Tax Status of Machinery and Equipment Used for Religious, Charitable, and Educational Purposes

April 25, 2002 DOF LOCAL FINANCE CIRCULAR NO. 01-02 FOR : The Executive Director and Regional Directors, Bureau of Local Government Finance, and All Provincial, City and Municipal Treasurers and Assessors SUBJECT : Tax Status of Machinery and Equipment Used for Religious, Charitable, and Educational Purposes Upon a petition filed by the sectors concerned, this Department has reviewed Joint Local Treasury/Assessment Regulation (JLTAR) No. 1-88 dated May 4, 1988, (Rules and Regulations on the Implementation of Section 28(3), Article VI, of the New Constitution providing for, among others, exemption from real property taxes of certain real properties). EcSCHD It will be recalled that JLTAR No. 1-88 was issued to ensure uniform application of Section 28(3), Article VI of the 1987 Constitution, which provides: "Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation." (emphasis supplied) Pursuant to the authority granted to the Department of Finance under Section 201 of the Local Government Code of 1991 (R.A. No. 7160), this Circular is meant to clarify, first ,certain provisions in JLTAR No. 1-88 on the treatment, for real estate tax purposes, of machinery that is not permanently attached to real estate and, second ,machinery and equipment of non-stock non-profit educational institutions. Treatment of machinery for real property tax purposes JLTAR No. 1-88 subjects to real property tax machineries that are attached to land and buildings, even though these are actually, directly, and exclusively used for religious, charitable or educational purposes on the ground that the word "improvements" does not include "machinery". This is because, as stated in Section 3(b) of JLTAR No. 1-88, the terms "improvements" and "machinery" are separately defined under the old Real Property Tax Code (Presidential Decree No. 464). Had the framers of the Constitution intended to exempt machinery from the coverage of the real property tax they would have done so by explicitly enumerating "machinery" alongside "lands, buildings, and improvements". In like manner, the Local Government Code defines "improvements" and "machinery" separately. It is a basic principle that the law frowns on exemption from taxation, hence, an exempting provision should be construed strictissimi juris . 1 However, JLTAR No. 1-88 is unclear as to the treatment of machinery that is not permanently attached to real estate. JLTAR No. 1-88 recognizes the definition of machinery under paragraph Section 3(k) of the Real Property Tax Code (now Section 199(o) of the Local Government Code) to include "...the physical facilities available for production, as well as the installations and appurtenant facilities, together with all those not permanently attached to the real estate but are actually, directly and essentially, used to meet the needs of the particular industry, business, or works, which by their very nature and purpose are designed for, or essential to manufacturing, commercial, mining, industrial or agricultural purposes." 2 (emphasis supplied) Under 20(c) of the Real Property Tax Code and Section 218(c) of the Local Government Code, such machinery is subject to real estate tax. This notwithstanding, the last paragraph of Section 3 of JLTAR No. 1-88 concludes that "[e]quipment that are movable or portable such as computers, typewriters, and the like shall not be considered as 'machinery' subject to the real property tax." To avoid any doubt as to treatment, for real property tax purposes, of machinery that is not permanently attached to real estate, we make this clarification: such machinery and equipment shall be considered as real property and hence, 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 will be unable to function. Otherwise, such machinery or equipment shall not be subject to the real property tax. The case of Mindanao Bus Company vs . City Assessor (L-17870, September 29, 1962) is instructive on this point: "We may here distinguish, therefore, those movables which become immobilized by destination because they are essential and principal elements in the industry from those which may not so considered immobilized because they are merely incidental, not essential and principal. Thus, cash registers, typewriters, etc. usually found and used in hotels, restaurants, theaters, etc. are merely incidentals and are not and should not be considered immobilized by destination, for these businesses can continue or carry on their functions, without those equipments. Airline companies use forklifts, jeepwagons, pressure pumps, IBM machines, etc. which are incidentals, not essentials, and thus retain their movable nature. On the other hand, machineries of breweries used in the manufacture of liquor and softdrinks, though movable in nature are immobilized because they are essential to said industries, but the delivery trucks and adding machines which they usually own and use and are found within their industrial compounds are merely incidentals and retain their movable nature." Special exemption for non-stock non-profit educational institutions Article XIV, Section 3(3) of the 1987 Constitution states: "All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively ,for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law. "Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions subject to the limitations provided by law including restrictions on dividends and provisions for reinvestment." (emphasis supplied) This article provides non-stock non-profit educational institutions with an exemption from duties and taxes including the real estate tax on assets actually, directly, and exclusively used for educational purposes. Since the word "assets" refers to property of all kinds, real or personal, 3 the exemption from real property tax extends to machinery and equipment of the educational institution. However, such machinery must be actually, directly, and exclusively used for educational purposes. To be actually, directly, and exclusively used for educational purposes, the property need not be indispensable for such purpose, but need only be incidental to and reasonably necessary for the accomplishment of said purpose. 4 We note that the Supreme Court has declared in Abra Valley College, Inc . vs . Aquino, et al . 5 that it tends to adopt a more liberal and non-restrictive interpretation of the phrase "actually, directly, and exclusively". Summary of the rules 1. Machinery that is permanently attached to land and buildings is subject to the 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. 3. Notwithstanding rules 1 and 2, machinery of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes is not subject to real property tax. In accordance with the guidelines laid down in this Circular, all local treasurers and assessors are hereby directed to list such machinery and equipment of non-stock non-profit educational institutions as "EXEMPT" in their respective assessment rolls upon compliance of the tax exempt individual or entity with the provisions of Section 206 of the Local Government Code. All Regional Directors for Local Government Finance shall supervise the local treasury and assessment offices in their respective regions in the execution of this Circular. All existing orders, rules, regulations, circulars and other issuances, particularly JLTAR No. 1-88, of this Department that are contrary to or inconsistent with this Circular are hereby repealed or modified accordingly. This Circular shall take effect immediately. TcCDIS (SGD.) JOSE ISIDRO N. CAMACHO Secretary MEMORANDUM DATE : 25 April 2002 TO : Undersecretary Juanita D. Amatong Officer in Charge Bureau of Local Government Finance All Local Treasurers and Assessors SUBJECT : Ruling on Petition of Coordinating Council of Private Educational Institutions to Repeal Joint Local Treasury/Assessment Regulation No. 1-88, Dated 4 May 1988 The accompanying circular clarifies the realty tax exemption privileges of educational institutions on their machinery and equipment. In accordance with the guidelines laid down in the circular, all local treasurers and assessors are hereby directed to list such machinery and equipment of non-stock non-profit educational institutions as "EXEMPT" in their respective assessment rolls upon compliance by the tax exempt individual or entity with the provisions of Section 206 of the Local Government Code. The exemption is also applicable to movable machinery and equipment of proprietary educational institutions operated for profit if such machinery is not actually, directly or exclusively used to meet the needs of the school's particular educational activity. All Regional Directors of the Bureau of Local Government Finance shall supervise the local treasury and assessment offices in their respective regions in the execution of this circular. (SGD.) JOSE ISIDRO N. CAMACHO Secretary of Finance Footnotes 1. Province of Abra vs. Hernando ,G.R. No. L-49366, August 31, 1981, citing various cases. 2. Section 3(b)(2),JLTAR No. 1-88. 3. Black's Law Dictionary, 6th ed.,1990. 4. Herrera vs. Quezon City Board of Assessment Appeals, 3 SCRA 186 (1961); Commissioner of Internal Revenue vs. Bishop of Missionary District ,14 SCRA 991 (1965),citing Cooley on Taxation, Vol. 2, p. 1430. 5. G.R. No. L-39086, June 15, 1988.