Section 5.

Taxation Power of Local Government

P12.3 Batangas Power Corp. v. Batangas City, NPC GR No. 152675, April 28, 2004
FACTS: BPC filed a petition for declaratory relief against BC and NPC. That it was not bound to
pay the business taxes imposed on it because under the Build Operate and Transfer Agreement
between NPC and Enron Power Dev’t Corp, Section 11.02 of the BOT Agreement provided that
NPC shall pay all taxes that may be imposed on the power station, except income taxes and permit.
When Enron assigned its obligation under the BOT Agreement to petitioner BPC. NPC refused to
assume and pay BPCs business tax later on as it allegedly constituted an indirect tax on NPC which
is a tax-exempt corporation under its Charter.

RULING: The removal of the blanket exclusion of government instrumentalities from local
taxation as one of the most significant provisions of the 1991 LGC. Section 193 of the LGC, an
express and general repeal of all statutes granting exemptions from local taxes, withdrew the
sweeping tax privileges previously enjoyed by the NPC under its Charter.

Pursuant to Article X, section 5 of the 1987 Constitution:

Section 5. Each Local Government unit shall have the power to create its own sources of
revenue, to levy taxes, fees and charges subject to such guidelines and limitations as the
Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees
and charges shall accrue exclusively to the Local Governments.

When NPC assumed the tax liabilities of the BPC under the BOT Agreement, the LGC which
removed NPCs tax exemption privileges had already been in effect for six (6) months. Thus, while
BPC remains to be the entity doing business in said city, it is the NPC that is ultimately liable to
pay said taxes under the provisions of both the BOT Agreement and the 1991 LGC.

P12.3 Smart Communications v. City of Davao, GR No. 155491, September 16, 2008
FACTS: Smart filed contended that its Tel-center in Davao is exempt from franchise tax because
the power of the City of Davao to impose a franchise tax is subject to statutory limitations such as
the “in lieu of all taxes” clause found in Section 9 of R.A. No. 7294 (Smart’s franchise).
Respondents invoked the power granted by the Constitution to LGUs to create their own sources
of revenue. RTC denied petition and noted that the ambiguity of the in “lieu of all taxes” provision
in R.A. No. 7294, on whether it covers both national and local taxes, must be resolved against the
taxpayer.

RULING: 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. Smart has the burden of providing that, aside from the imposed 3% franchise tax, the
Congress intended it to be exempt from all kinds of franchise taxes whether local or national.

Section 6. Share in National Taxes

P12.3 Pimentel v. Aguirre, 336 SCRA 201 (2000)
FACTS: Certiorari and prohibition to annul Section 1 Admin. Order 372 issued by President it
requires local government units to reduce their expenditures by 25% of their authorized regular
appropriations for non-personal services. And Section 4 withholds portion of their internal revenue
allotments.
RULING: Section 1 AO 372 does not violate Local Fiscal Autonomy. This order is to ensure that
local programs, fiscal and otherwise, are consistent with national goals. It is merely directory and
has been issued by the President consistent with his powers of supervision over local governments.
Such only contains advise for reduction measures in all agencies. Section 4 of AO No. 372 orders
the withholding of 10% LGU IRA, although temporary, it is equivalent to a holdback. Any
retention is prohibited. This effectively encroaches on the fiscal autonomy of local governments.