gaboogle.com

by Atty. Gabriel Ablola 🇵🇭

Tag: Franchise Law

  • Upholding Franchise Tax Exemptions: Philippine Airlines and the Doctrine of Special Laws Prevailing Over General Laws

    TL;DR

    The Supreme Court affirmed that Philippine Airlines (PAL) remains exempt from excise taxes on its imported commissary supplies like alcohol and tobacco, intended for international flights. This exemption is rooted in PAL’s franchise under Presidential Decree No. 1590, a special law granting tax privileges. The Court clarified that subsequent general tax laws, such as Republic Act No. 9334 and Republic Act No. 9337 amending the National Internal Revenue Code (NIRC), did not expressly repeal or override PAL’s specific franchise exemptions. This ruling reinforces the legal principle in Philippine jurisprudence that special laws prevail over general laws unless explicitly repealed, ensuring PAL’s continued tax benefits under its existing franchise.

    Franchise vs. Fiscal Mandate: When PAL’s Tax Shield Takes Flight

    This case revolves around the clash between Philippine Airlines’ (PAL) legislated tax exemptions and the government’s efforts to broaden the tax base through amendments to the National Internal Revenue Code (NIRC). At the heart of the dispute is Section 13 of Presidential Decree No. 1590 (PD 1590), PAL’s franchise, which grants significant tax privileges, including exemptions from duties and charges on imported commissary and catering supplies. The Commissioner of Internal Revenue (CIR) and Commissioner of Customs (COC) argued that Republic Act No. 9334 (RA 9334), which amended Section 131 of the NIRC, effectively revoked PAL’s excise tax exemption on imported alcohol and tobacco products. This amendment declared that importations of such goods, even for duty-free shops, are subject to all applicable taxes notwithstanding any special or general law. PAL, on the other hand, contended that its franchise, a special law, remained unaffected by this general tax amendment and that it was still entitled to the tax exemptions.

    The legal framework hinges on a fundamental principle of statutory construction: lex specialis derogat legi generali, meaning a special law prevails over a general law. PD 1590, enacted in 1978, specifically governs PAL’s franchise and tax obligations. Section 13 of PD 1590 is explicit in stating that the taxes paid by PAL under its franchise are “in lieu of all other taxes, duties, royalties, registration, license, and other fees and charges of any kind…including but not limited to…all taxes…duties, charges…due on all importations by the grantee of…commissary and catering supplies…”. This provision seemingly grants a broad tax exemption on importations essential for PAL’s operations, contingent on these supplies not being locally available in reasonable quantity, quality, or price and being used for its transport and non-transport operations.

    The CIR and COC argued that the “notwithstanding any special or general law” clause in RA 9334’s amendment of Section 131 NIRC, coupled with the removal of tax exemptions for certain imported goods, effectively repealed PAL’s franchise exemption concerning excise taxes on alcohol and tobacco. However, the Supreme Court disagreed, consistently adhering to its previous rulings on similar cases involving PAL’s tax exemptions. The Court emphasized that repeal by implication is disfavored and that for a later general law to repeal an earlier special law, the repeal must be express or through unavoidable implication, demonstrating a clear legislative intent to abrogate the special law. In this case, RA 9334 did not explicitly mention or repeal PD 1590. The general clause was deemed insufficient to override the specific tax exemptions granted in PAL’s franchise.

    The Court reiterated that PAL’s franchise, PD 1590, remains the governing law for its tax obligations. It highlighted Section 22 of Republic Act No. 9337 (RA 9337), which further amended the NIRC. Section 22 specifically addressed franchises of domestic airlines, abolishing the franchise tax but explicitly stating that franchisees “shall otherwise remain exempt from any taxes, duties, royalties, registration, license, and other fees and charges, as may be provided by their respective franchise agreement.”

    SEC. 22. Franchises of Domestic Airlines. – The provisions of P.D. No. 1590 on the franchise tax of Philippine Airlines, Inc., R.A. No. 7151 on the franchise tax of Cebu Air, Inc.…or any other franchise agreement or law pertaining to a domestic airline to the contrary notwithstanding:

    (A) The franchise tax is abolished;

    (B) The franchisee shall be liable to the corporate income tax;

    (C) The franchisee shall register for value-added tax under Section 236, and to account under Title IV of the National Internal Revenue Code of 1997, as amended, for value-added tax on its sale of goods, property or services and its lease of property; and

    (D) The franchisee shall otherwise remain exempt from any taxes, duties, royalties, registration, license, and other fees and charges, as may be provided by their respective franchise agreement.

