Bureau of Local Government Finance Opinion

October 8, 2002 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully returned to the OIC-City Assessor of Iligan City, his within letter dated September 4, 2002 addressed to the Hon. Undersecretary of the Department of Finance (DOF), in effect, requesting clarification as to whether or not machinery which is temporarily not in operation but still affixed, intact and useful, is taxable or not. It appears that the abovementioned letter was prompted by the opinion of the then Minister of Finance as contained under the letter dated February 16, 1976 as cited under the book "Real Property Taxation in the Philippines" by Generoso U. Baugbog which states, as follows: "The fact that a certain company had ceased to operate, is not a ground for the suspension of payment of the real property taxes due on the buildings and machineries of said company, for as long as the said buildings and machineries are still affixed and intact, and useful." However, a contrary opinion is expressed in another book entitled "Real Property Taxation" authored by Atty. Cipriano P. Cabaluna, Jr., which states: "From its definition in Sec. 3(m) of P.D. No. 464 (now Sec. 199(o) of the Local Government Code of 1991) 'machinery' shall be taxable when actually, directly and essentially used to meet the needs of the particular industry, business or works, which by their very nature and purpose are designed for manufacturing or industrial purposes. Conversely, when machineries are no longer actually used for its purpose by reason of closure or cessation or production, the same should be transferred from the Taxable Roll to the Exempt Roll and no longer subject to the payment of real property taxes during the period of non-use." The above opinion of Atty. Cabaluna is in conformity with the opinion of this Bureau under the attached copy of the 1st Indorsement dated June 5, 2000, bearing on the request of United Paragon and Mining Corporation (UPMC) with regard to the taxability of UPMC buildings and machineries, the pertinent portions of which read as follows: "As regards the exemption of machineries, however, it is informed that the Department of Finance has already ruled on several occasions that 'when machineries are no longer actually used for its purpose by reason of closure or cessation of production, the same should be dropped from the assessment roll and not anymore be subjected to the payment of real property taxes. "It is worthwhile to note that the said rulings were made on the basis of Section 3(m) of P.D. No. 464, which, under Section 199(o) of R.A. No. 7160, provide a substantially similar definition of machinery." "xxx xxx xxx. "Applying therefore, the abovequoted ruling of the Department of Finance to the instant case, it is obvious that the machineries and equipment of the said company which ceased operations due to the operational losses incurred should, likewise be dropped from the 'Taxable Roll' of real properties beginning the 2nd quarter of 1999 pursuant to Section 221 of R.A. No. 7160, otherwise known as the Local Government Code of 1991." The above opinion of this Bureau has been clarified under the subsequent 1st Indorsement dated December 18, 2000, copy likewise attached, to exclude buildings and improvements in the exemption from real property tax, the resolving portion of which are hereinbelow reproduced: "Please be informed also that under the abovementioned ruling, particularly the penultimate paragraph thereof, this Bureau had inadvertently answered query No. 1 (with the exclusion of industrial buildings from the exemption of real property tax, as a result of its non-operation), in the affirmative, in addition to the exemption from payment of real property taxes of UPMC machineries which ceased operations. TaDAHE "This Bureau, therefore, hereby reconsiders its previous ruling under its abovementioned 1st Indorsement dated June 5, 2000 particularly the answer to query No. 1, which should have referred solely to the tax exemption of the UPMC machineries which ceased operation and not to its building and improvements. "It is informed further that as regards the exemption from payment of real property tax on buildings owned by UPMC, this Bureau in its said Indorsement dated June 5, 2000 explained that: "It may be observed, however, that the above authority to grant tax exemption privileges is provided under Article One Book II of the Code, which pertains to Local Government Taxation and not Real Property Taxation which is found under Title Two of the same Book Two of the Code. The exemption from real property tax is specifically provided under Section 234 thereof." In conclusion, considering the pertinent provisions of the Local Government Code of 1991, this Bureau believes and so holds that machinery temporarily not in operation but still affixed, intact and useful, continues to enjoy exemption from the payment of real property taxes until such time that the company shall again be allowed to continue its activity/operations, in which case the said machinery should then be assessed as taxable real properties effective on the 1st day of January of the year immediately following its resumption of operations. In the case of buildings and other improvements, however, the same shall fall under the category of real properties subject to real property tax, regardless of whether or not the company ceased its operation/activity. We hope that this will help clarify matters. (SGD.) MA. PRESENTACION R. MONTESSA Executive Director