Bureau of Local Government Finance Opinion

July 11, 2017 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 2nd Indorsement Respectfully returned to the OIC Regional Director ,BLGF, Region XIII (CARAGA) Butuan City, the within 1st Indorsement dated 20 January 2017 received by this Bureau on 16 February 2017, relative to the inquiry of the OIC Municipal Treasurer of Claver, Surigao Del Norte, on whether the Taganito HPAL Nickel Corporation (THPAL) is no longer liable for the payment of the provincial imposition on real property tax beginning on 01 October 2017, as it will be subjected under the gross income tax (GIT) incentive. Representations are made that THPAL is registered with the Philippine Economic Zone Authority (PEZA) as an Ecozone Export Enterprise at the Taganito Economic Zone in the same Municipality of Claver, Surigao Del Norte. Furthermore, THPAL claimed that it has started its commercial operations in October 2013 and was accordingly granted a four-year income tax holiday (ITH) by PEZA. On 27 December 2016, the THPAL tendered advance payment for its real property tax (RPT) for FY2017 in the amount of Five Hundred Sixty Nine Million Two Hundred Ninety Nine Thousand Two Hundred Twenty Pesos and 24/100 (Php569,299,220.24), net of 20% discount, to the Office of the Municipal Treasurer of Claver. However, the 4th quarter FY2017 tax due in the amount of One Hundred Forty One Million Two Hundred Sixteen Thousand Nine Hundred Forty Eight Pesos and 20/100 (Php141,216,948.20) was paid under protest claiming that its ITH incentive expires on 30 September 2017 and that by that time it shall be subject to the GIT regime under Section 24 1 of RA 7916, as amended by RA 8748. 2 As provided under the Local Government Code (LGC) of 1991, the computation of the real property tax for any year shall accrue on the first day of January 3 of the succeeding year. However, the owner of the real property having legal interest therein may pay the basic real property tax and the additional tax accruing to the Special Education Fund (SEF) without interest in four equal installments on or before the end of each quarter as prescribed under the law. If no interest may be imposed on payment by installment, then it follows that the payment of the tax may be considered on time or prompt, or advance based on the quarter period provided under Section 250 of the LGC. 4 The advance and prompt payments shall be entitled to a discount 5 at the rates provided in the local ordinance subject to the limitation provided in the Code. In line with this, Section 232 of the LGC is deemed to be not applicable to THPAL as it provides that an ' ad valorem tax' may be levied on real properties not hereinafter specifically exempted. 6 It should be noted that THPAL is an Ecozone Export Enterprise registered with PEZA that was granted a four-year ITH after which it shall be subject to GIT incentive in lieu of all national and local taxes based on Section 24 of RA 7916, as amended by RA 8748. It enjoys exemption and incentives from PEZA upon compliance with the condition on the use of new machinery and equipment which have not been used by any other manufacturing facilities in the Philippines. In reiteration of our previous opinion 7 dated 11 January 2016, this Bureau affirms its ruling that THPAL, after the lapse of the first three years of operation of its machinery and equipment, shall be liable to pay real property taxes on such machinery on its fourth year of operations. In this case, it was provided that THPAL commenced its operation in October 2013 and it was exempted from RPT effective from the year following its operations which is from FY2014 up to FY2016. It is worth emphasizing that machinery and equipment of THPAL operated in October 2013 shall be exempted from payment of real property tax for the first three years of its operation which accrues from 01 January 2014 up to 01 January 2016 . It is clear that THPAL was not made to pay for the tax due from October 2013 till the end of the FY2013 by reason that the operative principle of taxation on real property tax, pursuant to Republic Act No. 7160, 8 accrues on the first day of January on the year following its operation (January 2014) and not on the date of the start of its operation (October 2013).Further, THPAL was also aware of the fact that starting 01 January 2017, it shall already be liable for RPT on its machinery and equipment. At this point, we also deem it appropriate to specifically mention, for purposes of clarity, that any machinery and equipment introduced after the start of operations of THPAL, shall be exempted for the first three (3) years of its operation and shall accrue on the 1st day of January of any year following its operations. Based on PEZA Memorandum Circular No. 2004-24, an eligible enterprise is entitled to the three-year exemption from payment of the real property tax on machinery and equipment for every machinery and equipment it acquires for its operation, at any point of its operation, and not only on those acquired during the start of its operation .This means that an eligible enterprise will have to pay the real property tax on its