In a Build-Operate-Transfer (BOT) agreement, tax exemptions for government-owned and controlled corporations (GOCCs) do not automatically extend to their private partners. The Supreme Court ruled that a private corporation operating a power plant under a BOT agreement with the National Power Corporation (NAPOCOR) could not claim NAPOCOR’s tax-exempt status. This decision clarifies that tax exemptions are strictly construed and apply only to the entity directly and exclusively using the equipment for the specified purpose.

Power Play: Can NAPOCOR’s Tax Shield Cover a Private Power Plant?

The central question in National Power Corporation v. Central Board of Assessment Appeals revolved around whether NAPOCOR’s real property tax exemption could be applied to machineries and equipment owned and operated by Bauang Private Power Corporation (BPPC) under a Build-Operate-Transfer (BOT) agreement. In this arrangement, BPPC was responsible for converting NAPOCOR’s diesel fuel into electricity. NAPOCOR argued that because it was the ‘actual, direct, and exclusive user’ of the power plant, the tax exemption should apply. This contention was rooted in Section 234(c) of the Local Government Code (LGC), which exempts machineries and equipment actually, directly, and exclusively used by GOCCs engaged in the generation and transmission of electric power from real property tax. However, local assessors assessed real property taxes on BPPC, leading to a legal battle that ultimately reached the Supreme Court.

The Local Board of Assessment Appeals (LBAA), Central Board of Assessment Appeals (CBAA), and the Court of Tax Appeals (CTA) all rejected NAPOCOR’s claim, asserting that BPPC, not NAPOCOR, was the actual user of the machineries and equipment. These lower tribunals emphasized that tax exemptions are construed strictissimi juris, meaning any ambiguity is resolved against the party claiming the exemption. Building on this principle, the Supreme Court affirmed the lower courts’ decisions, holding that the tax exemption could not be transferred to BPPC.

The Court scrutinized the BOT agreement, emphasizing BPPC’s ownership and operational control over the power plant. The Court considered the Build-Operate-Transfer (BOT) law, and underscored that BPPC, as the project proponent, undertook the construction, operation, and maintenance of the power plant, bearing the associated risks and costs. The fees collected from NAPOCOR for converting fuel to electricity allowed BPPC to recover its investment and operating expenses, aligning with the BOT framework. Here are some important clauses in the case, cited by the Supreme Court:

2.08 From the date hereof until the Transfer Date, CONTRACTOR shall, directly or indirectly, own the Power Station and all the fixtures, fittings, machinery, and equipment on the Site or used in connection with the Power Station which have been supplied by it or at its cost and it shall operate and manage the Power Station for the purpose of converting fuel of NAPOCOR into electricity.

The Court noted that NAPOCOR’s claim hinged on its interpretation of the BOT agreement as a mere financing arrangement. NAPOCOR contended that BPPC was essentially a lender, while NAPOCOR remained the beneficial owner and actual user of the power plant. However, the Court rejected this characterization, pointing to BPPC’s complete ownership and operational control. The Court highlighted that NAPOCOR’s role was primarily to supply fuel and purchase electricity generated by BPPC. Additionally, the Court referenced previous rulings, such as FELS Energy, Inc. v. The Province of Batangas, where it held that a similar tax exemption claim could not be extended to a private entity operating under contract with NAPOCOR.

This approach contrasts with a scenario where the government agency borrows funds and hires a private entity to manage the project on its behalf, the Supreme Court distinguished. In such cases, the agency retains ownership from the outset. The Court clarified that BPPC was not merely an agent of NAPOCOR but an independent entity operating the power plant for its own account. Therefore, this crucial detail differentiated the dynamics of the BOT arrangement.

Consequently, the Supreme Court affirmed that BPPC, not NAPOCOR, was the actual, direct, and exclusive user of the machineries and equipment. This determination led to the denial of NAPOCOR’s claim for tax exemption, highlighting the strict interpretation applied to tax exemptions. The Supreme Court further supported this ruling by pointing out that if NAPOCOR was worried about a real property tax, it could address that by having it properly put in the contract between the parties.

FAQs

What was the key issue in this case?	The main issue was whether NAPOCOR’s tax exemption extended to BPPC, a private corporation operating a power plant under a BOT agreement with NAPOCOR.
What does ‘actual, direct, and exclusive use’ mean in this context?	It refers to the entity that principally or predominantly utilizes the machineries and equipment to attain a specific purpose, without the intervention of others. In this case, BPPC directly used the equipment to generate power.
Why did the Court rule against NAPOCOR’s tax exemption claim?	The Court found that BPPC, not NAPOCOR, owned and operated the power plant and was the actual, direct, and exclusive user of the equipment. Therefore, BPPC couldn’t take on NAPOCOR’s exemption.
What is a Build-Operate-Transfer (BOT) agreement?	It’s a contractual arrangement where a project proponent builds, operates, and maintains an infrastructure facility for a fixed term, recovering investment through user fees, before transferring it to the government.
How does this ruling affect other BOT agreements?	This ruling clarifies that tax exemptions are specific to the entity that directly uses the equipment and cannot be automatically extended to private partners in BOT agreements.
Can parties agree to transfer tax exemptions through contracts?	No, tax exemptions must be expressly granted by the Constitution, statute, or franchise; they cannot be created through contracts between private parties.
What was NAPOCOR’s role in the BOT agreement with BPPC?	NAPOCOR supplied the fuel and purchased the electricity generated by BPPC, fulfilling its mandate to deliver electricity to consumers.
Does this decision mean BPPC is responsible for real property taxes?	Yes, as the owner and operator of the power plant equipment, BPPC is liable for real property taxes because they directly used it. The contract with NAPOCOR could determine the shouldering of the payment however.

In conclusion, the Supreme Court’s decision reinforces the principle that tax exemptions are strictly construed and apply only to the entity directly and exclusively using the property in question. This case highlights the importance of carefully structuring BOT agreements to clearly define the roles and responsibilities of each party, particularly concerning tax liabilities.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: National Power Corporation vs. Central Board of Assessment Appeals (CBAA), G.R. No. 171470, January 30, 2009