Navigating Real Property Tax Exemptions: The Crucial ‘Actual, Direct, and Exclusive Use’ Requirement

NATIONAL POWER CORPORATION, PETITIONER, VS. PROVINCIAL GOVERNMENT OF BULACAN, GLORIA P. STA. MARIA, MUNICIPAL ASSESSOR OF NORZAGARAY, AND THE MUNICIPAL GOVERNMENT OF NORZAGARAY, BULACAN, RESPONDENTS. G.R. No. 207140, January 30, 2023

Imagine a large power plant, essential for providing electricity to countless homes and businesses. Should all its components be exempt from real property tax (RPT)? The answer, according to Philippine jurisprudence, hinges on a critical factor: the ‘actual, direct, and exclusive use’ of the property. This principle was at the heart of a recent Supreme Court decision involving the National Power Corporation (NPC), offering valuable insights into how tax exemptions are interpreted and applied.

The case revolves around NPC’s claim for RPT exemption on properties within its Angat Hydro-Electric Power Plant. The Municipality of Norzagaray, Bulacan, assessed RPT on various structures, leading NPC to contest the assessment, arguing that these properties were directly used in power generation and transmission. The Supreme Court’s decision clarifies the stringent requirements for claiming such exemptions, emphasizing the necessity of proving ‘actual, direct, and exclusive use’ for the claimed purpose. This case serves as a crucial guide for GOCCs and other entities seeking RPT exemptions.

Understanding the Legal Framework for Real Property Tax Exemptions

The Local Government Code (LGC) governs real property taxation in the Philippines. Section 234 outlines exemptions from RPT, including those for machineries and equipment ‘actually, directly, and exclusively used’ by government-owned or -controlled corporations (GOCCs) engaged in water supply or power generation/transmission. This provision aims to support essential public services by reducing the tax burden on entities directly involved in their delivery.

However, the interpretation of ‘actually, directly, and exclusively used’ is critical. The Supreme Court has consistently held that the exemption applies only when the property is solely dedicated to the exempting purpose. If a property serves multiple purposes, even if one of them is tax-exempt, the exemption is generally denied. This strict interpretation ensures that tax exemptions are narrowly construed and applied only to properties that are unequivocally dedicated to the public benefit.

Section 234 (c) of the LGC states: “All machineries and equipment that are actually, directly and exclusively used by local water districts and government-owned or -controlled corporations engaged in the supply and distribution of water and/or generation and transmission of electric power” are exempted from RPT.

For example, consider a hospital that also operates a commercial pharmacy within its premises. While the hospital itself may be eligible for RPT exemptions, the pharmacy, being a commercial enterprise, would likely be subject to taxation because it is not exclusively used for the exempt purpose of healthcare.

NPC vs. Bulacan: A Detailed Case Analysis

The dispute began when the Municipal Assessor of Norzagaray issued RPT assessments on NPC’s properties, including the main dam, spillway, tunnels, and other structures. NPC contested these assessments, claiming exemption under Section 234(c) of the LGC. The case journeyed through various levels of administrative and judicial review:

• Local Board of Assessment Appeals (LBAA): Ruled against NPC, stating that payment under protest was a prerequisite for appeal and that NPC failed to prove the exclusive use of the properties.
• Central Board of Assessment Appeals (CBAA): Affirmed the LBAA’s decision, finding that the properties served multiple purposes beyond power generation.
• Court of Tax Appeals (CTA): Upheld the CBAA’s ruling, emphasizing NPC’s failure to comply with the ‘payment under protest’ requirement.
• Supreme Court: Affirmed the CTA’s decision, reiterating the mandatory nature of the ‘payment under protest’ rule and clarifying the interpretation of ‘actual, direct, and exclusive use.’

The Supreme Court quoted the CBAA’s findings, stating that the structures ‘are used for retention, conservation, diversion, utilization, as well as management and control of water in different aspects, and used for irrigation, flood control and water supply system for the Greater Manila Area.’

The Court also emphasized that ‘a claim for exemption from real property taxes does not actually question the assessor’s authority to assess and collect such taxes, but pertains to the reasonableness or correctness of the assessment by the local assessor.’

Practical Implications and Key Lessons

This case underscores the importance of meticulously documenting and demonstrating the ‘actual, direct, and exclusive use’ of properties for claiming RPT exemptions. GOCCs and other entities should maintain detailed records of how their properties are used, ensuring that the evidence supports a claim of exclusive dedication to the exempting purpose.

Furthermore, the case reinforces the ‘payment under protest’ rule as a mandatory procedural requirement. Taxpayers contesting RPT assessments must first pay the tax under protest before pursuing administrative or judicial remedies. Failure to comply with this rule can result in the dismissal of the appeal, regardless of the merits of the substantive claim.

Key Lessons:

• Document Exclusive Use: Maintain thorough records demonstrating that the properties are used solely for the exempt purpose.
• Pay Under Protest: Always pay the assessed tax under protest before initiating any appeal.
• Seek Expert Advice: Consult with legal professionals specializing in real property taxation to ensure compliance with all requirements.

Hypothetical Example: A renewable energy company owns a solar farm. To claim RPT exemption, it must demonstrate that all components of the farm, including solar panels, inverters, and transmission lines, are exclusively used for generating and transmitting electricity. If any portion of the property is used for commercial purposes unrelated to power generation, the exemption may be denied.

Frequently Asked Questions (FAQs)

Q: What does ‘actual, direct, and exclusive use’ mean in the context of RPT exemptions?

A: It means the property must be solely and unequivocally dedicated to the exempting purpose, with no other significant use.

Q: What is the ‘payment under protest’ rule?

A: It requires taxpayers contesting RPT assessments to first pay the tax under protest before pursuing any appeal.

Q: What happens if I don’t pay under protest?

A: Your appeal may be dismissed for failure to comply with a mandatory procedural requirement.

Q: How can I prove ‘actual, direct, and exclusive use’?

A: Maintain detailed records, including operational logs, financial statements, and other documents demonstrating the exclusive use of the property.

Q: Does this ruling apply to all types of RPT exemptions?

A: While the specific facts involve GOCCs, the principle of ‘actual, direct, and exclusive use’ applies broadly to various RPT exemptions.

ASG Law specializes in real estate law and taxation. Contact us or email hello@asglawpartners.com to schedule a consultation.