Batangas gov't cannot tax Shell refinery – Supreme Court

MANILA, Philippines – The Supreme Court ruled on Wednesday, August 12, that local government units (LGUs) cannot impose business taxes on those into the manufacturing and distribution of petroleum products.

The court's 3rd division dismissed the petition of the Batangas city government, which has sought to collect P405 million in business taxes from Pilipinas Shell Petroleum, which has an oil refinery and depot in Barangay Tabagao.

The 14-page ruling, penned by Associate Justice Diosdado Peralta, upholds the resolutions issued by the Court of Tax Appeals (CTA) in 2009: on January 22 and on April 13.

The CTA resolutions reversed and set aside the October 29, 2004, ruling of Batangas City, which favored the city government on imposing business taxes on Shell.


The Batangas City government had argued that LGUs has the power to tax any activity that is meant for profit, and that includes the production and distribution of petroleum products.

It cited Section 143 (h) of the Local Government Code (LGC), which states: "The municipality may impose taxes on  any business...which the sanggunian concerned may deem proper to tax: provided that on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent  of gross sales or receipts of the preceding calendar year."

The city government also said the CTA erred when it said that business taxes are not covered by "taxes" referred to in Section 133 (h) of the LGC.

The Supreme Court, however, said LGUs don't enjoy the power to tax that is inherent in the state. It said the  LGUs' power to tax is limited, based on Section 5, Article X of the Constitution. It states: "Each local government unit shall have the power to create its own sources of revenues and 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. "

The High Court also said that Section 133 (h) of the LGC prohibits LGUs from imposing excise taxes on items enumerated in the National Internal Revenue Code, including petroleum products.

Associate justices Teresita Leonardo-de Castro, Martin Villarama, Jose Portugal Perez, and Estela Perlas-Bernabe concurred.

On February 20, 2001, Batangas City Legal Officer Teodulfo Deguito and City Treasurer Teresa Geron demanded that Pilipinas Shell paid P92.37 million and P312.65 million in business taxes.

Pilipinas Shell filed a protest on April 17, 2002, saying it wasn't liable to pay the local business tax for manufacturing or distributing petroleum products. That year, it only paid P98,964.71 for fees and other charges, including P1,180.34 for mayor’s permit.

It even said the cost of a mayor’s permit was exorbitant, confiscatory, arbitrary, unreasonable, and not commensurable with the cost of issuing a license.

On May 13, 2002, the city government denied Shell's protest. Citing Section 14 of the Batangas City Tax Code of 2002, it said it has the power to deny Shell a mayor’s permit based on its failure to pay business taxes.

Pilipinas Shell brought the case to the Batangas City RTC, which sided with the city government on October 29, 2004. The case was then elevated by the company to the CTA.