machinery and equipment only on the fourth year of use/operation of such machinery. In other words, THPAL's machinery operated in 2013, and shall, therefore, be liable to pay real property tax in 2017, but will subsequently be exempted to such, once THPAL is already under the GIT. Moreover, the assessments or reassessments made after the first (1st) day of January of any year shall take effect on the first (1st) day of January of the succeeding year: Provided, however, that the reassessment of real property due to its partial or total destruction, or to a major change in its actual use, or to any great and sudden inflation or deflation of real property values, or to the gross illegality of the assessment when made or to any other abnormal cause, shall be made within ninety (90) days from the date any such cause or causes occurred, and shall take effect at the beginning of the quarter next following the reassessment. 9 It must be noted that, as stipulated in Section 246 of the LGC, real property tax shall accrue on the first day of January and shall be applied for the whole year. Stated otherwise, the RPT becomes due and demandable on the day as above mentioned and the payment through installments without penalty is just an option for the taxpayer. It is indeed but proper that THPAL pay its RPT for the whole year, falling on the 4th quarter tax due, because it's RPT has already accrued on the first day of the year even if its ITH expires before the 4th quarter of the same year. While it may be true that the GIT incentive shall be applied to THPAL at the time of expiration of its ITH, it cannot however, apply to RPT since its accrual begins on the first day of January on the year following its operations .Accordingly, the GIT incentive claimed by THPAL shall be applied the following year, which will commence on 01 January 2018, and the corresponding 5% gross income tax to be paid by THPAL will be shared as 3% to the National Government and 2% to be remitted directly to the Municipality of Claver. Lastly, the machinery which are not exclusively used for pollution control and environmental protection shall be considered as taxable, without prejudice to the claim of THPAL pursuant to the certification issued by the Mines and Geosciences Bureau dated 03 February 2005. This Opinion is issued based on the information provided and to guide local treasurers in collecting taxes and other local impositions. If upon subsequent verification or submission of information proves the contrary, this Opinion will be deemed null and void. Be guided accordingly. (SGD.) NIO RAYMOND B. ALVINA OIC Executive Director ATTACHMENT Bureau of Local Government Finance Opinion January 20, 2017 Footnotes 1. Section 24 . Exemption from National and Local Taxes . Except for real property taxes on land owned by developers, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu thereof, five percent (5%) of the gross income earned by all business enterprises within the ECOZONE shall be paid and remitted as follows: a) Three percent (3%) to the National Government; b) Two percent (2%) which shall be directly remitted by the business establishments to the treasurer's office of the municipality or city where the enterprise is located. 2. An Act Amending Republic Act No. 7916, otherwise known as the "Special Economic Zone Act of 1995." 3. Section 246 . Date of Accrual of Tax. The real property tax for any year shall accrue on the first day of January and from that date it shall constitute a lien on the property which shall be superior to any other lien, mortgage, or encumbrance of any kind whatsoever, and shall be extinguished only upon the payment of the delinquent tax. 4. Section 250 . Payment of Real Property Taxes in Installments . The owner of the real property or the person having legal interest therein may pay the basic real property tax and the additional tax for Special Education Fund (SEF) due thereon without interest in four (4) equal installments; the first installment to be due and payable on or before March Thirty-first (31st);the second installment, on or before June Thirty (30);the third installment, on or before September Thirty (30);and the last installment on or before December Thirty-first (31st),except the special levy the payment of which shall be governed by ordinance of the sanggunian concerned. 5. Section 251 . Tax Discount for Advanced Prompt Payment. If the basic real property tax and the additional tax accruing to the Special Education Fund (SEF) are paid in advance in accordance with the prescribed schedule of payment as provided under Section 250, the sanggunian concerned may grant a discount not exceeding twenty percent (20%) of the annual tax due. 6. Section 232 . Power to Levy Real Property Tax. A province or city or a municipality within the Metropolitan Manila Area may levy an annual ad valorem tax on real property such as land, building, machinery, and other improvement not hereinafter specifically exempted. 7. BLGF Opinion re: Claim for Exemption from Real Property Tax on the Production Machinery Owned by Taganito HPAL Nickel Corporation (THPAL). 8. Local Government Code of 1991. 9. Section 221, LGC.