Bureau of Local Government Finance Opinion

February 17, 2005 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully referred to the City Assessor of Quezon City, the within letter dated October 25, 2004 and addendum letter dated November 5, 2004, with enclosures, of Mr. Adonis S. dela Cruz, Branches Development Associate, International Exchange Bank (iBank for brevity), requesting clarification an whether certain machineries installed in the bank are subject to real property tax. The herein request stemmed from the receipt of Statements of Delinquency dated March 20, 2004 and August 7, 2004 issued by the Office of the City Treasurer of Quezon City, assessing them for realty taxes on alleged "machineries" located in the Kamias Branch, said city declared under TD Nos. 0-035-01444; 0-035-01445; 0-035-01446; 0-035-01447 and 0-035-01449. Upon verification of subject TDs, this Bureau identified the alleged machineries as follows: 1. ATM Machine procash 2. Cash vault door protect 3. Security cash locker fortress 4. Protect safe deposit boxes 5. Security Devices 6. Magitek UPS 7. Airconditioning units 8. Computers (CPU, printer, deskset, monitors, scanner/HP Flatbed, PC Server, modem, etc.) 9. Phone Panasonic Wireless AHEDaI 10. Phone SNI Digital 11. Exhaust fans It is the contention of Mr. dela Cruz that computers owned by iBank in Kamias, specifically the two (2) units CPU/SNI Pentium; two (2) units computer monitors/SNI SGVA and one (1) Modem Motorola v.34, are not considered as machineries since such are general purpose only and therefore are not subject to real property tax payment. He alleged that, even if these equipment are intended to meet the daily requirements of banking activities, these are not actually, directly and exclusively used to meet the essential and principal needs of the banking industry. In her letter dated October 14, 2004 to Mr. dela Cruz, the City Assessor of Quezon City made the following arguments: 1. The machineries installed in iBank, Kamias Branch, are found to be actually directly and exclusively used by the bank in connection with the operation of business; 2. The gadgets are "reasonably necessary and desirable in the operation of its business that the bank has to invest a large sum of money to have and use these machineries in the business"; 3. The air-conditioning units not only provide convenience, comfort and a place conducive to work in, for both the bank personnel and its clientele, but also to protect electronic equipment, such as computers; 4. In this present age of computers, when typewriters are already obsolete, personal computers are programmed/designated to do banking transactions; 5. The Department of Finance under its 2nd Indorsement dated March 7, 1996, opined that computers, air conditioning units and generator sets actually, directly and exclusively used by the bank in the operation of its business are subject to real property tax; and CITSAc 6. The machineries, computers and air conditioning units whether for general purpose use or not, are found to be actually, directly and exclusively used by the bank, "reasonably necessary and desirable in the operation of the business," therefore subject to real property tax. 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 formally 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. "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 used to meet the needs of a particular industry, business or activity shall not be considered within the definition of machinery under this Rule. aIDHET "xxx xxx xxx." DISCUSSION a.) ATM as Machinery Machinery to be considered real property subject to real property tax would have to be actually, directly, and exclusively used to meet the needs of the particular business or activity and by their very nature and purpose are designed for, or necessary to the business or activity. Inasmuch as ATMs are now becoming indispensable to the banking industry, these are considered real property subject to the payment of real property tax. Under the letter dated January 30, 2001, (Annex "A") the foregoing opinion was reiterated and cited under several rulings involving cases similarly situated. This Bureau has consistently ruled that ATMs are essential and principal elements of the banking business. TAIDHa 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). 2005cdtai 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 dated November 14, 2002 (Annex "C") of Assistant Secretary Emmanuel P. Bonoan. 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 included/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 Bakers Association of the Philippines (BAP) TcDaSI Lastly, please be informed of the provisions under Local Finance Circular No. 001-2002 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 Briefly, item Nos. 2-5 should have been classified as improvement subject to real property tax as discussed above; while item Nos. 6-11 should be classified as machinery of general purpose use thus exempt from payment of real property tax. ATMs, however, are correctly classified as machinery subject to real property tax. Similarly, appropriate action should likewise be made on the same property (1st of branches attached) of iBank located in other parts of Quezon City, on the basis of the basis of the above observation of this Bureau. A separate letter of ever date is being sent to Mr. Adonis dela Cruz, for his information and guidance. DcSEHT Be guided accordingly. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director