Bureau of Local Government Finance Opinion

May 7, 2012 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Javier B. Laxina AVP and Division Head, Asset Management Supply and Asset Management Department GMA Network Center EDSA cor. Timog Avenue Diliman, Quezon City Sir : This has reference to your follow-up letter dated February 16, 2012, in relation to your letter dated April 27, 2011, seeking clarification on the following: HESIcT 1) "Whether or not the local government unit has the authority to assess properties for purposes of real property tax beyond the valuation provided in the Local Assessment Regulations No. 1-92 more specifically Section 39 or its approved Schedule of Market Values as well as imposing contractors administration cost at 3%;" 2) "Whether or not elevators and air-conditioning units/centralized air-conditioning units are subject to real property tax not as machineries but as improvement; and" 3) "Whether or not the memorandum issued by the Office of the Mayor directing the City engineer, the City Building Officials and other concerned officials not to release mechanical permit unless contractor's tax is paid is legal and binding." Please be informed that, to date, we have not as yet received any comment and/or recommendation, as requested under our letter dated June 8, 2011, from the Office of the City Assessor of Quezon City that would address your allegations, as contained in your letter of April 27, 2011. In this connection, attention is invited to Section 39 of Local Assessment Regulations (LAR) No. 1-92, which reads in part, as follows: "Section 39. Addition and Deduction Factors . Structures falling under one classification are not all exact replica of each other, or of the standard adopted in the preparation of the schedule of values. It follows therefore that their values are not exactly equal, even if their area and classification may be the same. "To compensate for this difference in the value, a set of adjustment factors must be prepared, to go with the schedule. It should only treat items that are commonly found deviating from the standard and may be expressed as percentage of the base unit construction cost listed in the schedule. Addition and deduction factors may be prepared by the quantitative analysis method. Samples of the Addition and Deduction Factors of the schedule of base unit cost are shown below : (Underscoring and emphasis ours) cCSDaI "EXTRA ITEMS AS COMPONENT PART OF BUILDINGS;" "xxx xxx xxx. "8. Basement: "Residential 70% of Base Unit Value "High rise Building 20% of Base Unit Value "xxx xxx xxx." Likewise, Section 5 (D) (2) (b), Chapter III, of the Manual on Real Property Appraisal and Assessment Operations (MRPAAO) provides that: "xxx xxx xxx. "(8) Basement: "Residential ______ % of BUCC plus additional cost for finishing. "High Rise-Bldg. plus ______ % of BUCC plus additional cost for finishing. "xxx xxx xxx." Clearly, the given twenty percent (20%) under LAR 1-92, particularly for high rise building, like the GMA building in the instant case, is a mere sample of the addition and deduction factors of the schedule of base unit cost for buildings. Thus, the answer to item 1 is yes. The LGU's may come-up with a different rate in the preparation of their schedule of values from that which is provided for under the said assessment regulation. What is important to note, however, is that the said rate should only be a certain percentage of the Base Unit Construction Cost (BUCC) of the building type and classification. Anent the second issue, attention is also invited to Section 199 (o) of the LGC of 1991, which states that: "SEC. 199. Definitions. When used in this Title: "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 . 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;" (Underscoring supplied) Moreover, attached for your information is a copy of Local Finance Circular No. 1-2002, of the Department of Finance, amending Local Treasury/Assessment Regulations No. 1-88, providing the proper appraisal and assessment of machinery for real property taxation purposes, the pertinent portion of which reads as follows: CaTcSA "xxx xxx xxx. "1. Machinery that is permanently attached to land and buildings is subject to real property tax, even though this is actually, directly and exclusively used for religious, charitable or educational purposes. "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." Evidently, machinery that is permanently attached to building, such as elevator, is considered real property falling within the abovecited definition of "Machinery" that is subject to real property tax. On the other hand, the Bureau had on several occasions ruled that air-conditioning units (window type, cabinet type, split type, package type, centralized type, etc.) are considered as "machinery of general purpose use" and do not fall within the above definition of "Machinery" subject to real property tax, and are, therefore, exempt from the payment of real property tax. (BLGF letter dated May 13, 2010 hereto attached for reference). With regard to the last issue, it is regretted that the Bureau cannot delve on the issue pertaining to the legality or propriety of the memorandum issued by the Office of the City Mayor, for the same is beyond the ambit of authority reposed on this office. This is without prejudice, however, on your part to raise or question the said act with the appropriate agency or instrumentality. Likewise, this Bureau could not opine on the issue of the alleged application of Contractor's Administration Cost of three percent (3%) on the total fair market value of the building in the absence of any comment from the said LGU. We trust that this clarifies our position on the matter. ASEIDH Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director