July 18, 2012
Ponente: Mendoza, J.
SUMMARY:
The Philippine Reclamation Authority (PRA)'s properties were levied by the City Treasurer of Paranaque on account of PRA's delinquency in the payment of real property taxes on its reclaimed lands, some of which were located in Paranaque. PRA's petition for a TRO was dismissed by the RTC, so the levied properties were sold at a public auction. The SC held that the real estate tax assessments, including the final notices of real estate tax delinquencies, issued by the City of Parañaque on the subject reclaimed properties; the assailed auction sale; and the Certificates of Sale subsequently issued by the Parañaque City Treasurer in favor of the City of Parañaque, were all void. The SC ruled that the PRA is not a GOCC subject to real property taxes but is instead an instrumentality of the government vested with corporate powers and performing essential public services. PRA is not a GOCC because:
(a) it is neither a stock nor a non-stock corporation; and
(b) it fails to pass the test of economic viability under Sec. 16, Art. XII of the 1987 Constitution.
As an instrumentality of the national government, it cannot therefore be taxed by the City of Paranaque. This is in keeping with Sec. 234 of the LGC, which provides that real property owned by the Republic is exempt from real property tax unless the beneficial use thereof has been granted to a taxable person.
Furthermore, the SC held that the reclaimed lands managed by the PRA are of public dominion and are reserved for public use, and whose ownership remains with the State. Properties of public dominion are not subject to execution or foreclosure sale. Consequently, the certificates of sale on PRA's properties are void.
DOCTRINE:
To be a GOCC, an agency or instrumentality must be a stock or non-stock corporation. Sec. 16, Art. XII of the 1987 Constitution: For Congress to create a GOCC, two conditions must concur: 1) the GOCC must be established for the common good; and 2) the GOCC must meet the test of economic viability. The test of economic viability does not apply to government entities vested with corporate powers and performing essential public services. Real property owned by the Republic is exempt from real property tax unless the beneficial use thereof has been granted to a taxable person. Properties of public dominion are not subject to execution or foreclosure sale.
FACTS:
History of the Philippine Reclamation Authority (PRA)
1977 - The Public Estates Authority (PEA) was a government corporation created by virtue of P.D. No. 1084 to provide a coordinated, economical and efficient reclamation of lands, and the administration and operation of lands belonging to, managed and/or operated by, the government with the object of maximizing their utilization and hastening their development consistent with public interest.
1979 - President Marcos issued E.O. No. 525 designating PEA as the agency primarily responsible for integrating, directing and coordinating all reclamation projects for and on behalf of the National Government.
2004 - President Gloria Macapagal-Arroyo issued E.O. No. 380 transforming PEA into PRA, which shall perform all the powers and functions of the PEA relating to reclamation activities.
Present controversy
By virtue of its mandate, the PRA reclaimed several portions of the foreshore and offshore areas of Manila Bay, including those located in Parañaque City, and was issued Original Certificates of Title and Transfer Certificates of Title over the reclaimed lands.
In 2003, Parañaque City Treasurer Liberato M. Carabeo issued Warrants of Levy on PRA’s reclaimed properties (Central Business Park and Barangay San Dionisio) located in Parañaque City based on the assessment for delinquent real property taxes made by then Parañaque City Assessor Soledad Medina Cue for tax years 2001 and 2002.
The RTC denied PRA's petition for the issuance of a TRO.
PRA sent a letter to Carabeo requesting the latter not to proceed with the public auction of the subject reclaimed properties. In response, Carabeo sent a letter stating that the public auction could not be deferred because the RTC had already denied PRA’s TRO application.
Subsequently, the RTC denied PRA’s prayer for the issuance of a writ of preliminary injunction for being moot and academic considering that the auction sale of the subject properties on April 7, 2003 had already been consummated.
In 2009, after an exchange of several pleadings and the failure of both parties to arrive at a compromise agreement, PRA filed a Motion for Leave to File and Admit Attached Supplemental Petition which sought to declare as null and void the assessment for real property taxes, the levy based on the said assessment, the public auction sale conducted on April 7, 2003, and the Certificates of Sale issued pursuant to the auction sale.
