Bureau of Local Government Finance Opinion

February 6, 2001 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION The Municipal Assessor Taguig, Metro Manila S i r : This refers to your letter dated March 15, 1999, requesting legal opinion concerning the claim for real property tax exemption of the Philippine National Oil Company-Energy Development Corporation (PNOC-EDC) on its real properties located at Taguig, Metro Manila by virtue of the Court of Appeals Decision (C.A. G.R. S.P. No. 37120) in the case of Malangas Coal Corporation vs. The Province of Zamboanga del Sur . That Office, however, contends that the abovementioned case does not apply to the properties of PNOC because the same consist of a commercial land and an office building while the Malangas property is a mineral land where the contract of services requires the extraction of geothermal resources to be sold by the contractor and the proceeds will be divided per contract. The resolving portion of the subject Court of Appeals Decision under C.A. G.R. SP No. 37120 entitled " Malangas Coal Corporation vs. The Province of Zamboanga del Sur ," read as follows: "Our conclusion, therefore, is that the respondents-appellants have no power, authority, and jurisdiction to levy, assess, and collect real property taxes from petitioner-appellee because the latter exempt from the payment of all taxes except income tax under the Coal Operation Contract executed on 14 August 1980." (Emphasis supplied) TcaAID It appears that the abovementioned request was prompted by the letter dated January 21, 1999 of the Legal Counsel of the PNOC-EDC requesting a Tax Clearance from the Municipal Treasurer of Taguig as a requirement for the release by the Land Registration Authority (LRA) of the Original Certificate of Title (OCT) in PNOC-EDC's name. The requested tax clearance, however, has not been issued by the Municipal Treasurer of Taguig, hence, PNOC-EDC sought the assistance of the Office of the Government Corporate Counsel (OGCC). Under Opinion No. 222, dated December 1, 1998, the Government Corporate Counsel of the OGCC opined as follows: "We are of the opinion, however, that in the light of the aforequoted ruling in the Malangas Coal Corporation case, PNOC-EDC may no longer adduce further evidence to show that it is entitled to exemption. It is not being disputed that among the causes of considerations PNOC-EDC has entered into a service contract with the government, is the exemption from the payment of all taxes, except the payment of income tax. As such, as declared by the Court of Appeals in the case of Malangas Coal Corporation, 'contractual tax exemptions may not be revoked without impairing the obligations of contracts ( Casanovas vs. Hord , 8 Phil 125 [1907]).' "Accordingly, PNOC-EDC should first adduce evidence to establish that it is entitled to exemption; same may be done by presenting a certified copy of its service contract with the government, as well as certified copy of the ruling of the Court of Appeals in the Malangas Coal Corporation case, before the municipality where the tax clearance declaring PNOC-EDC as exempt from the payment of all (or assessed) taxes, except income tax pursuant to the submitted evidence. On the basis of the submitted clearance, the LRA may cause the release of the requested Original Certificate of Title, PNOC-EDC having complied with the questioned documentary requirement." It is worthwhile to note that, on May 14, 1981 and October 16, 1981, the Government, through the Bureau of Energy Development (BED), executed service contracts with the PNOC-Energy Development Corporation in pursuance of Presidential Decree No. 1442 (An Act to promote the exploration and development of geothermal resources, to execute/perform all geothermal operations and provide all the necessary services, technology and financing in connection therewith.) Section 4 of P.D. No. 1442 provides that: "Section 4. Privileges of Service Contracts . The provisions of any law to the contrary notwithstanding a service contract executed under this Act may provide that the contractor shall have the following privileges: "xxx xxx xxx. "(d) Other privileges provided in Section 12 of Presidential Decree No. 87 as may be applied to the geothermal operation." EIAaDC Section 12 of P.D. No. 87 provides, among others, the following: "Section 1. Privileges of Contractor . The provisions of any law to the contrary notwithstanding; a contract executed under this Act may provide that the contract shall have the following privileges: "(a) Exemption from all taxes except income tax. "xxx xxx xxx." It may be observed that both service contracts executed on May 14, 1981 and October 16, 1991, specifically stipulates that the Contractor (PNOC-EDC) shall execute the geothermal operations subject of the Service Contract including the implementation of the work program, and is hereby appointed and constituted by the Government as the exclusive party to conduct geothermal operations; which contract, likewise, provides an incentive for the Contractor to enjoy "(E)xemption from all taxes, except income tax." The sole issue to be resolved, therefore, is whether or not the PNOC-EDC's exemption from the payment of real property tax under the said Contract can be withdrawn by the application of certain provisions of the Local Government Code of 1991 (R.A. No. 7160), particularly the withdrawal of exemptions provision of Section 234 and the Repealing Clause under Section 534(f) thereof, without violating Article III, Section 10 of the 1987 