Bureau of Local Government Finance Opinion

September 18, 2003 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 2nd Indorsement Respectfully returned to the OIC-Regional Director for Local Government Finance, Department of Finance, Region X, 6th Div. Corner Tejero Street, Patag, Cagayan de Oro City, her attached 1st Indorsement dated March 13, 2003, relative to the letter of the City Treasurer, Iligan City, inquiring whether the opinion rendered by former Executive Director Lorinda M. Carlos still holds true relative to the real estate tax assessments made on properties owned by the Philippine Ports Authority (PPA) of Iligan City. It may be recalled that this Bureau, under its BLGF Memorandum Circular No. 02-95 dated February 1, 1995, instructed the Treasurers of local government units concerned to hold in abeyance all real property tax collection activities against PPA until such time that the Supreme Court has finally decided on the case filed by the Philippine Ports Authority (PPA) vs. City of Iloilo (G.R. No. 109791), except the real property taxes due on PPA properties which are rented or leased to taxable persons as the same are not affected by the resolution of the case. On July 14, 2003, the Supreme Court, Manila, First Division, rendered its decision on the said case of PPA vs. the City of Iloilo (G.R. No. 109791), copy attached, on the petition for review on certiorari assailing the Decision of the Regional Trial Court of Iloilo City, Branch 39, dated February 26, 1993 in Civil Case No. 18477, filed by PPA, the dispositive portion of which reads as follows: "xxx xxx xxx. "We also note that petitioner failed to raise the issue of ownership during the pre-trial. In its petition, it insists that to determine liability for real property tax, the ownership of the property must first be ascertained. In the pre-trial order, however, to which petitioner did not object, nowhere was the issue of ownership included in the stipulated factual or legal issues. "xxx xxx xxx. "The trial court correctly ruled that for the assessed period of 1984 to 1988, petitioner's exemption from real property taxes was withdrawn by P.D. No. 1931, at least for the period of 1984 to 1986." "xxx xxx xxx." "On June 11, 1984, however, P.D. 1931 effectively withdrew all tax exemption privileges granted to government-owned or controlled corporations as stated in Section 1 thereof, which reads: "Sec. 1. The provisions of special or general law to the contrary notwithstanding, all exemptions from the payment of duties, taxes, fees, imposts and other charges heretofore granted in favor of government-owned or controlled corporations including their subsidiaries, are hereby withdrawn." "xxx xxx xxx. "Petitioner, however, seeks to be excused from liability for taxes by invoking the pronouncement in Basco v. PAGCOR ( Basco ) quoted hereunder: "PAGCOR has a dual role, to operate and to regulate gambling casinos. The latter role is governmental, which places it in the category of an agency or instrumentality of the Government. Being an instrumentality of the Government, PAGCOR should be and actually is exempt from local taxes . Otherwise, its operation might be burdened, impeded or subject to control by a mere Local government. [Emphasis supplied] "Petitioner points out that its exercise of regulatory functions as decreed by its charter places it within the category of an 'agency or instrumentality of the government,' which, according to Basco , is beyond the reach of local taxation. "xxx xxx xxx. "Furthermore, in the more recent case of Mactan Cebu International Airport Authority v. Marcos , where the Basco case was similarly invoked for tax exemption, we stated: '[N]othing can prevent Congress from decreeing that even instrumentalities or agencies of the Government performing governmental functions may be subject to tax. Where it is done precisely to fulfill a constitutional mandate and national policy, no one can doubt its wisdom.' The fact that tax exemptions of government-owned or controlled corporations have been expressly withdrawn by the present Local Government Code clearly attests against petitioner's claim of absolute exemption of government instrumentalities from local taxation." "Petitioner also contends that the term 'government-owned or controlled corporations' referred in P.D. 1931 covers only those not performing governmental functions. This argument is without legal basis for it reads into the law a distinction that is not there. It runs contrary to the clear intent of the law to withdraw from all units of the government, including government-owned or controlled corporations, their exemptions from taxes. Had it been otherwise, the law would have said so." cETCID "Moreover, the trial court correctly pointed out that if indeed petitioner were not subject to local taxation, petitioners charter would not have specifically provided for its exemption from the payment of real property tax. Its exemption therein therefore proves that it was only an exception to the general rule of taxability of petitioner. Given that said privilege was withdrawn by subsequent law, petitioner's claim for exemption from real property taxes for the entire assessed period fails. "xxx xxx xxx. "The argument is unconvincing. As admitted by petitioner, it leases out its premises to private persons for 'convenience' and not necessarily as part of its governmental function of administering port operations. In fact, its charter classifies such act of leasing out port facilities as one of petitioner's corporate powers. Any income or profit generated by an entity, even of a corporation organized without any intention of realizing profit in the conduct of its activities, is subject to tax. What matters is the established fact that it leased out its building to ten private entities from which it regularly earned substantial income. Thus, in the absence of any proof of exemption therefrom, petitioner is liable for the assessed business taxes. "In closing, we reiterate that in taxing government-owned or controlled corporation, the State ultimately suffers no loss. In National Power Corp. v. Presiding Judge, RTC, Br. XXV , we elucidated: 'Actually, the State has no reason to decry the taxation of NAPOCOR's properties, as and by way of real property taxes. Real property taxes, after all, form part and parcel of the financing apparatus of the Government in development and nation-building, particularly in the local government level. 'xxx xxx xxx.' 'To all intents and purposes, real property taxes are funds taken by the State with one hand and given to the other. In no measure can the government be said to have lost anything. "Finally, we find it appropriate to restate that the primary reason for the withdrawal of tax exemption privileges granted to government-owned and controlled corporations and all other units of government was that such privilege resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises, hence resulting in the need for these entities to share in the requirements of development, fiscal or otherwise, by paying the taxes and other charges due from them." Accordingly, and with the above pronouncements of the Supreme Court and the provision of the last paragraph of Section 234 of the Local Government Code of 1991, PPA is liable to pay real property tax to the local government units concerned, in this particular case, to the City of Iligan. BLGF Memorandum Circular No. 2-95 of this Bureau, is now considered moot and academic. cHITCS (SGD.) MA. PRESENTACION R. MONTESA Executive Director