Bureau of Local Government Finance Opinion

January 12, 2000 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 3rd Indorsement Respectfully referred thru the Regional Director for Local Government Finance, Department of Finance, Region IV, People's Mansion Compound, Batangas City, to the Provincial Assessor of Quezon, Lucena City, the within preceding 2nd Indorsement dated July 22, 1999, relative to the 1st Indorsement dated June 23, 1999 of that Office requesting assistance concerning the taxability of the machineries and equipment of Hopewell Power (Philippine) Corporation located at Barangay Ibabang Polo, Pagbilao, that province. It appears that the said machineries and equipment were declared by that Office as taxable under Tax Declaration No. 22-027-486 M effective 1997. Mr. A. T. Corpuz, VP-SLRC. National Power Corporation (NPC) in his letter dated June 18, 1999, claims that the subject machineries and equipment are exempt from the payment of realty taxes under the provision of Section 234 of R.A. No. 7160 otherwise known as the Local Government Code of 1991 for reason that they are actually, directly and exclusively used by a government-owned or controlled corporation (NPC) engaged in the generation and transmission of electric power. The said Section 234 of the Code reads as follows: "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 . . . government-owned or controlled corporations engaged in the . . . transmission of electric power." Mr. Corpuz, also added, that the machineries and equipment were put up by Hopewell Energy International Limited (HEIL) under the Build, Operate and Transfer (BOT) Scheme, and during the co-operation period of twenty five (25) years, although still in the name of HEIL, are actually, directly and exclusively used by NPC in the generation and transmission of power, hence, allegedly exempt from real property taxes. NPC further avers that it provides the fuel HEIL uses for the generation and transmission of electric power. On the other hand, Article 7, Part A, Supply of Electricity of the Energy Conversion Agreement dated November 9, 1991 entered into by and between the National Power Corporation and the Hopewell Energy International Limited, provides: "7.1 SUPPLY. Subject to NAPOCOR supplying the necessary Fuel and start-up electricity pursuant to Article 6, HOPEWELL agrees to convert such Fuel into electricity and NAPOCOR agrees to take and pay for all electricity requested by NAPOCOR in accordance with the procedures set out in the Sixth Schedule (Electricity Delivery Procedures), and the Operating Parameters set out in the Second Schedule (Operating Parameters) HOPEWELL shall dedicate the entire Power Station output (net of Power Station usage) to NAPOCOR." It can be gleaned from the abovequoted agreement that NAPOCOR shall supply the necessary fuel to HOPEWELL and that Hopewell agrees to convert such fuel into electricity wherein NAPOCOR in turn agrees to take and pay all electricity to be supplied by Hopewell. TSADaI Clearly, the real properties in question are actually, directly and exclusively used by Hopewell Philippines in the conversion into electricity of the fuel supplied by NAPOCOR. And NAPOCOR agrees to pay all the electricity to the supplied by Hopewell. It is also clear that Hopewell is not a government owned or controlled corporation (GOCC) considering that the same falls under the category of a private company primarily engaged in the business of generating electric power that will supply and sell exclusively to NAPOCOR on a wholesale basis. It is also important to note that Article 11 of the said Agreement executed by Hopewell and NAPOCOR, provides: "11.1 RESPONSIBILITY. NAPOCOR shall be responsible for the payment of (a) all taxes, import duties, fees, charges and other levies imposed by the instrumentality thereof to which HOPEWELL OR HOPEWELL PHILIPPINES may at any time be or become subject in or in relation to the performance of their obligations under this Agreement (other than (i) taxes imposed or calculated on the basis of the net income HOPEWELL/HOPEWELL PHILIPPINES and (ii) construction permit fees, environmental permit fees and other similar fees and charges) and (b) all real estate taxes and assessments, rates and other charges in respect of the Site, the buildings and improvements thereon and the Power Station ." (Emphasis supplied) It is evident from the foregoing provision of the said "Agreement" that both parties are aware that the subject real properties of HOPEWELL fall under the category of taxable real properties and NAPOCOR is taking responsibility for the payment of such real estate taxes due on its (HOPEWELL's) real properties. Accordingly, the abovestated provisions of Section 231(c) of R.A. No. 7160 disqualifies HOPEWELL from enjoying real property tax exemption on its real property considering that the same is not a GOCC. Its liability to pay the same taxes on its subject real properties, however, was clearly acknowledged, on the basis of the aforecited Article 11.1 of the "Agreement", by NAPOCOR. Hence, this Bureau finds the assessment of the subject real properties of HOPEWELL as taxable in order. The Provincial Treasurer is hereby directed to exert all efforts in collecting the real property taxes on the subject real properties of HOPEWELL against NAPOCOR, which acknowledged the liability of paying the same. Report of action taken hereon within ten (10) days from receipt hereof is requested. AECDHS (SGD.) ANGELINA M. MAGSINO Deputy Executive Director Officer-in-Charge