Bureau of Local Government Finance Opinion

July 1, 2003 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully referred to the Provincial Assessor, Alabel, Sarangani Province, the within set of papers relative to the request of Atty. Inobobby P. Pinili, SODACO Compound, Km. 9, Sasa, Davao City, Counsel for M & S Co., Inc. (M & S for brevity), for reconsideration of the legal opinion rendered by the Provincial Legal Officer, Provincial Legal Office, same province, concerning the taxability of his client's real properties (Land and Agricultural Trees-Mangoes), planted on the land covered by Industrial Forest Management Agreement (IFMA) with the Government, thru the Department of Environment and Natural Resources (DENR) and covered by ARP No. 99-012-00331 in the name of its previous Holder, the South Cotabato Development Co. Inc. It appears that the abovementioned request is being made in view of the appraisal and assessment of the subject real properties effective CY 2001, as reflected in the Real Property Field Appraisal & Assessment Sheet (FAAS) Land/Plants & Trees (RPA Form No. 1-a), as follows: CLASSIFICATION ACTUAL USE AREA MARKET VALUE ASSESSED VALUE Agricultural Pastureland 928.5611 P43,299,510.00 P5,628,940.00 Orchardland 459.0000 Total Area 1,387.5611 ========= Plants Mangoes P797,280.00 103,650.00 TOTAL P5,732,650.00 ========== In his attached letter dated January 21, 2002, addressed to that Office, Atty. Pinili is requesting reconsideration that his client (M & S) be made pay realty tax only when it cuts or trims the planted mango trees , considering that "mango trees just like coffee trees can be used in manufacturing particleboards." Apparently, the abovementioned request for reconsideration was again referred by that Office to Atty. Antonio D. Delena (Provincial Legal Officer), who maintained his stand on the matter as contained in his previous opinion embodied under his 2nd Indorsement dated September 21, 2001, which reads as follows: ". . ., there is no showing that M & S Co. was granted by the Department of Finance exemption of real property taxes. Clearly, the property covered by the agreement is public being owned by the Republic of the Philippines. Under Section 234(a) of the Local Government Code of 1991, provides the exemptions from real property tax payments, which is quoted, thus: 'Real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person:' "As indicated in the agreement, it is clear that the IFMA holder is the owner of all the trees and other crops planted on the area. The same has the right to harvest, sell and utilize such trees and crops planted and even allowed to export logs, lumber and other forest products harvested from the plantations in the IFMA Area . . . This provision clearly imports that the beneficial use of the land has been granted to the corporation. cETCID "Another provision, that the corporation is not exempt from payment of real property taxes, the agreement states that in addition to the taxes and fees, the holder will pay to the government 5% of sales of logs, as government share . . . "In view of the foregoing disquisition, the assessor is duty bound to list, value and assess the subject property pursuant to section 205(d) of the same code, which provides, thus: `Real property owned by the Republic of the Philippines, its instrumentalities and political subdivisions, the beneficial use of which has been granted, for consideration or otherwise, to a taxable person, shall be listed, valued and assessed in the name of the possessor, grantee or of the public entity if such property has been acquired or held for resale or lease.' The above opinion being referred to by Atty. Delena is the letter dated April 18, 1997, copy enclosed, of the Department of Finance (DOF), treating on the appraisal of coffee trees located in IFMA Area involving the same corporation, the pertinent portions of which provide as follows: "Having settled the question of exemption under P.R. No. 705, as amended, in the negative, the main issue left to be resolved is: Whether or not permanent commercial trees, such as subject coffee trees, planted in IFPMA Areas may be treated as agricultural improvements and assessed separately from the forest land for the purpose of real property taxation. "xxx xxx xxx. "From the foregoing, it is evident that ` forest and timber lands' include not only the land itself but also all the vegetation found therein, in keeping with the intention of the law to promote forest management, protection and management . The law reflects the pronouncement of the Supreme Court in the case of ` Manila Railroad Co., vs. Maria Aguilar, et al ., . . . ." "xxx