FACTS:

Ericsson Telecommunications, Inc. (petitioner), a corporation with principal office in Pasig City (respondent), is engaged in the design, engineering, and marketing of telecommunication facilities/system.  In an Assessment Notice dated October 25, 2000 issued by the City Treasurer of Pasig City, petitioner was assessed a business tax deficiency for the years 1998 and 1999 amounting to P9,466,885.00 and  P4,993,682.00, respectively, based on its gross revenues as reported in its audited financial statements for the years 1997 and 1998.  Petitioner filed a Protest claiming that the computation of the local business tax should be based on gross receipts and not on gross revenue.

Respondent issued another Notice of Assessment to petitioner on November 19, 2001, this time based on business tax deficiencies for the years 2000 and 2001, amounting to P4,665,775.51 and P4,710,242.93, respectively, based on its gross revenues for the years 1999 and 2000.  Again, petitioner filed a Protest, reiterating its position that the local business tax should be based on gross receipts and not gross revenue. Respondent denied petitioner’s protest and gave the latter 30 days within which to appeal the denial.

Petitioner filed a petition for review with the RTC of Pasig, praying for the annulment and cancellation of petitioner’s deficiency local business taxes totaling P17,262,205.66.

ISSUE:

What is the extent of the Power of Local Taxation?

RULING:

The power to tax is primarily vested in the Congress; however, it may be exercised by local legislative bodies pursuant to direct authority conferred by Section 5, Article X of the Constitution. Under the latter, the exercise of the power may be subject to such guidelines and limitations as Congress may provide. Respondent assessed deficiency local business taxes on petitioner based on the latter’s gross revenue as reported in its financial statements, arguing that gross receipts is synonymous with gross earnings/revenue, which, in turn,  includes uncollected earnings.  Petitioner, however, contends that only the portion of the revenues which were actually and constructively received should be considered in determining its tax base.

Thus, respondent committed a palpable error when it assessed petitioner’s local business tax based on its gross revenue as reported in its audited financial statements, as Section 143 of the Local Government Code and Section 22(e) of the Pasig Revenue Code clearly provide that the tax should be computed based on gross receipts.