Imposition of Real Property Taxes

Question 1

What is the Extent of the local taxing power in real property taxation

Answer 1

Provinces, cities, and municipalities do not only have the power to levy real estate taxes, but they may also fix real estate tax rates. Sec. 233 of the LGC provides that they shall fix a uniform rate of basic real property tax applicable to their respective localities.

Question 2

Q: Capitol Wireless is in the business of providing international telecommunications services. Capwire has signed agreements with other local and foreign telecommunications companies covering an international network of submarine cable systems. The local government of Batangas considered the submarine cable systems as real property subject to real property tax. Is the local government of Batangas correct?

Answer 2

A: YES. Submarine or undersea communications cables are akin to electric transmission lines which are “no longer exempted from real property tax” and may qualify as “machinery” subject to real property tax under the LGC. Both electric lines and communications cables, in the strictest sense, are not directly adhered to the soil but pass through posts, relays or landing stations, but both may be classified under the term “machinery” as real property under Article 415(5) of the Civil Code because such pieces of equipment serve the owner’s business or tend to meet the needs of his industry or works that are on real estate.

Moreover, a portion of the submarine cable falls within what the UNCLOS would define as the country’s territorial sea (to the extent of 12 nautical miles outward from the nearest baseline over which the country has sovereignty. Further, under Article 79 of the UNCLOS, the Philippines clearly has jurisdiction with respect to cables laid in its territory that are utilized in support of other installations and structures under its jurisdiction. And as far as LGUs are concerned, the areas described above are to be considered subsumed under the term “municipal waters” which, under the LGC, includes “not only streams, lakes, and tidal waters within the municipality, x x but also marine waters included between two lines drawn perpendicularly to the general coastline from points where the boundary lines of the municipality or city touch the sea at low tide and a third line parallel with the general coastline and 15 kilometers from it.” (Capitol Wireless, Inc. vs. Provincial Treasurer of Batangas, G.R. No. 180110. May 30, 2016)

Question 3

Kinds of Imposition on Real Property

Answer 3

a. Real property taxes
1. Basic RPT
2. Special Education Fund
3. Ad valorem tax on idle lands
b Special Levy by LGUS

Question 4

Distinguish special levy from tax

Answer 4

1. Special levy (SPECIAL ASSESSEMENT) is NOT A TAX but an imposition to recover atleast 60 percent of the public works expenditures of the government.
2. As to subject, taxes are levied on land, property, persons, income, business while special assessments are levied on land only.
3. As to liability, taxes are perosnal liability of the tax payer while special levy, in some instances, cannot be made a personal liability of the person assessed.
4. As to basis, taxes are based on necessity and partially on beneifits, while special assessments are solely on benefits
5. As to Application, tax as a general application, special assessment has particular application only as to particular time and place.

Question 5

Real properties subject to tax based on kinds of imposition

Answer 5

1. For Basic Real Property Tax and Special Levy on Education Fund: a. Land b. Building c. Machinery d. Other improvements (Sec. 232, GC)
2. For Special Levy on Idle Lands and Special Levy on Public Works (Special Assessments): a. Land Only

Question 6

What are the Rates of levy

Answer 6

1. In a Province - at the rate not exceeding 1% of the assessed value of real property; and
2. In a City or Municipality within the Metro Manila area - at the rate not exceeding 2% of the assessed value of real property (Sec. 233, LGC).

Question 7

What are the contents of an Ordinance imposing special levy for public works

Answer 7

Ordinance imposing special levy for public works must contain the following:

1. The ordinance shall
   a. Describe the nature, extent, and location of the project;
   b. State estimated cost; and
   c. Specify metes and bounds by monuments and lines
2. It must state the number of annual installments, not less than 5 years nor more than 10 years.

NOTE: In the apportionment of special levy, Sanggunian may fix different rates depending whether such land is more or less benefited by the proposed work

3. Notice to the owners and public hearing (Sec. 242, LGC)
4. Owner can appeal to the LBAA and CBAA

Question 8

Special levy or special assessment by LGUs

Answer 8

A province, city or municipality may impose a special levy on the lands within its territorial jurisdiction specially benefited by public works projects or improvements by the LGU concerned.

XPN: It shall not apply to lands exempt from basic real property tax and the remainder of the land, portions of which have been donated to the LGU concerned for the construction of such projects or improvements (Sec. 240, LGC).

