Bureau of Local Government Finance Opinion

June 20, 2012 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 2nd Indorsement Respectfully referred to the Regional Director for Local Government Finance, Department of Finance, Region III, Benigno Aquino Memorial Hall, Provincial Capitol Compound, San Fernando City, Pampanga, the within preceding Indorsement dated March 12, 2012 of the City Assessor of Angeles City, relative to the request of Mr. Emmanuel Y. Angeles, University Chancellor of Angeles University Foundation (AUF),to drop the property from the roll of taxable properties, and thereafter to reclassify the property as tax exempt. It appears from the attached sub-joined letters, both dated February 27, 2012 of Mr. Angeles addressed to said City Assessor that the following real properties of AUF was allegedly been classified as taxable, to wit: aATHES 1) AUF Main Campus Used as Classrooms, administration offices, laboratories, auditorium, libraries, canteen, and parking spaces intended for students, faculty and staff. 2) AUF Medical Center Conducts Tertiary teaching, training and research hospital which cater to AUF's medical students, Nursing and Allied Medical Professions. 3) Sports Center Used as classrooms, sports activities and gymnasium. 4) University Hostels (UH) Serve as dormitories for AUF's students 1, 3, 4 & 5 and teachers. UH3 Also serves as site for the University Printing Press, maintenance area, and Newborn Screening Center for the AUF Medical Center. UH4 Serves as a laboratory for AUF's Hotel & Restaurant Management (HRM) students. 5) Botanical Garden Used for BS Biology program and other courses 6) Student Dormitory Used exclusively by AUF students 7) NSTP and ROTC Exclusively used by AUF students activity area 8) Sports and Recreation Exclusively used by AUF students facilities and employees 9) Parking Exclusive used by AUF 10) Storage Area Exclusive used by AUF Mr. Angeles likewise submitted the following arguments: 1. In Section 19 (2), Article XIV of the 1987 Constitution, educational institutions are mandated to undertake sports activities, to wit: "All educational institutions shall undertake regular sports activities throughout the country in cooperation with athlete clubs and other sectors." 2. It is likewise required under the Commission on Higher Education's Manual of Regulations for Private Higher Education Institutions "Sec. 26. Institutional Sites and Buildings. ...All higher education institutions are also required to provide for adequate auditoriums, lecture rooms, and gymnasiums ...." 3. The Code of Sanitation of the Philippines also requires playgrounds, athletic fields, school gardens and other facilities for suitable sports and games: "CHAPTER VI. SCHOOL SANITATION AND HEALTH SERVICES "SEC. 41. The Physical Environment. In the design and construction of the school plant, the following factors shall be considered: cHaDIA "b) Grounds . The acreage shall be large enough to permit playgrounds, athletic fields and school gardens. "SEC. 42. The Emotional Environment. For the promotion of emotional health of the school population the following requirements shall be observed: "xxx xxx xxx "b) Recreational Facilities . The school must have save and attractive playgrounds and adequate facilities for suitable sports and games." 4. Moreover, the tax exemption extends to facilities which are incidental to, and reasonably necessary for the accomplishment of the main purpose of an exempt entity. This principle was reiterated in the 2007 case of City Assessor of Cebu City v. Association of Benevola de Cebu, Inc. Quoting the rule in Herrera v. Quezon City Board of Assessment Appeals , "Moreover, the exemption in favor of property used exclusively for charitable or educational purposes 'is not limited to property actually indispensable' therefore (Cooley on Taxation, Vol. 2, p. 1430), but extends to facilities which are 'incidental to and reasonably necessary for' the accomplishment of said purposes ,such as, in the case of hospitals, 'a school for training nurses, a nurses' home, property use to provide housing facilities for interns, resident doctors, superintendents, and other members of the hospital staff, and recreational facilities for students nurses, interns and residents' (84 C.J.S.,621),such as 'athletic fields',including a 'farm used for the inmates of the institution (Cooley on Taxation, Vol. 2, p. 1430)." Contrary thereto, said City Assessor's Office of Angeles, as contained under its abovementioned indorsement, is of the opinion "that the University Hostels or Dormitory are not used for educational purposes even if the occupants are student of the Angeles University Foundation." In this connection, the said tax exemption privileges granted to educational institutions, among others, was quoted almost verbatim from the Constitution under Section 28 (3), Article VI, and reiterated under Section 234 (b) of R.A. No. 7160, otherwise known as the Local Government Code (LGC) of 1991, which provides as follows: Section 28 (3), Article VI of the Constitution : "Section 28(3) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation." Section 234 (b) of the LGC: HETDAC "Section 234. Exemptions from Real Property Tax. The following are exempted from payment of real property tax: "xxx xxx xxx. "(b) Charitable institutions, churches. Parsonages or convents appurtenant thereto, mosques, nonprofit or religious cemeteries and all lands, buildings and improvements actually, directly and exclusively used for religious or educational purposes ;(Underscoring supplied) "xxx