Taxwise Or Otherwise

“Shot through the heart, and you’re to blame, darlin’ you give love a bad name” — go the opening lines of a famous Bon Jovi song. In December, the Court of Tax Appeals (CTA) sitting En Banc resolved an issue that often strikes (or shoots, if you will) at the very heart of national Public-Private Partnership (PPP) projects — real property taxes (RPT).

This issue is a prominent one for national-level PPPs in the transportation sector, such as roads and railways, which often traverse multiple cities and municipalities. In 2013, the LRT Line 1 Cavite Extension PPP Project had to be rebid due to, among others, the significant RPT that had to be shouldered by the winning proponent. In the same year, the bidders of the Cavite-Laguna Expressway (CALAX) PPP Project — a 44.63-kilometer toll road connecting Manila-Cavite (CAVITEX) and South Superhighway (SLEX) — likewise expressed concerns about the impact of RPT on the project’s financial viability.

In the recently promulgated CTA case (CTA EB No. 2078), the local government unit (LGU) assessed the proponent of a railway project deficiency RPT that ballooned to a billion pesos by the time the Warrant of Levy was issued. The subject of the levy? Railways, train cars, and railway stations. Not surprisingly, this prompted the national government (through the Department of Transportation or DoTr) to file a complaint and prevent the auction and transfer of ownership of the properties. From then on, a legal battle spanning a decade and a half ensued.

Of particular interest here is the Build-Lease-and-Transfer (BLT) arrangement entered into between the national government and the proponent — the crux in the issue of whether the proponent is indeed liable for RPT. Republic Act No. 7718, otherwise known as the Build-Operate-and-Transfer (BOT) Law, defines build-lease-and-transfer as a contractual arrangement whereby a project proponent is authorized to finance and construct an infrastructure facility, and upon its completion, turn it over to the government on a lease arrangement for a fixed period, after which, ownership of the facility is automatically transferred to the concerned government agency or local government unit. In sum, it is a “finance-lease” type of arrangement, similar to how car loans are typically financed.

The LGU assessed the proponent during the “revenue period,” which is the period after construction (hence the government was already in possession and operating the facility) but prior to the transfer of ownership by the proponent. It argued that the proponent is liable for RPT since, during the assessment period, the properties were still privately-owned and were used for commercial and revenue purposes.

The CTA ruled in favor of the DoTr and the proponent, citing two reasons.

First, it noted that the BLT arrangement is more of a financing mechanism where the government is obligated to make amortized payments to the proponent, which in turn, will be sourced from operating the infrastructure facility. In other words, the government becomes not just a mere possessor of the facility, but also its beneficial owner.

Second, considering that the properties are intended for and devoted to public use, the CTA ruled that following Article 420 of the Civil Code, they are considered part of public dominion, and thus, owned by the government. As such, the properties are considered exempt from RPT following Sections 133(o) and 234(a) of the Local Government Code. The Tax Court also cited the case of MIAA vs. CA (GR No. 155650, 20 July 2006), where the Supreme Court ruled that properties of public dominion cannot be the lawful subject of an auction sale.

The CTA likewise took exception of the fact that the DoTr’s Petition for Review was filed only after nearly 10 years from the promulgation of the assailed Orders of the Regional Trial Court (RTC) — which was way beyond the 60-day period allowed under the Rules of Court — citing a litany of cases where the Supreme Court relaxed technicalities “to serve substantial justice and safeguard strong public interest.”

While there are other available remedies — Section 277 of the Local Government Code, for example, gives the President the power to condone such taxes when the public interest so requires (former President Benigno S.C. Aquino III, in fact, exercised this authority when he issued Executive Order Nos. 27 [s.2011] and 173 [s.2014] to condone RPT on power generation facilities under BOT contracts with Government-Owned or -Controlled Corporations) — the CTA decision is nevertheless an important victory for private sector participation in infrastructure projects.

The CTA decision could potentially end the long heartbreak over the payment of RPT for PPP projects. Could it have potentially avoided a rebid of the LRT Line 1 Cavite Extension PPP Project? Perhaps. Applying the reasoning of the CTA, such infrastructure facilities are considered part of public dominion and are therefore owned by the government. Perhaps we will only really know once the decision becomes final.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only and should not be used as a substitute for specific advice.


Jose Patrick S. Rosales is a lawyer and an Infrastructure & Tax Senior Manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.