Tax Articles

RPT Exemption

By Atty. Rodel C. Unciano

Another good source of revenue among local government units is the real property tax imposed on lands, buildings, machineries and other improvements located within the territorial jurisdiction of an LGU. Under the Local Government Code of 1991 though, there are real properties that are exempt from the imposition of RPT, among which are those real properties owned by duly registered cooperatives, machineries used for pollution control and environmental protection, properties actually, directly, and exclusively used for religious, charitable, or educational purposes, and those properties owned by the government and government instrumentalities, pursuant to Sections 205 and 234 of the LGC.

In relation to properties owned by government instrumentalities, Sections 205(d) and 234(a) of the LGC provides for the removal of the RPT exemption when beneficial use of a real property owned by a government instrumentality is granted to a taxable person. Stated differently, when beneficial use of a real property owned by a government instrumentality is granted to a taxable person, then the taxable person is not exempted from paying real property tax on such property. Thus, if the owner of the real property is a tax-exempt entity, there is a need to determine the tax status of the possessor or of the beneficial user of the property to ascertain further whether the property is exempt from t ax. This principle is sometimes referred to as the beneficial use doctrine.

In one case (GR 214044), a real property subject of a controversy was a parcel of land owned by the University of the Philippines, a government instrumentality established by law for educational purposes. In this case, the subject land was leased out to one of the country’s premier land developers, a taxable entity, for the purpose of developing a prestigious and dynamic science and technology park, where research and technology-based collaborative projects between technology and the academe thrive.

The Court ruled that the development of the land is clearly for an educational purpose or, at the very least, in support of an educational purpose. According to the Court, considering that the subject land and the revenue derived from the lease are used by UP for educational purposes and in support for its educational purposes, UP should not be assessed, and should not be made liable for RPT on the land. This is pursuant to the UP’s charter which provides that “all revenues and assets of the University of the Philippines used for educational purposes or in support thereof shall be exempt from all taxes and duties.”

Will this exemption of UP extend to the lessee, which is a taxable entity? The Court did not categorically answer this in the affirmative, but it would seem that the Court is inclined to rule that the exemption applies. According to the Court, following UP’s tax exemption under its charter, there is no longer any need to determine the tax status of the possessor or of the beneficial user to further ascertain whether UP’s revenue or asset is exempt from tax.

The Court ruled that the enactment and passage of the UP’s charter in 2008 superseded Sections 205(d) and 234(a) of the Local Government Code. Before the passage of the UP’s charter, there was a need to determine who had beneficial use of UP’s property before the property may be subjected to real property tax. After the passage of its charter, there is a need to determine whether UP’s property is used for educational purposes before the property may be subjected to real property tax.

Ergo, even if the beneficial user of the property is a taxable entity if the property is used for educational purposes, the same shall be exempt from real property tax, pursuant to the UP’s charter. The beneficial use doctrine does not apply in all cases.