First Private Power Corporation (FPPC) entered into a Build-Operate-Transfer (BOT) agreement with NAPOCOR for the construction of Bauang Diesel Power Plant and creation of Bauang Power Plant Corporation (BPPC). The pertinent provisions of the BOT agreement, include among others:“2.03 NAPOCORxxx shall be responsible for the payment of all real estate taxes and assessments, rates, and other charges in respect of the Site and the buildings and improvements thereon.” The Municipal Assessor of Bauang issued a Notice of Assessment and Tax Bill to BPPC. NAPOCOR sought tax exemption on the basis if Sec. 234(c) of R.A. No. 7160.
Under the terms of the BOT, can the GOCC be deemed the actual, direct, and exclusive user of machineries and equipment for tax exemption purposes? If not, can it pass on its tax-exempt status to its BOT partner, a private corporation, through the BOT agreement?
NO. Neither can NAPOCOR pass its tax–exempt status to its BOT partner.
NAPOCOR’s basis for its claimed exemption – Section 234(c) of the LGC – is clear and not at all ambiguous in its terms. Exempt from real property taxation are: (a) all machineries and equipment; (b) [that are] actually, directly, and exclusively used by; (c) [local water districts and] government-owned or –controlled corporations engaged in the [supply and distribution of water and/or] generation and transmission of electric power.
By [BOT’s] express terms, BPPC has complete ownership – both legal and beneficial – of the project, including the machineries and equipment used, subject only to the transfer of these properties without cost to NAPOCOR after the lapse of the period agreed upon. As agreed upon, BPPC provided the funds for the construction of the power plant, including the machineries and equipment needed for power generation; thereafter, it actually operated and still operates the power plant, uses its machineries and equipment, and receives payment for these activities and the electricity generated under a defined compensation scheme. Notably, BPPC – as owner-user – is responsible for any defect in the machineries and equipment.
Consistent with the BOT concept and as implemented, BPPC – the owner-manager-operator of the project – is the actual user of its machineries and equipment. BPPC’s ownership and use of the machineries and equipment are actual, direct, and immediate, while NAPOCOR’s is contingent and, at this stage of the BOT Agreement, not sufficient to support its claim for tax exemption.