Whether or Not University of the Philippines is Liable for Real Property Tax on Leased Properties in Diliman East Campus to Ayala Land, Inc. (ALI)

On 29 July 2010, the Board of Regents[1] at its 1258th meeting approved the Terms of Reference on the Prequalification and Bidding for the Development of the University of the Philippines Diliman East Campus Property[2].

The UP Diliman Land Use Plan designates for Commercial Use the East Campus Property, a 7.4-ha. (approx.) area at the east campus boundary along Katipunan/C-5 Avenue, which includes the site currently occupied by the UP Integrated School (UPIS). The project entails the construction by the proponent, as a donation, of new high school buildings of the UP Integrated School at the present site of the decommissioned Narra Dormitory. This will in turn allow for the development of the vacated UPIS site into mixed-use retail and office development and academic-support facilities, consistent with the UP Diliman campus setting and academic development goals. The project will involve the relocation and improvement of UPIS in a more suitable location within the main campus, and the development of the vacated UPIS property as an appropriately-scaled mixed-use facility.

The proponent will donate an amount of not less than PhP220 Million for the relocation of the UPIS high school and upgrade of other UPIS facilities. The vacated UPIS property will then be developed into an integrated mixed-use facility compatible with the UP Diliman campus character, and demonstrably consistent with a University-town concept of development.

The Board at its 1259th meeting on 27 August 2010 noted the recommendation of the Office of the Vice-President for Development on the schedule of activities for the call for proposals for the development of the University of the Philippines East Campus Property. On 01 September 2010, former UP President Dr. Emerlinda R. Roman, through Administrative Order No. PERR 10-048, created the Special Bids and Awards Committee (SBAC) that would carry out the prequalification and evaluation of proposals for the UP Diliman East Campus Development Project.

Five (5) proponents submitted prequalification applications and of these only three (3) passed prequalification. Of these three, two (2) submitted the requisite technical and financial proposals (Ayala Land and SM Land). Upon evaluation of the SBAC’s Technical Evaluation and Financial Evaluation Subcommittees, the proposal submitted by Ayala Land Inc. was found more advantageous to the University. Upon the recommendation of the SBAC, the Board of Regents, at its 1266th meeting on 27 January 2011 approved the award of the project to Ayala Land Inc. On 28 January 2011, former President Emerlinda R. Roman officially notified Ayala Land Inc. of the BOR’s decision, which prompted the drafting of the Lease Agreement (Contract of Lease with Development Obligations) between the University of the Philippines (Lessor) and Ayala Land Inc. (Developer/Lessee).

After months of negotiations, the Lease Agreement between the University of the Philippines and Ayala Land Inc. for the UP Diliman East Campus Project was signed by the parties on 22 June 2011. The provisions of the Lease Agreement are in accordance with the Board-approved Terms of Reference and the lessee’s Development Proposal.

Following is a summary of project features as embodied in the Lease Agreement:

UP Diliman East Campus Project               Contract Provisions/Project Features

Gross Land Area                                                7.4 hectares

Project                                                  Mixed Use Retail and Office Development/ University Town

Signing of Lease                                                22-Jun-11

Project Opening                                                2013

Gross Floor Area                                               86,746 sq.m.

Lease Term                                                         25 years, renewable subject to mutual agreement of                                                                                       parties

Start of Lease                                                     18 months from turnover of land

One-Time Upfront Rent                                PhP 400 Million – 01 December 2011

Rental Payment                                                 17% of gross rental income or minimum PHP                                                                                           215.65 per sq.m. of gross usable land area of 7.4                                                                                     hectares less easement

 

Escalation                                                            5% per annum after first full year of operation

Leaseable                                                            Space 70,888 sq.m.

