Bureau of Local Government Finance Opinion

April 3, 2003 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mrs. Sonia B. Doble Municipal Treasurer Subic, Zambales M a d a m : This refers to your letter of December 19, 2002, requesting opinion on the following issues relative to the request for tax refund/credit of Subic Shipyard & Engineering Inc.(SSEI for brevity) amounting to Three Million Eight Hundred Eighty Seven Thousand Eighty Five Pesos and 32/100 (P3,887,085.32): 1) Is the definition of "land" in Section 24 of RA 7916 as amended by R.A. No. 8748 identical with the legal sense of "land" in Real Estate Appraisal Terminology given as: "Land defined In legal sense, the solid part of the surface of the earth as distinguished from water, any ground, soil or earth whatsoever, regarded as the subject of ownership and everything in or on it, such as minerals and running water, or annexed to it by man such as building and fences." (in Cipriano P. Cabaluna, Real Property Taxation, Quezon City, Rex Printing Company, 200:29) 2) Are the machineries, buildings, improvements and other immovable properties of Subic Shipyard & Engineering Inc. (SSEI) exempted from Real property taxation for being owned by a PEZA registered enterprise/developer? 3) Is the Subic Shipyard & Engineering Inc. (SSEI) simultaneously liable to pay real property taxes on lands, machineries, buildings, improvements & other immovable properties, and the Two percent (2%) Municipal share from the Final tax of its gross income for being a PEZA registered-enterprises, to the Municipality of Subic? Or, does the PEZA registered enterprise like SSEI have a real property tax exemptions on its machineries, buildings & improvements when it remits the Two percent (2%) Municipal share to this Municipality; Records show that SSEI is registered with the Philippine Economic Zone Authority (PEZA), under Certificate of Registration No. 96-003 on January 10, 1996 as an ECOZONE export enterprise, engaged in the shipbuilding, ship repair and related activities. In a letter dated May 16, 2002, the Department Manager III, of PEZA (Mr. Anthony B. Padua), informed that under Board Resolution No. 95-164 dated 06 December 1995, SSEI was granted incentives as a PEZA enterprise under Book VI of Executive Order No. 226 and R.A. No. 7916 for being a pioneer firm. Further, under paragraph 13.9 Article XIII of its Registration Agreement with PEZA, SSEI was granted a six (6) year Income Tax Holiday (ITH) retroactively on February 24, 1994, the date it acquired ownership from Philseco. However, after the expiry of the six (6) year ITH period, SSEI shall be paying the 5% tax on gross income earned, pursuant to Section 24 of R.A. No. 7916, as amended by R.A. No. 8748, 2% of which shall be remitted to the Municipality of Subic. He likewise opined that inasmuch as "SSEI is presently availing of and paying the 5% tax on gross income earned, SSEI is therefore exempt from payment of the real property tax on its buildings, structures and machinery." In her letter of December 19, 2002, the Municipal Treasurer of Subic acknowledged having received the amount of Six Hundred Ninety Six Thousand Nine Hundred Twenty Six Pesos and 22/100 (P696,926.22), representing the 2% final tax paid by SSEI to the municipality of Subic for the first to third quarters of year 2002. Anent query No. 1, this Bureau agrees with your definition of land. Land as used in R.A. No. 8748 pertains solely to land (not buildings, machineries and other improvements) owned by developers. The issue however, is not on the proper interpretation of the word "land" but on the law (Sec. 24 of R.A. 8748), itself. In the interpretation of laws, nothing is more elementary than the rule that when the language of the law is clear and unequivocal, the law must be taken to mean exactly what it says ( Beranda vs. Gustilo , 165 SCRA 757, 758, 759). Section 24 of R.A. No. 8748 provides just that "that no taxes, local and national shall be imposed on business establishments operating within the ECOZONE" except for real property tax on land owned by developers. For further clarification, quoted hereunder are the two (2) contrasting provisions of Section 24, R.A. No. 7916, approved on February 24, 1995, and its amending provision Section 24 of RA 8748, approved on June 1, 1999: R.A. No. 7916 "SEC. 24. Exemption from Taxes Under the National Internal Revenue Code . Any provisions of existing laws, rules and regulations to the contrary notwithstanding, no taxes, local and national, shall be imposed on business establishments operating within the ECOZONE. In lieu of paying taxes, and enterprise 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." R.A. No. 8748 "SEC. 4. Chapter III, Section 24 of Republic Act No. 7916 is hereby amended to read as follows : "SEC. 