2019 BAR REVIEW TAXATION LAW

LOCAL GOVERNMENT & REAL Handout No. 45

PROPERTY TAXATION

LGUs have no inherent power to tax except to the extent that such power might be delegated
to them either by the basic law or by the statute.

It is settled that a municipal corporation unlike a sovereign state is clothed with no inherent
power of taxation. The charter or statute must plainly show an intent to confer that power or the
municipality, cannot assume it. And the power when granted is to be construed in strictissimi
juris. Any doubt or ambiguity arising out of the term used in granting that power must be resolved
against the municipality. Inferences, implications, deductions — all these — have no place in the
interpretation of the taxing power of a municipal corporation.

Per Section 5, Article X of the 1987 Constitution, “the power to tax is no longer vested exclusively
on Congress; local legislative bodies are now given direct authority to levy taxes, fees and other
charges.” Nevertheless, such authority is “subject to such guidelines and limitations as the
Congress may provide.”

In conformity with Section 3, Article X of the 1987 Constitution, Congress enacted Republic Act
No. 7160, otherwise known as the Local Government Code of 1991. Book II of the LGC governs
local taxation and fiscal matters.

Indeed, LGUs have no inherent power to tax except to the extent that such power might be
delegated to them either by the basic law or by the statute. “Under the now prevailing
Constitution, where there is neither a grant nor a prohibition by statute, the tax power must be
deemed to exist although Congress may provide statutory limitations and guidelines. The basic
rationale for the current rule is to safeguard the viability and self-sufficiency of local government
units by directly granting them general and broad tax powers. Nevertheless, the fundamental law
did not intend the delegation to be absolute and unconditional; the constitutional objective
obviously is to ensure that, while the local government units are being strengthened and made
more autonomous, the legislature must still see to it that (a) the taxpayer will not be
overburdened or saddled with multiple and unreasonable impositions; (b) each local government
unit will have its fair share of available resources; (c) the resources of the national government
will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just.” Ferrer, Jr. vs.
Bautista, 760 SCRA 652, G.R. No. 210551 June 30, 2015

The omnibus grant of power to municipalities and cities under Section 143(h) of the LGC cannot
overcome the specific exception/exemption in Section 133(j) of the same Code. This is in accord
with the rule on statutory construction that specific provisions must prevail over general ones.
A special and specific provision prevails over a general provision irrespective of their relative
positions in the statute.

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 2019 BAR REVIEW TAXATION LAW
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PROPERTY TAXATION

In the case at bar, the Sanggunian of the City of Manila cannot enact an ordinance imposing
business tax on the gross receipts of transportation contractors, persons engaged in the
transportation of passengers or freight by hire, and common carriers by air, land, or water, when
said sanggunian was already specifically prohibited from doing so. This prohibition is expressly
stated in Section 133(j) of the LGC.

Section 133(j) of the LGC is a specific provision that explicitly withholds from any LGU, i.e.,
whether the province, city, municipality, or barangay, the power to tax the gross receipts of
transportation contractors, persons engaged in the transportation of passengers or freight by
hire, and common carriers by air, land, or water.

In contrast, Section 143 of the LGC defines the general power of the municipality (as well as the
city, if read in relation to Section 15170 of the same Code) to tax businesses within its jurisdiction.
While paragraphs (a) to (g) thereof identify the particular businesses and fix the imposable tax
rates for each, paragraph (h) is apparently the "catch-all provision" allowing the municipality to
impose tax "on any business, not otherwise specified in the preceding paragraphs, which the
sanggunian concerned may deem proper to tax."

The succeeding proviso of Section 143(h) of the LGC, viz., "Provided, That on any business subject
to the excise, value-added or percentage tax under the National Internal Revenue Code, as
amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the
preceding calendar year[,]" is not a specific grant of power to the municipality or city to impose
business tax on the gross sales or receipts of such a business. Rather, the proviso only fixes a
maximum rate of imposable business tax in case the business taxed under Section 143(h) of the
LGC happens to be subject to excise, value added, or percentage tax under the NIRC. City of
Manila Vs. Judge Colet, G.R. No. 120051, December 10, 2014

A Local Government Unit may not impose Percentage Business Tax on a General Professional
Partnership since as such, it does not operate or conduct business.

