Bureau of Local Government Finance Opinion

July 30, 2003 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Danilo L. Concepcion Liquidator, on behalf of The Secured Creditors and the Original Shareholders National Steel Corporation (NSC) Unit 2701, 88 Corporate Center Sedeno cor. Valero Streets Salcedo Village, Makati City S i r : This refers to your letter dated May 5, 2003, in effect, requesting the condonation of real property taxes, specifically on machineries owned by the National Steel Corporation (NSC) located in Iligan City, which ceased operations in November, 1999 and eventually shut down its plants in June, 2000. Representation is being made that NSC stopped business operations in 1999 and SEC consequently ordered its dissolution and eventual liquidation thru a Memorandum of Agreement executed in November 2002. Pursuant to the Liquidation Plan, the assets of NSC will be divided into 2 groups. The first group (Plant Assets) will consist of the steel plant located in Iligan City and all movable equipment and other real properties used for the plant operations. The second group (the Other Assets) will consist of all the remaining assets of NSC including real properties in Iligan, Bohol, Pasig and Makati. The original Shareholders of NSC are the National Development Company, Marubeni Corporation, and Pengurusan Danaharta Nasional Berhad ("DANAHARTA"). Atty. Concepcion likewise cited previous opinions of this Bureau, all of which consistently ruled that "when machineries are no longer actually used for its purpose by reason of closure of or cessation of production, the same should be transferred from the Taxable Roll to the Exempt Roll and not be subjected to the payment of real property taxes during the period of non use." He likewise pointed out that inasmuch as NSC's machinery have not been in use since 2000, when the Iligan Plant was shut down, NSC should not be liable to pay real property tax on the machinery starting 2000, until the Iligan Plant reopens for commercial operations. Allegedly, these machineries account for 87% of the total Market Value of NSC assets in Iligan City. The OIC, Regional Director of Region X, Cagayan de Oro City, under her 1st Indorsement dated April 3, 2003, submitted that the total tax obligation of the NSC to the City of Iligan as of February 28, 2002 amounts to P604,026,305.50. Please be informed, in this regard that Section 199(o) of the Local Government Code of 1991 (R.A. No. 7160) provides the following: "Sec. 199. Definition of Terms . When used in this Title; the term: "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. It includes the physical facilities for production, the installations and appurtenant service facilities, those which are mobile, self-powered or self-propelled, and those not permanently attached to the real property which are actually, directly, and exclusively used to meet the needs of the particular industry, business or activity and which by their very nature and purpose are designed for, or necessary to its manufacturing, mining, logging, commercial, industrial or agricultural purposes ; (Emphasis ours) "xxx xxx xxx." This Bureau, under its 1st Indorsement dated April 4, 1997, copy attached, in the case of MARCOPPER (which was cited in all our rulings similarly situated, the latest of which is the letter dated August 3, 2001, copy attached addressed to the Administrator, PHIVIDEC Industrial Authority), has ruled as follows: ". . . the said Provincial Assessor is hereby instructed to drop the subject machineries of MARCOPPER from, the 'Taxable Roll' of real properties beginning the 2nd quarter of 1996. The same should remain under that status until such time that the company shall again be allowed to continue its mining activity/operations, in which case the said machineries should then be assessed as taxable real properties effective on the first day of January of the year immediately following the resumption of mining operations." Beyond doubt, the provision of Section 199(o), clearly provides that machinery, (such as those of NSC's) should be actually, directly and exclusively used to meet the needs of a particular industry, business, or activity. When these machineries are no longer actually, directly and exclusively used for its intended purpose, the same should no longer be subject to real property tax. However, it is emphasized that upon resumption of its activity/operations, the machineries owned by NSC should then be assessed as taxable real properties, effective on the first day of January of the year immediately following the resumption of its business activity/operations. Viewed in this light, this Bureau believes that for so long as the machineries owned by the NSC are not in use for reason of closure or cessation of production, the same are not subject to real property tax. CEASaT We hope that we have enlightened you on the matter. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director