xxx xxx. " Clearly, therefore, subject coffee trees and other permanent agricultural trees planted in IFPMA Areas with the express permission of the DENR should not be valued or appraised separately from the forest land . As adverted to earlier, R.A. No. 7160 does not prescribe an assessment level for `improvements'. But, in the appraisal of IFPMA Area, the market value of the marketable timber actually cut from subject coffee trees and other permanent agricultural crops, such as prunings sold for manufacture into particleboard, shall be added to the annual volume of timber actually cut and made part of the operational area's market value, less allowable deductions . . . ." (Emphasis supplied) "xxx xxx xxx. "Accordingly, the action of the Provincial Assessor of Sultan Kudarat in declaring subject coffee trees of your client . . . as separately subject to real property taxes is found to be without legal basis. The market value of marketable timber actually cut from such coffee trees shall be considered part of the market value of the covered operational or IFPMA Area, after deducting reasonable direct logging, costs, from which the taxable value shall be derived." First and foremost, it is imperative to state hereon that IFMA (No. 99-001) located in Kawayan, Malungon, Sarangani Province was premised on the establishment of industrial tree/forest plantations as government policy to promote ecological balance, ensure an adequate supply of timber and non-timber forest products to meet local and foreign demands, and to achieve a more equitable distribution of opportunities, income and wealth through the promotion of the well-being of forest dependent individuals and communities. ESHAIC A perusal of the within set of papers reveals the following additional information pertaining to the subject real properties of M & S in the said province, to wit: 1. That an Agreement (IFMA Nos. 26 and 99-001) was entered into by and between the South Cotabato Development Co., Inc. (SODACO) and the Government, thru the DENR, on August 19, 1992 and February 17, 1997, respectively, wherein the DENR agrees to devolve to the said IFMA Holder the responsibility for managing 863 has. and 459 has. (gross areas) of public forest lands located at Kawayan, Malungon, Sarangani Province and Balacayo, Malalag, Cogon, General Santos City, respectively; 2. That the said Agreement shall be for the establishment and management of plantation of timber and/or non-timber forest species subject to terms and conditions; 3. That the said terms and conditions include, among others, that: "The IFMA HOLDER shall plant principally timber-producing species compatible with the ecological and biophysical characteristics of the IFMA AREA, but not excluding non-timber species such as rattan and bamboo, where not more than ten (10) percent of the plantable area may be earmarked therefore, to support wood-processing facilities and/or to supply wood energy requirements." (Item 6 of the Agreement); 4. That item 7 of the said Agreement also provides that: "IFMA HOLDER may develop a minimum of ten percent (10%) of suitable portions of open and denuded area and brushland within the IFMA AREA for permanent agricultural production; provided, that such development is included in the approved Comprehensive Development and Management Plan; and may enter into an agreement with any qualified company to put up processing plants for agricultural crops and forest products subject to the prior approval of the SECRETARY; 5. That the DENR, thru an undated Memorandum (Hon. Sec. Antonio M. Cerilles) has approved the transfer of the Name/Rights of IFMA No. 26 and 99-001 of SODACO to M & S; 6. A Certification dated November 24, 1998 issued by the Director, Forest Products Research & Development Institute reveals that particleboards can actually be made from mango trees. To summarize, we gather that: 1. M & S is the present HOLDER of the subject IFMA AREA located in Malungon, Sarangani Province covering an area of 863 has. However, in the absence of any information that the whole area has indeed been planted to timber, this Bureau surmises that ten percent (10%) of the total 863 has. allowed under the Agreement has been planted with non-timber species; 2. M & S is authorized by the DENR to plant non-timber species such as mango trees; and 3. Mango trees just like coffee trees can make particleboards. HCTaAS Corollarily, other pertinent provision of law, i.e. Assessment Regulations No. 3-78 dated May 15, 1978, was likewise cited under the said DOF opinion, to wit: "Rule II Appraisal "Sec. 1. Taxability of Timber and Forest Lands, General Concept of Appraisal