TL;DR

The Supreme Court ruled that Philippine Global Communications, Inc. (Philcom) was liable to pay the 3% franchise tax under the National Internal Revenue Code (NIRC) during the period when the implementation of the Expanded Value Added Tax (E-VAT) Law was suspended due to a Temporary Restraining Order (TRO). Although the E-VAT Law initially removed the 3% franchise tax for telecommunications companies, the TRO effectively reinstated the old tax law until the E-VAT Law’s implementation resumed. This meant Philcom could not claim a refund for franchise taxes paid during the TRO’s effectivity, preventing a tax vacuum where neither VAT nor franchise tax was collected. The decision underscores that suspension of a new law revives the previous law’s provisions.

Taxing Times: When a Suspended Law Doesn’t Grant Tax Relief

This case revolves around Philippine Global Communications, Inc.’s claim for a refund of franchise taxes paid during a period of legal limbo. The core question is: Does a telecommunications company get relief from franchise tax under a new law (E-VAT Law) even when that law’s implementation is suspended by a Temporary Restraining Order (TRO)? The answer hinges on the effect of a TRO on tax obligations when a new tax regime replaces an old one. Before the E-VAT Law, respondent, operating under Republic Act No. 4617, was subject to a 3% franchise tax under Section 117(b) of the National Internal Revenue Code (Tax Code). This provision stipulated that telephone and/or telegraph systems, and radio/or broadcasting stations paid a franchise tax equivalent to 3% of their gross receipts.

The E-VAT Law, passed in 1994, amended this provision, seemingly removing the 3% franchise tax for telecommunications companies. Section 12 of the E-VAT Law revised Section 117 of the Tax Code, retaining the 2% franchise tax only for electric, gas, and water utilities. However, the Supreme Court issued a TRO on June 30, 1994, in the consolidated cases of Tolentino et al. v. Secretary of Finance, et al., which temporarily halted the enforcement of the E-VAT Law. This suspension triggered a legal conundrum concerning the applicable tax obligations during the TRO period.

Philippine Global Communications, Inc. (Philcom), believing it was no longer obligated to pay the 3% franchise tax, filed a claim for a refund of P70,795,150.51 for the 2nd quarter of 1994 until the 4th quarter of 1995. Philcom argued that the E-VAT Law’s effectivity exempted it from the franchise tax, and the TRO did not extend its obligation under the old Tax Code. The Court of Tax Appeals (CTA) sided with Philcom, stating that the dropping of Section 117(b) in the E-VAT Law was an express amendment by deletion, intending to exempt Philcom from the franchise tax. The CTA further stated that the TRO only suspended implementation, not the effectivity of the E-VAT Law.

However, the Supreme Court reversed these decisions. The Court emphasized that the amendment of a law becomes effective as part of the amended law when the amendment takes effect. The E-VAT Law, while initially removing the 3% franchise tax, was suspended by the TRO. The Supreme Court explicitly stated that the TRO restrained the implementation of the E-VAT Law in its entirety, not just specific provisions under challenge in the Tolentino et al. cases. Therefore, the provisions of the Tax Code, including Section 117(b), prior to their amendment by the E-VAT Law, applied during the TRO’s effectivity.

Revenue Memorandum Circular No. 27-94, issued by the Commissioner of Internal Revenue, confirmed this stance, directing internal revenue officers to abide by the provisions of the Tax Code prior to its amendment by the E-VAT Law until the Supreme Court ruled otherwise. The Court highlighted that the abolition of the 3% franchise tax and its replacement by the 10% VAT only became effective and implemented on January 1, 1996, following Revenue Regulation No. 7-95. Thus, granting a refund of the franchise tax paid before the VAT implementation would create a tax vacuum, depriving the government of revenue.

FAQs

This case demonstrates the principle that the suspension of a law revives the previous law. The Supreme Court’s decision ensures that tax obligations are clearly defined, preventing companies from avoiding taxation during periods of legal transition.

For inquiries regarding the application of this ruling to specific circumstances, please contact Atty. Gabriel Ablola through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: Commissioner of Internal Revenue v. Philippine Global Communications, Inc., G.R. No. 144696, August 16, 2006