CONCEPCION, KRIS IAN D.

Philreca v DILG

GR. No. 143076

Facts:

On May 23, 2003, a class suit was filed by petitioners in their own behalf and in behalf of other
electric cooperatives organized and existing under PD 269 which are members of petitioner
Philippine Rural Electric Cooperatives Association, Inc. (PHILRECA). The other petitioners,
electric cooperatives of Agusan del Norte (ANECO), Iloilo 1 (ILECO 1) and Isabela 1 (ISELCO 1)
are non-stock, non-profit electric cooperatives organized and existing under PD 269, as amended,
and registered with the National Electrification Administration (NEA).

Under Sec. 39 of PD 269 electric cooperatives shall be exempt from the payment of all National
Government, local government, and municipal taxes and fee, including franchise, fling
recordation, license or permit fees or taxes and any fees, charges, or costs involved in any court
or administrative proceedings in which it may be party.

From 1971to 1978, in order to finance the electrification projects envisioned by PD 269, as
amended, the Philippine Government, acting through the National Economic council (now
National Economic Development Authority) and the NEA, entered into six loan agreements with
the government of the United States of America, through the United States Agency for
International Development (USAID) with electric cooperatives as beneficiaries. The loan
agreements contain similarly worded provisions on the tax application of the loan and any property
or commodity acquired through the proceeds of the loan.

Petitioners allege that with the passage of the Local Government Code their tax exemptions have
been validly withdrawn. Particularly, petitioners assail the validity of Sec. 193 and 234 of the said
code. Sec. 193 provides for the withdrawal of tax exemption privileges granted to all persons,
whether natural or juridical, except cooperatives duly registered under RA 6938, while Sec. 234
exempts the same cooperatives from payment of real property tax.

Issue:

1. Does the Local Government Code (under Sec. 193 and 234) violate the equal protection
clause since the provisions unduly discriminate against petitioners who are duly registered
cooperatives under PD 269, as amended, and no under RA 6938 or the Cooperatives
Code of the Philippines?
2. Is there an impairment of the obligations of contract under the loan entered into between
the Philippine and the US Governments?

Held:

1. No. The guaranty of the equal protection clause is not violated by a law based on a
reasonable classification. Classification, to be reasonable must (a) rest on substantial
classifications; (b) germane to the purpose of the law; (c) not limited to the existing
conditions only; and (d) apply equally to all members of the same class. We hold that there
is reasonable classification under the Local Government Code to justify the different tax
treatment between electric cooperatives covered by PD 269 and electric cooperatives
under RA 6938.

First, substantial distinctions exist between cooperatives under PD 269 and those under RA
6938. In the former, the government is the one that funds those so-called electric cooperatives,
while in the latter, the members make equitable contribution as source of funds.

a. Capital Contributions by Members – Nowhere in PD 269 does it require

cooperatives to make equitable contributions to capital. Petitioners themselves
admit that to qualify as a member of an electric cooperative under PD 269, only
the payment of a P5.00 membership fee is required which is even refundable the
moment the member is no longer interested in getting electric service from the
CONCEPCION, KRIS IAN D.

cooperative or will transfer to another place outside the area covered by the
cooperative. However, under the Cooperative Code, the articles of cooperation of
a cooperative applying for registration must be accompanied with the bonds of the
accountable officers and a sworn statement of the treasurer elected by the
subscribers showing that at least 25% of the authorized share capital has been
subscribed and at least 25% of the total subscription has been paid and in no case
shall the paid-up share capital be less than P2,000.00.

b. Extent of Government Control over Cooperatives – The extent of government

control over electric cooperatives covered by PD 269 is largely a function of the
role of the NEA as a primary source of funds of these electric cooperatives. It is
crystal clear that NEA incurred loans from various sources to finance the
development and operations of these electric cooperatives. Consequently,
amendments were primarily geared to expand the powers of NEA over the electric
cooperatives o ensure that loans granted to them would be repaid to the
government. In contrast, cooperatives under RA 6938 are envisioned to be self-
sufficient and independent organizations with minimal government intervention or
regulation.

Second, the classification of tax-exempt entities in the Local Government Code is germane to
the purpose of the law. The Constitutional mandate that “every local government unit shall enjoy
local autonomy,” does not mean that the exercise of the power by the local governments is beyond
the regulation of Congress. Sec. 193 of the LGC is indicative of the legislative intent to vet broad
taxing powers upon the local government units and to limit exemptions from local taxation to
entities specifically provided therein.

Finally, Sec. 193 and 234 of the LGC permit reasonable classification as these exemptions are
not limited to existing conditions and apply equally to all members of the same class.

2. No. It is ingrained in jurisprudence that the constitutional prohibition on the impairment of

the obligations of contracts does not prohibit every change in existing laws. To fall within
the prohibition, the change must not only impair the obligation of the existing contract, but
the impairment must be substantial. Moreover, to constitute impairment, the law must
affect a change in the rights of the parties with reference to each other and not with respect
to non-parties.

The quoted provision under the loan agreement does not purport to grant any tax exemption in
favor of any party to the contract, including the beneficiaries thereof. The provisions simply shift
the tax burden, if any, on the transactions under the loan agreements to the borrower and/or
beneficiary of the loan. Thus, the withdrawal by the Local Government Code under Sec. 193 and
234 of the tax exemptions previously enjoyed by petitioners does not impair the obligation of the
borrower, the lender or the beneficiary under the loan agreements as, in fact, no tax exemption is
granted therein.