Thereof. "Timber and forest lands belonging to the Republic of the Philippines or any of its political subdivisions, the beneficial use of which have been granted to a taxable person, shall be subject to the real property tax. For this purpose, said lands shall be appraised and assessed yearly, at the market value of the marketable timber on the basis of the annual volume of timber, `actually cut' from the operational area, during the preceding year regardless of the annual total `allowable cut' indicated in the lease agreement . "Sec. 2. Market Value of Marketable Timber, Defined . "For the purpose of an equitable distribution of the tax burden on the wood industry sector, the market value of the marketable timber shall be the prevailing and current domestic price of logs in the immediate locality of origin after deducting the `reasonable direct logging costs' not exceeding sixty (60%) per cent of the price of logs, actually incurred by concessionaires/licensees in their operations . . . ." (Emphasis ours) Basically, IFMA Areas are subject to the payment of real property taxes. However, its appraisal and assessment (Land and Improvements) shall be based on the "market value of the marketable timber" on the basis of the annual volume of timber "actually-cut" from the operational area . The term "market value of marketable timber" shall be the prevailing and current domestic price of logs in the locality less "reasonable direct logging costs" not exceeding 60% of the price of logs actually incurred in the operation. In addition, the annual volume of permanent agricultural crops (as permitted by the DENR) like coffee and mango trees, as long as they make particleboards or used in the manufacturing of wood, shall be added to the annual volume of timber actually cut and forms part of the IFMA Area's Market Value (MV). Or simply put : IFMA Area's MV = MV of Marketable Timber - Allowable Deductions (Annual volume of timber (Not exceeding 60% actually cut + volume of of the price of logs agricultural trees used in actually incurred) the manufacturing of wood) In view hereof, this Bureau rules that: 1. M & S, although an IFMA Holder, is subject to real property tax. This Bureau, therefore, concurs with the opinion rendered by the Provincial Legal Officer of Sarangani Province that the Provincial Assessor thereat is duty bound to list, value and assess the subject real properties of the said corporation located in Kawayan, Malungon, Sarangani Province pursuant to Section 205(d) of the Local Government Code of 1991 (R.A. No. 7160); 2. Mango trees, just like coffee trees, are considered as "industrial trees" for purposes of timber plantation under IFMA Operational Areas, provided that they are certified to by the Forest Products Research & Development Institute-Department of Science and Technology that they make particleboards, and, its volume (mango and coffee trees) actually cut is added to the annual volume of timber actually cut to come up with the IFMA Areas' market value. 3. Hence, mango trees should not be taxed separately as "Plants-Mangoes" (as reflected in RPA Form No. 1-a) and as decided under Supreme Court Decision in the case of Manila Railroad Co. vs. Maria Aguilar, et al . (No. 10044, October 24, 1916, 118 Phil. 35); but rather be appraised and assessed together with the timber as part of the land. It may be recalled further that R.A. No. 7160 no longer provides for the separate appraisal and assessment of "Plants and Trees." 4. However, it may be emphasized that, with or without the cutting of the said mango trees, the holder of IFMA Areas remains liable to real property tax for so long as timber (not necessarily mango trees or non-timber species) is being cut. It may be worth mentioning further that the area reflected in the FAAS does not tally with the total area reflected in IFMA No. 99-001 for the M & S real properties situated in Sarangani Province. Likewise, in the said form, the areas for the timber and agricultural portion (planted with other species) of the IFMA Area are not clearly stated. IECAaD In view hereof, that Office is advised to correct the total area reflected in the FAAS to conform with the total area granted under IFMA No. 99-001, and at the same time, establish the actual areas (Timberland and Agriland) of the IFMA Area in said municipality in order to determine M & S's compliance with Item No. 7 of the Agreement. If findings warrant that the said provision in the Agreement has indeed been violated, the matter may be brought to the attention of the DENR for the DENR for the proper course of action. Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA Executive Director