The Supreme Court has clarified that the registered owner of a real property is primarily liable for real property taxes (RPT), even if another party has actual possession or beneficial use of the property. This liability exists unless the owner is tax-exempt or the tax liability is explicitly imposed on the beneficial use of the property. This decision underscores the importance of property ownership in Philippine tax law and clarifies the responsibilities of property owners regarding tax obligations.

Who Pays When Possession Differs from Ownership?

The case of Herarc Realty Corporation vs. The Provincial Treasurer of Batangas revolves around a dispute over unpaid real property taxes. Herarc Realty Corporation acquired several parcels of land through an execution sale. However, from 2006 to August 2009, these properties were in the actual possession of Dr. Rafael A. Manalo, Grace Oliva, and Freida Rivera Yap, assignees in an insolvency proceeding against the previous owners. When the Provincial Treasurer of Batangas demanded P8,093,256.89 from Herarc for unpaid RPT during this period, Herarc paid under protest and filed a petition arguing that the tax should be charged to those who had actual possession of the property at the time.

The central legal question was whether the registered owner (Herarc) or the entity in actual possession (the assignees) should be liable for the real property taxes during the period of possession by the latter. Herarc relied on previous Supreme Court rulings stating that unpaid tax is chargeable against the taxable person who had actual or beneficial use and possession of the property. However, the Regional Trial Court (RTC) ruled against Herarc, holding that as the registered owner and a non-tax-exempt entity, Herarc was liable for the taxes.

The Supreme Court affirmed the RTC’s decision, but clarified the proper procedure for appealing tax cases. The Court noted that Herarc should have appealed the RTC decision to the Court of Tax Appeals (CTA) before elevating it to the Supreme Court. This procedural lapse was significant because failure to appeal in the correct manner and within the prescribed period renders the assessment final and executory.

Even addressing the substantive merits of the case, the Supreme Court upheld the principle that in real estate taxation, the unpaid tax attaches to the property, and the personal liability generally falls on the owner at the time the tax accrues. The Court emphasized that this is a direct consequence of ownership, distinguishing it from cases where the tax liability is explicitly tied to the beneficial use of the property.

The decision differentiates between the general rule of owner liability and exceptions where beneficial use dictates liability. According to the Local Government Code (LGC), real properties are generally subject to RPT unless specifically exempted. Section 234 of the LGC provides exemptions, such as properties owned by the Republic of the Philippines or charitable institutions, but these exemptions cease if the beneficial use is granted to a taxable person.

The Court referenced Section 133(o) of the LGC, which states that local government units cannot levy taxes on the national government, its agencies, and instrumentalities. It also pointed out that if a tax-exempt entity allows a taxable person to have beneficial use of its property, the tax liability shifts to the beneficial user. The Supreme Court clarified that its earlier rulings, such as in Testate Estate of Concordia T. Lim v. City of Manila, should be understood in this context, where the taxpayer assessed was neither the registered owner nor the possessor when the tax became due.

In this case, Herarc, as the registered owner and a non-tax-exempt entity, was deemed personally liable for the RPT. The fact that another party had possession of the property during the covered period did not absolve Herarc of its tax obligations. This ruling reinforces the principle that ownership carries inherent responsibilities, including the payment of real property taxes.

The Supreme Court cited several supporting cases to underscore the principle that the tax liability rests primarily with the owner. As stated in National Power Corp. v. Province of Quezon, et al., and Republic of the Philippines v. City of Kidapawan, the personal liability for tax delinquency generally falls on the owner of the real property at the time the tax accrues, and this is a necessary consequence that proceeds from the fact of ownership.

As the RTC correctly opined, in real estate taxation, the unpaid tax attaches to the property. The personal liability for the tax delinquency is generally on whoever is the owner of the real property at the time the tax accrues. This is a necessary consequence that proceeds from the fact of ownership.

The High Court also clarified that the concept of “beneficial use” comes into play when determining tax liability. In cases where the tax liability is imposed on the beneficial use of the real property, such as properties owned by the government but leased to private entities, the personal liability falls on the person who has such beneficial use at the time the tax accrues. Beneficial use, in this context, means the person or entity has the use and possession of the property. Actual use refers to the purpose for which the property is principally or predominantly utilized by the person in possession thereof. In this case, it was found that there was no circumstance that was applicable, making the registered owner liable for the tax

FAQs

What was the key issue in this case?	The key issue was determining who is liable for real property taxes when the registered owner is different from the entity in actual possession of the property. The court had to decide if the owner or the possessor should be responsible for the tax payments.
Who is generally liable for real property taxes?	Generally, the registered owner of the real property at the time the tax accrues is personally liable for the real property taxes. This is because the tax liability is directly linked to property ownership.
When does beneficial use determine tax liability?	Beneficial use determines tax liability when the property is tax-exempt but is used by a taxable entity. In such cases, the entity with beneficial use, rather than the owner, is responsible for the real property taxes.
What is the significance of Section 234 of the LGC?	Section 234 of the Local Government Code lists properties exempt from real property tax, such as properties owned by the Republic of the Philippines. However, this exemption is lifted if the beneficial use of the property is granted to a taxable person.
What was the procedural error made by Herarc?	Herarc directly appealed the RTC decision to the Supreme Court instead of first appealing to the Court of Tax Appeals (CTA). This procedural lapse was a critical error because the CTA has exclusive appellate jurisdiction over local tax cases.
What happens if a taxpayer fails to appeal a tax assessment properly?	If a taxpayer fails to appeal a tax assessment in due course, the local government’s right to collect the taxes becomes absolute. The assessment becomes final, executory, and demandable, preventing the taxpayer from challenging its legality.
What is the definition of beneficial use in this context?	In the context of real property tax, beneficial use means that a person or entity has the use and possession of the property. This is a crucial factor in determining tax liability when the property is otherwise exempt.
Are there exceptions to the rule that the owner pays the RPT?	Yes, there are exceptions. Properties of the government are exempt unless they are used by private entities for a consideration. In that case, the liability shifts to the taxable beneficial user.

This case clarifies the importance of understanding the nuances of real property tax liability in the Philippines. While ownership generally dictates responsibility for RPT payments, exceptions exist, particularly when beneficial use is granted to a taxable entity. It is equally important to adhere to procedural requirements, such as appealing to the correct court within the prescribed period.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: HERARC CORPORATION VS. THE PROVINCIAL TREASURER OF BATANGAS, ET AL., G.R. No. 210736, September 05, 2018