Question 9

What is the limitation of the special levy?

Answer 9

The special levy shall not exceed 60% of the actual cost of such projects and improvements, including the costs of acquiring land and such other real property in connection therewith.

Question 10

Additional levy on real property for the Special Education Fund

Answer 10

A province, city, or a municipality within the Metro Manila area may levy and collect an annual tax of 1% on the assessed value of real property, which shall be in addition to the basic real property tax. The proceeds thereof shall exclusively accrue to the Special Education Fund created under RA 5447 (Sec. 235, LGC).

Question 11

Additional ad valorem tax on idle lands

Answer 11

A province or city or a municipality within the Metro Manila area may levy an annual tax on idle lands at the rate not exceeding 5% of the assessed value of the property which shall be in addition to the basic real property tax (Sec. 236, LGC).

Question 12

What are considered “idle lands” ?

Answer 12

The following are considered “idle lands” :

1. Agricultural lands:
   a. More than one (1) hectare in area
   b. Suitable for cultivation, dairying, inland fishery, and other agricultural uses
   c. One-half (1/2) of which remain uncultivated or unimproved by the owner or person having legal interest.

NOTE: Agricultural lands planted to permanent or perennial crops with at least fifty (50) trees to a hectare shall not be considered idle lands. Lands actually used for grazing purposes shall likewise not be considered idle lands.

2. Lands other than agricultural:
   a. Located in a city or municipality
   b. More than one thousand square meters (1,000 m2) in area
   c. One-half (1/2) of which remain unutilized or unimproved by the owner or person having legal interest.

Question 13

Causes for Exemption from Idle Lands Tax

Answer 13

1. Force majeure
2. Civil disturbance
3. Natural calamity
4. Any cause or circumstance which physically or legally prevents the owner or person having legal interest from improving, utilizing or cultivating the same (Ibid.).

Question 14

Purpose of imposing ad valorem taxes on idle land

Answer 14

To penalize property owners who do not use their property productively. It is also designed to encourage utilization of land resources in order to contribute to national development.

Question 15

Q: May local governments impose an annual realty tax in addition to the basic real property tax on idle or vacant lots located in residential subdivisions within their respective territorial jurisdictions? (2000 Bar)

Answer 15

A: Not all LGUs may do so. Only provinces, cities, and municipalities within the Metro Manila area (Sec. 232, LGC) may impose an ad valorem tax not exceeding five percent (5%) of the assessed value (Sec. 236, Ibid.) of idle or vacant residential lots in a subdivision, duly approved by proper authorities regardless of area (Sec. 237, Ibid.).

Question 16

Q: A city outside of Metro Manila plans to enact an ordinance that will impose a special levy on idle lands located in residential subdivisions within its territorial jurisdiction in addition to the basic real property tax. If the lot owners of a subdivision located in the said city seeks your legal advice on the matter, what would your advice be? Discuss. (2005 Bar)

Answer 16

A: I would advise the lot owners that a city, even if it is outside Metro Manila, may levy an annual tax on idle lands at the rate not exceeding five percent (5%) of the assessed value of the property which shall be in addition to the basic real property tax (Sec. 236, LGC). I would likewise advise them that the levy may apply to residential lots, regardless of land area, in subdivisions duly approved by proper authorities, the ownership of which has been transferred to individual owners who shall be liable for the additional tax (Last par., Sec. 237, LGC).

Finally, I would advise them to construct or place improvements on their idle lands by making valuable additions to the property or ameliorations in the land’s conditions so the lands would not be considered as idle (Sec. 199[m], LGC). In this manner their properties would not be subject to the ad valorem tax on idle lands.

Question 17

What Real Properties are EXEMPTED from Taxes?

Answer 17

1. 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.

NOTE: This exemption shall not apply to real properties the beneficial use of which has been granted, for consideration or otherwise, to a taxable person (Testate Estate of C.T. Lim v. City of Manila, G.R. No. 90639, February 21, 1990).

2. Charitable institutions, churches, parsonages, or convents appurtenant thereto, mosques, non-profit or religious cemeteries, and all lands, buildings, and improvements actually, directly and exclusively used for religious, charitable, or educational purposes. NOTE: The tax exemption herein rests on the premise that they are actually, directly and exclusively used by said entities or institutions for their stated purposes and not necessarily because they are owned by religious, charitable or educational institutions.
3. All machineries and equipment that are actually, directly and exclusively used by local Water utilities and government-owned or controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power.
4. All real property owned by duly registered Cooperatives as provided for under RA 6938.
5. Machinery and equipment used for Pollution control and environmental protection (Sec. 234, LGC).

