Important notes on local taxation

An ordinance carries with it the presumption of validity. The question of reasonableness though is open to judicial inquiry. Much should be left thus to the discretion of municipal authorities. Courts will go slow in writing off an ordinance as unreasonable unless the amount is so excessive as to be prohibitive, arbitrary, unreasonable, oppressive, or confiscatory. A rule which has gained acceptance is that factors relevant to such an inquiry are the municipal conditions as a whole and the nature of the business made subject to imposition.[1]

For an ordinance to be valid though, it must not only be within the corporate powers of the LGU to enact and must be passed according to the procedure prescribed by law, it should also conform to the following requirements: (1) not contrary to the Constitution or any statute; (2) not unfair or oppressive; (3) not partial or discriminatory; (4) not prohibit but may regulate trade; (5) general and consistent with public policy; and (6) not unreasonable.[2] As jurisprudence indicates, the tests are divided into the formal (i.e., whether the ordinance was enacted within the corporate powers of the LGU and whether it was passed in accordance with the procedure prescribed by law), and the substantive (i.e., involving inherent merit, like the conformity of the ordinance with the limitations under the Constitution and the statutes, as well as with the requirements of fairness and reason, and its consistency with public policy).[3]

An ordinance must pass muster under the test of constitutionality and the test of consistency with the prevailing laws.[4] If not, it is void.[5] Ordinance should uphold the principle of the supremacy of the Constitution.[6] As to conformity with existing statutes, Batangas CATV, Inc. v. Court of Appeals[7] has this to say:

It is a fundamental principle that municipal ordinances are inferior in status and subordinate to the laws of the state. An ordinance in conflict with a state law of general character and statewide application is universally held to be invalid. The principle is frequently expressed in the declaration that municipal authorities, under a general grant of power, cannot adopt ordinances which infringe the spirit of a state law or repugnant to the general policy of the state. In every power to pass ordinances given to a municipality, there is an implied restriction that the ordinances shall be consistent with the general law. In the language of Justice Isagani Cruz (ret.), this Court, in Magtajas vs. Pryce Properties Corp., Inc., ruled that:

The rationale of the requirement that the ordinances should not contravene a statute is obvious. Municipal governments are only agents of the national government. Local councils exercise only delegated legislative powers conferred on them by Congress as the national lawmaking body. The delegate cannot be superior to the principal or exercise powers higher than those of the latter. It is a heresy to suggest that the local government units can undo the acts of Congress, from which they have derived their power in the first place, and negate by mere ordinance the mandate of the statute.

Municipal corporations owe their origin to, and derive their powers and rights wholly from the legislature. It breathes into them the breath of life, without which they cannot exist. As it creates, so it may destroy. As it may destroy, it may abridge and control. Unless there is some constitutional limitation on the right, the legislature might, by a single act, and if we can suppose it capable of so great a folly and so great a wrong, sweep from existence all of the municipal corporations in the State, and the corporation could not prevent it. We know of no limitation on the right so far as to the corporation themselves are concerned. They are, so to phrase it, the mere tenants at will of the legislature.

This basic relationship between the national legislature and the local government units has not been enfeebled by the new provisions in the Constitution strengthening the policy of local autonomy. Without meaning to detract from that policy, we here confirm that Congress retains control of the local government units although in significantly reduced degree now than under our previous Constitutions. The power to create still includes the power to destroy. The power to grant still includes the power to withhold or recall. True, there are certain notable innovations in the Constitution, like the direct conferment on the local government units of the power to tax, which cannot now be withdrawn by mere statute. By and large, however, the national legislature is still the principal of the local government units, which cannot defy its will or modify or violate it.[8]

LGUs must be reminded that they merely form part of the whole; that the policy of ensuring the autonomy of local governments was never intended by the drafters of the 1987 Constitution to create an imperium in imperio and install an intra-sovereign political subdivision independent of a single sovereign state.[9] “[M]unicipal corporations are bodies politic and corporate, created not only as local units of local self-government, but as governmental agencies of the state. The legislature, by establishing a municipal corporation, does not divest the State of any of its sovereignty; absolve itself from its right and duty to administer the public affairs of the entire state; or divest itself of any power over the inhabitants of the district which it possesses before the charter was granted.”[10]

