TL;DR

The Supreme Court ruled that Camarines Sur III Electric Cooperative, Inc. (CASURECO III), despite being a non-profit electric cooperative, is liable for franchise tax to the City of Iriga. The Court clarified that the power to tax is constitutionally granted to local government units and that franchise tax is levied on the privilege of operating a business, not on profit. Crucially, CASURECO III’s tax exemptions under Presidential Decree 269 were deemed withdrawn by the Local Government Code and subsequent laws. This means electric cooperatives, even if non-profit, are not automatically exempt from local franchise taxes unless explicitly granted by current law, reinforcing the fiscal autonomy of local governments and ensuring cooperatives contribute to local revenue generation.

Powering Up Revenue: Iriga City’s Franchise Tax on CASURECO III

Can a city impose franchise tax on a non-profit electric cooperative? This question sparked a legal battle between the City of Iriga and Camarines Sur III Electric Cooperative, Inc. (CASURECO III). At the heart of the dispute was whether CASURECO III, operating under a government-granted franchise, could claim exemption from local franchise tax, arguing its non-profit nature. This case delves into the nature of franchise tax, the extent of local government taxing powers, and the limits of tax exemptions for electric cooperatives in the Philippines.

The legal saga began when Iriga City demanded CASURECO III pay franchise taxes for 1998-2003 and real property taxes. CASURECO III resisted, citing its provisional registration with the Cooperative Development Authority (CDA) and its non-profit status as grounds for exemption. The Regional Trial Court (RTC) initially sided with Iriga City, finding CASURECO III liable for franchise taxes. However, the Court of Appeals (CA) reversed this decision, emphasizing CASURECO III’s non-profit nature and concluding it wasn’t engaged in “business” as defined under the Local Government Code (LGC). This CA ruling prompted the City of Iriga to elevate the case to the Supreme Court.

Procedurally, the Supreme Court noted a critical error: the appeal from the RTC should have gone to the Court of Tax Appeals (CTA), not the CA, based on Republic Act (RA) 9282. This procedural misstep rendered the CA decision void for lack of jurisdiction. However, recognizing the substantive importance of the issue, the Supreme Court opted to address the merits of the case. The Court emphasized that the power of local government units to tax is constitutionally enshrined, enabling them to generate revenue for local services. This power is concretized in the LGC, specifically Section 137 which grants provinces, and by extension cities, the authority to impose franchise tax, notwithstanding any existing exemptions in other laws.

CASURECO III leaned heavily on Presidential Decree (PD) 269, which initially provided tax exemptions to electric cooperatives. However, the Court clarified that these exemptions were not perpetual. The enactment of RA 6938, the Cooperative Code of the Philippines, and the subsequent LGC, particularly Section 193, significantly altered the landscape. Section 193 of the LGC explicitly withdrew tax exemptions previously granted, except for specific entities like cooperatives duly registered under RA 6938. The Supreme Court cited its precedent in PHILRECA v. DILG, which established that PD 269 exemptions were withdrawn, and only cooperatives registered with the CDA under RA 6938 could retain certain tax privileges.

Crucially, CASURECO III’s registration with the CDA was only provisional and had expired in 1992. Therefore, it could not claim exemption under RA 6938. The Court firmly rejected CASURECO III’s argument that its non-profit nature exempted it from franchise tax. Referencing National Power Corporation v. City of Cabanatuan, the Court reiterated that franchise tax is a “tax on the privilege of transacting business” and “exercising corporate franchises.” It is not a tax on income or property, but on the very right to operate under a franchise. Thus, the relevant inquiry is whether an entity holds and exercises a franchise, not whether it is profit-oriented.

The Court concluded that CASURECO III, operating under a franchise granted by the National Electrification Administration (NEA) under PD 269 and exercising this franchise within Iriga City and the Rinconada area, is indeed liable for franchise tax. The situs of taxation, the Court clarified, is “the place where the privilege is exercised,” which in this case is Iriga City where CASURECO III’s principal office is located and from where it operates. Consequently, the franchise tax base includes gross receipts from both Iriga City and the Rinconada area, as the privilege is exercised from Iriga City. The Supreme Court thus reversed the CA and reinstated the RTC decision, affirming Iriga City’s right to collect franchise tax from CASURECO III.

FAQs

This case underscores the principle that tax exemptions are strictly construed and must be explicitly granted by law. It clarifies that operating under a franchise, regardless of profit motives, generally subjects an entity to franchise tax unless a clear and current legal exemption applies. This decision reinforces the taxing power of local government units and ensures that entities enjoying franchises contribute to local revenue, even if they are non-profit in nature.

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: City of Iriga v. CASURECO III, G.R. No. 192945, September 05, 2012