DOJ Opinion No. 055, s. 1993

DOJ OPINION NO. 055 , s. 1993 April 27, 1993 The Administrator Export Processing Zone Authority 4th Floor, Legaspi Towers 300 Roxas Boulevard, Manila Sir : This refers to your request for opinion on whether or not in the light of the enactment of the Local Government Code of 1991 ("LGC"), production machineries and equipment actually used in the operations of zone enterprises registered with the Export Processing Zone Authority ("EPZA") continue to enjoy exemption from real estate taxes pursuant to Article 78(a) of Executive Order No. 226, otherwise known as the "Omnibus Investments Code of 1987". prcd You state that the municipal government of Rosario, Cavite is making EPZA-registered zone enterprises located therein liable for the payment of the real estate tax on their production machineries and equipment, pursuant to Section 193 of the LGC withdrawing tax exemption privileges; that it is your view that the real estate tax exemption privileges of such business enterprises have not been withdrawn for the reasons (a) that under Article 283 of the LGC implementing rules and regulations, EPZA-registered zone entities shall continue to enjoy tax exemption privileges and tax incentives, (b) that the withdrawal of such privileges would violate the constitutional prohibition against impairment of obligations of contracts since the said tax exemption privileges form integral parts of the Registration Agreements between EPZA and the zone export enterprises, and (c) that Section 5(d) of the LGC protects contractual rights and obligations existing on the date of the effectivity of the LGC; and that the withdrawal of the said tax-exempt privileges may be seen by the international business community as transgressive of the moral commitment of the Philippines, which may brand our country as being unreliable in honoring its commitments. There is merit in your position. Production machineries and equipment operated by EPZA-registered enterprises are initially exempt from payment of real property taxes by virtue of Section 78(a) of E.O. No. 226, which reads: "Art. 78. Additional Incentives . A zone registered enterprise shall also enjoy all the incentive benefits provided in Article 39 hereof under the same terms and conditions stated therein. In addition, zone registered enterprises shall also be entitled to the following: a) Exemption from Local Taxes and Licenses. Notwithstanding the provisions of law to the contrary, zone registered enterprises shall, to the extent of their construction, operation or production inside the zone be exempt from the payment of any and all local government imposts, fees, licenses or taxes except real estate taxes which shall be collected by the Province/City/Municipality responsible for the collection thereof under the provisions of the Real Property Tax Code: Provided, That machineries owned by zone registered enterprises which are actually installed and operated in the Zone for manufacturing, processing or for industrial purposes shall not be subject to the payment of real estate taxes for the first three (3) years of operation of such machineries: ...(Emphasis supplied). True, Section 198 of LGC provides for the sweeping withdrawal of tax exemption privileges of all persons, natural or juridical, as follows: "Sec. 193. Withdrawal of Tax Exemption Privileges. Unless otherwise provided in this Code, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives duly registered under R.A. No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of this Code." It is noted, however, that the broad language of the foregoing section is subject to the qualifying clause, "Unless otherwise provided in this Code".Said clause evidently refers to Section 5(d) of the LGC which reads: "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 unit shall be governed by the original terms and conditions of said contracts or the law in force at the time such rights were vested;" As previously adverted to, EPZA-registered enterprises located at the export processing zone in Rosario, Cavite were registered prior to the enactment of the LGC pursuant to appropriate registration agreements which entitle them to a 3-year realty tax holiday with respect to their production machineries and equipment. Thus, when the LGC went into effect on January 1, 1992, these enterprises were enjoying this tax benefit and the government was obligated to respect such benefit until its expiry date. In accordance with Section 5(d), supra , the contractual relationships between these enterprises and the government shall be governed by the original terms and conditions of said registration agreements or by the provisions of the law in force at the time, namely, E.O. No. 226, which granted them the tax-exempt privileges. Relevant to observe, Section 234 of the LGC enumerates the properties which are exempt from the payment of the real property tax and the production machineries and equipment of zone-registered enterprises are not among them. We believe, however, that the said section is likewise subject to Section 5(d) of said Code, supra, which protects rights and obligations existing at the moment of the Code's effectivity. Otherwise, the application of Section 234 to the production machineries and equipment of EPZA-registered firms would constitute an impairment of contractual obligations, which is constitutionally impermissible. It has been said, in this connection, that - "If the rant of an exemption does not constitute a contract it is revocable by the power which made the grant. It is perfectly well settled that an exemption granted from motives of state policy merely, and where the state and the citizen do not meet on a basis of bargain and consideration, is to be deemed expressive only of the present will of the state on the subject and the law granting it, like laws in general, is subject to modification or repeal in the legislative discretion, and it is immaterial that while it continued in force persons have acted in reliance upon it. In other words, an exemption which does not constitute a contract but is a spontaneous concession by the legislature, not connected with any service or duty imposed is subject to modification or repeal; and a state may, at its pleasure, withdraw an exemption which is a mere gratuity possessing no element of a contract, even though the corporation may have incurred expense on the faith thereof ...". On the other hand, if the exemption constitutes a binding contract it is not revocable, subject to certain exceptions hereinafter noticed. The contract derives its character of inviolability from the clause of the constitution ...inhibiting the states from passing any law impairing the obligation of contracts; a clause which applies to the contracts of a state equally with those of individuals. (Alejandrino, The Law of Taxation, 2nd Ed.,pp. 63-64 citing 2 Cooley Taxation, 4th. ed.,pp. 1469-1473)." Premises considered, there is sufficient basis for the view that EPZA-registered zone enterprises which were enjoying realty tax exemption privileges as regards their production machineries and equipment at the time of the effectivity of the LGC shall continue to enjoy such privileges until the relevant expiry date of such privileges. LLphil Very truly yours, (SGD.) FRANKLIN M. DRILON Secretary