THE COURT of Tax Appeals (CTA) has ruled in favor of Smart Communications, Inc., canceling over P48 million in local franchise taxes assessed by the province of Cagayan for the years 2011–2015, citing an expired demand letter and lack of territorial jurisdiction.

“All told, petitioner’s (Smart) insistence on its local franchise tax exemption is untenable. However, as discussed hereunder, respondent’s (Cagayan) local franchise tax assessment must still fail,” the 13-page ruling, made public on Feb. 27, stated.

“The local franchise tax assessment for the year 2011 has already prescribed,” Associate Justice Maria Rowena Modesto-San Pedro wrote.

The tribunal canceled P48,587,497.20 in local franchise taxes for the period.

In granting Smart’s petition, the CTA’s Second Division cited Section 166 of the Local Government Code (LGC), which states that unless otherwise provided, all local taxes, fees, and charges shall accrue on Jan. 1 each year.

Section 167 further provides that unless otherwise specified, all local taxes, fees, and charges must be paid within the first 20 days of January or each subsequent quarter, as applicable.

Meanwhile, Section 194 of the LGC sets a five-year prescriptive period for assessing local taxes, fees, or charges from the date they become due. After this period, no administrative or judicial action for collection may be initiated.

“The same is replicated in Section 133 of the Cagayan Revenue Code. Respondent thus only had five years from the date the tax became due within which to assess the same,” the ruling noted.

As the 2011 local franchise tax became due on Jan. 20, 2011, under Section 167 of the LGC, the Cagayan provincial government had until Jan. 20, 2016, to assess it.

However, Smart received the demand letter only on May 13, 2016, by which time the province’s authority to assess the 2011 local franchise tax had expired.

The tribunal also voided the province’s tax assessment, ruling that Cagayan failed to examine Smart’s books of accounts and other records.

Moreover, it found that the province was not authorized to use the presumed Level Income Assessment Approach as the basis for computing the tax.

In granting Smart’s plea, the tax court also ruled that the company’s franchise operations were outside Cagayan’s territorial jurisdiction since its gross receipts were recorded in Tuguegarao City.

“Respondent is not authorized to impose local franchise tax outside its territorial jurisdiction,” it said.

Section 137 of the LGC allows provinces to impose a franchise tax at a rate not exceeding 50% of 1% of the gross annual receipts for the preceding calendar year, based on income earned or realized within their territorial jurisdiction.

However, Article 266(b) of the LGC’s implementing rules and regulations prohibits provinces from imposing franchise taxes on businesses operating within any city in their jurisdiction.

“The LGC does not expressly provide guidelines for determining the situs of a local franchise tax,” the ruling noted.

Nonetheless, the tax tribunal cited Section 150(a) of the LGC, which states that businesses with branches or sales outlets—such as manufacturers, wholesalers, contractors, and financial institutions—must record sales at the branch where the transaction occurs. The corresponding tax should be paid to the municipality where that branch is located.

“In this case, it is undisputed that petitioner’s gross receipts are recorded in Tuguegarao City. As such, pursuant to Article 266(b) of the LGC IRR, petitioner’s gross receipts are already outside respondent’s territorial jurisdiction,” it said.

The case originated when the province of Cagayan argued that Smart was liable for local franchise tax under Section 137 of the LGC and Section 2G.02 of the Cagayan Revenue Code of 2005, asserting that Smart conducted business throughout the province.

The province also contended that the franchise tax was abolished by the Expanded Value-Added Tax (E-VAT) Law.

Smart, however, maintained that the province’s right to assess the 2011 local franchise tax had prescribed.

It further invoked its exemption from local taxes under its legislative franchise, Republic Act No. 7294, which includes an “in lieu of all taxes” clause.

Additionally, Smart cited the equality clause of the Public Telecommunications Policy Act, arguing that it should receive the same tax privileges as other telecommunications companies.

The company also challenged the validity of the tax assessment, asserting that its gross receipts were recorded in Tuguegarao City, which falls outside Cagayan’s jurisdiction.

Finally, Smart argued that the assessment was flawed due to the absence of an examination of its books of accounts and other records, and that the province’s tax computation lacked legal and factual bases.

A regional trial court initially dismissed Smart’s appeal but later ruled on the merits, ultimately denying the company’s claims. Smart then elevated the case to the tax court.

Smart is the wireless subsidiary of PLDT Inc. Hastings Holdings, Inc., a unit of PLDT Beneficial Trust Fund subsidiary MediaQuest Holdings, Inc., has a majority stake in BusinessWorld through the Philippine Star Group, which it controls. — Chloe Mari A. Hufana