Total Nominal Value of Rent                        PhP 8.504 Billion

Total NPV                                                            PhP 2.283 Billion

Net Present Value per sq.m.                        PhP 30,855.23

Donation                                                             PhP 220 Million

TOR: Donation of modern completely finished and                                                                                equipped buildings costing no less than PHP                                                                                            180M, the design and specifications of which shall                                                                                 be dictated by the University, provided that gross                                                                                 enclosed floor area shall not be less than 9,000                                                                                     square meters.

Allocation of at least an additional PHP 40M for                                                                                     rehabilitation and upgrading work on other UPIS                                                                                   facilities. Integration of sustainability features                                                                                       (e.g., green/open spaces) that are in full                                                                                                   compliance with acceptable environmental                                                                                              guidelines.

Compliance with Laws/Ordinances           LESSEE shall secure on its own account all permits                                                                                and licenses

Delivery Conditions                                         LESSOR to provide plans & designs for UPIS                                                                                             relocation site and buildings; secure relevant                                                                                         approvals and authorizations relative to                                                                                                   relocation of UPIS.

Permanent Improvements                            LESSOR to become owner of permanent                                                                                                    improvements at end of-lease (mixed-use                                                                                              development).

LESSEE to guarantee that all buildings and                                                                                               facilities are in condition acceptable to the                                                                                               University.

 

The objective of this paper is to determine whether or not University of the Philippines is Liable for Real Property Tax on Leased Properties in Diliman East Campus to Ayala Land, Inc. (ALI)

The University of the Philippines is declared a national university by virtue of the Republic Act 9500: An Act to Strengthen the University of The Philippines As The National University. Under this Act, UP’s Board may approve land leases in accordance with the provisions of this Act. It states in part:

(c) The Board may plan, design, approve and/or cause the implementation of land leases: Provided, That such mechanisms and arrangements shall sustain and protect the environment in accordance with law, and be exclusive of the academic core zone of the campuses of the University of the Philippines: Providedfurther, That such mechanisms and arrangements shall not conflict with the academic mission of the national university;

(d) The Board may allow the use of the income coming from real properties of the national university as security for transactions to generate additional revenues when needed for educational purposes;

(e) The Board may approve the implementation of joint ventures: Provided, That in the event real properties of the national university are involved, only the income derived by the University from the use of the real properties shall be the subject of its participation or obligation in the joint ventures: Providedfurther, That no joint venture shall result in the alienation of the real properties of the national university; and

(f) Any plan to generate revenues and other sources from land grants and other real properties entrusted to the national university shall be consistent with the academic mission and orientation of the national university as well as protect it from undue influence and control of commercial interests: Provided, That such programs, projects or mechanisms shall be approved by the Board subject to a transparent and democratic process of consultation with the constituents of the national university: Providedfurther, That funds generated from such programs, projects or mechanisms shall not be meant to replace, in part or in whole, the annual appropriations provided by the national government to the national university.[3]

The issue whether or not the University of the Philippines is liable for realty taxes, Rep. Act 9500 (2008) Sec 25 (a) has this to say:

SEC. 25. Tax Exemptions. – The provisions of any general or special law to the contrary            notwithstanding:

  • 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;

The Real Property Tax Code of 1974[4] declares those exempted from Real Property Tax. The exemption shall be as follows:

 (a) Real property owned by the Republic of the Philippines or any of its political subdivisions and any government-owned corporation so exempt by its charter: Provided; however, That this exemption shall not apply to real property of the above named entities the beneficial use of which has been granted, for consideration or otherwise, to a taxable person.

(c) Charitable institutions, churches, personages or convents appurtenant thereto, mosques, and all land, buildings, and improvements actually, directly and exclusively used for religious or charitable purposes.

The Local Government Code of 1991[5] likewise declares that 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;

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actually, directly, and exclusively used for religious, charitable or educational purposes;

All these real property tax exemptions from RA 9500, PD 464 as amended and RA 7160 derive from 1987 Constitution.

Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements, actually, directly and exclusively used for religious, charitable or educational purposes shall be exempt from taxation. (CONST., art. VI, sec. 28, par. (3)

Sec. 4 (3), ART. XIV

(3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly, and exclusively for educational purposes shall be exempt from taxes and duties. Upon the dissolution or cessation of the corporate existence of such institutions, their assets shall be disposed of in the manner provided by law.

Proprietary educational institutions, including those cooperatively owned, may likewise be entitled to such exemptions, subject to the limitations provided by law, including restrictions on dividends and provisions for reinvestment. (CONST., art XIV, sec. 4, par. (3).

The law certainly provides for the exemption of educational institutions which include the University of the Philippines from real property taxes. Properties of the national government as well as those of local government units are not subject to tax, otherwise it will result in the absurd situation of the government “taking money from one pocket and putting it in another.”[6]

In Manila International Airport Authority V. Court of Appeals[7], the Supreme Court held that the real properties of MIAA are owned by the Republic of the Philippines and thus exempt from real estate tax. A government instrumentality like MIAA falls under Local Government Code Section 133 which provides: the exercise of the powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: (o) taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities and local government units.

However, the approved development proposal of the lessee (Ayala Land, Inc.) will establish some points for reconsideration in granting the leased property at UP Diliman East Campus. The lessee will develop the vacated UPIS site into mixed-use retail and office development and academic-support facilities or as an appropriately-scaled mixed-use facility.

The question now is whether or not an appropriately-scaled mixed-use facility can be classified under those provisions exempted by law for real estate properties of educational institutions.

It is beneficial to define terminologies to eliminate some confusion.

Generally, Mixed use facility combines two or more different types of land uses, such as residential, commercial, employment, and entertainment uses, in close proximity. In some communities, mixed use may be defined as different uses contained within the same physical structure. As an example, a building may include retail uses on the ground floor and residential or office uses on the upper floors. Defined more broadly, mixed use may encompass two or more uses on the same lot, whether housed in a single building or in separate buildings.[8]

Real Property tax has been defined as a “direct tax on ownership of lands and buildings or other improvements thereon not specifically exempted and is payable regardless of whether the property is used or not, although the value may vary in accordance with such factor.”[9]

The tax exemptions in Sec. 28(3), Article VI of the 1987 Constitution rest on the premise that they are actually, directly and exclusively used by said entities or institutions for their stated purpose, and not necessarily because they are owned by religious, charitable or educational institution.[10] The provision of Art.VI, Sec 28(3) applies to three institutions – religious, charitable, and educational institutions – while Art. XIV, Sec 4(3) applies solely to non-stock, non-profit educational institutions. Hence, in this case, we should apply its literal interpretation – “solely” – in consonance with the principle of strictissimi juris. The word “exclusively” is an “exclusive word,” which is indicative of an intent that the provision is mandatory. (See MccGee v. Republic, 94 Phil. 821[1954])[11]

In the case of Lung Center of the Philippines v. Quezon City and Constantino P. Rosas,[12] the Court said:

The tax exemption under this constitutional provision [Section 28(3), Article VI] covers property taxes only. [Commissioner of Internal Revenue v. Court of Appeals, 298 SCRA 83 (1998)] As Chief Justice Hilario G. Davide, Jr., then a member of the 1986 Constitutional Commission, explained: “. . . what is exempted is not the institution itself . . .; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes.” [Records of the Constitutional Commission 90]

Consequently, the constitutional provision is implemented by Section 234(b) of Republic Act No. 7160 (otherwise known as the Local Government Code of 1991) as follows:

SECTION 234. Exemptions from Real Property Tax. – The following are exempted from payment of the real property tax:

(b) Charitable institutions, churches, parsonages or convents appurtenant thereto, mosques, non-profit or religious cemeteries and all lands, buildings, and improvements actuallydirectly, and exclusively used for religious, charitable or educational purposes

We note that under the 1935 Constitution [Article VI, Section 22, par. (3)], “… all lands, buildings, and improvements used ‘exclusively’ for … charitable … purposes shall be exempt from taxation.” However, under the 1973 [Article VIII, Section 17, par. (3)] and the present Constitutions, for “lands, buildings, and improvements” of the charitable institution to be considered exempt, the same should not only be “exclusively” used for charitable purposes; it is required that such property be used “actually” and “directly” for such purposes.

