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by Atty. Gabriel Ablola 🇵🇭

Tag: Tax Exemptions

  • Is Our Non-Profit Electric Cooperative Liable for Local Franchise Tax?

    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.

  • Tax Exemptions and Retroactivity: Understanding the Pansacola Case

    TL;DR

    The Supreme Court ruled in Pansacola v. Commissioner of Internal Revenue that increased tax exemptions under the National Internal Revenue Code of 1997 (NIRC) could not be applied retroactively to the 1997 taxable year. The Court emphasized that tax laws generally operate prospectively unless expressly stated otherwise. This means taxpayers cannot claim higher exemptions introduced by the NIRC for income earned before its effectivity on January 1, 1998. This decision clarifies that tax benefits are determined by the law in force during the taxable year, not when the tax return is filed.

    Can New Tax Breaks Apply to Old Income? The Pansacola Tax Saga

    The case of Carmelino F. Pansacola revolves around a straightforward yet critical question: Can taxpayers avail of increased personal and additional tax exemptions introduced by a new law (NIRC) for a taxable year prior to the law’s effectivity? Pansacola, believing he was entitled to the new exemptions for the 1997 taxable year, sought a refund, a claim that was ultimately denied by both the Court of Tax Appeals and the Court of Appeals. This case highlights the fundamental principle of prospective application of tax laws and the strict interpretation of tax exemptions.

    At the heart of the matter is Section 35 of the NIRC, which increased personal and additional exemptions for individual taxpayers. Pansacola argued that these exemptions, being of a fixed character, should be applicable to his 1997 income tax return, filed in 1998 after the NIRC took effect. He leaned heavily on the Umali v. Estanislao case, suggesting that the new law should immediately benefit taxpayers. However, the Supreme Court distinguished Umali, emphasizing that the NIRC lacked any explicit provision for retroactive application. Tax laws, the Court reiterated, are generally prospective, meaning they apply to future transactions and events unless the legislature clearly intends otherwise.

    The Court delved into the specific provisions of the NIRC to underscore its prospective nature. Section 24(A)(1)(a), in conjunction with Sections 31 and 22(P), clarifies that income tax is imposed on taxable income derived for each taxable year. This means the taxpayer’s income, deductions, and exemptions are all determined within the confines of that particular calendar year. Moreover, Section 45 stipulates that deductions are taken for the taxable year in which they are paid or incurred. The Court stated:

    SEC. 24. Income Tax Rates –

    (A) Rates of Income Tax on Individual Citizen …

    (1) An income tax is hereby imposed:

    (a) On the taxable income defined in Section 31 of this Code, other than income subject to tax under Subsections (B), (C), and (D) of this Section, derived for each taxable year from all sources within and without the Philippines by every individual citizen of the Philippines residing therein; (Emphasis ours.)

    Building on this principle, the Court highlighted Section 35(C), which addresses changes in taxpayer status during the taxable year. This provision allows taxpayers to claim the full exemption amount even if their marital status or number of dependents changes within the year, but crucially, it still ties the exemptions to the specific taxable year. The Court saw that the exemptions are computed as of the close of the taxable year:

    Sec. 35. Allowance of Personal Exemption for Individual Taxpayer. –

    x x x x

    (C) Change of Status. – If the taxpayer marries or should have additional dependent(s) as defined above during the taxable year, the taxpayer may claim the corresponding additional exemption, as the case may be, in full for such year.

    The taxpayer’s reliance on Umali v. Estanislao was found to be misplaced. In Umali, the Court allowed retroactive application because the amending law was considered social legislation intended to remedy a prior inequity and there was explicit legislative intent to that effect. In contrast, the NIRC lacked any such indication of retroactive intent. The Court emphasized that tax exemptions are construed strictly against the taxpayer and cannot be implied. As such, since the NIRC became effective in 1998, the increased exemptions applied to taxable year 1998 and beyond.

    The Supreme Court ultimately ruled against Pansacola, affirming the decisions of the lower courts. This ruling reinforces the principle of prospective application in tax law and underscores the importance of clear legislative intent when considering retroactive application. It also highlights the strict interpretation of tax exemptions and the taxpayer’s burden to demonstrate their entitlement to such benefits.

    FAQs

    What was the key issue in this case? The key issue was whether increased personal and additional tax exemptions under the NIRC could be applied retroactively to the taxable year 1997, prior to the law’s effectivity.
    What is the general rule regarding the application of tax laws? Tax laws are generally applied prospectively, meaning they apply to future transactions and events unless the law explicitly states otherwise.
    Why did the Court deny Pansacola’s claim for a refund? The Court denied the refund because the NIRC, which provided for the increased exemptions, took effect on January 1, 1998, and did not contain any provision for retroactive application to the 1997 taxable year.
    What is the significance of Section 35(C) of the NIRC? Section 35(C) allows taxpayers to claim the full exemption amount even if their marital status or number of dependents changes during the taxable year, but it does not allow for retroactive application of exemptions from prior years.
    How does this ruling affect taxpayers? This ruling clarifies that taxpayers can only claim tax exemptions and deductions according to the laws in effect during the specific taxable year for which they are filing.
    Why was the Umali v. Estanislao case not applicable here? Umali involved a social legislation with clear legislative intent for retroactive application, while the NIRC lacked any such indication of retroactivity.

    The Pansacola case serves as a reminder of the importance of understanding the effective dates and applicability of tax laws. Taxpayers should always consult with a tax professional to ensure compliance with current regulations and to properly claim any eligible deductions or exemptions.

    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: Pansacola vs. CIR, G.R. No. 159991, November 16, 2006