Bureau of Local Government Finance Opinion

May 7, 2003 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 2nd Indorsement Respectfully returned to the City Assessor, Marikina City, the within preceding Indorsement dated 31 July 2001, relative to the letter dated 22 November 2002 of Atty. Pedro R. Perez, Perez Law Office, #24 Arellano St., Tuguegarao City, requesting exemption from the payment of real property tax on a house and lot at Provident Village, Marikina City. Records show that subject property is covered by a Lease-Purchase Agreement executed on 08 August 1983, by and between the Government Service Insurance System (GSIS) and the Sps. Pedro R. Perez, Jr. and Teresita Perez (the "Spouses" for brevity), the rents constituting the monthly installments of the consideration of the purchase price. After having paid in full the total consideration of P500,000.00, GSIS executed a Deed of Absolute Sale in favor of the Spouses on 06 February 2001, a copy of which is hereto attached. Thereupon, for purposes of registration, the spouses tried to secure a tax clearance from the City assessor, which the latter denied on the ground that the tax delinquency amounting to P71,578.56 covering the period from 1984 to 2001, will have to be settled first by the Spouses. The City Legal Officer of Marikina City, in a letter dated 29 June 2001 opined that "in determining who should bear the tax burden of a certain real property, it is important to note who owns the subject real property because taxes are paid by persons who owns the real property". It was being argued that "the burden of paying the real property tax has been shifted to Atty. Perez, who is not a tax exempt person and who being a constructive owner, has the possession and beneficial use thereof". Later, the Acting City Attorney of the same City, under a letter dated 16 August 2001, in response to the request for reconsideration dated 27 July 2001 of Atty. Perez, argued that "the moment one party signed and agreed with the Lease-Purchase Agreement, that person has acquired rights over the property, especially that there is an existing Contract to Sell and the fact that the subject property is placed under your possession, you have the exclusive enjoyment and the control therein and you may even assign your rights over the subject property", citing in support thereof Sections 205(d) and 234(a) of the Local Government Code (LGC) of 1991 (R.A. 7160). IDESTH On the other hand, Atty. Perez contended that inasmuch as the GSIS was the owner of the said property since 1983 up to the time when the GSIS executed the Deed of Absolute Sale in 2001, the unpaid taxes should be paid by the GSIS. But since GSIS is exempt from the payment of real property tax pursuant to its charter (P.D. 1146, as amended), he should not be made to pay the real property tax. He argued further that neither Section 205(d) nor Section 234(a) of the LGC would apply since Section 205 pertains to the listing, valuation and assessment of real property owned by the Republic of the Philippines, and that Section 234(a) applies only to exemption from payment of real property tax on the property owned by the Republic of the Philippines or its political subdivisions, the beneficial use of which is granted to a taxable person, and not to the instrumentalities of the Republic of the Philippines (such as GSIS), which are not included in the enumeration therein. The issue to be resolved in this case is whether or not the "beneficial use theory" will apply in order to determine the real property tax liability of Mr. Perez. Notice should be taken of the fact that the real property tax liability in question covers the period from 1984 to 2001, wherein P.D. No. 464, otherwise known as the Real Property Tax Code, as amended, was the prevailing law from 1984 to 1991. With the promulgation of R.A. No. 7160, also known as the Local Government Code of 1991, which took effect on 01 January 1992, the provisions thereof will be applied starting 1992. In order to determine the applicability of the "beneficial use theory", a closer look at the applicable provisions of P.D. No. 464 and R.A. No, 7160 is in order. Section 40(a) of P.D. 464 provides, thus: "Sec. 40. Exemption from Real Property Tax . The exemption shall be as follows: "(a) Real Property owned by the Republic of the Philippines or any of its political subdivisions and any government-owned or controlled corporations so exempt by its charter , provided, however, that this exemption shall not apply to real property of the abovementioned entities the beneficial use of which has been granted, for consideration or otherwise, to a taxable person." On the other hand, Section 234(a) of R.A. No. 7160 reads, as follows: "Sec. 234. Exemption from Real Property Tax . The following are exempted from the payment of real property tax: "(a) Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person." Note that as reproduced in Section 234(a), the phrase "any government-owned or controlled corporations so exempt by its charter" was excluded. 