In a significant ruling, the Supreme Court addressed the complex interplay between tax exemptions granted to the Government Service Insurance System (GSIS) and the local government’s power to levy real property taxes. The Court clarified that while GSIS generally enjoys tax-exempt status, this exemption does not extend to properties leased to taxable entities. The Court held that the real property tax assessment issued by the City of Manila to GSIS are void, except that the real property tax assessment pertaining to the leased Katigbak property shall be valid if served on the Manila Hotel Corporation, as lessee which has actual and beneficial use thereof. Ultimately, the decision balances the need to protect GSIS’s financial stability with the principle that those who derive benefit from property should bear the corresponding tax burden.

Taxing Times: When a Government Agency Leases to a Private Company

The case of Government Service Insurance System vs. City Treasurer and City Assessor of the City of Manila (G.R. No. 186242) revolves around the City of Manila’s attempt to collect unpaid real property taxes from GSIS on two properties: the Katigbak property and the Concepcion-Arroceros property. GSIS argued that it was exempt from all taxes, including real property taxes, under its charter, Republic Act No. (RA) 8291. The City of Manila, however, contended that the Local Government Code (LGC) of 1991, or RA 7160, had withdrawn this exemption. The dispute reached the Supreme Court, which was tasked with determining the extent of GSIS’s tax exemption and its liability for real property taxes, especially on properties leased to taxable entities.

The legal framework at play in this case involves several key pieces of legislation. Commonwealth Act No. (CA) 186, GSIS’s first charter, initially provided limited exemptions. Subsequently, Presidential Decree No. (PD) 1146 expanded these exemptions, granting GSIS a full tax exemption. However, the enactment of RA 7160, or the LGC, introduced a general provision withdrawing tax exemption privileges, which led to a period where GSIS’s tax-exempt status was unclear. This status was later restored by RA 8291, the GSIS Act of 1997, which reinstated the agency’s full tax exemption. The Supreme Court’s analysis hinged on interpreting these laws and determining their impact on GSIS’s liability for real property taxes.

At the heart of the matter was Section 39 of RA 8291, which states:

SEC. 39. Exemption from Tax, Legal Process and Lien. – It is hereby declared to be the policy of the State that the actuarial solvency of the funds of the GSIS shall be preserved and maintained at all times and that contribution rates necessary to sustain the benefits under this Act shall be kept as low as possible in order not to burden the members of the GSIS and their employers. Taxes imposed on the GSIS tend to impair the actuarial solvency of its funds and increase the contribution rate necessary to sustain the benefits of this Act. Accordingly, notwithstanding, any laws to the contrary, the GSIS, its assets, revenues including all accruals thereto, and benefits paid, shall be exempt from all taxes, assessments, fees, charges or duties of all kinds. These exemptions shall continue unless expressly and specifically revoked and any assessment against the GSIS as of the approval of this Act are hereby considered paid. Consequently, all laws, ordinances, regulations, issuances, opinions or jurisprudence contrary to or in derogation of this provision are hereby deemed repealed, superseded and rendered ineffective and without legal force and effect.

The Court acknowledged that RA 7160 had indeed withdrawn GSIS’s tax exemption under PD 1146 from 1992 to 1996. However, RA 8291 effectively restored this exemption in 1997. The Court also noted the condoning proviso in Section 39, which considered as paid “any assessment against the GSIS as of the approval of this Act.” This provision played a crucial role in the Court’s decision, effectively wiping out any prior tax liabilities.

Moreover, the Court drew parallels with its earlier ruling in Manila International Airport Authority v. Court of Appeals, emphasizing that GSIS, like MIAA, is an instrumentality of the National Government. As such, it is not a government-owned and controlled corporation (GOCC) in the context of Section 193 of the LGC. The Court stated that the subject properties under GSIS’s name are likewise owned by the Republic and that “GSIS is but a mere trustee of the subject properties which have either been ceded to it by the Government or acquired for the enhancement of the system.” This classification as a government instrumentality further bolstered GSIS’s claim to tax exemption. The Court considered the legislative intent behind the tax-exempting provisions, emphasizing the need to isolate GSIS funds and properties from legal processes that could impair its solvency. This concern was consistently expressed across GSIS’s different charters.

Despite these considerations, the Court recognized an exception based on the “beneficial use” principle. Section 234(a) of the LGC states that real property owned by the Republic is exempt from real property tax “except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person.” The Court found that GSIS, by leasing the Katigbak property to Manila Hotel Corporation (MHC), a taxable entity, had transferred the beneficial use of the property. Therefore, the Katigbak property was subject to real property tax for the period from 1992 to 2002. The Court was keen to also point out Sec. 133(o) of the LGC, which prohibits LGUs from imposing taxes or fees of any kind on the national government, its agencies, and instrumentalities. In cases like this, the agency or instrumentality is not a taxable juridical person under Sec. 133(o) of the LGC; with the exception that GSIS contracted its beneficial use to MHC, which is a taxable person.

However, the Court clarified that the liability for the real property tax on the Katigbak property fell on MHC, as the lessee and the entity with actual and beneficial use of the property. This liability was further supported by a stipulation in the GSIS-MHC Contract of Lease, which obligated MHC to shoulder any taxes imposed on the leased property. Considering MHC was not impleaded in this case, the Court has allowed the City of Manila to serve a realty tax assessment to MHC and to pursue remedies in case of nonpayment, since the Katigbak property cannot be levied upon.

What was the key issue in this case?	The key issue was whether GSIS was exempt from real property taxes on its properties, particularly those leased to taxable entities, and whether these properties could be subject to levy for non-payment of taxes.
What is the “beneficial use” principle?	The “beneficial use” principle, as outlined in Section 234(a) of the LGC, states that real property owned by the Republic is exempt from real property tax unless its beneficial use has been granted to a taxable person. In such cases, the property becomes taxable.
Who is liable for the real property taxes on the Katigbak property?	Manila Hotel Corporation (MHC), as the lessee with actual and beneficial use of the Katigbak property, is liable for the real property taxes assessed on that property. This liability is based on both the “beneficial use” principle and a specific stipulation in the GSIS-MHC Contract of Lease.
Can the City of Manila levy on GSIS properties to collect unpaid taxes?	No, the Court held that GSIS properties are exempt from any attachment, garnishment, execution, levy, or other legal processes under Section 39 of RA 8291. This exemption aims to protect the solvency of GSIS funds.
What was the impact of RA 7160 (the LGC) on GSIS’s tax exemption?	RA 7160 temporarily withdrew GSIS’s tax exemption from 1992 to 1996. However, this exemption was restored in 1997 by RA 8291, which reenacted the full tax exemption clause.
How does the Court classify GSIS in terms of tax liability?	The Court classifies GSIS as an instrumentality of the National Government, not a government-owned and controlled corporation (GOCC). This classification supports its claim to tax exemption under the LGC.
What is the significance of Section 39 of RA 8291?	Section 39 of RA 8291 is crucial because it restores GSIS’s full tax exemption and includes a condoning proviso that considers as paid “any assessment against the GSIS as of the approval of this Act.”
What properties owned by GSIS are subject to tax?	Real properties of GSIS which were transferred for beneficial use, for a consideration or otherwise, to a taxable person, shall be subject to real property tax pursuant to Sec. 234 (a) of the Local Government Code.

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: GOVERNMENT SERVICE INSURANCE SYSTEM, VS. CITY TREASURER AND CITY ASSESSOR OF THE CITY OF MANILA, G.R. No. 186242, December 23, 2009