“Exclusive” is defined as possessed and enjoyed to the exclusion of others; debarred from participation or enjoyment; and “exclusively” is defined, “in a manner to exclude; as enjoying a privilege exclusively.” If real property is used for one or more commercial purposes, it is not exclusively used for the exempted purposes but is subject to taxation.

What is meant by actual, direct and exclusive use of the property for charitable purposes is the direct and immediate and actual application of the property itself to the purposes for which the charitable institution is organized. It is not the use of the income from the real property that is determinative of whether the property is used for tax-exempt purposes. [Christian Business College v. Kalamanzoo, 131 N.W. 553]

In the case of Philippine Fisheries Development Authority (PFDA) v. Municipality of Navotas[13] the Supreme Court ruled that PFDA, being an instrumentality of the national government, is exempt from real property tax but the exemption does not extend to the portions of the Navotas Fishing Port Complex (NFPC) that were leased to taxable or private persons and entities for their beneficial use.

It would seem, however, that to be entitled to the exemption, lands, buildings and improvements of religious and charitable institutions should be actually directly and exclusively used” for charitable and religious purposes.[14] It is not the use of the income from real property that is determinative of whether the property is used for tax-exempt purposes.[15] If a property, although actually owned by a religious, charitable and educational institution, is used for a non-exempt purpose, the exemption from tax shall not attach.[16]

What is exempted is not the institution itself; those exempted from real estate taxes are lands, buildings and improvements actually, directly and exclusively used for religious, charitable or educational purposes.[17]

Based on legal provisions and jurisprudence above, the leased property at UP Diliman East Campus which is an appropriately-scaled mixed-use facility is not exempt from real property tax except those which are actually, directly and exclusively used for educational purposes.

Another question arises as to whom the real property tax be accounted for.

The Local Government Code of 1991 Sec 217 states that:

Real properties shall be classified, valued and assessed on the basis of actual use regardless of where located, whoever owns it, and whoever uses it. (Rep. Act 7160 [1991], sec. 217)

The Supreme Court held in Province of Nueva Ecija v. Imperial Mining Co.,Inc.[18]that the policy of taxing real property is on the basis of actual use even if the user is not the owner.[19]

In real estate taxation, said the Court, the unpaid tax attaches to the property and is chargeable against the taxable person who had the actual or beneficial use and possession of it regardless of whether or not he is the owner. (Testate Estate of Concordia T. Lim v. City of Manila et al. G.R. No. 90639, Feb 21, 1990)[20]

In the case at bar, the property is an appropriately-scaled mixed-use facility and as for the beneficial or actual use of the property will for both the lessor and the lessee. Hence, real property tax shall be due for the taxable person beneficially or actually using the property whether he be the lessor/owner or the lessee/developer.

 

SOURCES

Primary Sources

  1. Constitution (1987), available at http://www.lawphil.net/consti/cons1987.html (last visited August 8, 2014)
  2. Republic Act No. 9500 (2008), available at http://www.lawphil.net/statutes/repacts/ra2008/ra_9500_2008.html (last visited August 8, 2014)
  3. Presidential Decree No. 464 (1974), available at http://www.lawphil.net/statutes/presdecs/pd1974/pd_464_1974.html (last visited August 6, 2014)
  4. Republic Act No. 7160 (1991), available at http://www.lawphil.net/statutes/repacts/ra1991/ra_7160_1991.html (last visited August 8, 2014)
  5. Lung Center of the Philippines v. Quezon City and Constantino P. Rosas, G.R. No. 144104, June 29, 2004, available at http://www.lawphil.net/judjuris/juri2004/jun2004/gr_144104_2004.html (last visited August 8, 2014)
  6. Manila International Airport Authority v. Court of Appeals, G.R. No. 155650, July 20, 2006 available at http://www.lawphil.net/judjuris/juri2006/jul2006/gr_155650_2006.html (last visited August 8, 2014).
  7. Philippine Fisheries Development Authority v. Municipality of Navotas, GR No. 150301, October 02, 2007, available at http://www.lawphil.net/judjuris/juri2007/oct2007/gr_150301_2007.html (last visited August 8, 2014)