RTC: Dismissed PRA's petition. PRA could not be exempted from payment of real property taxes because it was a GOCC under Section 3 of P.D. No. 1084. It was organized as a stock corporation because it had an authorized capital stock divided into no par value shares. In fact, PRA admitted its corporate personality and that said properties were registered in its name as shown by the certificates of title. Therefore, as a GOCC, local tax exemption is withdrawn by virtue of Section 193 of the LGC, which was the prevailing law in 2001 and 2002 with respect to real property taxation.
Hence, the instant petition.
RULING:
Petition granted. RTC ruling reversed. All reclaimed properties owned by the PRA are hereby declared EXEMPT from real estate taxes. All real estate tax assessments, including the final notices of real estate tax delinquencies, issued by the City of Parañaque on the subject reclaimed properties; the assailed auction sale, dated April 7, 2003; and the Certificates of Sale subsequently issued by the Parañaque City Treasurer in favor of the City of Parañaque, are all declared VOID.
Whether PRA is a GOCC subject to payment of real property taxes. – NO.
[CITY OF PARANAQUE]
PRA is a GOCC because since its creation, it has consistently represented itself to be a GOCC. PRA’s very own charter (P.D. No. 1084) declared it to be a GOCC and that it has entered into several thousands of contracts where it represented itself to be a GOCC. In fact, PRA admitted in its original and amended petitions and pre-trial brief filed with the RTC of Parañaque City that it was a GOCC.
PRA is a stock corporation with an authorized capital stock divided into 3 million no par value shares, out of which 2 million shares have been subscribed and fully paid up. Section 193 of the LGC of 1991 has withdrawn tax exemption privileges granted to or presently enjoyed by all persons, whether natural or juridical, including GOCCs.
Since PRA is a GOCC, it is not exempt from the payment of real property tax.
[PRA]
It is not a GOCC under Section 2(13) of the Introductory Provisions of the Administrative Code. Neither is it a GOCC under Section 16, Article XII of the 1987 Constitution because it is not required to meet the test of economic viability.
PRA is a government instrumentality vested with corporate powers and performing an essential public service pursuant to Section 2(10) of the Introductory Provisions of the Administrative Code.
Although it has a capital stock divided into shares, it is not authorized to distribute dividends and allotment of surplus and profits to its stockholders. Therefore, it may not be classified as a stock corporation because it lacks the second requisite of a stock corporation which is the distribution of dividends and allotment of surplus and profits to the stockholders.
Neither may it be classified as a non-stock corporation because it has no members and it is not organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like chambers as provided in Section 88 of the Corporation Code.
It was not created to compete in the market place as there was no competing reclamation company operated by the private sector.
As an incorporated instrumentality of the National Government, it is exempt from payment of real property tax except when the beneficial use of the real property is granted to a taxable person. PRA claims that based on Section 133(o) of the LGC, local governments cannot tax the national government which delegate to local governments the power to tax.
While PRA is vested with corporate powers under P.D. No. 1084, such circumstance does not make it a corporation but merely an incorporated instrumentality and that the mere fact that an incorporated instrumentality of the National Government holds title to real property does not make said instrumentality a GOCC.reclaimed lands are part of the public domain, owned by the State, thus, exempt from the payment of real estate taxes.
Reclaimed lands retain their inherent potential as areas for public use or public service. While the subject reclaimed lands are still in its hands, these lands remain public lands and form part of the public domain. Hence, the assessment of real property taxes made on said lands, as well as the levy thereon, and the public sale thereof on April 7, 2003, including the issuance of the certificates of sale in favor of the respondent Parañaque City, are invalid and of no force and effect.
[SC]
PRA is not a GOCC but a mere government instrumentality.
GOCC v. Instumentality
Section 2(13) of the Introductory Provisions of the Administrative Code of 1987 defines a GOCC as follows:
SEC. 2. General Terms Defined. – x x x x
(13) Government-owned or controlled corporation refers to any agency organized as a stock or non-stock corporation, vested with functions relating to public needs whether governmental or proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly, or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of its capital stock: x x x.
Section 2(10) of the Introductory Provisions of the Administrative Code defines a government "instrumentality" as follows:
SEC. 2. General Terms Defined. –– x x x x
(10) Instrumentality refers to any agency of the National Government, not integrated within the department framework,
vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. x x x
From the above definitions, it is clear that a GOCC must be "organized as a stock or non-stock corporation" while an instrumentality is vested by law with corporate powers. Likewise, when the law makes a government instrumentality operationally autonomous, the instrumentality remains part of the National Government machinery although not integrated with the department framework.