xxx xxx." However, the Supreme Court, in the case of City of Baguio vs. Fernando S. Busuego , G.R. No. L-29772 promulgated on September 18, 1990, held that "the sole determinative factor for exemption from realty taxes is the USE to which the property is devoted. And where 'use is the test, the ownership is immaterial' (Martin on the Revenue Administration Code, 1961, Vol. II, p. 487, citing Apostolic prefect of Mt. Province vs. Treasurer of Baguio City ,71 Phil 547)." Premises considered, for the said properties of AUF to be exempt from the payment of real property tax, it must conform with the test as stated in the case above cited as well as with the provision of Sec. 217 of the Local Government Code of 1991 which provides that: "Section 217. Actual Use of Real Property as Basis for Assessment. Real Property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it." Clearly, all lands, buildings and improvements of educational institutions which are actually, directly and exclusively used for educational purposes are exempt from real property tax. Conversely, if the same properties are used other than its intended purposes, the same shall not be entitled to real property tax exemption granted under the abovementioned provisions of law. With regard to facilities which are incidental to and reasonably used, and necessary for the accomplishment of the purpose, this Bureau, in its 2nd Indorsement dated August 27, 2003, copy enclosed, treating on a similar subject matter, ruled in part, as follows: "xxx xxx xxx. '1. Although a part of the building is functioning as an office, still, the undersigned deem that the subject real properties (land and building) of CMHJI are being used actually, directly and exclusively for its religious purposes. We find the operations of the Circulation Office as only 'incidental' for the accomplishment of their religious existence and purpose. Also, we cannot assume that the same is income-generating considering the minimal rates being charged, as observed. We deem that the same only necessary to continuously run the said Circulation Office in spreading the word of God. "xxx xxx xxx. "Moreover, attention is also invited to the clarificatory portion in Supreme Court (SC) Decisions, as embodied under CBAA Decision Case No. L-08: Classification/Actual Use in clarifying the term 'actually, directly and exclusively used,' to wit: '1. Abra Valley College, Inc. vs. Aquino (G.R. No. L-39086, June 15, 1988, 162 ACRA 106), citing Herrera vs. Quezon City Board of Assessment Appeals (G.R. No. L-1570, September 30, 1961, 3 SCRA 1860) and Commissioner of Internal Revenue vs. Bishop of the Missionary District (14 SCRA 991) : ...Moreover, the exemption in favor of property used exclusively for charitable or educational purposes is not limited to property actually indispensable therefore (Cooley on Taxation, Vol. 2, p. 1430),but extends to facilities which are incidental to and reasonably necessary for the accomplishment of said purposes, such as in the case of hospitals, a school for training nurses, a nurses home, a property used to provide housing facilities for student nurses, interns, and residents (18 C. Juris Secundum 621) such as athletics fields, including a farm used for inmates of the institutions. (Cooley on Taxation, Vol. 2, p. 1430) cTAaDC 2. Herrera vs. Quezon City Board of Assessment Appeals (3 SCRA 186 [1961] and Commissioner of Internal Revenue vs. Bishop of Missionary District (14 SCRA 191 [1965]) : 'It must be stressed however, that while this court allows a more liberal and nonrestrictive interpretation of the phrase 'exclusively used for educational purposes' as provided for in Article VI, Section 22, paragraph 3 of the 1935 Philippine Constitution, reasonable emphasis has always been made that exemption extends to facilities which are incidental to and reasonably necessary for the accomplishment of the mean purpose ....' (Underlining supplied) "It is clear, therefore, that the term 'actually, directly and exclusively used' under Section 234(b) of the Code is not limited to and does not preclude such other 'incidental uses' attached to the primary use of a property. "In the instant case, the Circulation Office of CMHJI, which is a part of the subject building is considered as incidental to and reasonably necessary in achieving the main purpose of the said congregation in spreading the Word of God. The Living Quarters which house the local and foreign missionaries of CMHJI who are indeed distinguished parsonages that constitute religious institutions, are likewise incidental to and necessary in the accomplishment of the existence and purpose. "xxx xxx xxx." In view of the above discussion, and if indeed, upon further verification by that Office, the subject properties of AUF which are being used actually, directly and exclusively for educational purposes, including those real properties which are found to be incidental to and reasonably necessary in achieving the educational purposes of AUF, should be dropped from the roll of "taxable" properties and entered in the "exempt" roll of real properties. Otherwise, those properties shall remain in the "taxable" roll of real properties. In addition thereto, if indeed the subject Dormitory is owned by the school and erected within the AUF campus, the same should be dropped from the roll of "taxable" properties and entered in the "exempt" roll of real properties. Otherwise it shall remain in the "taxable" roll of real properties. Be guided accordingly. TEIHDa (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director