The Supreme Court ruled that the National Power Corporation (Napocor) lacked the legal standing to protest real property tax assessments on machineries used by Mirant Pagbilao Corporation, despite a Build-Operate-Transfer (BOT) agreement between them. The Court clarified that only the owner or a person with direct, immediate, and actual legal interest in the property, not merely a contractual obligation to pay taxes, can contest such assessments. This decision reinforces the principle that tax liabilities and the right to challenge assessments are tied to actual ownership and beneficial use of the property.

Napocor’s Tax Battle: Can a Contractual Obligation Replace Ownership Rights?

The case revolves around a tax assessment of approximately P1.5 Billion on machineries located in Mirant’s power plant in Pagbilao, Quezon. Napocor, claiming entitlement to tax exemptions under Section 234 of the Local Government Code (LGC), protested the assessment. These exemptions included those for machineries used by government-owned corporations engaged in power generation and transmission, as well as those used for pollution control. Napocor also asserted entitlement to a lower assessment level and depreciation allowances under other provisions of the LGC.

However, the Supreme Court dismissed Napocor’s claims, primarily because Napocor lacked the requisite legal standing to protest the tax assessment. Under Section 226 of the LGC, only the owner or a person with legal interest in the property can appeal a real property tax assessment. The Court emphasized that this legal interest must be actual, material, direct, and immediate, not merely contingent or expectant. To reiterate the provision in the LGC:

SEC. 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.

Napocor argued that its future ownership after 25 years, its control over the power plant’s construction and operation, and its obligation to pay taxes under the BOT Agreement granted it sufficient legal interest. The Court rejected these arguments, stating that a future, contingent interest does not suffice. A full reading of the BOT agreement revealed that Mirant retained significant control over the power plant’s operations. Furthermore, the Court cited previous rulings establishing that contractual assumption of tax liability alone does not create tax liability without actual use and possession of the property.

The Court underscored that tax liability arises from law, enforceable by local government units, not from contractual agreements between private parties. The Province of Quezon, as a third party to the BOT Agreement, could not enforce payment from Napocor based solely on the contract. Thus, it could not be compelled to recognize Napocor’s protest without violating the principle of relativity of contracts. Even if Napocor had legal interest, it failed to prove actual, direct, and exclusive use of the machineries, a requirement for tax exemption under Section 234(c) of the LGC.

Napocor contended that it was the beneficial owner of the machineries, with Mirant retaining only a naked title as security. It likened the BOT Agreement to a financing agreement under Article 1503 of the Civil Code, where ownership is reserved to secure performance of obligations. The Court found Article 1503 inapplicable, as it pertains to ordinary sales contracts, not the unique nature of BOT agreements. In BOT agreements, private corporations/investors are the owners of the facility or machinery. Napocor’s BOT agreement with Mirant expressly stated that Mirant owns the power station and all equipment until the transfer date, and operates and maintains the power station to convert Napocor’s fuel into electricity.

The Supreme Court referenced a similar case, Napocor v. CBAA, where it defined the underlying concept behind a BOT agreement. It is the project proponent who constructs the project at its own cost and subsequently operates and manages it. The proponent secures the return on its investments from those using the project’s facilities through appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as negotiated. At the end of the fixed term agreed upon, the project proponent transfers the ownership of the facility to the government agency.

The underlying concept behind a BOT agreement is defined and described in the BOT law as follows:

Build-operate-and-transfer – A contractual arrangement whereby the project proponent undertakes the construction, including financing, of a given infrastructure facility, and the operation and maintenance thereof. The project proponent operates the facility over a fixed term during which it is allowed to charge facility users appropriate tolls, fees, rentals, and charges not exceeding those proposed in its bid or as negotiated and incorporated in the contract to enable the project proponent to recover its investment, and operating and maintenance expenses in the project. The project proponent transfers the facility to the government agency or local government unit concerned at the end of the fixed term which shall not exceed fifty (50) years x x x x.

The Court also noted that Napocor’s actions contradicted its claim of ownership. If Napocor truly believed it owned the machineries, it should have filed a sworn statement declaring the true value of the property and documentary evidence supporting its claim for tax exemption, as required by Sections 202 and 206 of the LGC. The assumption of tax liability did not confer legal title. The Court clarified that the phrase “person having legal interest in the property” in Section 226 of the LGC does not encompass an entity merely assuming another’s tax liability by contract.

The Court referenced multiple sections of the LGC that repeatedly used the phrase “person having legal interest in the property” to define an entity in whose name the property is listed, valued, and assessed. This entity may be summoned by the local assessor for information, may protest the tax assessment, and may be liable for or exempt from idle land tax. The Court emphasized that extending these privileges and responsibilities to an entity merely assuming tax liability would be inconsistent with the LGC’s intent. The local government unit is concerned only with the entity that has the legal ownership, not with contractual agreements between private parties.