PRA is neither a stock nor non-stock corporation
When the law vests in a government instrumentality corporate powers, the instrumentality does not necessarily become a corporation. Unless the government instrumentality is organized as a stock or non-stock corporation, it remains a government instrumentality exercising not only governmental but also corporate powers.
Many government instrumentalities are vested with corporate powers but they do not become stock or non-stock corporations, which is a necessary condition before an agency or instrumentality is deemed a GOCC. Examples are the Mactan International Airport Authority, the Philippine Ports Authority, the University of the Philippines, and Bangko Sentral ng Pilipinas. All these government instrumentalities exercise corporate powers but they are not organized as stock or non-stock corporations as required by Section 2(13) of the Introductory Provisions of the Administrative Code. These government instrumentalities are sometimes loosely called government corporate entities. They are not, however, GOCCs in the strict sense as understood under the Administrative Code, which is the governing law defining the legal relationship and status of government entities.
Section 3 of the Corporation Code defines a stock corporation as one whose capital stock is divided into shares and x x x authorized to distribute to the holders of such shares dividends x x x Section 87 thereof defines a non-stock corporation as one where no part of its income is distributable as dividends to its members, trustees or officers; Further, Section 88 provides that non-stock corporations are organized for charitable, religious, educational, professional, cultural, recreational, fraternal, literary, scientific, social, civil service, or similar purposes, like trade, industry, agriculture and like chambers.
Two requisites must concur before one may be classified as a stock corporation, namely: (1) that it has capital stock divided into shares; and (2) that it is authorized to distribute dividends and allotments of surplus and profits to its stockholders. If only one requisite is present, it cannot be properly classified as a stock corporation.
As for non-stock corporations, they must have members and must not distribute any part of their income to said members.
In the instant case, PRA cannot be considered as a stock corporation because although it has a capital stock divided into no par value shares as provided in Section 74 of P.D. No. 1084, it is not authorized to distribute dividends, surplus allotments or profits to stockholders. There is no provision whatsoever in P.D. No. 1084 or in any of the subsequent executive issuances pertaining to PRA, particularly, E.O. No. 525, E.O. No. 654 and EO No. 798 that authorizes PRA to distribute dividends, surplus allotments or profits to its stockholders.
PRA cannot be considered a non-stock corporation either because it does not have members. A non-stock corporation must have members. Moreover, it was not organized for any of the purposes mentioned in Section 88 of the Corporation Code. Specifically, it was created to manage all government reclamation projects.
PRA is not a GOCC as per the 1987 Constitution
GOCCs created through special charters are those that meet the two conditions prescribed in Section 16, Article XII of the 1987 Constitution, which provides as follows:
Section 16. The Congress shall not, except by general law, provide for the formation, organization, or regulation of private corporations. Government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.
The fundamental provision above authorizes Congress to create GOCCs through special charters on two conditions: 1) the GOCC must be established for the common good; and 2) the GOCC must meet the test of economic viability.
Congress has plenary authority to create government instrumentalities vested with corporate powers provided these instrumentalities perform essential government functions or public services. However, when the legislature creates through special charters corporations that perform economic or commercial activities, such entities — known as "government-owned or controlled corporations" — must meet the test of economic viability because they compete in the market place.
In this case, PRA may have passed the first condition of common good but failed the second one - economic viability. Undoubtedly, the purpose behind the creation of PRA was not for economic or commercial activities. Neither was it created to compete in the market place considering that there were no other competing reclamation companies being operated by the private sector. As mentioned earlier, PRA was created essentially to perform a public service considering that it was
primarily responsible for a coordinated, economical and efficient reclamation, administration and operation of lands belonging to the government with the object of maximizing their utilization and hastening their development consistent with the public interest.
In contrast, government instrumentalities vested with corporate powers and performing governmental or public functions need not meet the test of economic viability. These instrumentalities perform essential public services for the common
good, services that every modern State must provide its citizens. These instrumentalities need not be economically viable since the government may even subsidize their entire operations. These instrumentalities, such as the PRA, are not
the government-owned or controlled corporations referred to in Section 16, Article XII of the 1987 Constitution.
