Guidelines in the Assessment of Government-Owned and Controlled Corporations (GOCCs) Engaged in the Generation and/or Transmission of Electric Power

October 2, 2014 BLGF MEMORANDUM CIRCULAR NO. 039-14 TO : All Regional Directors for Local Government Finance, City and Municipal Assessors within Metro Manila Area, Provincial, City and Municipal Assessors and Others Concerned SUBJECT : Guidelines in the Assessment of Government-Owned and Controlled Corporations (GOCCs) Engaged in the Generation and/or Transmission of Electric Power For the information and guidance of all concerned and in view of similar requests for opinion from Local Government Units (LGUs) on the taxability of GOCCs engaged in the generation and and/or transmission of electric power but leased for consideration or otherwise to a taxable person, quoted hereunder are portions of the Supreme Court Decision (2nd Division, G.R. No. 171586) in the case entitled " National Power Corporation vs. Province of Quezon and Municipality of Pagbilao , promulgated on July 15, 2009, and the corresponding BLGF opinions issued pursuant thereto: "xxx xxx xxx "The liability for taxes generally rests on the owner of the real property at the time the tax accrues. This is a necessary consequence that proceeds from the fact of ownership. However, personal liability for realty taxes may also expressly rest on the entity with the beneficial use of the real property, such as the tax on property owned by the government but leased to private persons or entities, or when the tax assessment is made on the basis of the actual use of the property. In either case, the unpaid realty tax attaches to the property but is directly chargeable against the taxable person who has actual and beneficial use and possession of the property regardless of whether or not that person is the owner . "In the present case, the NPC, contrary to its claims, is neither the owner nor the possessor/user of the subject machineries. SEDaAH "The ECA's terms regarding the power plant's machineries clearly vest their ownership with Mirant. Article 2.12 of the Energy Conversion Agreement (ECA) states: "2.12 OWNERSHIP OF POWER STATION. From the Effective Date until the Transfer Date [that is, the day following the last day of the 25-year period], [Mirant] shall, directly or indirectly, own the Power Station and all the fixtures, fittings, machinery and equipment on the Site or used in connection with the Power Station which have been supplied by it or at its cost. [Mirant] shall operate, manage, and maintain the Power Station for the purpose of converting fuel of [NPC] into electricity. [Emphasis supplied.] "The NPC contends that it should nevertheless be regarded as the beneficial owner of the plant, since it will acquire ownership thereof at the end of 25 years. The NPC also asserts, by quoting portions of the ECA, that it has the right to control and supervise the construction and operation of the plant, and that Mirant has retained only naked title to it. These contentions, unfortunately, are not sufficient to vest the NPC the personality to protest the assessment. "In Cario v. Ofilado , we declared that legal interest should be an interest that is actual and material, direct and immediate, not simply contingent or expectant . The concept of the directness and immediacy involved is no different from that required in motions for intervention under Rule 19 of the Rules of Court that allow one who is not a party to the case to participate because of his or her direct and immediate interest, characterized by either gain or loss from the judgment that the court may render. In the present case, the NPC's ownership of the plant will happen only after the lapse of the 25-year period; until such time arrives, the NPC's claim of ownership is merely contingent, i.e. , dependent on whether the plant and its machineries exist at that time. Prior to this event, the NPC's real interest is only in the continued operation of the plant for the generation of electricity. This interest has not been shown to be adversely affected by the realty taxes imposed and is an interest that NPC can protect, not by claiming an exemption that is not due to Mirant, but by paying the taxes it (NPC) has assumed for Mirant under the ECA. TCIEcH "xxx xxx xxx "On liability for taxes, the NPC indeed assumed responsibility for the taxes due on the power plant and its machineries, specifically, "all real estate taxes and assessments, rates and other charges in respect of the site, the buildings and improvements thereon and the [power plant]." At first blush, this contractual provision would appear to make the NPC liable and give it standing to protest the assessment. The tax liability we refer to above, however, is the liability arising from law that the local government unit can rightfully and successfully enforce, not the contractual liability that is enforceable between the parties to a contract as discussed below. By law, the tax liability rests on Mirant based on its ownership, use, and possession of the plant and its machineries. "In Testate of Concordia Lim v. City of Manila , we had occasion to rule that: "In Baguio v. Busuego , the assumption by the vendee of the liability for real estate taxes prospectively due was in harmony with the tax policy that the user of the property bears the tax . In [the present case], the interpretation that the [vendee] assumed a liability for overdue real estate taxes for the periods prior to the contract of sale is incongruent with the said policy because there was no immediate transfer of possession of the properties previous to full payment of the repurchase price . ESHAIC xxx xxx xxx "To impose the real property tax on the estate which was neither the owner nor the beneficial user of the property during the designated periods would not only be contrary to law but also unjust. "xxx xxx xxx "To reiterate, only the parties to the ECA agreement can exact and demand the enforcement of the rights and obligations it established only Mirant can demand compliance from the NPC for the payment of the real property tax the NPC assumed to pay. The local government units (the Municipality of Pagbilao and the Province of Quezon), as third parties to the ECA, cannot demand payment from the NPC on the basis of Article 11.1 of the ECA alone. Corollarily, the local government units can neither be compelled to recognize the protest of a tax assessment from the NPC, an entity against whom it cannot enforce the tax liability. The test of exemption is the nature of the use, not