Franchise Tax vs Real Property Tax: Clarifying NGCP's Tax Liabilities

The Supreme Court recently clarified the boundaries between the franchise tax paid by the National Grid Corporation of the Philippines (NGCP) and the real property tax imposed by local governments. The ruling in National Grid Corporation of the Philippines v. Oliva (G.R. Nos. 213157 and 213558, August 10, 2016) settles when NGCP's "in lieu of all taxes" clause shields its properties from local taxation—and when it does not.

The Dispute: Tax Demands on Transmission Properties

The case began when the City Treasurer of Cebu City issued Final Notices of Demand against NPC/TRANSCO for unpaid real property taxes on three commercial buildings for the years 2001 to 2009, totaling P2,792,862.41. NGCP, which took over transmission operations from TRANSCO in January 2009, paid the amount under protest in November 2009.

NGCP argued that under Section 9 of Republic Act No. 9511—its legislative franchise—the 3% franchise tax it pays is "in lieu of all taxes," including real property tax on properties used in connection with its franchise. The City Treasurer, on the other hand, insisted that NGCP remained liable for real property tax.

The Legal Framework: Two Tax Systems

The case required the Court to reconcile two distinct tax regimes. Under the Local Government Code (Republic Act No. 7160), real property tax is a local tax imposed on properties based on their assessed value. Section 234 exempts properties owned by the Republic or its political subdivisions, except when beneficial use has been granted to a taxable person.

The Local Government Code also creates a "special class" for properties owned and used by government-owned or controlled corporations rendering essential public services in the generation and transmission of electric power. These properties may enjoy a reduced assessment level, as provided under the Code's provisions on special classes.

Meanwhile, Section 9 of RA 9511 imposes a franchise tax on NGCP's gross receipts. The decision quotes this provision as stating that the tax is "in lieu of income tax and any and all taxes, duties, fees and charges of any kind, nature or description levied, established or collected by any authority whatsoever, local or national, on its franchise, rights, privileges, receipts, revenues and profits, and on properties used in connection with its franchise."

The Court's Ruling: It Depends on Use

The Supreme Court held that the key question is how the properties are used. For the years 2001 to 2008, when NPC/TRANSCO controlled the properties, the CBAA must determine whether these entities owned and used the properties in connection with electricity transmission. If so, the properties qualify as "special class" under the Local Government Code, subject to a reduced assessment level.

For 2009, when NGCP took control, the analysis shifts to NGCP's franchise. The Court found that NGCP's franchise tax exemption is broader than that of other franchise holders. Unlike Smart's franchise in PLDT v. City of Davao, which limited the "in lieu of all taxes" clause to national internal revenue taxes, Section 9 of RA 9511 expressly covers taxes imposed by "any authority whatsoever, local or national."

However, this exemption is not absolute. The proviso in Section 9 states that NGCP remains liable for taxes on "real estate, buildings and personal property, exclusive of this franchise." The Court interpreted "exclusive of this franchise" to mean that properties used in the exercise of the franchise are not subject to the same taxes as other corporations. Properties not used in connection with NGCP's franchise remain taxable.

The Remedy: Refund of Excess Payments

The Court also addressed the amount NGCP paid. Since NGCP paid taxes covering years when NPC/TRANSCO owned the properties, the Court applied Article 1236 of the Civil Code. NGCP had an interest in paying because failure to pay would result in public auction of the properties, preventing NGCP from exercising its franchise. However, NGCP's remedy is to seek reimbursement from NPC/TRANSCO, not from the City Treasurer.

The City Treasurer must refund any excess payment once the correct assessment is determined. The Court remanded the case to the Central Board of Assessment Appeals to compute the proper amounts.

Practical Takeaways

• Franchise tax exemptions are not automatic. An "in lieu of all taxes" clause only covers what the law expressly states. For NGCP, the exemption applies only to properties actually used in connection with its franchise.
• Read the full franchise provision. The proviso in Section 9 of RA 9511 preserves liability for properties "exclusive of this franchise"—meaning properties not used in the franchise operations remain taxable.
• Special class status requires government ownership. Private corporations, even those engaged in public services, cannot claim the reduced assessment level for special classes if they are not government-owned or controlled.
• Taxes are not debts. A party paying another's tax liability may seek reimbursement from the actual taxpayer, but cannot demand a refund from the local government for amounts properly due.
• Payment under protest preserves remedies. NGCP's timely protest and appeal, despite procedural hurdles, allowed the Court to review the merits and order a refund of excess payments.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.