LOCAL FINANCE CIRCULAR NO.

001-2002

DATE : 25 April 2002

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 revised 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).

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, no-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 stictissimi 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 v. 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 consider 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.”

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.
1
Province of Abra vs. Henando, 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.
 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

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.

JOSE ISIDRO N. CAMACHO

Secretary