LGUs are able to legislate only by virtue of a valid delegation of legislative power from the national legislature; they are mere agents vested with what is called the power of subordinate legislation.[11] “Congress enacted the LGC as the implementing law for the delegation to the various LGUs of the State’s great powers, namely: the police power, the power of eminent domain, and the power of taxation. The LGC was fashioned to delineate the specific parameters and limitations to be complied with by each LGU in the exercise of these delegated powers with the view of making each LGU a fully functioning subdivision of the State subject to the constitutional and statutory limitations.”[12]

Specifically, with regard to the power of taxation, it is indubitably the most effective instrument to raise needed revenues in financing and supporting myriad activities of the LGUs for the delivery of basic services essential to the promotion of the general welfare and the enhancement of peace, progress, and prosperity of the people.[13] As this Court opined in National Power Corp. v. City of Cabanatuan:[14]

In recent years, the increasing social challenges of the times expanded the scope of state activity, and taxation has become a tool to realize social justice and the equitable distribution of wealth, economic progress and the protection of local industries as well as public welfare and similar objectives. Taxation assumes even greater significance with the ratification of the 1987 Constitution. Thenceforth, the power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Article X, Section 5 of the 1987 Constitution, viz:

“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.”

This paradigm shift results from the realization that genuine development can be achieved only by strengthening local autonomy and promoting decentralization of governance. For a long time, the country’s highly centralized government structure has bred a culture of dependence among local government leaders upon the national leadership. It has also “dampened the spirit of initiative, innovation and imaginative resilience in matters of local development on the part of local government leaders.” The only way to shatter this culture of dependence is to give the LGUs a wider role in the delivery of basic services, and confer them sufficient powers to generate their own sources for the purpose. To achieve this goal, Section 3 of Article X of the 1987 Constitution mandates Congress to enact a local government code that will, consistent with the basic policy of local autonomy, set the guidelines and limitations to this grant of taxing powers x x x[15]

Fairly recently, it was also stated in Pelizloy Realty Corporation v. Province of Benguet[16] that:

The rule governing the taxing power of provinces, cities, municipalities and barangays is summarized in Icard v. City Council of Baguio:

It is settled that a municipal corporation unlike a sovereign state is clothed with no inherent power of taxation. The charter or statute must plainly show an intent to confer that power or the municipality, cannot assume it. And the power when granted is to be construed in strictissimi juris. Any doubt or ambiguity arising out of the term used in granting that power must be resolved against the municipality. Inferences, implications, deductions – all these – have no place in the interpretation of the taxing power of a municipal corporation. [Underscoring supplied]

x x x x

Per Section 5, Article X of the 1987 Constitution, “the power to tax is no longer vested exclusively on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other charges.” Nevertheless, such authority is “subject to such guidelines and limitations as the Congress may provide.”

In conformity with Section 3, Article X of the 1987 Constitution, Congress enacted Republic Act No. 7160, otherwise known as the Local Government Code of 1991. Book II of the LGC governs local taxation and fiscal matters.[17]

Indeed, LGUs have no inherent power to tax except to the extent that such power might be delegated to them either by the basic law or by the statute.[18] “Under the now prevailing Constitution, where there is neither a grant nor a prohibition by statute, the tax power must be deemed to exist although Congress may provide statutory limitations and guidelines. The basic rationale for the current rule is to safeguard the viability and self-sufficiency of local government units by directly granting them general and broad tax powers. Nevertheless, the fundamental law did not intend the delegation to be absolute and unconditional; the constitutional objective obviously is to ensure that, while the local government units are being strengthened and made more autonomous, the legislature must still see to it that (a) the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; (b) each local government unit will have its fair share of available resources; (c) the resources of the national government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just.”[19]

