Republic vs Kidapawan G.R. No. 166651. December 9, 2005.

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Facts:
Pres. Marcos issued PD. 1442 which allowed the government to enter into service contracts for financial,
technical, management or other forms of assistance with qualified domestic and foreign entities, for the exploration,
utilization, etc. of the country's geothermal resources. On Jan 1992, Pres. Corazon C. Aquino issued Proclamation No.
853 which excluded certain portions of the land embraced in the Mt. Apo National Park and declared the same as
geothermal reservation under the administration of the PNOC, now referred to as the MAGRA.
The government through the now DOE, (Dept of Energy) entered into a service contract with PNOC-EDC, a GOCC
(under Corp. Code), to exclusively conduct geothermal operations within the MAGRA (Mar 1992). Thereafter PNOC-EDC
built a 104-megawatt power plant within the MAGRA which produces electricity through turbines using steam extracted
from the MAGRA as fuel.
The City Treasurer of Kidapawan, Cotabato notified PNOC-EDC of its tax delinquency after which, he issued a
warrant of levy on the 701-hectare MAGRA for failure to pay real property taxes, from 1993-2002, and sent a notice of
sale of delinquent real property and that it will be sold through public auction.
PNOC-EDC thus filed a petition for prohibition (writ of preliminary injunction and/or TRO) which sought to enjoin
the respondents from issuing assessments or notice of delinquency and from proceeding with the public auction of the
Geothermal Reservation Area.
Respondents were then ordered respondents to desist from proceeding with the public auction on the ground
that the same is part of the public domain and thus inalienable .
Not digestible part. Do not write
RTC:
 PNOC-EDC is not exempt from paying the real property taxes
 MAGRA is part of the Mt. Apo National Park which has not been reclassified as alienable
agricultural land and could not be sold at public auction.
 The improvements on the subject land, not being in the nature of public dominion, may be
validly levied and sold at public auction to satisfy the payment of realty tax
delinquencies.
PNOC Contention:
 under Section 234, paragraph (a) of the LGC, MAGRA, which is a real property owned by the
government, they can only be subjected to real property tax if its beneficial use is
transferred to a taxable person.
 Citing Sections 1.2, 6.1(d) and 6.3 of the service contract, and Section 1 of PD 1442,
argues that PNOC-EDC is not liable to pay the real property tax since the beneficial use of
MAGRA was retained by the government.
Respondent contention:
 assert that PNOC-EDC is a taxable entity because it is not a political subdivision or a
government owned or controlled corporation which is exempt from taxes under its charter.
 under the service contract, the PNOC-EDC retains absolute control of the operations and is
thus the beneficial user of the property.
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Issue:
Is PNOC exempt from real property taxation under Section 234(a) of the LGC?
Ruling: No, because it is PNOC who has the beneficial use of the property.
 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. xxx
The above provision exempts from real property taxation properties of the government, provided the beneficial
use of the property was not transferred to a taxable person. Conversely, if the beneficial use has been transferred to a
taxable entity, such as PNOC-EDC, then the real property owned by the government, which in this case is the MAGRA, is
subject to real property tax. At this point, it is well to note that in real estate taxation, the unpaid tax attaches to the
property and is chargeable against the taxable person who had actual or beneficial use and possession of it regardless
of whether or not he is the owner.
Issue 2:
Under the service contract, is PNOC the beneficial user of the MAGRA?
Ruling 2: Yes.
It is clear from the service contract [Sections 7.3 & 8.1] that the PNOC-EDC is the beneficial user of the MAGRA
and is thus liable to pay the real property tax assessments. PNOC-EDC exclusively conducts geothermal operations in
the area for commercial utilization. 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.
The provisions of the service contract also show that it is the PNOC-EDC which actually utilizes the MAGRA.
Actual use refers to the purpose for which the property is principally or predominantly utilized by the person in
possession thereof. In fact, under the provisions of the service contract, PNOC-EDC must surrender possession of 25% of
the MAGRA to the government after the 3rd year and another 25% on the 5th year, if the contract is extended.
Likewise, although it is the government which actually pays the income taxes, the contract nonetheless
specifically provided that the payment is for and in behalf of PNOC-EDC and is chargeable against the 60% share of the
government in the net profits derived by the PNOC-EDC arising from the geothermal operation. 'In reality, the PNOC-
EDC is the actual payee while the government is only its agent in the payment of the income taxes. In fact, the official
receipt is being issued in the name of PNOC-EDC.
Issue 3:
Did section 6.2 of their service contract with DOE grant them tax exemption?
Ruling 3: No.
The power to tax and to grant tax exemptions is vested in the Congress and, to a certain extent, in the local
legislative bodies. Under Section 28(4), Article VI of the Constitution, no law granting any tax exemption shall be passed
without the concurrence of a majority of all Members of Congress. Thus the exemption provided in the service contract
cannot be given effect because the DOE, representing the government in the execution of the contract, has no authority
to grant the same.
Issue 4:
Can PNOC’s machineries, equipment, buildings and other infrastructures found in MAGRA be levied and sold?
Ruling 4:
 No, its machineries, equipment, buildings and other infrastructures found in MAGRA cannot be levied upon and
sold at public auction to satisfy the alleged tax delinquency because the warrant of levy shows that MAGRA is the only
delinquent real property subject to tax. Respondents have two remedies for the collection of real property tax: (1) by
administrative action through levy on real property; and (2) by judicial action. Under Sections 257 and 258 of the LGC,
the basic real property tax constitutes as a lien on the property subject to the tax which may be levied upon through the
issuance of a warrant. The local government unit concerned may also enforce the collection of the basic real property
tax by civil action in any court of competent jurisdiction.
Respondents levied on a portion of the MAGRA to satisfy the tax delinquency of PNOC-EDC. However, the land
being levied is classified as inalienable. It is owned by the government and thus, cannot be sold at public auction.
Likewise, the machineries, equipment and other infrastructures in the MAGRA cannot be levied and sold at public
auction because it is not the property that is subject to the tax.

Notes:

PNOC-EDC is a government owned or controlled corporation conferred by law with corporate powers.
Under its charter, no tax exemptions were granted. Even if PNOC-EDC was awarded exemptions in its
charter, the same were withdrawn by the LGC. Thus, there is no need to deliberate on whether PNOC-
EDC is a taxable entity but on whether it is an entity exempt from paying real property tax.

In the case at bar, PNOC-EDC is the beneficial user, however, since respondents cannot avail of
the administrative remedy through levy, they can only enforce the collection of real property tax
through civil action.

[The real property tax assessment is final and executory]. If PNOC-EDC was not satisfied with the
assessment of its property, it should have appealed to the Local Board of Assessment Appeals
within 60 days from receipt of the written notice of assessment. Instead, it waited until the
issuance of a warrant of levy before it filed a petition for injunction in the regional trial
court, which was not in accordance with the remedies provided in the LGC.