Bureau of Local Government Finance Opinion

December 4, 2003 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully referred to the Municipal Assessor, Meycauayan, Bulacan, the within letter dated November 17, 2003, of Mr. Pedro Q. Roldan, External Auditor, Himalayan Resources Development Corporation (HRDC for brevity), located at Camalig, said province, posing the following queries relative to real property tax liability of HRDC with regard to machineries which stopped operations: 1. Does HRDC has the right to stop paying its real property tax this coming year, 2004? 2. What are the regulations (opinions) applicable to the herein subject matter, i.e., machineries which are no longer in use due to cessation of operations? The writer made representations that HRDC was registered and approved by the Securities and Exchange Commission (SEC) under SEC NO. 179434; and Board of Investment (BOI) under BOI No. EP90-774. It was further represented that the company is no longer operating for almost five (5) years now due to the scarcity of marble supply materials and that the machineries of HRDC have already been eaten by rust and no longer functioning. Likewise it was alleged that despite the stoppage of its operations, the company continues to pay real property tax due on the machineries for almost five (5) years. CaEIST Anent Query No. 1, it is informed that if indeed the subject machineries have been inoperational for the past five (5) years, HRDC should no longer be made to pay real property tax on its machineries. Machinery can only be considered real property subject to real property tax, if it falls within the definition of "machinery" as provided under Section 199 (o) of the Local Government Code (LGC) of 1991. If these machineries are not actually, directly, and exclusively used to meet the specific needs of the particular industry, business or activity, then these machineries are no longer considered real property, and therefore, not subject to real property tax. This, in essence, answers your Query No. 1 in the affirmative. With regard to Query No. 2, the following provisions of the LGC of 1991 (R.A. No. 7160), specifically Section 199 (o) thereof; as implemented under Article 290 of its Implementing Rules and Regulations (IRR), are quoted hereunder: "Section 199. Definition of Terms. When used in this Title, the term: "(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 supplied) HTScEI "Article 290. Definition of Terms . When used in this Rule, 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. "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, 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, furnitures and fixtures, freezers, refrigerators, display cases or 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." This Bureau, in the attached letter dated July 30, 2003, to the Liquidator of the National Steel Corporation (NSC) located in Iligan City, (which shut down its operation in 2000), opined that "when machineries are no longer actually used for its purpose by reason of closure 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." In view of the abovequoted provisions of law, and the opinion of this Bureau, that office is directed to conduct an ocular inspection to determine whether the herein subject machineries have indeed ceased operations. If in the affirmative, the same should be transferred from the Taxable Roll and entered in the Exempt Roll of Real Properties. Report of the action taken hereon, direct to the party concerned, copy furnished this Bureau, is requested, soonest. Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA Executive Director