Local Governments vs National Corporations: Who Pays Franchise Taxes

The Supreme Court's 2003 decision in National Power Corporation v. City of Cabanatuan (G.R. No. 149110) settled a recurring question: can local governments impose franchise taxes on government-owned and controlled corporations (GOCCs)? The answer is yes. This ruling reshaped the tax landscape for GOCCs and affirmed the taxing power of local government units (LGUs) under the Local Government Code of 1991.

The Dispute

The National Power Corporation (NPC), created under Commonwealth Act No. 120, sold electricity to residents of Cabanatuan City and earned over P107 million in gross income in 1992. The city imposed a franchise tax of 75% of 1% of NPC's gross receipts under its tax ordinance, amounting to P808,606.41.

NPC refused to pay. It argued that as a government-owned corporation, it was exempt from all taxes under Section 13 of its charter (Republic Act No. 6395). It also cited the doctrine from Basco v. Philippine Amusement and Gaming Corporation that local governments have no power to tax instrumentalities of the national government.

The city countered that Section 193 of the Local Government Code (Republic Act No. 7160) had withdrawn all tax exemption privileges of GOCCs.

The Legal Framework

The Local Government Code of 1991 gave LGUs direct authority to levy taxes under Article X, Section 5 of the 1987 Constitution. Two provisions were central to this case:

• A provision allowing provinces to impose a franchise tax on businesses enjoying a franchise, at a rate not exceeding a specified percentage of gross annual receipts. The exact text of this provision is not available in the ASG law library, but the Supreme Court's decision in this case confirms its existence and application.
• Section 193 of the Local Government Code, which withdrew tax exemptions previously enjoyed by all persons, including GOCCs, except for local water districts, registered cooperatives, and non-stock, non-profit hospitals and educational institutions.

The Court's Ruling

The Supreme Court ruled against NPC. It held that the city had the authority to impose the franchise tax. Three key points emerged from the ruling.

First, the Basco doctrine no longer applies. That case was decided before the Local Government Code took effect. The Code expressly allows LGUs to tax national government instrumentalities in specific instances, overriding the old rule that local governments could not tax such entities.

Second, NPC holds a "franchise" under the Code. The Court explained that a franchise tax is a tax on the privilege of transacting business and exercising corporate franchises, not on the mere existence of a corporation. NPC's charter granted it special powers—like taking water from public streams and exercising eminent domain—that ordinary corporations do not have. NPC was exercising these privileges within Cabanatuan City, so it met both requirements for the franchise tax.

Third, NPC's "non-profit" status and government ownership did not exempt it. The Court noted that NPC was created as a separate entity from the National Government and could sue and be sued in its own name. Its activities—generating and selling electricity—were commercial undertakings, even if imbued with public interest. The Court also rejected the argument that Section 193 was merely an implied repeal of NPC's charter exemptions. It found the repeal express and unequivocal.

Practical Takeaways

• Government-owned and controlled corporations with original charters are now subject to local franchise taxes when they do business within an LGU's territory.
• The Local Government Code's withdrawal of tax exemptions is broad and applies to GOCCs unless they fall under the specific exceptions listed in Section 193.
• A "franchise" for tax purposes includes the special privileges granted by a corporate charter, not just franchises given to private companies.
• Local governments may tax national government instrumentalities when the Code specifically authorizes it.
• Tax exemptions are construed strictly against the claimant; entities seeking exemption must point to a clear legal provision.

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