Bureau of Local Government Finance Opinion

July 31, 2006 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Rina Pauline T. Abadiano, et al. Erwin C. Go & Associates Second Floor, Allied Bank Center 6754 Ayala Avenue, Makati City M a d a m : This refers to your letter dated February 10, 2006 in behalf of your client, Allied Banking Corporation (Allied Bank), requesting clarification concerning the taxability of airconditioning units being used by Allied Bank, Lapasan Branch, Cagayan de Oro City. The request was made in view of the assessment made by the Office of the City Assessor of said city, subjecting said airconditioning units to real property tax for reason that the same are essential, indispensable, vital and necessary to the conduct of the business in order to maintain a conducive, comfortable working environment, both for the bank officials, personnel and their clients. On the other hand, Allied Bank, in its letter dated January 16, 2006 addressed to the City Treasurer, same city, contends that the bank can continue with its regular business operations without airconditioning units, as it has been in the early years of the last century, and the bank officials and personnel can efficiently perform their functions without the said airconditioning units. It may be recalled that this Bureau had previously issued an opinion dated March 22, 2005 that airconditioning units, among other things, "are considered as falling under the category of Machinery of general purpose use", and therefore do not fall under the category of Machinery defined under the Local Government Code of 1991. Quoted hereunder are excerpts of said opinion: TaCSAD "xxx xxx xxx In view of the conflicting arguments and to have a clear understanding on the definition of Machinery under the Local Government Code, we deem it proper to resort to the legislative intent behind Section 199 (0) thereof as found on pages 414 to 416 of the Journal and Records of the House of Representatives Proceedings and Debates, 4th Regular Session of Congress 1990-1991, Volume II (September 4 November 6, 1990) pertinent portions of that deliberation read as follows: "xxx xxx xxx "MR. AQUINO (A.). Thank you, Mr. Speaker: Mr. Speaker, to continue with the interpellation, may I refer the honorable sponsor to page 147 of Book II. On item 13, under the title "machinery", this Representation believes that the definition of machinery here for purposes of appraisal and assessment of real property for taxation purposes should include movable machines but immovable by destination or purpose or for purposes of taxation to cover sewing machines, forklifts, cranes, bulldozers, and similar equipment as falling under the purview of the coverage of machinery as has been defined? "MR. JAVIER (E). Mr. Speaker, this provision involves real property taxation and, therefore, the taxation should only be limited to real properties. Movable machines like sewing machines, bulldozers could not be classified as real property if they can be mobilized or can be moved from the place of activity. But there are some machines, defined under the Civil Code, which are considered as real property by destination, Mr. Speaker. "MR. AQUINO (A.). Yes. That is what this Representation was referring to. That is why we specifically mentioned sewing machines, forklifts, cranes, bulldozers, and similar equipment which under the Civil Code are really defined as movable machines but immovable by destination or purpose. "MR. JAVIER (E.). We are trying to preserve the definition of real property, Mr. Speaker, under the Civil Code. And that is the definition that we have used here in defining machinery as real property. Therefore, if we accede to the request of the honorable Gentleman from Quezon City, what will happen is all types of movables will be taxed as real property, and where do we stop, Mr. Speaker. STcHEI "So, Mr. Speaker, I do not think we can agree on a redefinition of machinery as real property under this provision because if we agree, what, will prevent, let us say, the assessors from taxing movable equipment or property although they are not really real property? This will give the assessors discretion, Mr. Speaker. If we give these functionaries so much discretion, we will be giving them the opportunity for graft. So we have to stick by the definition under this provision, Mr. Speaker . (Emphasis supplied) "Article 415 of the NEW Civil Code provides as follows: "Art. 415. The following are immovable property: "(1) Land, buildings, roads and construction of all kinds adhered to the soil; "(2) Trees, plants, and growing fruits, while they are attached to the land or form an integral part of an immovable; "(3) Everything attached to an immovable in a fixed manner, in such a way that it cannot be separated therefrom without breaking the material or deterioration of the object; "(4) Statues, reliefs, paintings or other objects for use or ornamentation, placed in buildings or on lands by the owner of the immovable in such a manner that it reveals the intention to attach them permanently to the tenements; "(5) Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works; "xxx xxx xxx. In its Decision dated May 10, 2002, the CBAA, under Case No. M-14, entitled Taganito Mining Corporation and Hinatuan Mining Corporation vs. Provincial Assessor of Surigao del Norte and LBAA of Surigao del Norte held, thus: "xxx xxx xxx. "Section 199(o) of R.A. 7160 seems to convey that all things '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' should be considered 'machinery' for purposes of real property tax. On the other hand, Article 415 of the New Civil Code provides that, in order for an apparently movable machinery to be 'immovable', the intention of the owner thereof to make that machinery 'immovable' must be manifest. "Dump trucks or haulers are similar in nature to delivery trucks and yet the latter are never considered real property for purposes of the real property tax. Not all things which are actually, directly and exclusively used to meet the needs of a particular industry, business or activity are considered real property for purposes of the real property tax . Adding machines and calculators, for example, are always necessary to any kind of business, yet they are not subject to the payment of real property tax. "xxx xxx xxx. "Centralized airconditioning systems have the same functions as window-type airconditioning units and yet the latter are never considered as real property for purposes of the real property tax because window-type airconditioning systems could not be. "xxx xxx xxx." It is therefore clear from the above deliberations that Congress intended to confine the definition of machinery as real property under Section 199 (o) of the Local Government Code of 1991 within the meaning of Article 415 of the New Civil Code. In view of the foregoing, and considering that the said machinery is not essential to the needs of banking operations, this Bureau reiterates its previous ruling that airconditioning units are considered as falling under the category of machinery of general purpose use and do not fall within the definition of "Machinery" subject to real property tax as provided under Section 199 (o) of the Local Government Code of 1991. We hope that this clarifies matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director