    This provision in RA 9337, enacted after RA 9334, further solidified the legislative intent to preserve the tax exemptions granted under existing franchise agreements, except for the franchise tax itself which was abolished. The Court interpreted this as a clear indication that PAL’s other tax exemptions, including those on importations under PD 1590, were intended to continue. Regarding the condition in Section 13 of PD 1590 that the imported supplies must not be locally available, the Supreme Court deferred to the factual findings of the Court of Tax Appeals (CTA). The CTA, as a specialized court, had determined that PAL sufficiently proved its compliance with this condition for alcoholic beverages, although not for tobacco products in the initial CTA decision. The Supreme Court, respecting the CTA’s expertise in tax matters and absent any compelling reason to overturn its factual findings, upheld the CTA’s decision.

    Ultimately, this case underscores the enduring strength of franchise-specific tax exemptions in Philippine law. It serves as a reminder that general tax laws, even with “notwithstanding” clauses, do not automatically override the specific privileges granted by prior special laws like legislative franchises. For businesses operating under franchises with tax incentives, this decision provides reassurance that these legislated benefits remain valid unless expressly and unequivocally repealed.

    FAQs

    What was the central legal question in this case? The core issue was whether Republic Act No. 9334, amending the NIRC, effectively revoked Philippine Airlines’ (PAL) tax exemption on imported commissary supplies, particularly alcohol and tobacco, as granted under its franchise, Presidential Decree No. 1590.
    What was the Supreme Court’s ruling? The Supreme Court ruled in favor of Philippine Airlines, affirming that RA 9334 did not revoke PAL’s tax exemption on imported commissary supplies under PD 1590. The Court upheld the principle that special laws (like PAL’s franchise) prevail over general laws (like the NIRC amendments) unless there is an express repeal.
    What is the legal basis for PAL’s tax exemption? The tax exemption is based on Section 13 of Presidential Decree No. 1590, PAL’s franchise, which grants tax exemptions on importations of commissary and catering supplies, provided they are for PAL’s use and not locally available.
    Did Republic Act No. 9334 repeal PAL’s tax exemption? No, the Supreme Court held that RA 9334, a general tax law, did not expressly repeal PD 1590, a special franchise law. General “notwithstanding” clauses are insufficient to override specific franchise exemptions without explicit mention of the franchise law intended to be repealed.
    How does Republic Act No. 9337 relate to this case? RA 9337, enacted after RA 9334, further amended the NIRC and, in Section 22, specifically addressed airline franchises. It abolished franchise taxes but explicitly maintained other tax exemptions provided in franchise agreements, reinforcing the continued validity of PAL’s exemptions under PD 1590.
    What is the significance of the ‘lex specialis derogat legi generali’ principle in this case? This principle, meaning a special law prevails over a general law, was crucial. The Court applied it to prioritize PAL’s franchise (special law) over the general amendments to the NIRC (general law), preserving PAL’s tax exemptions.
    What are the practical implications of this ruling for Philippine Airlines? This ruling allows Philippine Airlines to continue enjoying tax exemptions on eligible imported commissary supplies, reducing its operational costs and maintaining its financial advantages under its franchise.

    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 AND COMMISSIONER OF CUSTOMS VS. PHILIPPINE AIRLINES, INC., G.R. Nos. 215705-07, February 22, 2017

  • Allocation of Horse Racing ‘Breakages’: Ensuring Funds Benefit Intended Beneficiaries

    TL;DR

    The Supreme Court affirmed that the Philippine Racing Commission (PHILRACOM) is entitled to the ‘breakages’ (fractions of eliminated dividends) from all horse races, including mid-week races, conducted by Manila Jockey Club, Inc. (MJCI) and Philippine Racing Club, Inc. (PRCI). This ruling ensures that funds intended for provincial/city hospitals, drug rehabilitation, and athletic programs are properly allocated, preventing racing clubs from using these funds for their own purposes. The decision clarifies that franchise laws and executive orders regarding breakage allocation apply to all authorized racing days, not just those specified in the original franchise agreements, and that the responsibility for remitting these breakages extends back to when PHILRACOM authorized mid-week races.

    Who Gets the Change? Resolving Disputes Over Horse Racing Proceeds

    This case revolves around a dispute over the allocation of “breakages” derived from horse races conducted by Manila Jockey Club, Inc. (MJCI) and Philippine Racing Club, Inc. (PRCI). Breakages are the fractions of ten centavos eliminated from the dividend of winning tickets. The central question is whether these breakages from mid-week races, authorized by the Philippine Racing Commission (PHILRACOM) beyond the original franchise agreements, should be distributed according to the allocation scheme defined in Republic Acts (R.A.) 6631 and 6632, as amended by Executive Orders (E.O.) 88 and 89, or whether the racing clubs could retain them for their own business purposes.

