Unimasters Conglomeration v. Tacloban City Government
REITERATIONFacts
The Antecedents: Leyte Park Hotel Inc. (LPHI), co-owned by the Privatization and Management Office (PMO), the Province of Leyte, and the Philippine Tourism Authority (PTA), was leased to Unimasters Conglomeration Incorporated (UCI) for 12 years. The Contract of Lease stipulated that real property taxes would be for the account of the lessor, with any payments by the lessee credited against rentals. Initially, UCI complied, but it later stopped paying rentals and taxes. The City Treasurer of Tacloban sent demand letters to UCI for unpaid real property taxes on LPHI from 1989 to 2012. Procedural History: The City Treasurer filed a collection case against LPHI and its co-owners, including UCI, before the Court of Tax Appeals (CTA). The CTA (Special First Division) found UCI liable for P22,826,902.20, recognizing the crediting clause. Upon denial of its motion for reconsideration, UCI appealed to the CTA En Banc. The CTA En Banc affirmed UCI's liability for realty taxes for 1995-2004, citing the beneficial use principle, but deferred resolving the contractual obligation of the lessors due to a pending case on the lease agreement's validity. The Petition: UCI filed a Petition for Review on Certiorari with the Supreme Court, assailing the CTA En Banc's decision for holding it liable for real property taxes and for refusing to enforce the contractual assumption of tax liability by PMO, PTA, and the Province of Leyte. UCI argued that the Republic, through its instrumentalities, waived its tax exemption by assuming tax payment in the lease contract.
Issue(s)
Whether the Court of Tax Appeals En Banc erred in holding UCI liable to pay the real property tax sought by the City Government of Tacloban over LPHI. Whether the Court of Tax Appeals En Banc erred in refusing to enforce the provision in the contract whereby PMO, PTA, and the Province of Leyte contractually assumed liability to pay the taxes due.
Ruling
The petition is denied. The Decision dated August 22, 2014, of the Court of Tax Appeals En Banc in CTA EB No. 091 is affirmed.
Ratio Decidendi
On the issue of UCI's liability for real property taxes: The Supreme Court affirmed the CTA En Banc's ruling that UCI is liable for real property taxes over the LPHI property. The Court reiterated the beneficial use principle enshrined in Section 234(a) of the Local Government Code, which states that real properties owned by the Republic are exempt from real property tax, except when their beneficial use is granted to a taxable person. In such cases, the tax exemption is withdrawn, and the burden to pay the taxes shifts to the taxable beneficial user. The Court clarified that the term "Republic" includes government instrumentalities, and while these entities are generally exempt, this exemption does not extend to taxable private entities to whom the beneficial use of government properties is vested. Since UCI, a private entity, was granted the beneficial use of LPHI, it became liable for the real property taxes accruing during its possession, regardless of the ownership of the property. The Court cited cases such as GSIS v. City Treasurer and City Assessor of the City of Manila, Republic v. City of Kidapawan, MWSS v. Central Board of Assessment Appeals, and City Treasurer of Taguig v. Bases Conversion and Development Authority to support this principle. The Court emphasized that the unpaid realty tax attaches to the property but is directly chargeable against the taxable person who has actual and beneficial use and possession of the property, irrespective of ownership. On the enforceability of the contractual assumption of tax liability: The Supreme Court agreed with the CTA En Banc that the contractual assumption of tax liability by PMO and PTA does not automatically exonerate UCI from its legal obligation to pay real property taxes. The Court highlighted that the City Treasurer of Tacloban, as the respondent local government unit, is not a privy to the Contract of Lease between UCI and the lessors. Under the principle of relativity of contracts, a contract generally binds only the parties thereto, their assigns, and heirs. Therefore, the local government cannot be automatically bound by the stipulations in the lease agreement regarding tax payments. The validity and enforceability of Section 11.04 of the contract, wherein PMO and PTA assumed tax liability, is a matter that should be determined by the Regional Trial Court, where a case involving the validity of the lease agreement was pending. The Supreme Court reiterated that where there is no privity of contract, there is no obligation or liability to speak of concerning third parties like the local government unit.
Main Doctrine
The beneficial use principle under Section 234(a) of the Local Government Code dictates that when the beneficial use of government-owned real property is granted to a taxable person, the tax exemption is withdrawn, and the liability to pay real property taxes shifts to the taxable beneficial user, irrespective of ownership. The local government unit is not bound by contractual stipulations between the lessors and the lessee regarding tax payments unless it is a party to the contract.