EO 173 – An effective solution to the LGU-GOCC issue?

The Constitution grants local government units (LGUs) the power to create its own sources of revenue and levy taxes, subject to the limitations imposed by Congress. A similar provision is found in Section 129 of Republic Act No. 7160, also known as the Local Government Code (LGC).

One of the common local taxes imposed by LGUs is real property taxes. Pertinent to this, a recurring issue regarding the taxing power of LGUs is its power to assess and collect real property taxes from Independent Power Producers (IPPs) whose payment of taxes had been contractually assumed by a government- owned and controlled corporation (GOCC).

GOCCs which are engaged in transmission and generation of power enter into Build-Operate-Transfer (BOT) Agreements with IPPs. Generally, under BOT agreements, the IPPs would shoulder the financing, construction, and maintenance of the facility or plant. The IPP would then be given the right to operate the same for a fixed term, after which it should transfer the ownership and operation to the GOCC.  In order to attract these investors, GOCCs assume the tax liabilities of the IPPs.

Since ownership and operation remain with the IPPs during the existence of the BOT, LGUs assess and collect real property taxes from the IPPs. The IPPs are assessed for real property taxes on the basis of the assessment levels provided under Section 218 of the LGC, which ranges from 30-80 percent, depending on the fair market value of industrial buildings or structures. The fair market value of the property is multiplied by the assessment level to obtain the assessed value of the property. The assessed value would then serve as the tax base as this is multiplied by the real estate tax rate to compute the real property tax due. The real property tax rate ranges from a rate of not more than one percent for the provinces, and not more than two percent for cities and municipalities in Metro Manila.

Due to the contractual assumption of tax liabilities by GOCCs, the burden imposed on IPPs are devolved upon the GOCCs. The LGUs’ insistence on exercising its power to assess and collect real property taxes has resulted in investors becoming hesitant to invest in the Philippines and enter into contract agreements with GOCCs. This is because, a refusal on the part of the IPPs to pay its assessed real property taxes would risk the possibility of its property, plant or machineries being levied and auctioned by the LGU concerned.

To address this problem, President Aquino issued Executive Order (EO) No. 173 decreeing the reduction of real property taxes, as well as the condonation of interest and penalties assessed on the power generation facilities of IPPs that have BOT contracts with GOCCs through the issuance of EO No. 173. This was done pursuant to the power of the President under Section 277 of the LGC to condone or reduce the real property tax and interest for any year in any province or city or municipality within the Metropolitan Manila area.

It has been explained in EO No. 173, that there is a need to condone or reduce real property tax and interest because the payment of the real property taxes by the affected IPPs, some of which the obligation has been contractually assumed by the GOCCs, poses a threat to the financial stability of the GOCCs and the government’s fiscal consolidation effort, which in effect may lead to an increase in the cost of electricity, and may trigger cross-defaults and significant economic losses across all sectors.

Under the EO, real property taxes due on property, machinery and equipment including special levies accruing to the Special Education, Fund, which are actually and directly used by IPPs for the production of electricity under BOT contracts with GOCCs, for all years up to 2014, are reduced. Rather than using the assessment levels provided in Section 218 of the LGC, the tax liability is computed based on an assessment level of 15 percent of the fair market value of said property, machinery and equipment depreciated at the rate of two percent (two percent) per annum, less any amounts already paid by the IPPs. EO No. 173 further provided for a condonation of all fines, penalties and interests for all years up to 2014, arising from deficient real property tax liabilities.

The government hopes that with the passage of EO No. 173, the fear or hesitation of the IPPs to invest in the Philippines would be lessened to some extent. However, since the reduction and condonation of real property taxes under the EO is limited only to all years up to 2014, the measures adopted under EO No. 173 could only temporarily address the problem.  It would be best if the government, specifically the legislative department, would pass a law that would provide a more permanent or a long term solution to the issue, weighing the interests of the investors on the one hand and the interests of the government, especially the LGUs to enforce and collect taxes on the other.

Mark Andrew M. Santiago is a supervisor from the tax group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

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