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. . . ." (Emphasis Supplied) Clearly, beginning 1996 and in pursuance of Section 221 of RA No. 7160, also known as the Local Government Code of 1991, (Date of Effectivity of Assessment or Reassessment), PEZA registered enterprises shall be exempt from the payment of real property tax, (be it land, buildings, machineries and other improvements) pursuant to Section 24 of R.A. No. 7916. This was clarified by the Department of Finance (DOF), under its letter dated August 26, 1997, the resolving portion of which states as follows: "The law cannot be clearer that what it already is. By stating that 'no taxes local and national shall be imposed' on subject operators and that 'in lieu of paying taxes, five percent (5%) of the gross income earned shall be remitted to the national government, the law covers all taxes. The IRR filled in the word 'all' in implementing this fiscal incentive in recognition of the clear mandate of the law. Verily, the IRR defined the nature of the 5% imposition as a 'final tax' which, in essence, is a tax that precludes the application of other taxes on the subject. It may also be noted that Rule XX, Section 2 of the IRR, does not mention real property tax payment as among those impression from this omission other than that ECOZONE operators are indeed exempt from real property tax . Otherwise, such payments should have been considered tax deductible." (Emphasis ours) The 5% tax on gross income earned provided under Section 24 of R.A No. 7916, as amended by Section 24 of R.A. No. 8748, as implemented under Revenue Regulations No. 12-97 has further been clarified under DOF Revenue Regulations No. 1-00. Section 4 of DOF Revenue Regulations No. 1-00 provides as follows: "Section 4. Nature of the 5% Tax and Extent of Tax Exemption . "The above 5% tax is imposed on "gross income earned" hence, income tax in nature and a national internal revenue law in character. Registered ECOZONE enterprises shall be exempt from all other taxes, national and local, except the real property tax on land owned by developers, pursuant to Section 24 of R.A. No. 7916, as amended by R.A. No. 8748" (Emphasis Ours) Obviously, the 5% tax referred to above shall refer to tax imposed on gross income earned, which is considered as income tax in nature and a national internal revenue law in character and not local tax imposable by local governments. SSEI, shall therefore, be liable to pay real property tax on land only and shall be exempt from real property tax on buildings, machineries and other improvements. This accordingly answers query no. 2 in the affirmative. With respect to your 3rd and last query, please be informed that inasmuch as Section 24 of R.A No. 7916 has already been amended by Section 24 of R.A. No. 8748, SSEI shall now be liable to pay only the real property tax on land. Simply put, SEEI, having been registered with PEZA in 1996, shall be exempt from real property tax (land, building, machineries and other improvement) for the year 1997-1999. However, beginning the year 2000, SSEI shall be exempt from national and local taxes except real property tax on lands. SSEI cannot be simultaneously liable to pay the 2% tax to the municipality and the real property tax on land. It can only be liable to pay the real property tax on land in pursuance of Section 24 of R.A. No. 8748. Attached is a copy of this Bureau's letter dated March 7, 2003, which deals on the same subject matter, for your reference. Viewed in the light of all the foregoing, this Bureau believes that except for the real property tax on land, SSEI shall be exempt from the payment of real property tax on buildings, machineries and other improvements beginning the year 2000. The request therefore of SSEI for tax refund/credit should be given due course. SDHITE Be guided accordingly. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director