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Wisdom less than Solomon’s

(Article published in the Jan 4, 2006 issue of Manila Standard Today)  

The term “Solomonic wisdom”, as other once noble phrases eventually debased by pedestrian usage, has come to mean no more than merely splitting, roughly equally, a contested amount between two contending parties.  In this sense, the decision in case of Commissioner of Internal Revenue v. PLDT, G.R. No. 140230, promulgated 15 December 2005, is akin to the wisdom of Solomon. 

At the bottom of the judicial ladder, PLDT initially sought the refund of  the amount of P280,552,286.00, representing compensating taxes, advance sales taxes, VAT and other internal revenue taxes alleged to have been erroneously paid on its importations from October 1992 to May 1994. At the top rung, the Supreme Court instead ordered the Commissioner to issue a Tax Credit Certificate or to grant a tax refund to PLDT of only P94,673,422.00 as advance sales tax and compensating tax erroneously collected by the Bureau of Customs from October 1, 1992 to May 31, 1994, less the  VAT which may have been due on the importations in question, but have otherwise remained uncollected.   Not quite 50-50, but roughly Solomonic.

But, on closer look, the wisdom of Solomon lay not in ordering that each of the two contending women be awarded a part of the whole they were after.  It consisted precisely in upholding the benefit on the hapless baby.  Commissioner of Internal Revenue v. PLDT, on the other hand, simply gave the unrepresented consumer one more tax burden that Congress, I believe, did not intend him to bear. 

The legal issue that the Supreme Court was asked to resolve is whether or not PLDT, given that its franchise requires it to pay a franchise tax equivalent to three percent (3%) of all its gross receipts of the telephone or other telecommunications businesses transacted under it which percentage tax “shall be in lieu of all taxes on this franchise or earnings thereof,” is exempt from paying VAT, compensating taxes, advance sales taxes and internal revenue taxes on its importations from October 1992 to May 1994.

The Supreme Court started its analysis from the indubitable principle “that taxation is the rule, exemption is the exception. Accordingly, statutes granting tax exemptions must be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority. To him, therefore, who claims a refund or exemption from tax payments rests the burden of justifying the exemption by words too plain to be mistaken and too categorical to be misinterpreted.”  It is a principle crafted to strike down anyone who wishes to escape paying his share of the tax burden.

With this mind-set, it then proceeded to examine the franchise of PLDT and noted that the so-called “in lieu of all taxes” clause was modified by the phrase “on this franchise or earnings thereof.”  This phrase suggested, according to the Supreme Court, that the word “all” did not really mean what is understood by you and I, but meant only “some”.  Specifically, it meant only “direct” taxes, although the word “direct” is not in the phrase itself  compensating taxes, advance sales taxes, VAT and other internal revenue taxes.

In sum, the payment of 3% percentage tax is in lieu only of the so-called “direct taxes.” In defense of its logic, the Supreme Court maintained that if it were to accept that view that the “in lieu of all taxes” clause encompasses the totality of all taxes collectible under the Revenue Code, then, the immediately following limiting clause “on this franchise and its earnings” would be nothing more than a pure jargon bereft of effect and meaning whatsoever.

With due respects, I beg to disagree.

In the first place, PLDT, on the basis of my reading of the Supreme Court’s own version of the said taxpayer’s allegations, never claimed to be exempt from “the totality of all taxes collectible under the Revenue Code.”  It specifically limited its claim for refund to compensating taxes, advance sales taxes, VAT and other internal revenue taxes. 

Secondly, the said taxes were collected from PLDT by the government agencies on its importation of equipment which were, if I am not mistaken, all related to exercise of its franchise.  Hence, these were taxes on importations of equipment without which PLDT could not have effectively exercised its franchise.  That aspect of the importation clearly situates it, I submit, within the ambit of the phrase “on this franchise.”

But the most important argument against the ruling in Commissioner of Internal Revenue v. PLDT is the economic impact on the public that PLDT serves.  As recognized by the Supreme Court itself, the taxes sought to be refunded are in the nature of  “indirect taxes.”

Explained the Supreme Court:  “Indirect taxes are those that are demanded, in the first instance, from, or are paid by, one person in the expectation and intention that he can shift the burden to someone else. Stated elsewise, indirect taxes are taxes wherein the liability for the payment of the tax falls on one person but the burden thereof can be shifted or passed on to another person, such as when the tax is imposed upon goods before reaching the consumer who ultimately pays for it. When the seller passes on the tax to his buyer, he, in effect, shifts the tax burden, not the liability to pay it, to the purchaser as part of the price of goods sold or services rendered.”

A public utility performs a service which the Government itself, had it been in a better financial and organizational shape, ought to perform.  A franchise is thus an outsourcing contract on the part of the government. And when Congress grants a public utility a tax exemption, it does not have in mind primarily the financial benefit of the franchisee but instead the benefit of the public that franchisee is mandated to serve.

By denying PLDT exemption from indirect taxes related to the exercise of its franchise, the Supreme Court in effect made it more expensive for the public to avail itself of the services that the Government should have provided in the first place.  Indeed, it could have unwittingly have imposed a Congressionally unintended tax on the privilege of speech since, in the age we live, telecommunications is an infrastructure without which we could not freely express ourselves.

In Commissioner of Internal Revenue v. PLDT our Supreme Court, alas, is no match for the splendor of Solomon’s court.