REPUBLIC OF THE PHILIPPINES (REPRESENTED BY THE DEPARTMENT OF ENERGY [DOE] AND THE PHILIPPINE NATIONAL OIL COMPANY-ENERGY DEVELOPMENT CORPORATION [PNOC-EDC]), PETITIONER, VS. CI…

Republic of the Philippines versus City Treasurer of Kidapawan

The Case

This is a petition for review on certiorari brought by the Republic of the Philippines, represented by the Department of Energy and the Philippine National Oil Company-Energy Development Corporation, against the City Treasurer of Kidapawan, Cotabato and its officials. The dispute concerns real property taxes assessed on the Mt. Apo Geothermal Reservation Area, a government reservation administered by the Philippine National Oil Company-Energy Development Corporation, which we shall call PNOC-EDC. The case matters because it fixes the rule on when government-owned land becomes taxable in the hands of its beneficial user, and because it draws the line between the land, which cannot be sold at public auction, and the improvements, which may be reached only through the correct remedy.

Procedural History

The City Treasurer of Kidapawan notified PNOC-EDC of its tax delinquency, issued a warrant of levy on the reservation area, and sent a notice of sale at public auction. PNOC-EDC filed a petition for prohibition with a prayer for a writ of preliminary injunction before the Regional Trial Court of Kidapawan City, Branch 23, which initially ordered the respondents to desist from the auction on the ground that the land is part of the public domain. The case was later heard by Branch 17, which rendered a decision holding that PNOC-EDC is not exempt from real property taxes, enjoining the sale of the reservation area, but allowing the sale of the existing improvements. PNOC-EDC's motion for reconsideration was denied, and the matter reached the Supreme Court by petition for review on certiorari.

Facts

To reduce dependence on imported energy, then President Ferdinand Marcos issued Presidential Decree Number 1442, allowing the government to enter into service contracts for the exploration and development of geothermal resources. Then President Corazon Aquino issued Proclamation Number 853, excluding portions of the Mt. Apo National Park and declaring them a geothermal reservation under the administration of the PNOC, referred to as the Mt. Apo Geothermal Reservation Area.

On March 24, 1992, the government, through the Office of Energy Affairs, now the Department of Energy, entered into a service contract with PNOC-EDC, a government owned or controlled corporation, to exclusively conduct geothermal operations within the reservation. PNOC-EDC built a 104-megawatt power plant producing electricity from steam extracted from the area.

The City Treasurer then notified PNOC-EDC of its delinquency for the tax period from 1993 to 2002, issued a warrant of levy on the 701-hectare reservation, and set the property for public auction. PNOC-EDC resisted, claiming it is not the beneficial user and that the service contract exempted it from taxes.

Issues

• Whether or not PNOC-EDC is the beneficial user of the Mt. Apo Geothermal Reservation Area.
• Whether or not the Local Government Code withdrew the exemption under the service contract.
• Whether or not the machineries, equipment, buildings and other infrastructures found in the reservation may be levied upon and sold at public auction.
• Whether or not the assessment has become final and executory for failure to exhaust administrative remedies.

Applicable Provisions

Section 234, paragraph (a) of the Local Government Code provides:

SECTION 234. Exemptions from Real Property Tax. – The following are exempted from payment of the real property tax: (a) 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;

This is the pivot of the case: government land is exempt, but the exemption is lost once beneficial use passes to a taxable person.

Section 257 of the Local Government Code provides:

SECTION 257. Local Government's Lien. – The basic real property tax and any other tax levied under this Title constitutes a lien on the property subject to tax, superior to all liens, charges or encumbrances in favor of any person, irrespective of the owner or possessor thereof, enforceable by administrative or judicial action, and may only be extinguished upon payment of the tax and the related interests and expenses.

This lien attaches only to the property subject to the tax, which is why the improvements cannot be levied upon.

Section 226 of the Local Government Code provides:

SECTION 226. Local Board of Assessment Appeals. – Any owner or person having legal interest in the property who is not satisfied with the action of the provincial, city or municipal assessor in the assessment of his property may, within sixty (60) days from the date of receipt of the written notice of assessment, appeal to the Board of Assessment Appeals of the province or city by filing a petition under oath in the form prescribed for the purpose, together with copies of the tax declarations and such affidavits or documents submitted in support of the appeal.

This is the administrative remedy PNOC-EDC skipped, which defeats its claim that the assessment is not yet final.

Ruling

On the first issue, the Court held that PNOC-EDC is the beneficial user. Under the service contract, it exclusively conducts geothermal operations for commercial utilization, retains forty percent of the net value, and charges its operating expenses against gross value. Actual use means the purpose for which the property is principally utilized by the person in possession. Since beneficial use passed to a taxable entity, the reservation is subject to real property tax.

On the second issue, the Court held that the exemption in the service contract cannot stand. The power to grant tax exemptions belongs to Congress, and the Department of Energy had no authority to grant one. The Court stressed that tax exemptions are construed strictissimi juris against the taxpayer, that is, strictly against the one claiming the exemption and liberally in favor of the taxing authority.

On the third issue, the Court held that the machineries, equipment and buildings cannot be levied upon and sold, because the warrant of levy identified only the reservation area as the delinquent property. Since the land is inalienable and cannot be sold, the respondents may collect only through a civil action.

On the fourth issue, the Court held that PNOC-EDC failed to exhaust administrative remedies. It should have appealed the assessment to the Local Board of Assessment Appeals within sixty days from notice, instead of waiting for the warrant of levy before filing for injunction.

Doctrine

Government-owned real property is exempt from real property tax, but the exemption is lost when its beneficial use is granted, for consideration or otherwise, to a taxable person. The unpaid tax attaches to the property and is chargeable against the taxable person who has actual or beneficial use, regardless of ownership. A tax exemption cannot be created by a service contract, for only Congress may grant exemptions, and exemptions are construed strictly against the claimant. The local government may collect delinquent real property tax by levy on the property subject to the tax or by civil action, but it may not levy on improvements that are not themselves the property assessed. Finally, a taxpayer dissatisfied with an assessment must first appeal to the Local Board of Assessment Appeals within sixty days.

Disposition

The petition was partially granted: the ruling declaring PNOC-EDC liable for real property tax was affirmed, but the respondents were directed to refrain from levying on its buildings, infrastructures and machineries.

Remember This

Memorize the line that government land is taxable once beneficial use is granted to a taxable person, and that only Congress can grant an exemption. Examiners use this case to test the beneficial user rule under Section 234, the strict construction of tax exemptions, and the exhaustion of administrative remedies before the Local Board of Assessment Appeals.