In Bureau of Local Government Finance Opinion dated March 15, 2017 involving exact same facts
as the instant case, it was discussed that following the rules on taxation provided by the LGC, as
well as the relevant rulings of the Supreme Court, this Bureau in several occasions held that a
GPP is not subject to business tax, as it is not engaged in any trade or business, but is focused on
the exercise of the profession of its individual partners.

The contention of BATAS Law that it must not be subject to percentage business tax based on
gross receipts exclusively on year 2017 must be upheld, without prejudice to the validity of the

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assessment made by the City Treasurer pursuant to the Revenue Code of Valenzuela. Bureau of
Local Government Finance Opinion dated March 15, 2017

The procedure in questioning the constitutionality of an ordinance under Section 187 of the
Local Government Code applies only to a local tax ordinance and does not apply to ordinances
which impose fees that are regulatory in nature.

Considering that the fees in Ordinance No. 18 are not in the nature of local taxes, and Smart is
questioning the constitutionality of the ordinance, the CTA correctly dismissed the petition for
lack of jurisdiction. Likewise, Section 187 of the LGC, which outlines the procedure for
questioning the constitutionality of a tax ordinance, is inapplicable, rendering unnecessary the
resolution of the issue on non-exhaustion of administrative remedies.

Section 1187 of the Local Government Code provides:

Section 187. Procedure for Approval and Effectivity of Tax, Ordinances and Revenue Measures;
Mandatory Public Hearings.—The procedure for approval of local tax ordinances and revenue
measures shall be in accordance with the provisions of this Code: Provided, That public hearings
shall be conducted for the purpose prior to the enactment thereof: Provided, further, That any
question on the constitutionality or legality of tax ordinances or revenue measures may be raised
on appeal within thirty (30) days from the effectivity thereof to the Secretary of Justice who shall
render a decision within sixty (60) days from the date of receipt of the appeal: Provided, however,
That such appeal shall not have the effect of suspending the effectivity of the ordinance and the
accrual and payment of the tax, fee, or charge levied therein: Provided, finally, That within thirty
(30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary
of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a
court of competent jurisdiction.

Considering that the imposition under the subject ordinance is not a local tax but a regulatory
fee, an appeal concerning the legality or constitutionality of the subject ordinance before the
Secretary of Justice was an incorrect remedy. Smart Communications, Inc. vs. Municipality of
Malvar, Batangas, 716 SCRA 677, G.R. No. 204429 February 18, 2014

MERALCO’s transformers, electric posts, transmission lines, insulators, and electric meters may
qualify as ‘machinery’ subject to real property tax under the Local Government Code. For
purposes of real property tax (RPT), the taxable properties are not limited to lands, buildings

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and improvements only. Machinery and equipment are also taxable. Machinery, though mobile
or not permanently attached, is taxable as long as necessary to the business.

While the Local Government Code still does not provide for a specific definition of “real
property,” Sections 199(o) and 232 of the said Code, respectively, gives an extensive definition
of what constitutes “machinery” and unequivocally subjects such machinery to real property tax.
The Court reiterates that the machinery subject to real property tax under the Local Government
Code “may or may not be attached, permanently or temporarily to the real property”; and the
physical facilities for production, installations, and appurtenant service facilities, those which are
mobile, self-powered or self-propelled, or are not permanently attached must (a) be actually,
directly, and exclusively used to meet the needs of the particular industry, business, or activity;
and (b) by their very nature and purpose, be designed for, or necessary for manufacturing,
mining, logging, commercial, industrial, or agricultural purposes.

MERALCO insists on harmonizing the aforementioned provisions of the Civil Code and the Local
Government Code. The Court disagrees, however, for this would necessarily mean imposing
additional requirements for classifying machinery as real property for real property tax purposes
not provided for, or even in direct conflict with, the provisions of the Local Government Code. As
between the Civil Code, a general law governing property and property relations, and the Local
Government Code, a special law granting local government units the power to impose real
property tax, then the latter shall prevail.