Purpose of the economic viability test
Commissioner Blas F. Ople, proponent of the test of economic viability, explained to the Constitutional Commission the purpose of this test, as follows:
MR. OPLE: x x x when the government creates a corporation, there is a sense in which this corporation becomes exempt from the test of economic performance. x x x If a government corporation loses, then it makes its claim upon the taxpayers money through new equity infusions from the government and what is always invoked is the common good. x x x this is all taxpayers money which could have been relocated to agrarian reform, to social services like health and education, to augment the salaries of grossly underpaid public employees. And yet this is all going down the drain. Therefore, when we insert the phrase ECONOMIC VIABILITY together with the common good this becomes a restraint on future enthusiasts for state capitalism to excuse themselves from the responsibility of meeting the market test so that they become viable.
Father Joaquin G. Bernas, a leading member of the Constitutional Commission, explains in his textbook The 1987 Constitution of the Republic of the Philippines: A Commentary:
The second sentence was added by the 1986 Constitutional Commission. The significant addition, however, is the phrase in the interest of the common good and subject to the test of economic viability. The addition includes the ideas that they must show capacity to function efficiently in business and that they should not go into activities which the private sector can do better. Moreover, economic viability is more than financial viability but also includes capability to make profit and generate benefits not quantifiable in financial terms.
Clearly, the test of economic viability does not apply to government entities, such as the PRA, which are vested with corporate powers and performing essential public services. The State is obligated to render essential public services regardless of the economic viability of providing such service. The non-economic viability of rendering such essential public service does not excuse the State from withholding such essential services from the public.
However, GOCCs with special charters, organized essentially for economic or commercial objectives, must meet the test of economic viability. These are the government-owned or controlled corporations that are usually organized under their special charters as stock corporations, like the Land Bank of the Philippines and the Development Bank of the Philippines.
Whether the City Treasurer of Paranaque acted without or in excess of jurisdiction, or with grave abuse of discretion amounting to lack or in excess of jurisdiction in issuing the warrants of levy on PRA's properties. – YES.
Section 234(a) of the LGC, in relation to its Section 133(o), exempts PRA from paying realty taxes and protects it from the taxing powers of local government units.
Sections 234(a) and 133(o) of the LGC provide, as follows:
SEC. 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.
x x x x
SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. – Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: x x x x
(o) Taxes, fees or charges of any kinds on the National Government, its agencies and instrumentalities, and local government units.
Real property owned by the Republic of the Philippines (the Republic) is exempt from real property tax unless the beneficial use thereof has been granted to a taxable person. In this case, there is no proof that PRA granted the beneficial use of the subject reclaimed lands to a taxable entity. There is no showing on record either that PRA leased the subject reclaimed properties to a private taxable entity.
This exemption should be read in relation to Section 133(o) of the same Code, which prohibits local governments from imposing "taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities x x x. The Administrative Code allows real property owned by the Republic to be titled in the name of agencies or instrumentalities of the national government. Such real properties remain owned by the Republic and continue to be exempt from real estate tax.
The Republic grants the beneficial use of its real property to an agency or instrumentality of the national government. This happens when the title of the real property is transferred to an agency or instrumentality even as the Republic remains the owner of the real property. Such arrangement does not result in the loss of the tax exemption, unless "the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person.
Local governments cannot invoke the power to tax on national government instrumentalities
When local governments invoke the power to tax on national government instrumentalities, such power is construed strictly against local governments. The rule is that a tax is never presumed and there must be clear language in the law imposing the tax. Any doubt whether a person, article or activity is taxable is resolved against taxation. This rule applies with greater force when local governments seek to tax national government instrumentalities.
When Congress grants an exemption to a national government instrumentality from local taxation, such exemption is construed liberally in favor of the national government instrumentality.
This doctrine emanates from the supremacy of the National Government over local governments.