ownership, of the subject machineries "At any rate, the NPC's claim of tax exemptions is completely without merit. To successfully claim exemption under Section 234(c) of the LGC, the claimant must prove two elements: "a. the machineries and equipment are actually, directly, and exclusively used by local water districts and government-owned or controlled corporations ; and "b. the local water districts and government-owned and controlled corporations claiming exemption must be engaged in the supply and distribution of water and/or the generation and transmission of electric power. cSTHAC "As applied to the present case, the government-owned or controlled corporation claiming exemption must be the entity actually, directly, and exclusively using the real properties, and the use must be devoted to the generation and transmission of electric power . Neither the NPC nor Mirant satisfies both requirements. Although the plant's machineries are devoted to the generation of electric power, by the NPC's own admission and as previously pointed out, Mirant a private corporation uses and operates them. That Mirant operates the machineries solely in compliance with the will of the NPC only underscores the fact that NPC does not actually, directly, and exclusively use them. The machineries must be actually, directly, and exclusively used by the government-owned or controlled corporation for the exemption under Section 234(c) to apply. (Underscoring supplied) "Nor will NPC find solace in its claim that it utilizes all the power plant's generated electricity in supplying the power needs of its customers. Based on the clear wording of the law, it is the machineries that are exempted from the payment of real property tax, not the water or electricity that these machineries generate and distribute. "Even the NPC's claim of beneficial ownership is unavailing. The test of exemption is the use, not the ownership of the machineries devoted to generation and transmission of electric power . The nature of the NPC's ownership of these machineries only finds materiality in resolving the NPC's claim of legal interest in protesting the tax assessment on Mirant. As we discussed above, this claim is inexistent for tax protest purposes. (Underlining ours) aSEHDA "Lastly, from the points of view of essential fairness and the integrity of our tax system, we find it essentially wrong to allow the NPC to assume in its BOT contracts the liability of the other contracting party for taxes that the government can impose on that other party, and at the same time allow NPC to turn around and say that no taxes should be collected because the NPC is tax-exempt as a government-owned and controlled corporation . We cannot be a party to this kind of arrangement; for us to allow it without congressional authority is to intrude into the realm of policy and to debase the tax system that the Legislature established. We will then also be grossly unfair to the people of the Province of Quezon and the Municipality of Pagbilao who, by law, stand to benefit from the tax provisions of the LGC." (Underlining supplied) Under its letter dated August 1, 2013, (copy attached) in response to the letter request of the City Mayor of Quezon City, the Bureau, opines, citing the subject Supreme Court Decision, that the property owned by the University of the Philippines (UP), Diliman, Quezon City, but leased to Ayala Land, Inc. known as Up-Ayala Techno Hub, being the lessee and the beneficial user is the "legally accountable party to the unpaid real property taxes due on the government-owned UP property." Further, the BLGF ruled that it is "deemed essentially wrong being without congressional authority for UP to assume the real property tax liability of the Ayala Lands, Inc. over the subject property. TSADaI In another opinion embodied under a 3rd indorsement dated August 18, 2014, (copy attached) the BLGF ruled that NPC, a GOCC, which acquired the Siquijor Diesel Power Plant (DPP) from the Province of Siquijor Electric Cooperative (PROSIELCO), thru a Memorandum of Agreement (MOA), but still declared for taxation purposes in the name of PROSIELCO, is taxable, citing a dispositive portion of the same Supreme Court decision, as follows: "xxx xxx xxx "As applied to the case, the government-owned or controlled corporations claiming exemption must be the entity actually, directly, and exclusively using the real properties and the use must be devoted to the generation and transmission of electric power, by the NPC's own admission and as previously pointed out, Mirant a private corporation uses and operates them. That Mirant operates the machineries solely in compliance with the will of the NPC only underscores the fact that NPC does not actually, directly, and exclusively use them . The machineries must be actually, directly, and exclusively used by the government-owned and controlled corporation for the exemption under Section 234(c) to apply. (Underscoring ours) In view of all the foregoing, the following guidelines are hereby issued: 1. All machinery and equipment that are actually, directly and exclusively used by local water districts and GOCCs engaged in the supply and distribution of water and/or generation and transmission of electric power are exempt from real property tax (Sec. 234 (c)) of the LGC. 2. Item 1 above shall likewise apply to all machinery and equipment leased by a GOCC from a taxable entity, the actual, direct and exclusive use of which, is for the generation and transmission of electric power. aSTECI 3. All lands, buildings and other improvements owned by GOCCs shall have a 10% Assessment Level (Sec. 218 (d) of the LGC. 4. To enjoy real property tax exemption under Sec. 234 (c) of the LGC, all machinery and equipment should be (1) a GOCC (2) actually, directly and exclusively used in the generation and transmission of electric power and/or supply and distribution of water. 5. The GOCC claiming exemption must be the entity actually, directly and exclusively USING the real properties and the use must be devoted to the generation and transmission of electric power. 6. GOCC should not assume in its Contracts, the liability of the other contracting party (taxable person or entity) for taxes i.e. , real property tax, that the LGU may impose. Accordingly, all Regional Directors, Provincial, City and Municipal Assessors are hereby directed to disseminate and furnish copies of this Circular including its attachments, to all concerned within their respective jurisdiction. (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director