NOTE: Pollution control and infrastructure devices refers to infrastructure, machinery, equipment and/or improvements used for impounding, treating or neutralizing, precipitating, filtering, conveying and cleansing mine industrial waste and tailings as well as eliminating or reducing hazardous effects of solid particles, chemicals, liquids, or other harmful by-products and gases emitted from any facility utilized in mining operations for their disposal (RA No. 7942, Sec. 3).

Question 18

What should a tax payer do to be exempt?

Answer 18

A taxpayer claiming exemption must submit sufficient documentary evidence to the local assessor within 30 days from the date of the declaration of real property; otherwise, it shall be listed as taxable in the Assessment Roll (Sec. 206, LGC).

Question 19

What Other properties are exempt from real property tax

Answer 19

1. Real property in any one city or municipality belonging to a single owner, the entire assessed valuation of which is not in excess of P1,000.00.
2. Land acquired by grant, purchase, or lease from the public domain for conversion into dairy farms for a period of 5 years from the time of such conversion.
3. Machinery of a pioneer and preferred industry as certified by the Board of Investments used or operated for industry, agriculture, manufacturing, or mining purposes, during the first 3 years of the operation of the machinery.
4. Perennial trees and plants of economic value except where the land upon which they grow is planted principally to such growth. 5. Properties owned by non-stock or non-profit educational institutions, the total assessed value of which does not exceed P3,000.00, including those owned by Educational Foundations organized under R.A. No. 6055.

Question 20

Q: Are the transformers, electric posts, transmission lines, insulators, and electric meters of MERALCO exempt from real property taxes?

Answer 20

A: NO. The transformers, electric posts, transmission lines, insulators, and electric meters of MERALCO are no longer exempted from real property tax based on its franchise, and may qualify as “machinery” subject to real property tax under the LGC. MERALCO is a public utility engaged in electric distribution, and its transformers, electric posts, transmission lines, insulators, and electric meters constitute the physical facilities through which MERALCO delivers electricity to its consumers. Each may be considered as one or more of the following: a “machine,” “equipment,” “contrivance,” “instrument,” “appliance,” “apparatus,” or “installation.”

Under Sec. 199(o) of the LGC, machinery, to be deemed real property subject to real property tax, need no longer be annexed to the land or building as these “may or may not be attached, permanently or temporarily to the real property,” and in fact, such machinery may even be “mobile.” The same provision though requires that to be machinery subject to real property tax, the physical facilities for production, installations, and appurtenant service facilities, those which are mobile, self-powered or self-propelled, or not permanently attached to the real property (a) must be actually, directly, and exclusively used to meet the needs of the particular industry, business, or activity; and (2) by their very nature and purpose, are designed for, or necessary for manufacturing, mining, logging, commercial, industrial, or agricultural purposes.

Question 21

Q: Is PEZA a government instrumentality or a GOCC? Is it exempt from real property taxation?

Answer 21

A: PEZA is an instrumentality of the government. Being an instrumentality of the national government, it cannot be taxed by LGUs.Instrumentality is “any agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter.” Examples of instrumentalities of the national government are the MIAA, Philippine Fisheries Development Authority, GSIS, and Philippine Reclamation Authority. These entities are not integrated within the department framework but are nevertheless vested with special functions to carry out a declared policy of the national government.

Similarly, the PEZA is an instrumentality of the national government. It is not integrated within the department framework but is an agency attached to the Department of Trade and Industry. PEZA is also vested with special functions or jurisdiction by law. Congress created the PEZA to operate, administer, manage and develop special economic zones in the Philippines.

Although a body corporate vested with some corporate powers, the PEZA is not a government-owned or controlled corporation taxable for real property taxes. To be considered a GOCC, the entity must have been organized as a stock or non-stock corporation.Under its charter, the PEZA was created a body corporate endowed with some corporate powers. However, it was
not organized as a stock or non-stock corporation. Nothing in the PEZA’s charter provides that the PEZA’s capital is divided into shares. The PEZA also has no members who shall share in the PEZA’s profits. PEZA, therefore, is not a government-owned or controlled corporation liable for real property tax (PEZA v. Lapulapu City, 742 SCRA 524).