Constitution. The particular provisions of Sections 234 and 534(f) of the said Code provide as follows: "Section 234. Exemptions from Real Property Tax . The following are exempted from payment of the real property tax: "xxx xxx xxx. "Except as provided herein, any exemption from payment of real property tax previously granted to, or presently enjoyed by, all persons, whether natural or juridical, including all government-owned or-controlled corporations are hereby withdrawn upon the effectivity of this Code. AaCTcI "xxx xxx xxx. "Section 534. Repealing Clause . . . . " "xxx xxx xxx. "(t) All general and special laws, acts, city charters, decrees, executive orders, proclamations and administrative regulations, or part or parts thereof which are in consistent with any of the provisions of this Code are hereby repealed or modified accordingly." PNOC-EDC contends that the exemption it enjoys has not been withdrawn by the Local Government Code of 1991, notwithstanding Sections 234 and 534(f) thereof. We agree. The stand taken by the PNOC-EDC leans and fines support under Article III, Section 10 of the 1987 Constitution which provides: "xxx xxx xxx "Sec. 10. No law impairing the obligation of contracts shall be passed." This proviso, simply referred to as the "non-impairment of Contract Clause" in the Bill of Rights, expressly guarantees the rights of contracting parties to non-impairment or non-infringement of obligations of contracts. It guarantees the rights of the parties to contractual agreements against "unwarranted interference by the state. "(I. Cruz, Constitutional Law, 1987 ed., P. 273). It is undisputed that, although the Local Government Code of 1991 provides for the withdrawal of exemption of GOCC's such as the PNOC-EDC from the payment of real property taxes, the code, nevertheless, recognizes the Constitutional mandate on the non-impairment of Contracts Sec. 5(d) of the Code reads as follows: Sec. 5. Rules of Interpretation . In the interpretation of the provisions of this Code the following rules shall apply: "xxx xxx xxx. "(d) Rights and obligations existing on the date of effectivity of this Code and arising out of contracts or any other source of presentation involving a local government shall be governed by the original terms and conditions of said contracts or the law in force at the time such rights were vested." (Emphasis ours) AcHaTE Simply stated, the withdrawal of exemption provisions under Section 234 and the repealing clause of Section 534(f) of the Local Government Code of 1991, could not prevail over those exemptions existing or arising out of perfected contracts. Otherwise, the violation of the non-impairment of contracts contemplated under the 1987 Constitution, arises. Noteworthy to mention is Opinion No. 209, dated November 19, 1992 of the Office of the Government Corporate Counsel (OGCC), on the request for opinion on Semirara Coal Corporation's (SCC's) payment of real property taxes. The case, although pertains to the Coal operations in the Municipality of Caluya, Antique, similarly ventilated thoroughly the issue concerning the interpretation on the "non-impairment of Contracts" provided under the Constitution in relation to Section 5 of the Local Government Code of 1991. The resolving portions of the subject OGCC Opinion read. "xxx xxx xxx." "It can be reasonably deduced therefrom that the parties not being content with the statutory provision granting tax-exemption as their basis for a mutually enforceable obligation, had stipulated unequivocally as a material and binding covenant to their coal operating contract, that the operator shall be exempt from all taxes except income tax. Consequently, under contract law, once the contract is perfected, "the parties are bound not only to the fulfillment of what has been expressly stipulated but also to all the consequences which, according to their nature may be in keeping with good faith, usage and law." (Article 1315, Civil Code.) "xxx xxx xxx. "Be that as it may, under the present facts, it is not material that Section 534, paragraph e of R.A. 71 60 re ndered Sec. 16 of P.D. 972, as amended, nugatory. Following the general rule on the prospective operation of laws, the repeal of the tax-exemption provision should operate prospectively. Hence, applying the same to the instant case, said repeal does not negate nor abrogate the tax-exemption in the coal operating contract in favour of SCC which contract was executed pr ior to R.A. 7160. "xxx xxx xxx. "The foregoing premises considered, it is opined that Semirara Coal Corporation is not liable to pay real estate taxes to the Municipality of Caluya, Antique as its right to be exempt from payment of all taxes except income tax as embodied in the contract executed July 11, 1977 is for a valuable consideration and is guaranteed by the constitutional provision on non-impairment of obligation of contracts." Viewed in the light of the foregoing, and considering the pertinent provisions of the Constitution and the Code; and considering further the opinions rendered by the OGCC on the matter and that of the Decision of the Court of Appeals, this Bureau believes and so holds that PNOC-EDC's property in Taguig consisting of a commercial land and an office building are exempt from the payment of real property taxes, the same way that its properties located in its operational areas, by virtue of its coal operating contract, are hereby considered exempt. EHDCAI Be guided accordingly. Very truly yours, (SGD.) BENJAMIN A. GERONIMO Executive Director