Some authorities argue that a person whose pecuniary interests are affected by the tax assessment has legal interest, citing Cooley’s Law on Taxation. The Court dismissed this argument, stating that U.S. tax laws are not applicable. Our LGC requires legal interest in the property, not just pecuniary interest, before administrative or judicial remedies can be availed. The right to appeal a tax assessment is statutory, determined by the LGC, not foreign tax laws. Lastly, the Supreme Court held that payment under protest is a prerequisite for appealing tax assessments.

The LBAA dismissed Napocor’s petition for exemption due to non-compliance with Section 252 of the LGC, which mandates payment of the tax before any protest. Although the CBAA and CTA initially disagreed on this point, the Supreme Court clarified that payment under protest is indeed required when questioning the correctness of the assessment, including claims for tax exemption. The Court distinguished the present case from Ty v. Trampe and Olivarez v. Marquez. The case of Ty v. Trampe questioned the authority of the assessor to impose the assessment and the treasurer to collect the tax. These were attacks on the very validity of any increase. Moreover, the petitioner was raising a legal question that is properly cognizable by the trial court; no issues of fact were involved.

In Olivarez v. Marquez, the petitioner was seeking the annulment of his realty tax delinquency assessment. He failed to exhaust administrative remedies, particularly the requirement of payment under protest. The Court found that there was nothing in his petition that supported his claim regarding the assessor’s alleged lack of authority. What the petitioner raised were the correctness of the assessments, which is a question of fact that is not allowed in a petition for certiorari, prohibition, and mandamus.

The Supreme Court noted that a claim for tax exemption does not challenge the local assessor’s authority to assess real property tax. It may be inferred from Section 206 which states that real property not declared and proved as tax-exempt shall be included in the assessment roll, implying that the local assessor has the authority to assess the property for realty taxes, and any subsequent claim for exemption shall be allowed only when sufficient proof has been adduced supporting the claim. Since Napocor was simply questioning the correctness of the assessment, it should have first complied with Section 252, particularly the requirement of payment under protest.

The Supreme Court emphasized that Sections 252 and 226 provide successive administrative remedies to taxpayers questioning an assessment’s correctness. Filing directly with the LBAA under Section 226 without first paying the tax under protest as required by Section 252 was premature. The action referred to in Section 226 thus refers to the local assessor’s act of denying the protest filed pursuant to Section 252. Without the action of the local assessor, the appellate authority of the LBAA cannot be invoked.

FAQs

What was the key issue in this case?	The central issue was whether Napocor had sufficient legal interest in the taxed machineries to protest the real property tax assessment, considering its Build-Operate-Transfer (BOT) agreement with Mirant. The Court determined that Napocor’s interest was insufficient to confer standing to protest.
What does “legal interest” mean in the context of real property tax?	Legal interest refers to a direct, immediate, and actual interest in the property, equivalent to that of a legal owner who has legal title. This excludes contingent or expectant interests, such as future ownership rights under a BOT agreement.
Why was Napocor’s contractual obligation to pay taxes not enough to establish legal interest?	The Court clarified that contractual assumption of tax liability alone does not create legal interest. The obligation must be supplemented by actual use and possession of the property, which Napocor did not have.
What is a Build-Operate-Transfer (BOT) agreement?	A BOT agreement is a contractual arrangement where a private entity constructs, operates, and manages a project for a fixed term, then transfers ownership to the government. During the term, the private entity recovers its investment through user fees.
What is the significance of Section 226 of the Local Government Code?	Section 226 of the Local Government Code specifies who may appeal a real property tax assessment, limiting it to the owner or person having legal interest in the property. This provision was central to the Court’s decision regarding Napocor’s standing.
Is payment under protest required before appealing a tax assessment?	Yes, the Supreme Court affirmed that payment under protest is a prerequisite for appealing a tax assessment, as required by Section 252 of the Local Government Code. This requirement applies even when claiming tax exemption.
How does this ruling affect other government-owned or -controlled corporations?	This ruling clarifies that GOCCs must demonstrate actual, direct, and exclusive use of the property to claim tax exemptions. A mere contractual relationship or future interest is insufficient.
What should property owners do if they disagree with a tax assessment?	Property owners who disagree with a tax assessment must first pay the tax under protest and then file a written protest with the local treasurer within 30 days. They may then appeal to the Local Board of Assessment Appeals (LBAA) if the protest is denied.
What was the court’s basis for distinguishing Ty v. Trampe and Olivarez v. Marquez from this case?	Unlike Ty, Napocor was not challenging the assessor’s authority but the correctness of the assessment, which requires payment under protest. Olivarez similarly involved a failure to exhaust administrative remedies.

The Supreme Court’s decision in National Power Corporation vs. Province of Quezon provides essential clarification on who possesses the legal standing to contest real property tax assessments. It underscores that actual ownership and beneficial use are paramount, ensuring that only those with a direct and immediate stake in the property can challenge tax impositions. This ruling reinforces the integrity of local tax collection and the principle of relativity of contracts under Philippine law.

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: NATIONAL POWER CORPORATION VS. PROVINCE OF QUEZON AND MUNICIPALITY OF PAGBILAO, G.R. No. 171586, January 25, 2010