Republic ofthe Philippines (
DEPARTMENT OF FINANCE
‘Ros Woslvad Come Palo Deargo, Se Suet
Mart 004
LOCAL FINANCE CIRCULAR NO. 20/-209%
DATE : 2S April 2002
FOR + ‘The Executive Director and Regional Directors,
Bureau of Local Goverument Finance, aud All Provincial,
City and Municipal Treasurers and Assessors
SUBJECT : TaxStatus of Machinery aud Equipment Used for Religious,
Charitable, and Educational Purposes
Upon a petition filed by the sectors concerned, this Department has reviewed
Joint Local Treasury/Assessmect Regulation (ILTAR) No. 1-88 dated May 4, 1988,
(Rules and Regulations on the Implementation of Section 283), Article VI, of the New
Constitution providing for, among olbers, exemption from real property taxes of certain
real properties).
It will be recalled that JLTAR No. 1-88 was issued to ensure uniform application
of Section 28(3), Article VI of the 1987 Constitution, which provides:
“Charitable institutions, churches, parsonages or convents appurtenant
thereto, mosques, non-profit cemeteries, and all lands, buildings, and
improvements actually, directly and exclusively used for religious,
hanitable, or educational purposes shall be exempt ftom taxation.”
(emphasis supplied)
Pursuant to the authority granted to the Department of Finance under Section 201
of the Local Government Code of 1991 (R.A. No. 7160), this Circular is meant to-
clarify, first, certain provisions in JLTAR No. 1-88 on the treatments Zor real estate tax
purposes, of machinery that is not permanently attached to real estate and, second,
fachinery and equipment of non-stock non-profit educational institutions.
Treatment of mackinery for real. fax purposes
SLTAR No. 1-88 subjects to real property tax machineries that are attached to
land and buildings, even though these are actually, directly, and exclosively used for
religious, charitable or educational purposes on the ground thatthe word “improvements”
senor include “machinery”. This is because, a5 stated in Section 3(8) of JLTAR No.
1.58, tbe terms “improvements” and “machinery” are separately defined under the old
Real Property Tax Code (Presidontial Decree No, 464). Had the framers of the
Constitution intended to exempt machinery fom the coverage of the real property Hs
they would have done so by explicitly enumerating “machinery” alongside “lands,
buildings, and improvements”. In ke manner, the Local Government Code defines
Smproverests” and “machinery” separately. It is @ basic principle: het the: law frowns‘on exemption from taxation, hence, an exempting provision should be construed
strictissimi juris.
However, JLTAR No. 1-88 is unclear as to the treatment of machinery that is not
permanently attached to teal estate. JLTAR No. 1-88 recognizes the definition of
machinery under paragraph Section 3(K) of the Real Property Tax Code (now Section
199(0) of the Local Government Code) to include
the physical facilities available for production, as well as the
allations and appurtenant facilities, together with all those not
permanently attached to the real estate but are actually, directly and
‘essentially, used to meet the needs of the particular industry, business, or
works, which by their very nature and purpose are designed for, or
essential to manufacturing, commercial, mining, industrial or agricultural
purposes.” (emphasis supplied)
Under 20(¢) of the Real Property Tax Code and Section 218(c) of the Local
Government Code, such machinery is subject to real estate tax. This notwithstanding, the
last paragraph of Section 3 of ILTAR No. 1-88 concludes that “[eJquipment that are
movable or portable such as computers, typewriters, and the like shall not be considered
as ‘machinery’ subject to the real property tax.”