Question 22

Q: Group of Tibetan monks approached A and offered to lease the building in order to use it as a venue for their Buddhist rituals and ceremonies. A accepted the rental of P1 million for the whole year. The following year, the City Assessor issued an assessment against A for non-payment of real property taxes. Is the assessor justified in assessing A’s deficiency real property taxes? Explain. (2010 Bar)

Answer 22

A: NO. The property is exempt from real property tax by virtue of the beneficial use thereof by the Tibetan monks for their religious rituals and ceremonies. A property that is actually, directly and exclusively used for religious purposes is exempt from real property tax. The test of exemption from the tax is not ownership but the beneficial use of the property.

Question 23

Q: The Light Rail Transit Authority (LRTA) resolutely argues that the improvements such as, carriageways, passenger terminal stations and similar structures, not of its properties, but of the government-owned national roads to which they are immovably attached. They are thus not taxable as improvements under the Real Property Tax Code. It contends that to impose a tax on the carriageways and terminal stations would be to impose taxes on public roads. Are the LRT improvements subject to real property tax?

Answer 23

A: YES. While it is true that carriageways and terminal stations are anchored, at certain points, on public roads, said improvements do not form part of the public roads since the former are constructed over the latter in such a way that the flow of vehicular traffic would not be impaired. These carriageways and terminals serve a function different from the public roads. The former are part and parcel of the LRT system which, unlike the latter, are not open to use by the general public. The carriageways are accessible only to the LRT trains, while the terminal stations have been built for the convenience of LRTA itself and its customers who pay the required fare. Even granting that the national government owns the carriageways and terminal stations, the property is not exempt because their beneficial use has been granted to LRTA which is a taxable entity (LRTA v. CBAA, G.R. No. 127316, October 12, 2000).

Question 24

Q: Are the airport lands and buildings of Manila International Airport Authority (MIAA) exempt from real estate tax under existing laws?

Answer 24

A: YES.First, MIAA is not a GOCC but an instrumentality of the National Government and thus exempt from local taxation. MIAA is a government instrumentality vested with corporate powers to perform efficiently its governmental functions. MIAA is like any other government instrumentality; the only difference is that MIAA is vested with corporate powers. Second, the real properties of MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax. Airport lands and buildings are outside the commerce of man. The airport lands and buildings of MIAA are devoted to public use and thus are properties of public dominion (MIAA v. CA, City of Paranaque, et al., G.R. No. 155650, July 20, 2006).

Question 25

Q: In 1957, R.A. 2036 granted RCPI a 50 year franchise and Sec. 14 thereof mandates it to pay the taxes required by law on real estate, buildings and other personal property except radio equipment, machinery and spare parts needed in connection with its business. In consideration of the franchise, a tax equal to one and one-half per centum of all gross receipts from the business transacted under this franchise by the grantee shall be paid and such shall be in lieu of any tax collected by any authority. The municipal treasurer of Tupi, South Cotabato subsequently assessed RCPI real property tax on its radio station building, machinery shed, radio station tower and its accessories and generating sheds. RCPI protested such assessment. Is RCPI liable to pay real property tax on the said properties?

Answer 25

A: YES. RCPI’s radio relay station tower, radio station building, and machinery shed are real properties and are thus subject to real property tax. The “in lieu of all taxes” clause in Section 14 of R.A. 2036, as amended by R.A. 4054, cannot exempt RCPI from the real estate tax because the same Section 14 expressly states that RCPI “shall pay the same taxes on real estate, buildings.” Subsequent legislations have radically amended the “in lieu of all taxes” clause in franchises of public utilities. The LGC of 1991 “withdrew all the tax exemptions existing at the time of its passage — including that of RCPI’s” with respect to local taxes like the real property tax. Also, R.A. 7716 abolished the franchise tax on telecommunications companies effective 1 January 1996. To replace the franchise tax, R.A. 7716 imposed a 10% VAT on telecommunications companies under Sec.102, NIRC. Lastly, it is an elementary rule in taxation that exemptions are strictly construed against the taxpayer and liberally in favor of the taxing authority. (Radio Communications of the Philippines, Inc. v. Provincial Assessor of South Cotabato, A.C. No. 5637, April 13, 2005).