Justice Holmes: No state or political subdivision can regulate a federal instrumentality in such a way as to prevent it from consummating its federal responsibilities, or even to seriously burden it in the accomplishment of them. Otherwise, mere creatures of the State can defeat National policies thru extermination of what local authorities may perceive to be undesirable activities or enterprise using the power to tax as "a tool for regulation.” Otherwise, mere creatures of the State can defeat National policies thru extermination of what local authorities may perceive to be undesirable activities or enterprise using the power to tax as "a tool for regulation." (U.S. v. Sanchez, 340 US 42)
The reason for the rule does not apply in the case of exemptions running to the benefit of the government itself or its agencies. In such case the practical effect of an exemption is merely to reduce the amount of money that has to be handled by government in the course of its operations. For these reasons, provisions granting exemptions to government agencies may be construed liberally, in favor of non tax-liability of such agencies.
There is, moreover, no point in national and local governments taxing each other, unless a sound and compelling policy requires such transfer of public funds from one government pocket to another.
There is also no reason for local governments to tax national government instrumentalities for rendering essential public services to inhabitants of local governments. The only exception is when the legislature clearly intended to tax government instrumentalities for the delivery of essential public services for sound and compelling policy considerations. There must be express language in the law empowering local governments to tax national government instrumentalities. Any doubt whether such power exists is resolved against local governments.
Whether the reclaimed lands managed by the PRA are still part of the public dominion, owned by the State and, therefore, exempt from payment of real estate taxes. – YES.
The subject lands are reclaimed lands, specifically portions of the foreshore and offshore areas of Manila Bay. As such, these lands remain public lands and form part of the public domain.
Legal bases: Section 2, Article XII of the 1987 Constitution; Article 420 of the Civil Code
Foreshore and submerged areas irrefutably belonged to the public domain and were inalienable unless reclaimed, classified as alienable lands open to disposition and further declared no longer needed for public service (Chavez v. Public Estates Authority and AMARI Coastal Development Corporation).
PEA, the predecessor of the present-day PRA, the central implementing agency tasked to undertake reclamation projects nationwide, with authority to sell reclaimed lands, PEA took the place of DENR as the government agency charged with leasing or selling reclaimed lands of the public domain. The reclaimed lands being leased or sold by PEA are not private lands, in the same manner that DENR, when it disposes of other alienable lands, does not dispose of private lands but alienable lands of the public domain. Only when qualified private parties acquire these lands will the lands become private lands. In the hands of the government agency tasked and authorized to dispose of alienable of disposable lands of the public domain, these lands are still public, not private lands.
Furthermore, PEA's charter expressly states that PEA "shall hold lands of the public domain as well as any and all kinds of lands. Thus, the mere fact that alienable lands of the public domain like the Freedom Islands are transferred to PEA and issued land patents or certificates of title in PEA's name does not automatically make such lands private.
Likewise, it is worthy to mention Section 14, Chapter 4, Title I, Book III of the Administrative Code of 1987, thus: SEC 14. Power to Reserve Lands of the Public and Private Dominion of the Government.- (1)The President shall have the power to reserve for settlement or public use, and for specific public purposes, any of the lands of the public domain, the use of which is not otherwise directed by law. The reserved land shall thereafter remain subject to the specific public purpose indicated until otherwise provided by law or proclamation.
Reclaimed lands such as the subject lands in issue are reserved lands for public use. They are properties of public dominion. The ownership of such lands remains with the State unless they are withdrawn by law or presidential proclamation from public use.
Under Section 2, Article XII of the 1987 Constitution, the foreshore and submerged areas of Manila Bay are part of the lands of the public domain, waters x x x and other natural resources" and consequently owned by the State; As such, foreshore and submerged areas "shall not be alienated," unless they are classified as agricultural lands" of the public domain. The mere reclamation of these areas by PEA does not convert these inalienable natural resources of the State into alienable or disposable lands of the public domain. There must be a law or presidential proclamation officially classifying these reclaimed lands as alienable or disposable and open to disposition or concession. Moreover, these reclaimed lands cannot be classified as alienable or disposable if the law has reserved them for some public or quasi-public use.
The fact that alienable lands of the public domain were transferred to the PEA (now PRA) and issued land patents or certificates of title in PEA’s name did not automatically make such lands private. Reclaimed lands also retain their inherent potential as areas for public use or public service.
Granted, properties of public dominion, such as the subject reclaimed lands, are not subject to execution or foreclosure sale. Thus, the assessment, levy and foreclosure made on the subject reclaimed lands by the City Treasurer of Paranaque City are without basis.