Secondary Sources

  1. Aban, Benjamin. Law of Basic Taxation in the Philippines. Mandaluyong City: National Bookstore (2001) 579p.
  2. Memorandum of Agreement between the University of the Philippines (Lessor) and the Ayala Land, Inc. (ALI) (Lessee) for the University of the Philippines Diliman East Campus Development Project. XLII UP Gazette No.3, 64-65 (July-September, 2011) Available at http://osu.up.edu.ph/wp-content/uploads/gazette/2011-JUL-SEP.pdf (last visited August 6, 2014)
  3. Dimaampao, Japar. Tax Principles And Remedies. Manila: Rex Book Store (2008) 369

 


ENDNOTES:

[1] Hereafter, Board.

[2] Memorandum of Agreement between the University of the Philippines (Lessor) and the Ayala Land, Inc. (ALI) (Lessee) for the University of the Philippines Diliman East Campus Development Project. Vol. XLII UP Gazette No.3, 64-65 (July-September, 2011) Available at http://osu.up.edu.ph/wp-content/uploads/gazette/2011-JUL-SEP.pdf (last visited August 6, 2014)

[3] Rep. Act 9500 (2008) Sec. 22

[4] Pres. Decree No. 464 [1974], sec. 40, par. (a) (c)

[5] Rep. Act 7160 (1991), sec. 234, par. (a) (b)

[6] Cooley on Taxation, Sec 621, 4th edition as cited in Dimaampao, Japar. Tax Principles And Remedies. Manila: Rex Book Store (2008), p. 56

[7] Manila International Airport Authority v. Court of Appeals G.R. No. 155650, July 20, 2006, available at http://www.lawphil.net/judjuris/juri2006/jul2006/gr_155650_2006.html (last visited August 8, 2014)

[8] Available at http://www.mrsc.org/subjects/planning/lu/mixedusedev.aspx (last visited August 8, 2014) (Emphasis supplied)

[9] Aban,   Benjamin. Law of Basic Taxation in the Philippines. Mandaluyong City: National Book Store (2001) p.436. (See also Villanueva et al. v. City of Iloilo L-26521 Dec. 28, 2968) (Emphasis supplied)

[10] Id. at 447.

[11] Dimaampao, Japar. Tax Principles And Remedies. Manila: Rex Book Store (2008), p. 107

[12] Lung Center of the Philippines v. Quezon City and Constantino P. Rosas. G.R. No. 144104, June 29, 2004 available at http://www.lawphil.net/judjuris/juri2004/jun2004/gr_144104_2004.html (last visited August 8, 2014)

[13] Philippine Fisheries Development Authority (PFDA) v. Municipality of Navotas. G.R. No. 150301, October 02 2007 available at http://www.lawphil.net/judjuris/juri2007/oct2007/gr_150301_2007.html (last visited August 8, 2014)

[14] Dimaampao, Japar. Tax Principles And Remedies. Manila: Rex Book Store (2008), p. 99

[15] Id. at 101(Citing St. Louis Young Men’s Christian Association v. Gehner, 47 S.W.2d. 776)

[16] Id.  at 100

[17] Id at 101

[18] Province of Nueva Ecija v. Imperial Mining Co.,Inc. G.R. No. 59463, Nov. 19, 1982.

[19] Aban, Benjamin. Law of Basic Taxation in the Philippines. Mandaluyong City: National Book Store (2001) p.436.

[20] Id at 449

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