Bureau of Local Government Finance Opinion

February 14, 2001 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 4th Indorsement Respectfully returned to the Regional Department for Local Government Finance, Department of Finance, Region XII, corner Corcuerra and Lim Sr. Streets, Cotabato City. This refers to the within set of papers concerning the 2nd Indorsement dated January 28, 2000 of the City Assessor of Kidapawan City requesting opinion on the taxability of the assessment of real properties (machinery and equipment) owned by the Marubeni-Oxbow Consortium, which incurred a real property tax delinquency amounting to P39,646,506.90. The Philippine National Oil Company-Energy Development Corporation (PNOC-EDC) is requesting the cancellation of the said assessments, allegedly for lack of legal basis. Mr. Jose Jesus G. Laurel, General Counsel, PNOC-EDC, in his attached letter dated January 5, 2000, addressed to the OIC-City Treasurer of Kidapawan City, submitted the following arguments, to wit: 1. That in order to meet the responsibilities covered by the Power Purchase Agreement entered into between PNOC-EDC and the National Power Corporation (NPC), PNOC-EDC contracted the Marubeni-Oxbow Consortium; EICSTa 2. That the subject properties listed in the Summary of Realty Tax Delinquency of the City Treasurer's Office of Kidapawan are machineries and equipment actually, directly and exclusively used by PNOC-EDC in the generation and transmission of electric power to NPC; and 3. That, considering item no. 2 above, the subject properties are exempt from real property tax pursuant to Section 234(c) of R.A. No. 7160, The Local Government Code of 1991. On the other hand, the said City Assessor, in his abovementioned 2nd Indorsement, noted, among others, the following observations on the attached Agreement for Finance, Engineering, Supply, Installation, Construction, Testing, Commissioning, Operation and Maintained of the 47 Megawatt Mindanao I Geothermal Plant under the Build-Operate and Transfer (BOT) arrangement, to wit: 1. That since the PNOC-EDC could not perform its obligation to construct, operate and maintain a geothermal power plant, it had contracted, the Marubeni-Oxbow Consortium for the construction, operation and maintenance of the power plant as well as other structures and equipment for the generation of electricity; hence there is not doubt that these real properties are owned by the Marubeni-Oxbow Consortium until the expiration of the BOT contract, or even before the expiration of contract, if the PNOC-EDC will have fully paid and reimbursed the Marubeni-Oxbow Consortium its capital investment and expenses, including national taxes and other taxes ; 2. On Article 2, Project "2.1 POWER FACILITY The operator shall be responsible for the finance, design, supply, construction, testing commissioning, operation, maintenance and repair of a proposed approximately 47 MV Net Geothermal Power Pant, to be installed on the site whose net generation shall be delivered to NAPOCOR on behalf of PNOC-EDC during the cooperation period; "2.2 ENERGY CONVERSION PNOC-EDC shall supply and deliver all steam in conformity to steam specifications and at no cost to the operator, necessary for the power plant to generate the electric capacity and energy required by NAPOCOR up to nominated capacity. The operator shall convert such steam, and on behalf of the PNOC-EDC, shall deliver all electric capacity and energy generated by the power plant, less than that required for auxiliary purposes by the operator and that required by PNOC-EDC for its own uses in accordance with this agreement. The PNOC-EDC shall pay to the operator conversion fees as provided in Section 5.4 and Article 8. SCADIT "2.3 OWNERSHIP From the effectivity date until the termination date, the buy out date or transfer date , whichever comes earlier, the operator shall own the power plant and all fixtures, fittings, machinery and equipment on the site and used in connection with the power plant which has been supplied by it or at its cost ( but excluding the site ) and the operator shall operate and maintain the power plant for the purpose of converting the steam of PNOC-EDC delivered in accordance with this agreement into electric capacity and energy." 3. On Section 8.3.2, "Energy Payments" Energy payments to the operator shall reflect variable cost to be paid by PNOC-EDC to the operator for variable expenses incurred by the operator in the generation of electricity by its power plants. 4. On Section 8.6 (a), "Taxes, Set Off" "All payments made to the operator pursuant to this agreement shall be paid together with all taxes, duties, fees and other assessments to be paid by the operator in respect of the power plant or this agreement, including value added taxes and all other taxes, but excluding national income taxes at rates of up to 35% . . ." 