Subject to the provisions of the LGC and consistent with the basic policy of local autonomy, every LGU is now empowered and authorized to create its own sources of revenue and to levy taxes, fees, and charges which shall accrue exclusively to the local government unit as well as to apply its resources and assets for productive, developmental, or welfare purposes, in the exercise or furtherance of their governmental or proprietary powers and functions.[20] The relevant provisions of the LGC which establish the parameters of the taxing power of the LGUs are as follows:

SECTION 130. Fundamental Principles. – The following fundamental principles shall govern the exercise of the taxing and other revenue-raising powers of local government units:

(a) Taxation shall be uniform in each local government unit;

(b) Taxes, fees, charges and other impositions shall:

(1) be equitable and based as far as practicable on the taxpayer’s ability to pay;

(2) be levied and collected only for public purposes;

(3) not be unjust, excessive, oppressive, or confiscatory;

(4) not be contrary to law, public policy, national economic policy, or in restraint of trade;

(c) The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person;

(d) The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and,

(e) Each local government unit shall, as far as practicable, evolve a progressive system of taxation.

SECTION 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following:

(a) Income tax, except when levied on banks and other financial institutions;

(b) Documentary stamp tax;

(c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein;

(d) Customs duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned;

(e) Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise;

(f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen;

(g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from the date of registration;

(h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products;

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code;

(k) Taxes on premiums paid by way of reinsurance or retrocession;

(l) Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles;

(m) Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known as the “Cooperative Code of the Philippines” respectively; and

(o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units.

SECTION 151. Scope of Taxing Powers. – Except as otherwise provided in this Code, the city, may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes.

SECTION 186. Power To Levy Other Taxes, Fees or Charges. – Local government units may exercise the power to levy taxes, fees or charges on any base or subject not otherwise specifically enumerated herein or taxed under the provisions of the National Internal Revenue Code, as amended, or other applicable laws: Provided, That the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy: Provided, further, That the ordinance levying such taxes, fees or charges shall not be enacted without any prior public hearing conducted for the purpose.

[1] Victorias Milling Co., Inc. v. Municipality of Victorias, etc., supra note 49, at 194, as cited in Progressive Development Corporation v. Quezon City, 254 Phil. 635, 646 (1989). and Smart Communications, Inc. v. Municipality of Malvar, Batangas, G.R. No. 204429, February 18, 2014, 716 SCRA 677, 695.

[2] Legaspi v. City of Cebu, G.R. No. 159110, December 10, 2013, 711 SCRA 771, 784-785; White Light Corp., et al. v. City of Manila, 596 Phil. 444, 459 (2009); Social Justice Society (SJS), et al. v. Hon. Atienza, Jr., supra note 53, at 699-700; and See City of Manila v. Hon. Laguio, Jr., 495 Phil. 289, 307-308 (2005).

[3] Legaspi v. City of Cebu, supra, at 785.

[4] City of Manila v. Hon. Laguio, Jr., supra note 71, at 308.

[5] Tan v. Pereña, 492 Phil. 200, 221 (2005).

[6] City of Manila v. Hon. Laguio, Jr., supra note 71, at 308.

[7] 482 Phil. 544 (2004).

[8] Batangas CATV, Inc. v. Court of Appeals, supra, at 564-565. Social Justice Society (SJS), et al. v. Hon. Atienza, Jr., supra note 53, at 710-711.

[9] Batangas CATV, Inc. v. Court of Appeals, supra not 76, at 571.

[10] Id. at 570.

[11] City of Manila v. Hon. Laguio, Jr., supra note 71, at 337.

[12] Legaspi v. City of Cebu, supra note 71, at 785.

[13] National Power Corp. v. City of Cabanatuan, 449 Phil. 233, 261 (2003).

[14] Id.

[15] Id. at 247-249.

[16] G.R. No. 183137, April 10, 2013, 695 SCRA 491.

[17] Pelizloy Realty Corporation v. Province of Benguet, supra, at 500-501.

[18] MERALCO v. Province of Laguna, 366 Phil. 428, 433 (1999).

[19] Id. at 434-435.

[20] See LGC, Secs. 18 and 129.