Furthermore, in Caltex (Philippines), Inc. v. Central Board of Assessment Appeals,62 the Court
acknowledged that “[i]t is a familiar phenomenon to see things classed as real property for
purposes of taxation which on general principle might be considered personal property[.]”

Therefore, for determining whether machinery is real property subject to real property tax, the
definition and requirements under the Local Government Code are controlling. Manila Electric
Company vs. The City Assessor, 765 SCRA 52, G.R. No. 166102 August 5, 2015

Mactan-Cebu International Airport Authority (MCIAA) is an instrumentality of the government;

thus, its properties actually, solely and exclusively used for public purposes, consisting of the
airport terminal building, airfield, runway, taxiway and the lots on which they are situated, are
not subject to real property tax and respondent City is not justified in collecting taxes from
petitioner over said properties.

All the more do we find that petitioner MCIAA, with its many similarities to the MIAA, should be
classified as a government instrumentality, as its properties are being used for public purposes,
and should be exempt from real estate taxes. This is not to derogate in any way the delegated

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authority of local government units to collect realty taxes, but to uphold the fundamental
doctrines of uniformity in taxation and equal protection of the laws, by applying all the
jurisprudence that have exempted from said taxes similar authorities, agencies, and
instrumentalities, whether covered by the 2006 MIAA ruling or not.

Like in MIAA, the airport lands and buildings of MCIAA are properties of public dominion because
they are intended for public use. As properties of public dominion, they indisputably belong to
the State or the Republic of the Philippines, and are outside the commerce of man. This, unless
petitioner leases its real property to a taxable person, the specific property leased becomes
subject to real property tax; in which case, only those portions of petitioner’s properties which
are leased to taxable persons like private parties are subject to real property tax by the City of
Lapu-Lapu.

We hereby adopt and apply to petitioner MCIAA the findings and conclusions of the Court in the
2006 MIAA case. Mactan-Cebu International Airport Authority (MCIAA) vs. City of Lapu-Lapu,
757 SCRA 323, G.R. No. 181756 June 15, 2015

The Philippine Economic Zone Authority (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 (DTI). City of Lapu-Lapu vs. Philippine Econimic Zone
Authority, 742 SCRA 524, G.R. No. 187583 November 26, 2014. As an instrumentality, it is
exempt from the payment of real property tax under Section 133(o) of the Local Government
Code.

An 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 Manila International Airport
Authority, the Philippine Fisheries Development Authority, the Government Service Insurance
System, and the 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.
Being an instrumentality of the national government, the PEZA cannot be taxed by local

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government units. City of Lapu-Lapu vs. Philippine Economic Zone Authority, 742 SCRA 524, G.R.
No. 187583 November 26, 2014

The imposition of 1% special educational fund under Section 235 of the Local Government Code
does not denote that such rate is the minimum amount to be paid. Section 235’s permissive
language is unqualified. Moreover, there is no limiting qualifier to the articulated rate of 1%
which unequivocally indicates that any and all special education fund collections must be at
such rate.

There are, in this case, three (3) considerations that illumine our task of interpretation: (1) the
text of Section 235, which, to reiterate, is cast in permissive language; (2) the seminal purpose of
fiscal autonomy; and (3) the jurisprudentially established preference for weighing the scales in
favor of autonomy of local government units. We find it to be in keeping with harmonizing these
considerations to conclude that Section 235’s specified rate of 1% is a maximum rate rather than
an immutable edict. Accordingly, it was well within the power of the Sangguniang Panlalawigan
of Palawan to enact an ordinance providing for additional levy on real property tax for the special
education fund at the rate of 0.5% rather than at 1%. Demaala vs. Commission on Audit, 750
SCRA 612, G.R. No. 199752 February 17, 2015

Submarine or undersea communications cables are akin to electric transmission lines which this
Court has recently been treated as “no longer exempted from real property tax” and may
qualify as “machinery” subject to real property tax under the Local Government Code.

