rep. Act No. 7395,
● [TOPIC] IN THE CASE AT BAR: Section 151 in relation to Section 137 of the constitutes petitioner's primary and secondary franchises
LGC clearly authorizes the respondent city government to impose on NPC the  It serves as the petitioner’s charter, defining its composition,
franchise tax in question capitalization, the appointment and the specific duties of its corporate
 Sec. 137. Franchise Tax. — Notwithstanding any exemption granted by officers, and its corporate life span
any law or other special law, the province may impose a tax on  As its secondary franchise, Commonwealth Act No. 120, as amended,
businesses enjoying a franchise, at a rate not exceeding fifty percent vests the petitioner the following powers which are not available to
(50%) of one percent (1%) of the gross annual receipts for the preceding ordinary corporations,
calendar year based on the incoming receipt, or realized, within its territorial (2) NPC is operating within the respondent city government's territorial
jurisdiction. jurisdiction pursuant to the powers granted to it by Commonwealth Act No.
In the case of a newly started business, the tax shall not exceed one- 120
twentieth (1/20) of one percent (1%) of the capital investment. In the  From its operations in the City of Cabanatuan, petitioner realized a
succeeding calendar year, regardless of when the business started to gross income of P107,814,187.96 in 1992
operate, the tax shall be based on the gross receipts for the preceding ● NPC’s ARGUMENT: It is excluded from the coverage of the franchise tax simply
calendar year, or any fraction thereof, as provided herein. because its stocks are wholly owned by the National Government, and its charter
 Sec. 151. Scope of Taxing Powers. — Except as otherwise provided in characterized it as a "non-profit" organization.
this Code, the city, may levy the taxes, fees, and charges which the ● SC: These contentions must necessarily fail. NPC, as an entity distinct from the
province or municipality may impose: Provided, however, That the taxes, National Government, is a taxable entity.
fees and charges levied and collected by highly urbanized and independent  A franchise tax is imposed based not on the ownership but on the exercise
component cities shall accrue to them and distributed in accordance with by the corporation of a privilege to do business
the provisions of this Code. o The taxable entity is the corporation which exercises the franchise,
The rates of taxes that the city may levy may exceed the maximum rates and not the individual stockholders.
allowed for the province or municipality by not more than fty percent (50%) o By virtue of its charter, petitioner was created as a separate and
except the rates of professional and amusement taxes." distinct entity from the National Government
● NATURE OF A FRANCHISE TAX: A franchise is a privilege conferred by ▪ It can sue and be sued under its own name
government authority, which does not belong to citizens of the country generally ▪ It can exercise all the powers of a corporation under the
as a matter of common right Corporation Code
 In its specific sense, a franchise may refer to a general or primary franchise,  The ownership by the National Government of its entire capital stock does
or to a special or secondary franchise not necessarily imply that petitioner is not engaged in business
 o Section 2 of P.D. No. 2029 classifies GOCCs into those performing  With the added burden of devolution, it is even more imperative for
governmental functions and those performing proprietary functions government entities to share in the requirements of development, fiscal or
o Sec. 2. A government-owned or controlled corporation is a stock or a otherwise, by paying taxes or other charges due from them.
non-stock corporation, whether performing governmental or
proprietary functions, which is directly chartered by special law Ruling/Dispositive Portion:
or if organized under the general corporation law is owned or IN VIEW WHEREOF, the instant petition is DENIED and the assailed Decision and
controlled by the government directly, or indirectly through a parent Resolution of the Court of Appeals dated March 12, 2001 and July 10, 2001,
corporation or subsidiary corporation, to the extent of at least a respectively, are hereby AFFIRMED.
majority of its outstanding voting capital stock XXX-XXX-XXX
 NPC’s activities activities do not partake of the sovereign functions of the
government
o They are purely private and commercial undertakings, albeit imbued
with public interest.
o The public interest involved in its activities, however, does not distract
from the true nature of the petitioner as a commercial enterprise,
o NPC is in the same league with similar public utilities like telephone
and telegraph companies, railroad companies, water supply and
irrigation companies, gas, coal or light companies, power plants, ice
plant among others; all of which are declared by this Court as
ministrant or proprietary functions of government aimed at advancing
the general interest of society
● CONCLUSION: Fulfilling both requisites, petitioner is, and ought to be, subject of
the franchise tax in question.

2. W/N NPC’s tax exemptions under its charter subsist despite the passage of
the LGC – NO, the exemptions have been withdrawn
● NPC’s sole refuge is Section 13 of Rep. Act No. 6395 exempting from, among
others, "all income taxes, franchise taxes and realty taxes to be paid to the
National Government, its provinces, cities, municipalities and other government
agencies and instrumentalities."
● However, Section 193 of the LGC withdrew, subject to limited exceptions, the
sweeping tax privileges previously enjoyed by private and public corporations.
 Contrary to the contention of petitioner, Section 193 of the LGC is an
express, albeit general, repeal of all statutes granting tax exemptions from
local taxes
 Sec. 193. Withdrawal of Tax Exemption Privileges. — Unless otherwise
provided in this Code, tax exemptions or incentives granted to, or
presently enjoyed by all persons, whether natural or juridical, including
government owned or controlled corporations, except local water
districts, cooperatives duly registered under R.A. No. 6938, non-stock and
non-profit hospitals and educational institutions, are hereby withdrawn
upon the effectivity of this Code.
● Not being a local water district, a cooperative registered under R.A. No. 6938, or
a non-stock and non-pro t hospital or educational institution, NPC clearly does
NOT belong to the exception.
● Rationale behind withdrawal of exemptions:
 The original reasons for the withdrawal of tax exemption privileges granted
to government-owned or controlled corporations and all other units of
government were that such privilege resulted in serious tax base
erosion and distortions in the tax treatment of similarly situated
enterprises (MCIAA v Marcos)