The Supreme Court ruled that PNOC-EDC, despite being a government-owned corporation, is liable for real property taxes on the Mt. Apo Geothermal Reservation Area (MAGRA) because it is the beneficial user of the property. This means that even if the government owns the land, if a private entity or a government corporation with no tax-exempt charter benefits from its use, it becomes subject to real property taxes. The decision clarifies the scope of tax exemptions for government properties when their use is transferred to taxable entities.

Power, Property, and Taxes: Who Pays When Public Land Generates Private Profit?

This case revolves around the taxability of the Mt. Apo Geothermal Reservation Area (MAGRA), a government-owned property utilized by the Philippine National Oil Company-Energy Development Corporation (PNOC-EDC). PNOC-EDC, a government-owned corporation without specific tax exemptions in its charter, entered into a service contract with the Department of Energy (DOE) to conduct geothermal operations within MAGRA. This included building and operating a 104-megawatt power plant that generates electricity using steam extracted from the area. The City of Kidapawan assessed real property taxes on MAGRA, leading PNOC-EDC to contest the assessment, arguing that as a government entity utilizing government land, it should be exempt.

The central legal question is whether PNOC-EDC’s use of MAGRA qualifies as a “beneficial use” that triggers tax liability under Section 234(a) of the Local Government Code (LGC). This provision states that real property owned by the Republic of the Philippines is exempt from real property tax, except when the beneficial use is granted to a taxable person. If PNOC-EDC is deemed the beneficial user, the property becomes taxable, impacting its operational costs and potentially affecting energy prices.

The Supreme Court, in its analysis, underscored the importance of interpreting tax exemptions strictly against the claimant and liberally in favor of the taxing authority. The Court then addressed whether the Local Government Code (LGC) withdrew the exemption under the service contract and if PNOC-EDC is liable to pay the real property taxes, whether the machineries, equipment, buildings and other infrastructures found in MAGRA may be levied. The Court examined the nature of PNOC-EDC’s use of MAGRA based on the service contract between the government and PNOC-EDC. Section 234(a) of the LGC is key to the Court’s analysis:

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;

The Court found that PNOC-EDC was indeed the beneficial user. It highlighted several factors demonstrating PNOC-EDC’s control and benefit from the property. PNOC-EDC exclusively conducts geothermal operations within MAGRA. It retains a profit in the amount of 40% of the net value of the amount realized from the sale of geothermal resources. It is even allowed to charge its operating expenses from the gross value of the sales. These operational and financial benefits indicated that PNOC-EDC’s role went beyond mere administration, making it the primary beneficiary of MAGRA’s resources.

Further cementing its conclusion, the Court emphasized the concept of “actual use,” which refers to the purpose for which the property is principally utilized by the person in possession. The Court also examined specific provisions in the service contract, noting that PNOC-EDC was required to surrender portions of MAGRA back to the government after certain periods, further demonstrating its control over the property during the contract’s term. This power to utilize and potentially relinquish portions of the land underscored PNOC-EDC’s position as the entity in actual control and use of MAGRA.

Building on this principle, the Court addressed PNOC-EDC’s argument that the LGC did not withdraw the tax exemption provided under the service contract. The Court emphasized that the power to grant tax exemptions lies with Congress and, to a certain extent, with local legislative bodies. Moreover, the Local Government Code specifically enumerates the entities exempt from real property taxation and PNOC-EDC is not one of them. The Court referenced Section 28(4), Article VI of the Constitution, highlighting that any law granting tax exemptions must be passed with the concurrence of a majority of all Members of Congress.

The Court then addressed the issue of whether PNOC-EDC’s machineries, equipment, buildings, and other infrastructures within MAGRA could be levied upon to satisfy the tax delinquency. It clarified that the warrant of levy specifically targeted MAGRA itself, not the improvements on it. The Court explained that while the land itself, being inalienable government property, could not be sold at public auction, the improvements were also exempt from levy because the warrant only covered the land.

However, the Court emphasized that the City of Kidapawan was not without recourse. It could pursue a civil action to collect the real property tax. This remedy acknowledges the city’s right to collect taxes while respecting the limitations on levying government-owned land. The Court further elaborated on the concept of personal liability for real property taxes.

Finally, the Court addressed PNOC-EDC’s claim that the real property tax assessment was not yet final and executory. The Court cited Systems Plus Computer College of Caloocan City v. Local Government of Caloocan City, emphasizing the doctrine of exhaustion of administrative remedies. It stressed that PNOC-EDC should have appealed the assessment to the Local Board of Assessment Appeals before seeking judicial intervention. By failing to exhaust these administrative remedies, PNOC-EDC’s challenge to the assessment was deemed premature.

FAQs

What was the key issue in this case?	The key issue was whether PNOC-EDC, a government-owned corporation, was the beneficial user of the Mt. Apo Geothermal Reservation Area (MAGRA) and therefore liable for real property taxes.
What is “beneficial use” in the context of real property tax?	“Beneficial use” refers to the actual use and enjoyment of a property, even if the user is not the legal owner. If a taxable entity has beneficial use of government-owned property, the property becomes subject to real property tax.
Why did the Supreme Court rule against PNOC-EDC?	The Court ruled against PNOC-EDC because it found that the corporation had exclusive control over the geothermal operations, retained a significant portion of the profits, and was responsible for operating expenses. These factors demonstrated that PNOC-EDC was the primary beneficiary of MAGRA.
What does the Local Government Code say about tax exemptions?	The Local Government Code (LGC) generally withdraws previous tax exemptions unless specifically provided for in the code. The LGC also states that properties owned by the government are exempt except when the beneficial use is granted to a taxable person.
Can the City of Kidapawan sell MAGRA to recover the unpaid taxes?	No, the City of Kidapawan cannot sell MAGRA because it is inalienable government property. However, the city can pursue a civil action to collect the unpaid real property taxes from PNOC-EDC.
What administrative steps should PNOC-EDC have taken?	PNOC-EDC should have appealed the real property tax assessment to the Local Board of Assessment Appeals within 60 days of receiving the notice of assessment before seeking judicial relief.
What is the implication of this ruling for other government-owned corporations?	This ruling clarifies that government-owned corporations without specific tax-exempt charters are liable for real property taxes on government-owned land they use for commercial purposes. This encourages these corporations to evaluate potential tax consequences in operations.
Can the machineries and equipment of PNOC-EDC in MAGRA be levied?	The court ruled that the machineries and equipment of PNOC-EDC cannot be levied because the warrant of levy only covered the delinquent land and not the said improvements.
What happens to existing tax exemptions not found in the LGC?	According to the Supreme Court, any exemption from payment of real property tax previously granted to, or presently enjoyed by, all persons, whether natural or juridical, including all government-owned or controlled corporations are hereby withdrawn upon the effectivity of the Code.

In conclusion, this case serves as a crucial reminder that tax exemptions are narrowly construed and that government-owned corporations are not automatically exempt from real property taxes. The focus is on who truly benefits from the use of the property. This decision reinforces the importance of exhausting administrative remedies before seeking judicial intervention in tax disputes.

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: REPUBLIC OF THE PHILIPPINES VS. CITY OF KIDAPAWAN, G.R. No. 166651, December 09, 2005