Dear Atty. Gab,

Musta Atty. Gab!

My name is Ricardo Cruz, and I serve as the treasurer for our community-based cooperative, the “Bagong Liwanag Electric Cooperative,” located in Sta. Elena City, Province of Rizal. We’ve been providing electricity not only to our city but also to the neighboring towns of San Roque and La Paz for over twenty years. Our cooperative was originally organized under Presidential Decree No. 269, primarily to help with rural electrification, and we’ve always operated on a non-profit basis, reinvesting any surplus back into improving our services.

Just last week, we were quite surprised to receive a formal assessment from the Sta. Elena City Treasurer’s Office. They are demanding payment of franchise taxes amounting to approximately P500,000, covering the period from 2018 to 2023. This came as a shock because we’ve always been under the impression that as a non-profit electric cooperative established under P.D. 269, we were exempt from such local taxes. We did have a provisional registration with the Cooperative Development Authority (CDA) many years ago, but I recall that it had an expiration date and we might not have formally renewed it under the newer cooperative laws, assuming our P.D. 269 status was sufficient.

We are now quite confused. Does our non-profit nature not shield us from these franchise taxes? Does the City of Sta. Elena have the authority to impose this tax on us, especially since P.D. 269 seemed to grant exemptions? Furthermore, part of their computation includes our gross receipts from San Roque and La Paz. Can Sta. Elena City tax income generated from services rendered outside its direct territorial jurisdiction, even if our main office is here? We are a small cooperative, and this amount is substantial for us. Any guidance you can provide would be immensely helpful.

Salamat po,

Ricardo Cruz

Dear Mr. Cruz,

Thank you for reaching out with your concerns regarding the franchise tax assessment received by Bagong Liwanag Electric Cooperative. I understand this situation can be unsettling, especially when you’ve operated under the belief of tax exemption for a long time.

In general, local government units (LGUs) in the Philippines are empowered by the Local Government Code (LGC) to impose a franchise tax on entities exercising a franchise within their territorial jurisdiction. The non-profit nature of an entity does not automatically guarantee exemption from this tax. While Presidential Decree No. 269 did grant certain tax privileges to electric cooperatives, the LGC, which took effect in 1992, withdrew many pre-existing tax exemptions unless specifically provided for under the LGC itself or if the cooperative is duly registered under the Cooperative Code (R.A. No. 6938, as amended by R.A. No. 9520). The situs of taxation, or the place where the tax is imposed, for a franchise tax is generally where the privilege or franchise is exercised, which is often the location of the principal office.

Understanding Franchise Taxes and LGU Powers in the Philippines

The power of local government units to levy taxes, like the franchise tax your cooperative is facing, is a fundamental aspect of local autonomy. This power is granted by the Constitution and further detailed in the Local Government Code of 1991 (Republic Act No. 7160). Specifically, Section 137 of the LGC allows provinces to impose a tax on businesses enjoying a franchise. Cities, like Sta. Elena City, are granted similar, and sometimes broader, taxing powers under Section 151 of the same Code.

A franchise tax is not a tax on the income or property of the cooperative per se, but rather a tax on the privilege of exercising its franchise. The Supreme Court has clarified this concept:

“a franchise tax is ‘a tax on the privilege of transacting business in the state and exercising corporate franchises granted by the state.’”

This means that the tax is imposed because your cooperative is exercising the special privilege granted to it by the government—in this case, to operate an electric light and power service.

To be liable for local franchise tax, two main conditions must be met:

“that one has a ‘franchise’ in the sense of a secondary or special franchise; and (2) that it is exercising its rights or privileges under this franchise within the territory of the pertinent local government unit.”

Your cooperative, having been granted the right to distribute electricity, clearly holds such a special franchise and operates within Sta. Elena City.

Now, regarding your cooperative’s tax-exempt status, it’s crucial to understand how laws have evolved. While P.D. No. 269 did provide significant tax exemptions to electric cooperatives registered with the National Electrification Administration (NEA), the LGC introduced a pivotal change. Section 193 of the LGC explicitly states the withdrawal of many tax exemptions:

“Section 193 [of the LGC] withdrew tax exemptions or incentives previously 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.’”

This provision means that unless Bagong Liwanag Electric Cooperative is currently and validly registered with the Cooperative Development Authority (CDA) under R.A. No. 6938 (or its successor, R.A. No. 9520, the Philippine Cooperative Code of 2008) and such registration grants franchise tax exemption under the LGC, the exemptions previously enjoyed under P.D. No. 269 may no longer be applicable with respect to local taxes like the franchise tax. A provisional registration with the CDA that has lapsed would generally not suffice to claim ongoing tax benefits under the Cooperative Code or the LGC. The term “businesses enjoying a franchise” in Section 137 of the LGC has been interpreted to mean the exercise of the privilege granted by the franchise, regardless of whether the entity is primarily for profit or non-profit. The focus is on the exercise of the granted right.

Regarding the scope of the tax, particularly on receipts from San Roque and La Paz, the general principle for franchise tax is that the situs of taxation is the place where the privilege is exercised. If Sta. Elena City is your cooperative’s principal place of business from which it operates and exercises its franchise, the LGU may indeed have the basis to assess franchise tax on the gross annual receipts realized from all areas it serves, based on the operations from its principal office within Sta. Elena. The Supreme Court has noted that for franchise tax, which is an excise tax:

“the situs of taxation is the place where the privilege is exercised… regardless of the place where its services or products are delivered.”

Therefore, if your cooperative’s franchise is exercised from Sta. Elena City, the city can likely tax the gross receipts from services rendered in adjacent municipalities as these are considered part of the overall business conducted under the franchise exercised within its jurisdiction.

Practical Advice for Your Situation

• Verify Your Cooperative’s Registration Status: Confirm your current registration status with both the National Electrification Administration (NEA) and, more importantly, the Cooperative Development Authority (CDA). Determine if your cooperative is registered under R.A. No. 9520 and if any specific tax exemptions apply under that registration and the LGC.
• Review the Local Tax Ordinance: Obtain a copy of Sta. Elena City’s Revenue Code or ordinance imposing the franchise tax. This will provide the specific rate, basis, and procedures for the tax.
• Examine the Tax Assessment: Carefully review the assessment from the City Treasurer. Check the computation, the periods covered, and the basis used for gross receipts. Ensure it aligns with the local ordinance.
• Check for Prescription: Under Section 194 of the LGC, local taxes generally must be assessed within five (5) years from the date they became due. Review if any portion of the assessed P500,000 covers years beyond this prescriptive period, unless fraud is alleged by the LGU.
• Consult with the LGU Treasurer: Schedule a meeting with the Sta. Elena City Treasurer’s Office to discuss the assessment. You may be able to clarify points of contention or negotiate terms if the liability is confirmed.
• Explore CDA Registration Benefits: If not currently registered or if registration has lapsed, investigate the process and benefits of full registration with the CDA under R.A. No. 9520. This might provide access to certain tax privileges moving forward, though it won’t retroactively negate past liabilities.
• Seek Specific Legal Counsel: Given the amount involved and the complexities of tax law, it is highly advisable to consult with a lawyer specializing in local government taxation or cooperative law. They can provide tailored advice based on your specific documents and circumstances.

Navigating tax obligations can indeed be complex, especially with changes in governing laws over time. It’s important to address the assessment proactively and ensure your cooperative complies with current legal requirements.

Hope this helps!

Sincerely,
Atty. Gabriel Ablola

For more specific legal assistance related to your situation, please contact me through gaboogle.com or via email at connect@gaboogle.com.

Disclaimer: This correspondence is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please schedule a formal consultation.