Bureau of Local Government Finance Opinion

November 21, 2002 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully returned to the City Assessor, Valenzuela City, his within follow-up letter dated July 1, 2002, relative to the letter dated October 23, 2001 of Mr. Benito S. Adajar, Jr., Branch Manager, BPI Family Bank, Malinta Branch, requesting that the bank vault and airconditioning system of BPI, said branch, be exempt from the. payment of real property tax. In his letter dated October 23, 2001, Mr. Adajar submitted that bank vault and airconditioning system are declared by that Office under Tax Declarations No. C-10016-07928 and C-0016-07927 as "improvement" and "machinery" respectively. He argues that these properties are not real property subject to real property tax for the following reasons: 1. The bank vault and airconditioning units are not permanently attached to the land and building where the bank performs its business activities, these properties should therefore be classified as personal property; 2. Sec. 199(0) is not the operative provisions that empowers local governments to impose a real property tax, but Sec. 232 thereof; 3. The Local Government Code of 1991 does not provide for the definition of real property; and 4. The bank vault and airconditioning system fall in the category of properties acquired and used only for expediency to facilitate or improve services, which are considered merely as "incidentals", and are therefore not part of real properties. AECIaD Bank vault has been defined under Webster's Encyclopedic Unabridged Dictionary of the English Language as "a room, often built of or lined with steel, reserved for the storage and safekeeping of valuables, especially, such a room in a bank." By its definition, bank vault is a room specifically built to enhance the utility of the bank for the purpose of storage and safekeeping of cash/check deposits, safety deposit boxes, and other valuables for its clients. Being a room, the bank vault are considered as "Improvement" which is defined under Section 199(o) of the Local Government Code of 1991 (R.A. 7160), as a valuable addition made to a property or an amelioration in its condition, amounting to more than a mere repair or . . . which is intended to enhance its value, beauty or utility or to adopt it for new or further purposes." Undeniably, the purpose of constructing the vault is to adopt it for the purpose of storage and safekeeping of client's deposits and other valuables. Bank Vaults, in the same manner as Automated Teller Machines (ATMs), the latter being a machinery (as discussed under this Bureau's 1st Indorsement dated April 25, 2001), are indispensable to the banking business as no banks could possibly operate without a vault. With regard to his third argument, that the Local Government Code does not provide for the definition of real property, attention is invited to the case entitled " Meralco Securities Industrial Corp. vs. CBAA and Provincial Assessor of Laguna , SCRA No. L-46245, May 31, 1982, the Supreme Court ruled, in part, as follows: "Meralco Securities insists that its pipeline is not subject to realty tax because it is not real property within the meaning of Article 415. This contention is not sustainable under the provisions of the Assessment Law, the Real Property Tax Code and the Civil Code. "Section 2 of the Assessment Law provides that the realty tax is due `on real property, including land, buildings, machinery and others not specifically exempted in Section 3 thereof. This provision is reproduced with some modification in the Real Property Tax Code which provides" "Section 38. Incidence of Real Property Tax . There shall be levied, assessed and collected in all provinces, cities, and municipalities an annual ad valorem tax on real property, such as land, buildings, machinery and other improvements affixed or attached to real property not hereinafter specifically exempted." The abovequoted provision of the Real Property Tax Code was substantially reproduced under Section 232 of the Local Government Code of 1991, which is quoted below: "Section 232. Power to Levy Real Property Tax . Province, City or Municipality within Metropolitan Manila Area may levy the Annual Ad Valorem Tax on real property such as land, buildings, machinery and other improvements not hereinafter specifically exempted ." (Emphasis ours) HSAcaE With regard to airconditioning system, attention is invited to the 2nd Indorsement dated January 30, 2001, as reiterated under its 2nd Indorsement dated April 25, 2001, both of this Bureau (both copies enclosed), treating on a similar subject matter, the pertinent portion of which provide as follows: "Other equipment/machines, however, which are not essentially being used directly and exclusively in the banking business like airconditioning units (window and packaged type), small generating sets and other mechanical devices of the same nature which are considered as falling under the category of machinery of general purpose use should not be considered real properties in line with the clarification under Article 290(o) of the IRR of R.A. No. 7160." Viewed in this light, this Bureau believes and so holds that Bank Vault is considered as falling under the definition of "Improvement" subject to real property taxes in pursuance of Section 199(m) of the Local Government Code of 1991. Airconditioning units, however, which are classified as machinery of general purpose use, are not considered real property as contemplated under Sec. 199(o) of the same Code as clarified under Article 290(o) of its IRR. This Bureau accordingly finds the action of that Office in declaring the Bank Vault of BPI Family Bank in Malinta, that city, as improvement, in order. Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA Executive Director