    The petitioners, MJCI and PRCI, argued that the franchise laws should be strictly construed to apply only to races conducted on Saturdays, Sundays, and official holidays, as explicitly stated in their franchise agreements. They contended that the mid-week races, authorized later by PHILRACOM, fell outside this distribution scheme, entitling them to the breakages. The respondent, PHILRACOM, countered that R.A. Nos. 6631 and 6632 primarily granted the franchises, and the addition of mid-week races by PHILRACOM did not alter the general applicability of the laws regarding breakage allocation. They maintained that the allocation scheme should apply to all races, regardless of when they were conducted.

    The Supreme Court sided with PHILRACOM, emphasizing that franchise laws are privileges conferred by the government, subject to governmental control in the public interest. As grantees of a franchise, MJCI and PRCI’s operations are governed by all existing rules related to horse racing, provided they are not inconsistent with each other. Therefore, the applicable laws included R.A. 309, as amended, R.A. 6631 and 6632, as amended by E.O. 88 and 89, and P.D. 420. The Court invoked the legal maxim “interpretare et concordare leges legibus est optimus interpretandi,” which means to interpret in such a way as to harmonize laws with laws.

    A reasonable reading of the horse racing laws favors the determination that the entities enumerated in the distribution scheme provided under R.A. Nos. 6631 and 6632, as amended by Executive Orders 88 and 89, are the rightful beneficiaries of breakages from mid-week races.

    The Court determined that the addition of mid-week races became an integrated part of R.A. 6631 and 6632, making the procedures in the franchise laws applicable to all races. This meant the allocation of breakages did not require another legislative act to reiterate the method of distribution. The Court further noted that when the petitioners mistakenly appropriated the breakages for themselves, they became implied trustees for those legally entitled to the proceeds, as per Article 1456 of the Civil Code. This article states that if property is acquired through mistake, the person obtaining it is considered a trustee for the benefit of the person from whom the property comes.

    Regarding the period for remittance, the Court held that it should have commenced from the time PHILRACOM authorized the holding of mid-week races because R.A. Nos. 6631 and 6632 were already in effect. The argument that the petitioners could not be held retroactively liable prior to the effectivity of E.O. Nos. 88 and 89 was rejected. Even if one of the beneficiaries, the Philippine Amateur Athletic Federation (PAAF), had ceased operation, the petitioners should have set aside the amount until an alternative beneficiary was designated, which was later provided by Executive Order Nos. 88 and 89, naming PHILRACOM.

    The Court also addressed the issue of detrimental consequences if city hospitals and other institutions were deprived of the funds needed for rehabilitation and patient care, emphasizing that the allocation of breakages in favor of these institutions is a policy decision pursuing social development goals. It noted that horse racing, while authorized, is a form of gambling, which is inherently antagonistic to national productivity and self-reliance. Therefore, statutes authorizing gambling must be strictly construed to limit rather than expand the powers and rights claimed by franchise holders.

    The Supreme Court emphasized the importance of non-impairment of contracts, but stated that a gambling franchise is subject to police power for public welfare. The Court stated that an administrative body’s opinion does not bind the State. The correct application of the law can be applied later on even with previous erroneous applications. The Court ultimately affirmed the Court of Appeals’ decision, mandating MJCI and PRCI to remit the breakages to the designated beneficiaries.

    FAQs

    What are “breakages” in horse racing? Breakages are the fractions of ten centavos eliminated from the dividend of winning tickets, which are then allocated for specific purposes.
    What was the main issue in this case? The central issue was whether the breakages from mid-week horse races, authorized by PHILRACOM, should be allocated according to existing laws or retained by the racing clubs.
    Who did the Supreme Court rule should receive the “breakages”? The Supreme Court ruled that PHILRACOM and other beneficiaries designated in R.A. Nos. 6631 and 6632, as amended by Executive Orders 88 and 89, are the rightful recipients of the breakages.
    What is the significance of Executive Orders 88 and 89 in this case? Executive Orders 88 and 89 amended the original laws to specify the beneficiaries of the breakages, including PHILRACOM, for the purpose of funding races and horse-breeding activities.
    Why couldn’t the racing clubs retain the “breakages” for their own use? The Court determined that the franchise laws and subsequent amendments applied to all authorized races, and the racing clubs were considered implied trustees for the legally entitled beneficiaries.
    From when were the racing clubs required to remit the “breakages”? The racing clubs were required to remit the breakages from the time PHILRACOM authorized the mid-week races, as the relevant laws were already in effect.
    What was the legal basis for the Supreme Court’s decision? The decision was based on the interpretation of franchise laws, the principle of harmonizing laws, and the concept of implied trust under the Civil Code, along with public policy considerations.

    In conclusion, this case clarifies the responsibility of horse racing clubs to allocate breakages according to the established legal framework, ensuring that funds intended for public welfare are properly distributed. The Supreme Court’s decision underscores the importance of adhering to franchise agreements and related regulations, even when operational changes occur.

    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: Manila Jockey Club vs. Court of Appeals, G.R. No. 103533, December 15, 1998