SMART V CITY OF DAVAO

FACTS: SMART FILED A SPECIAL CIVIL ACTION FOR DECLARATORY RELIEF FOR THE
ASCERTAINMENT OF ITS RIGHTS AND OBLIGATIONS UNDER THE TAX CODE OF THE CITY. THEY
CONTENDS THAT ITS TELECENTER IS EXEMPT FROM PAYMENT OF FRANCHISE TAX ON THE
FOLLOWING GROUNDS, THE ISSUANCE OF ITS FRANCHISE SUBSEQUENT TO LGC SHOWS THE CLEAR
LEGISLATIVE INTENT TO EXEMPT IT FROM THE PROVISION OF LGC AND THE POWER OF THE CITY
TO IMPOSE A FRANCHISE TAX IS SUBJECT TO STATUTORY LIMITATIONS SUCH AS THE "IN LIEU
OF ALL TAXES" CLAUSE FOUND IN SECTION 9 OF ITS FRANCHISE. HOWEVER, THE CITY INVOKED
THE POWER GRANTED BY THE CONSTITUTION TO LGU TO CREATE THEIR OWN SOURCES OF
REVENUE.

ISSUE: WHETHER OR NOT SMART IS LIABLE TO PAY THE FRANCHISE TAX IMPOSED BY THE CITY

HELD: YES. SMART IS LIABLE. IT IS TRUE THAT THE WITHDRAWAL OF TAX EXEMPTIONS OR
INCENTIVES PROVIDED IN THE LGC CAN ONLY AFFECT THOSE FRANCHISES GRANTED PRIOR TO
THE EFFECTIVITY OF THE LAW.FURTHERMORE, SMARTS FRANCHISE IS NOT DEFINITE IN
GRANTING EXEMPTION TO SMART FROM LOCAL TAXATION. IT ALSO DOES NOT EXPRESSLY PROVIDE
WHAT KIND OF TAXES SMART IS EXEMPTED FROM. IT IS NOT CLEAR WHETHER THE "IN LIEU OF
ALL TAXES" PROVISION IN THE FRANCHISE OF SMART WOULD INCLUDE EXEMPTION FROM LOCAL
OR NATIONAL TAXATION. THE UNCERTAINTY IN THE "IN LIEU OF ALL TAXES" CLAUSE IN
SMARTS FRANCHISE ON WHETHER SMART IS EXEMPTED FROM BOTH LOCAL AND NATIONAL
FRANCHISE TAX IS CONSTRUED STRICTYL AGAINST SMART WHO IS CLAIMING THE EXEMPTION.
TAX EXEMPTIONS ARE NEVER PRESUMED AND ARE STRICTLY CONSTRUED AGAINST THE TAXPAYER
AND LIBERALLY IN FAVOR OF THE TAXING AUTHORITY. THEY CAN ONLY BE GIVEN FORCE WHEN
THE GRANT IS CLEAR AND CATEGORICAL. THE "IN LIEU OF ALL TAXES" CLAUSE REFERS ONLY
TO TAXES, OTHER THAN INCOME TAX, IMPOSED UNDER THE NIRC AND DOES NOT APPLY TO LOCAL
TAXES. HOWEVER, THE FRANCHISE TAX THAT THE CITY MAY IMPOSE MUST COMPLY WITH
SECTIONS 137 AND 151 OF THE LGC. THUS, THE LOCAL FRANCHISE TAX THAT MAY BE IMPOSED
BU THE CITY MUST NOT EXCEED 50% OF 1% OF THE GROSS ANNUAL RECEIPTS FOR THE
PRECEDING CALENDAR YEAR BASED ON THE INCOME ON RECEIPTS REALIZED WITHIN THE
TERITORIAL JURISDICTION OF DAVAO. HENCE, SMART IS LIABLE TO PAY PAY THE FRANCHISE
TAX IMPOSED BY THE CITY OF DAVAO.