Bureau of Local Government Finance Opinion

March 22, 2005 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Erwin C. Go, et al . Allied Banking Corporation Allied Bank Center 6754 Ayala Avenue Corner Legaspi Street Makati City S i r : This pertains to your letter dated February 2, 2005, seeking opinion on the taxability of the following: 1) vault doors 2) safety deposit boxes 3) surveillance cameras 4) airconditioners 5) generator sets 6) water pumps 7) uninterrupted power supply equipment 8) exhaust fans 9) ceiling fans In this connection, attention is invited to the 1st Indorsement of this Bureau, dated February 17, 2005, copy enclosed, treating on a similar subject matter, which provides as follows: "Article 290 (m) and (o) of the Implementing Rules and Regulations (IRR) of the Local Government Code of 1991 (R.A. No. 7160) implementing Section 199 (m) and (o) of the Code defines Improvement and Machinery as follows: "xxx xxx xxx. "(m) Improvement is a valuable addition made to a property or an amelioration in its condition, which is intended to enhance its value, beauty or utility or to adapt it for new or further purposes, amounting to more than a mere repair or replacement of parts involving capital expenditures and labor and normally requiring a building permit;" "xxx xxx xxx. "(o) Machinery embraces machines, equipment, mechanical contrivances, instruments, appliances or apparatus, which may or may not be attached, permanently or temporarily to the real property. "Physical facilities for production, installations and appurtenant service facilities, those which are mobile, self-powered, or self-propelled and those not permanently attached to the real property shall be classified as real property provided that: "(1) They are actually, directly, and exclusively used to meet the needs of the particular industry, business, or activity; and "(2) By their very nature and purpose are designed for, or necessary to manufacturing, mining, logging, commercial, and industrial, or agricultural purposes. cdtax2005 "Machinery which are of general purpose use including but not limited to office equipment, typewriters, telephone equipment, breakable or easily damaged containers (glass or cartons), micro computers, fax, telex machines, cash dispensers, furniture and fixtures, freezers, refrigerators, display cases of racks, fruit juice or beverage automatic dispensing machines which are not directly and exclusively use to meet the needs of a particular industry, business or activity shall not be considered within the definition of machinery under this Rule. "xxx xxx xxx. "DISCUSSION "xxx xxx xxx. "b.) Bank Security Devices (Vaults, Security locker, safety deposit boxes, various security devices, etc.) "The City Assessor's Office assessed the abovementioned various security devices as machinery subject to the payment of real property tax with an assessment level of seventy percent (70%)." "This Bureau believes that these various bank security devices should have been assessed not as machineries, but as an improvement for enhancing the utility of the bank provided under Section 199 (m) of the Code; and Article 290 (m) of its Implementing Rules and Regulations (IRR). "This Bureau's 1st Indorsement dated November 21, 2002, (Annex "B") to the City Assessor of Valenzuela City, clarified that the Bank Vault of BPI Family Bank is considered as an improvement for reason that 'it enhances the utility of the bank for the purpose of storage and safe keeping of cash/check deposits, safety deposit boxes and other valuables for its clientele.' This opinion was arrived at after prior consultation with, and approval of, the Secretary of Finance, as evidenced by the covering Memorandum date November 14, 2002 (Annex "C") of Assistant Secretary Emmanuel P. Bonoan. aIcCTA "Likewise, it was clarified under the subject covering Memorandum, that `while the air conditioning system is not subject to real property tax, the Bank Vault is subject to real property tax.' Being an improvement, however, the market value of these security devices should have been include/added to the market value of the building where these devices are installed to come up with the total market value, and the assessment level to be applied as provided under Section 218(b)(3) of the Code. "c.) Machinery of General Purpose Use (Air Conditioning units/Computers/Phones/Exhaust fans) "Under the herein mentioned ruling of January 30, 2001, this Bureau agreed with the contention of the Bohol Bankers Association (BBA) that only ATMs of banks should be subject to real property tax. The subject BLGF opinion had likewise been cited under our 2nd Indorsement dated April 25, 2001, (Annex "D"). "With regard to the contention of that office that the Department of Finance, under its 2nd Indorsement dated March 7, 1996 to the then Municipal Assessor of Marikina, (Annex "E"), rendered an opinion that computers, air conditioning units and generating sets are subject to assessment and payment of real property tax, please be informed that a research made with the BLGF Central and DOF Records, revealed that the cited 2nd Indorsement of the Department of Finance (DOF) was not signed by the then Undersecretary Ma. Cecilia G. Soriano. It is informed further that the subject opinion of the BLGF with regard to exemption of air conditioning units, computers and generating sets had been with the prior approval and consent of the Department of Finance officials as evidenced by the attached copy of Memorandum dated November 18, 2002" (Annex "F") to the letter dated November 21, 2002 (Annex "G") addressed to the Executive Director of the Bankers Association of the Philippines (BAP) "Lastly, please be informed of the provisions under Local Finance Circular No. 001-2 02 dated April 25, 2002 of the Department of Finance (DOF), wherein the DOF made the following clarification on when machinery can be considered as real property subject to real property tax: "xxx xxx xxx "2. Machinery that is not permanently attached to real estate is: "a. Subject to the real property tax if it is an essential and principal element of an industry, work or activity without which such industry, work or activity cannot function; and "b. Not subject to the real property tax if it is not an essential and principal element of an industry, work or activity; "xxx xxx xxx" Based on the foregoing provisions of law, this Bureau believes and so holds that item Nos. 1-3 should be assessed as Improvements for enhancing the utility of the bank as provided under Section 199 (m) of the Code and Article 290 (m) of its Implementing Rules and Regulations (IRR), while item Nos. 4-9 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 in line with the clarification under Article 290(o) of the Implementing Rules and Regulations (IRR) of R.A. 7160. We trust that this clarifies matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director