Transportation and common carriers exempt from local tax, says SC

MANILA, Philippines–Transportation contractors and common carriers are exempt from local tax, the Supreme Court said in a ruling released Wednesday.

In a 45-page decision written by Associate Justice Teresita Leonardo-de Castro, the high court en banc nullified Section 21 (B) of the Manila Revenue Code for violating restrictions on the taxing powers of local government units (LGU) under the Local Government Code (LGC).

“Strictly assessed against the guidelines and limitations set forth in the LGC, Section 21 (b) of the Manila Revenue Code, as amended was enacted ultra vires (abuse of authority),” the Court said.

Enacted and approved in 1993, Section 21(b) imposed a business tax of 50 percent of one percent per annum on the “gross receipts of garages, cars for rent or hire driven by lessee, transportation contractors, persons who transport passenger or freight for hire, and common carriers by land, air or water, except owners of bancas and owners of animal-drawn two-wheel vehicles.”

The City Treasurer of Manila began imposing and collecting this business tax on January 1994.

Believing it was exempt, Malaysian Airline System (MAS) challenged the validity of Section 21 (B) before the Regional Trial Court of Manila after it was assessed to pay P1.1-million license tax instead of the usual P10,307. The Manila Court ruled in favor of MAS.

Other companies also questioned the same provision in a separate case and the Manila Court issued a restraining order against its implementation. The other companies however, were not so lucky after the Manila court eventually recalled all the restraining orders prompting the companies to take the case to the high court. These companies were Maersk Filipinas Inc. (Maersk), American President Lines, Ltd. (APL), Overseas Freighters Shipping Inc. (OFSI), Flagship Tankers Corporation (Flagship Tankers), Core Indo Maritime Corporation (CIMC) and Core Maritime Corporation.

The City government of Manila also filed a petition with the Supreme Court questioning the decision that favored MAS. The high court consolidated the petition filed by Manila City and the companies.

In its decision, the high court said “it is already well-settled that although the power to tax is inherent in the State, the same is not true for the [local government units] to whom the power must be delegated by Congress and must be exercised within the guidelines and limitations that Congress may provide.”

In ruling against the City of Manila, the high vourt focused on the limitations on the taxing power of LGUs provided under the LGC, specifically, Sec 133 (j). According to the decision, this section “clearly and unambiguously proscribes LGUs from imposing any tax on the gross receipts of transportation contractors, persons engaged in the transportation of passengers or freight by hire, and common carriers by air, land and water.”

The confusion stemmed from a phrase in Section 143 (h) of the LGC, “unless otherwise provided herein,” which the City interpreted as an authority to impose tax on any business subject to excise, percentage or value-added tax. The Supreme Court disagreed and said that Section 133 (j) prevails over Section 143 (h) because the former is a specific provision that explicitly withholds taxing power from the LGU, whereas the latter defines the general power of the municipality.

“The omnibus grant of power to municipalities and cities under Section 143(h) of the LGC cannot overcome the specific exception/exemption in Section 133(j) of the same Code. This is in accord with the rule on statutory construction that specific provisions must prevail over general ones,” the decision said.

Citing provisions from the former Local Tax Code and Rep Act 7716 (E-VAT Law), as well as Congress deliberations on the LGC, the Court emphasized that this interpretation is consistent with the intention of the laws to withhold from the LGUs the power to tax persons engaged in transportation.

“It is clear that the legislative intent in excluding from the taxing power of the local government unit the imposition of business tax against common carriers is to prevent a duplication of the so-called ‘common carrier’s tax.’ Petitioner is already paying three percent common carrier’s tax on its gross sales/earnings under the National Internal Revenue Code. To tax petitioner again… would defeat the purpose of the Local Government Code.”