5. On Section 8.6 (d) "PNOC-EDC shall promptly reimburse the operator upon demand for all customs duties, national internal revenue taxes, and other taxes, as to which no exemption has been granted to the operator under existing laws, and which are actually paid by the operator." Based on the above premises, the said City Assessor is of the opinion that the subject real properties are taxable. The ownership of the subject machinery and equipment allegedly belongs to Marubeni-Oxbow Consortium from the effectivity date until the termination date of the said BOT arrangement pursuant to Article 2.3 thereof. The issue to be resolved, therefore, is whether or not Marubeni-Oxbow Consortium can be granted exemption from the payment of real property taxes pursuant to Section 234(c) of R.A. No. 7160. In another letter dated March 7, 2000, copy also attached, addressed to the said BLGF Regional Director for Region XII, the said General Counsel of the PNOC-EDC, argued, among others, that: "An examination of our basis of exemption, specifically paragraph (c) of the above provision clearly shows that the word 'own' has not been used as determination of its applicability. Rather, this provision states only "actually, directly and exclusively used by . . . government-owned or controlled corporation engaged in the generation and transmission of electric power' as the requirement for one to claim the exemption. It is not disputed that PNOC-EDC is a wholly government-owned and controlled corporation engaged in the generation and transmission of electric power." CHATEa In this connection, attention is invited to the said Section 234 (c) of R.A. No. 7160 and Article 308 of its Implementing Rules and Regulations (IRR), which are quoted hereunder: Section 234 (c) R.A. No. 7160 : "SEC. 234. Exemptions from Real Property Tax . The following are exempted from payment of the real property tax: "xxx xxx xxx. "c) All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power ." Article 308, IRR of R.A. No. 7160 : "Article 308. Actual Use of Real Property as Basis for Assessment . Real property shall be classified, valued and assessed on the basis of its actual use regardless of where located, whoever owns it, and whoever uses it." Evidently, machineries and equipment , in order to be exempt from real property tax must be actually, directly, and exclusively used by a government-owned or controlled corporation in the generation and transmission of electric power regardless of whoever owns the same. In this case, however, it was Marubeni-Oxbow Consortium, a private corporation, who actually, directly and exclusively used the subject machineries and equipment in the power plant for conversion of PNOC-EDC's geothermal energy into electricity . Clearly, it cannot be said that it was PNOC-EDC or NAPOCOR who has actual, direct and exclusive use of the said machineries and equipment as what the latter did pursuant to the Agreement, was merely to supply geothermal energy to Marubeni-Oxbow Consortium for conversion into electricity. In view hereof, attention is also invited to the letter dated March 16, 1999, copy enclosed, of this Bureau, treating on a similar subject matter, which ruled, in part, as follows: "Apparently, the properties in question are actually, directly and exclusively used by Bauang Private Power Corporation in the conversion of bunker fuel to electricity for NAPOCOR for a fee. It is also worthwhile to note that BPPC is not a government-owned or controlled corporation considering that the same falls under the category of a private corporation . . . primarily to engage in the business of generating electric power which the company sells to the NAPOCOR on a wholesale basis. CTSDAI "In view thereof, and the fact that the subject real properties are actually, directly and exclusively used by a private company (BPPC) in the operation of its business, the same is, therefore, liable to pay real property taxes." Similarly, therefore, this Bureau shares the same view expressed by the said City Assessor of Kidapawan City, that the subject real properties are taxable and, therefore, hereby holds that the said assessment made on the subject real properties of the Marubeni-Oxbow Consortium as taxable, in order. In view of the foregoing, the City Treasurer or said city should likewise be furnished a copy hereof and thereupon, he directed to exert all efforts in collecting the real property taxes due on the subject real properties of the said consortium. Be guided accordingly. (SGD.) BENJAMIN A. GERONIMO Executive Director