To avoid any doubt as to treatment, for real property tax purposes, of machinery
that is not permanently attached to real estate, we make this clarification: such
machinery and equipment shall be considered as real property — and hence, subject to the
real property tax — if it is an essential and principal element of an industry, work or
activity without which such industry, work or activity will be unable to function,
Otherwise, such machinery or equipment shall not be subject to the real property tax. The
case of Mindanao Bus Company vs. City Assessor (L-17870, September 29, 1962) is
instructive on this point:
“We may here distinguish, therefore, those movables which
become immobilized ty destination because they are essential and
principal elements in the industry from those which may not so considered
immobilized because they are merely incidental, not essential and
principal. Thus, cash registers, typewriters, etc. usually found and used in
hotels, restaurants, theaters, etc. are merely incidentals and are not and
should not be considered immobilized by destination, for these businesses
can continue or carry on their functions, without those equipments. Airline
companies use forklifts, jeepwagons, pressure pumps, IBM machines, etc.
which are incidentals, not essentials, and thus retain their movable nature.
"Province of Abra vs. Hernando, G.R. No. L-49366, August 31, 1981, citing various cases.
* Section 3(0)(2), JLTAR No. 1-88.Cc
Ce
On the other hand, machineries of breweries used in the manufacture of
fiquor and softdrinks, though movable in nature are immobilized because
they are essential to said industries, but the delivery trucks and adding
‘machines which they usually own and yse and are found within their
industrial compounds are merely incidentals and retain their movable
nature.”
ial non-stock ne fit educational institutions
Article XIV, Section 3(3) of the 1987 Constitution states:
“All revenues and assets of non-stock, non-profit educational
institutions used actually, directly, and exclusively, for educational
purposes shail be exempt fom taxes and duties. Upon the dissolution or
cessation of the corporate existence of such institutions, their assets shall
bbe 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 inchiding restrictions on dividends and
provisions for reinvestment.” (emphasis supplied)
This article provides non-stock non-profit educational institutions with an
exemption from duties and taxes — including the real estate tax — on assets actually,
directly, and exclusively used for educational purposes. Since the word “assets” refers to
property of all kinds, real or personal,” the exemption from real property tax extends to
machinery and equipment of the educational institution.
However, such machinery must be actually, directly, and exclusively used for
educational purposes. To be actually, directly, and exclusively used for educational
purposes, the property need not be indispensable for such purpose, but need only be
incidental to and reasonably necessary for the accomplishment of said purpose.’ We note
that the Supreme Court has declared in Abra Valley College, Inc. vs. Aquino, et. al.° that
it tends to adopt a more liberal and non-restrictive interpretation of the phrase “actually,
directly, and exclusively”.
Summary of the rules
> Black’s Law Dictionary, 6" ed., 1990.
4 Herrera va. Quezon City Board of Assessment Appeals, 3 SCRA 186 (1961); Commissioner of Internal
Rovenua vs, Bishop of Missionary District, 4 SCRA 991 (1963), citing Cooley on Taxation, Vat. 2, p.
1430.
SG.R, No, £-39086, June 15, 1988.O Oo
1. Machinery that is permanently atached to land and buildings subject to
Mh eal peoperty tax, even though this is actually, directly, and exolusively
‘used for religious, charitable or educational purposes.
2. Machinery that js not permanently attached to real estate is:
a. Subject to the real property tax if itis an essential and principal
aoe of an industry, work or activity without which such industry,
‘work or activity cannot function; and
ba. Not subject tothe real property tax fit snot an essential and principal
element of an industry, work or activity.
3, Notwithstanding rules 1 and 2, machinery of non stock nonprofit
educational institutions used actually, directly, and exclusively for
educational purposes is not subject to real property tax,
ta sccordance wit the guidelines laid down in this Ciesla a local treasurers
and asonmors are hereby directed to list such machinery and eqipment of non-stock non~
profit educational institutions as “EXEMPT” in thet respective assessment rolls upon
Prmmplance of the tax exempt individual or entity with the provisions of Section 206 of
the Local Government Code.
All Regional Directors for Local Government Finance shall supervise the local
treasury and ‘assessment offices in their respective regions in the execution of this
Circular.
Al existing orders, rules, regulations, circulars and other isnance particularly
JLTAR No. 1-88, of this Department that are contrary 19 oF inconsistent with this
Circular are hereby repealed of modified accordingly.
‘This Circular shall take effect immediately.
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