Question 26

Q: NAPOCOR entered into a build-operate-transfer (BOT) agreement with First Private Power Corporation (FPPC) for the construction of a power plant in Bauang, La Union and the creation of Bauang Private Power Corporation (BPPC), a corporation that will own, manage and operate the power plant. When BPPC was assessed for real property taxes on the machineries and equipment, NAPOCOR sought the exemption of the machineries and equipment from RPT on the ground of its exemption from taxes and the provision under the BOT Agreement whereby Napocor assumes responsibility for all real estate taxes. Is Napocor liable to pay tax?

Answer 26

A: NO. Under Sec. 234(c) of the LGC of 1991, machineries and equipment actually, directly and exclusively used by a government-owned or controlled corporation are exempt from real property tax. BPPC, not being a GOCC, is not entitled to the Sec. 234(c) exemption. NAPOCOR, not being the actual, direct and exclusive user of the machineries and equipment, cannot invoke the Sec. 234(c) exemption either (National Power Corp. v. CBAA, G.R. No. 171470, January 30, 2009).

Question 27

Q: Is GSIS exempt from real property taxes?

Answer 27

A: YES. Pursuant to Sec. 33 of P.D. 1146, GSIS enjoyed tax exemption from real estate taxes, among other tax burdens, until January 1, 1992 when the LGC took effect and withdrew exemptions from payment of real estate taxes privileges granted under PD 1146. R.A. 8291 restored in 1997 the tax exempt status of GSIS by reenacting under its Sec. 39 what was once Sec. 33 of P.D. 1146. If any real estate tax is due, it is only for the interim period, or from 1992 to 1996, to be precise (GSIS v. City Treasurer and City Assessor of the City of Manila, G.R. No. 186242, Dec. 23, 2009).

Question 28

Q: Is the National Grid Corporation of the Philippines (NGCP) exempt from real property taxes?

A

Answer 28

A: YES. Section 9 of RA 9511 states that NGCP’s payment of franchise tax is in lieu of payment of “income tax and any and all taxes, duties, fees and charges of any kind, nature or description levied, established or collected by any authority whatsoever, local or national, on its franchise, rights, privileges, receipts, revenues and profits, and on properties used in connection with its franchise.” Thus, in contrast to Smart’s franchise as quoted above, Section 9 of RA 9511 clearly stated that the NGCP’s “in lieu of all taxes” clause includes taxes imposed by the local government on properties used in connection with NGCP’s franchise. However, NGCP’s tax exempt status on real property due to the “in lieu of all taxes” clause is qualified: NGCP shall be liable to pay the same tax as other corporations on real estate, buildings and personal property exclusive of their franchise (National Grid Corporation of the Philippines vs. Oliva, G.R. No. 213157. August 10, 2016).

Question 29

Q: Filipinas Palm Oil Plantation, Inc. is a private organization engaged in palm oil plantation. It leases the land from NGPI-NGEI Cooperative. The LBAA assessed Filipinas of real property taxes on the land it leases, on the road it built primarily for the benefit of the plantation, and on the machineries that are not attached to the land. Is the assessment of LBAA proper?

Answer 29

A: NO. Under Section 133(n) of the LGC, the taxing power of LGUs shall not extend to the levy of taxes, fees, or charges on duly registered cooperatives under the Cooperative Code. NGPI-NGEI, as the owner of the land being leased by respondent, falls within the purview of the law. Section 234 of the LGC exempts all real property owned by cooperatives without distinction. Nothing in the law suggests that the real property tax exemption only applies when the property is used by the cooperative itself. Similarly, the instance that the real property is leased to either an individual or corporation is not a ground for withdrawal of tax exemption.

The roads that Filipinas Palm constructed within the leased area should not be assessed with real property taxes. The roads constructed became permanent improvements on the land owned by the NGPI-NGEI by right of accession under Article 440 and 445 of the Civil Code. Hence, whatever is incorporated in the land, either naturally or artificially, belongs to the NGPI-NGEI as the landowner. Although the roads were primarily built for Filipinas Palm’s benefit, the roads were also being used by the members of NGPI and the public.

However, the assessment pertaining to the machinery is proper. The definition of “machinery” under Section 199 of the LGC includes machines which may or may not be attached, permanently or temporarily, to the real property. (Provincial Assessor of Agusan del Sur vs. Filipinas Palm Oil Plantation, Inc., G.R. No. 183416, October 5, 2016)