1 In view of the non-inclusion in Section 234(a) of government-owned or controlled corporations (GOCC) this Bureau so holds that as far as GOCCs are concerned, the "beneficial use" theory is applicable only under the provisions of Section 40(a) P.D. 464 but not under Section 234(a) of the LGC. This view is supported by the pronouncement of the Supreme Court in the case of " City of Baguio vs. Busuego ", 2 wherein it was held that "while the GSIS may be exempt from real estate tax, the exemption does not cover property belonging to it, where the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person. There can be no doubt that under the provisions of the contract in question, the purchaser to whose possession the property has been transferred was granted beneficial use thereof. It follows on the strength of the provision of Sec. 40(a) of P.D. 464 that the said property is not exempt from the real property tax ." The "beneficial use" theory was applied in the said case because GOCCs were included in the said Section 40(a). EAHDac Applying the foregoing in the herein case of the Spouses, the "beneficial use" theory shall only be applied to the real property tax liability for the period 1984 to 1991 during which period P.D. 464 was still applicable. However, starting 1992, the "beneficial use" theory can no longer be applied in the case of GOCCs for reasons already herein stated. The Lease-Purchase Agreement entered into by and between the Spouses and GSIS is in the nature of a Contract to Sell. It is not correct to say that upon execution of the Contract to Sell, there is already a transfer of ownership over the real property. A Contract to Sell does not pass ownership unlike in a Contract of Sale. 3 Therefore, GSIS retains the ownership of the property until after payment of the purchase price by the Spouses. For this reason, the Spouses, not being the owner cannot be liable for payment of the real property tax. Neither can the Spouses be liable as beneficial user for the reason that the "beneficial use" theory can no longer be applied under Section 234(a) of the LGC. Hence, from 1992, the year of effectivity of the LGC up to 2001, the year of execution of the Deed of Sale, the Spouses shall not be liable for real property taxes. Moreover, it should be noted that the exemption of GSIS continues notwithstanding the enactment of the LGC. Opinion No. 165 of the Department of Justice (DOJ) dated 16 December 1994 is quoted hereunder: ". . . it bears emphasis that Section 33 of the GSIS Charter, in a clear and peremptory tone requires that the exemptions (from taxes, assessments, fees charges or duties) granted thereunder to the GSIS shall continue unless expressly and specifically revoked. Section 33 itself is categorical in stating that the intention behind the requirement of express and specific revocation is to promote the declared state policy of preserving and maintaining at all times the actuarial solvency of the funds of the System keeping as low as possible the contribution rates necessary to sustain the benefits granted under the GSIS Act, which objective cannot be attained if taxes are imposed upon the GSIS." (Secretary of Justice Op. No. 126, S. 1981) In view of the foregoing, this Bureau hereby rules as follows: a) Atty. Perez shall be liable for real property taxes for the period 1984 to 1991; b) Starting 1992, Atty. Perez shall not be liable for real property taxes in view of the inapplicability of the "beneficial use" theory; and c) Starting 2002, pursuant to Sec. 221 of the LGC, Atty. Perez shall already be liable for real property taxes. cHSIDa Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA Executive Director Footnotes 1. The justification for this restricted exemption in Section 234 (a) seems obvious: to limit further tax exemption privileges, especially in light of the general provisions on withdrawal of tax exemption privileges in Section 193 and the special provision on withdrawal of exemption from payment of real property taxes in the last paragraph of Section 234. These policy considerations with the State Policy to ensure autonomy to local governments and the objective or the LGC that they enjoy genuine and meaningful local autonomy to enable them to attain their fullest development as self-reliant communities and make effective partners in the attainment of national goals. ( Mactan-Cebu International Airport Authority vs. Marcos , G.R. No. 120082, 11 September 1996, 261 SCRA) 2. G.R. No. L-29772, 18 Sept. 1980 3. (a) In a Contract of Sale , the non-payment of the price is a resolutory condition, that is, the Contract of Sale may be such occurrence put an end to a transaction that once upon a time existed; in a Contract to Sell , the payment in full of the price is a positive suspensive condition. Hence, if the price is not paid, it is as if the obligation of the seller to deliver and to transfer ownership never became effective and binding. (b) In the first, title over the property generally passes to the buyer upon delivery; in the second, ownership is retained by the seller, regardless of delivery and is not to pass until full payment of the price . (c) In the first, after delivery has been made, the seller has lost ownership and cannot recover it unless the contract is resolved or rescinded; in the second, he is enforcing not rescinding the contract if he seeks to oust the buyer for failure to pay. ( Santos vs. Santos , C.A. 47, O.C. 6372; Manuel vs. Rodriguez , C-13435, 27 July 1960, cited in PARAS [1990])