To the extent that the equipment’s location is determinable to be within the taxing authority’s
jurisdiction, the Court sees no reason to distinguish between submarine cables used for
communications and aerial or underground wires or lines used for electric transmission, so that
both pieces of property do not merit a different treatment in the aspect of real property taxation.
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 for the simple reason that 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. Even
objects in or on a body of water may be classified as such, as “waters” is classified as an
immovable under Article 415(8) of the Code. A classic example is a boathouse which, by its
nature, is a vessel and, therefore, a personal property but, if it is tied to the shore and used as a
residence, and since it floats on waters which is immovable, is considered real property. Besides,

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the Court has already held that “it is a familiar phenomenon to see things classed as real property
for purposes of taxation which on general principle might be considered personal property.”

Lastly, absent any showing from Capwire of any express grant of an exemption for its lines and
cables from real property taxation, then this interpretation applies and Capwire’s submarine
cable may be held subject to real property tax. Capitol Wireless, Inc. vs. Provincial Treasurer of
Batangas, 791 SCRA 272, G.R. No. 180110 May 30, 2016

A Government owned or controlled corporation (GOCC) cannot claim exemption under Section
234(c) from the payment of real property tax if the real properties subject of the assessment
are not actually, directly and exclusively used for generation of electric power. The fact that
another person operates the machineries solely in compliance with the will of the GOCC under
an Energy Conversion Agreement only underscores the fact that NPC does not actually, directly,
and exclusively use them.

At any rate, the NPC’s claim of tax exemptions is completely without merit. To successfully claim
exemption under Section 234(c) of the LGC, the claimant must prove two elements: (a) the
machineries and equipment are actually, directly, and exclusively used by local water districts
and government-owned or controlled corporations; and (b) the local water districts and
government-owned and controlled corporations claiming exemption must be engaged in the
supply and distribution of water.

Such incentives, aside from financial incentives as provided by law, shall include providing a
climate of minimum government regulations and procedures and specific government
undertakings in support of the private sector. [Emphasis supplied.]

As applied to the present case, the government-owned or controlled corporation claiming

exemption must be the entity actually, directly, and exclusively using the real properties, and the
use must be devoted to the generation and transmission of electric power. Neither the NPC nor
Mirant satisfies both requirements. Although the plant’s machineries are devoted to the
generation of electric power, by the NPC’s own admission and as previously pointed out,
Mirant—a private corporation—uses and operates them. That Mirant operates the machineries
solely in compliance with the will of the NPC only underscores the fact that NPC does not actually,
directly, and exclusively use them. The machineries must be actually, directly, and exclusively
used by the government-owned or controlled corporation for the exemption under Section
234(c) to apply.

Nor will NPC find solace in its claim that it utilizes all the power plant’s generated electricity in
supplying the power needs of its customers. Based on the clear wording of the law, it is the

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machineries that are exempted from the payment of real property tax, not the water or electricity
that these machineries generate and distribute.

Even the NPC’s claim of beneficial ownership is unavailing. The test of exemption is the use, not
the ownership of the machineries devoted to generation and transmission of electric power. The
nature of the NPC’s ownership of these machineries only finds materiality in resolving the NPC’s
claim of legal interest in protesting the tax assessment on Mirant. National Power Corporation
vs. Province of Quezon, 593 SCRA 47, G.R. No. 171586 July 15, 2009

The taxing power of local government units shall not extend to the levy of taxes, fees, or
charges on duly registered cooperatives under the Cooperative Code. 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 exemption from real property taxes given to cooperatives applies regardless of whether or
not the land owned is leased. This exemption benefits the cooperative’s lessee. Under Section
133(n) of the Local Government Code, the taxing power of local government units shall not
extend to the levy of taxes, fees, or charges on duly registered cooperatives under the
Cooperative Code.61 Section 234(d) of the Local Government Code specifically provides for real
property tax exemption to cooperatives:

SECTION 234. Exemptions from Real Property Tax.—The following are exempted from
payment of the real property tax.

NGPI-NGEI, as the owner of the land being leased by respondent, falls within the purview of the
law. Section 234 of the Local Government Code 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.
Provincial Assessor of Agusan del Sur vs. Filipinas Palm Oil Plantation, Inc., 805 SCRA 112, G.R.
No. 183416 October 5, 2016

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