Bureau of Local Government Finance Opinion

April 10, 2003 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Eduardo M. Pineda Administrative Manager Tokyo Tokyo #85 P. Tuazon Street Cubao, Quezon City S i r : This refers to your letter dated February 27, 2003, requesting opinion on whether freezers, refrigerators, soft drink dispensers, air conditioning units, gas burner and other standard equipment or paraphernalia of Tokyo Tokyo, fall within the purview of the definition of "Machinery" as provided for under Section 199 (o) of Republic Act No. 7160, otherwise known as the Local Government Code of 1991. As represented herein, Tokyo Tokyo is engaged in the operations of fast food stores, having branches all over Metro Manila. Lately, however, the management has been receiving notices from concerned assessors requiring them to file a sworn statement declaring the true value of their equipment for assessment purposes; and to subsequently pay the real property tax on the abovementioned equipment. Section 199(o), of the Local Government Code of 1991 (R.A. No. 7160) provides as follows: "Section 199. Definition of Terms . When used in this Rule, the term: "xxx xxx xxx "(o) Machinery embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus which may or may not be attached, permanently or temporarily to the real property. It includes the physical facilities for production, the installations and appurtenant service facilities, those which are mobile, self-powered or self-propelled, and those not permanently attached to the real property which are actually, directly, and exclusively used to meet the needs of the particular industry, business or activity, and which by their very nature and purpose are designed for, or necessary to its manufacturing, mining, logging, commercial, industrial or agricultural purposes." The above provision of the LGC has been clarified under Article 290 (o) of its Implementing Rules and Regulations (IRR) which is quoted hereunder: "Article 290. Definitions . When used in this Title; the term: "xxx xxx xxx "(o) Machinery embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus, which may or may not be attached, permanently or temporarily to the real property. Physical facilities for production, installations and appurtenant service facilities, those which are mobile, self powered, or self propelled and those not permanently attached to the real property shall be classified as real property provided that: (1) They are actually, directly, and exclusively used to meet the needs of the particular industry, business, or activity; and (2) By their very nature and purpose are designed for, or necessary to manufacturing, mining, logging, commercial, and industrial, or agricultural purposes. Machinery which are of general purpose use including but not limited to office equipment, typewriters, telephone equipment, breakable or easily damaged containers (glass or cartons), micro computers, fax, telex machines, cash dispensers, furniture and fixtures, freezers, refrigerators, display cases or racks, fruit juice or beverage automatic dispensing machines which are not directly and exclusively used to meet the needs of a particular industry, business or activity shall not be considered within the definition of machinery under this Rule." Verily, the equipment used by Tokyo Tokyo in the operations of its business activities consisting of freezers, refrigerators, soft drink dispensers, gas burners, misuno grills, microwave ovens, dishwashing machines, food warmers, store counter, chairs and tables do not fall within the definition of "Machinery" which could be considered real properties subject to real property taxes. IASTDE With regard to air conditioning units, please be informed of this Bureau's letter dated January 30, 2001, cited in our letter dated November 21, 2002 to the Bankers Association of the Philippines (BAP), (copy attached), pertinent portion of which reads: "xxx xxx xxx "Other equipment/machines, however, which are not essentially being used directly and exclusively in the banking business like air conditioning units (window and packaged type) , small generating sets and other mechanical devices of the same nature which are considered as falling under the category of machinery of general purpose use should not be considered real properties in line with the clarification under Article 290(o) of the Implementing Rules and Regulations of R.A. No. 7160, . . ." (Emphasis ours) In determining when a machinery can be considered real property subject to real property tax, please be informed of the pertinent portion of Finance Circular No. 001-2002 dated April 25, 2002 of the Department of Finance, copy also attached, which provides: " Summary of the Rules "xxx xxx xxx. "2. Machinery that is not permanently attached to real estate is: "a. Subject to the real property tax if it is an essential and principal element of an industry, work or activity without which such industry, work or activity cannot function; and "b. Not subject to the real property tax if it is not an essential and principal element of an industry, work or activity. "xxx xxx xxx We trust that this will help clarify matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director