The Supreme Court has definitively ruled that government instrumentalities are exempt from real property taxes on properties used for public purposes. This decision clarifies the scope of local government taxing powers and reinforces the principle that properties dedicated to serving the public good should not be burdened by local taxes, except when leased to private entities. This ensures that essential public services provided by these instrumentalities are not hampered by financial constraints imposed by local tax assessments.

Airport Authority vs. City Hall: Who Pays Property Taxes?

The central legal question in Mactan-Cebu International Airport Authority (MCIAA) v. City of Lapu-Lapu revolved around whether MCIAA, as an airport authority, was exempt from real property taxes levied by the City of Lapu-Lapu. The City argued that MCIAA, as a government-owned and controlled corporation (GOCC), was subject to real property taxes under the Local Government Code of 1991. MCIAA countered that it was a government instrumentality, not a GOCC, and thus exempt from such taxes. This case required the Supreme Court to reconcile conflicting interpretations of the Local Government Code and its impact on the taxing powers of local government units versus the tax exemptions of national government instrumentalities.

The Court’s analysis hinged on distinguishing between a GOCC and a government instrumentality. It relied on Section 2(13) of the Administrative Code of 1987, which defines a GOCC as an agency organized as a stock or non-stock corporation. MCIAA, like the Manila International Airport Authority (MIAA), does not have capital stock divided into shares and does not have stockholders, thus failing to qualify as a stock corporation. Similarly, it does not have members and is not organized for charitable, religious, or similar purposes, disqualifying it as a non-stock corporation. The Court underscored that merely vesting corporate powers in a government instrumentality does not transform it into a corporation.

Building on this principle, the Court highlighted that MCIAA functions as a government instrumentality vested with corporate powers to efficiently perform governmental functions. This classification aligns with Section 2(10) of the Administrative Code, which defines an instrumentality as an agency of the National Government, not integrated within the department framework, vested with special functions or jurisdiction by law, endowed with some if not all corporate powers, administering special funds, and enjoying operational autonomy, usually through a charter. MCIAA exercises both governmental powers (eminent domain, police authority, levying fees) and corporate powers, but its fundamental nature remains that of a government instrumentality.

The implications of this classification are significant in the realm of taxation. Section 133(o) of the Local Government Code restricts local government units from imposing taxes, fees, or charges on the National Government, its agencies, and instrumentalities, “unless otherwise provided” in the Code. The Court clarified that the “unless otherwise provided” clause does not apply in this instance. MCIAA, as a government instrumentality, is not a taxable person under the Local Government Code. The only exception to this exemption arises when MCIAA leases its real property to a taxable person, as stipulated in Section 234(a) of the Local Government Code. In such cases, only the specific real property leased becomes subject to real estate tax.

The Court’s ruling further hinged on the nature of the airport lands and buildings themselves. Citing Article 420 of the Civil Code, the Court affirmed that properties devoted to public use are properties of public dominion owned by the State or the Republic of the Philippines. The airport lands and buildings of MCIAA, used for international and domestic travel, constitute a “port” constructed by the State, thus classifying them as properties of public dominion. As properties of public dominion, they are outside the commerce of man and are expressly exempt from real estate tax under Section 234(a) of the Local Government Code.

This approach contrasts with taxing private entities operating for profit. The rationale behind exempting properties of public dominion from real estate tax lies in their dedication to public service and the broader benefit they provide to the community. Taxing these properties would essentially transfer public funds from one government pocket to another, serving no practical purpose. By exempting MCIAA’s properties used for public purposes, the Court ensured that MCIAA could continue providing essential public services without being burdened by local taxes.

The Supreme Court addressed the lower court’s reliance on the 1996 MCIAA v. Marcos case. The Court clarified that the 2006 MIAA v. Court of Appeals case, decided en banc, had effectively reversed the earlier ruling. The Court highlighted that the 2006 MIAA case, which explicitly mentioned MCIAA as being similarly situated, became final and executory and has been either affirmed or cited in numerous subsequent cases. This underscored the precedential value of the 2006 MIAA case and its applicability to MCIAA.

Moreover, the Court deemed void the sale in a public auction of 27 of MCIAA’s properties, as well as the corresponding Certificates of Sale of Delinquent Property issued to the City of Lapu-Lapu. Since MCIAA’s properties used for public purposes are exempt from real property tax, the city lacked the authority to sell them for tax delinquency. This underscores the limitations on local government taxing powers and reinforces the protection afforded to properties dedicated to public service.

FAQs

What was the key issue in this case?	The key issue was whether the Mactan-Cebu International Airport Authority (MCIAA) is exempt from real property taxes imposed by the City of Lapu-Lapu.
What is the difference between a GOCC and a government instrumentality?	A GOCC is organized as a stock or non-stock corporation, while a government instrumentality is an agency of the National Government vested with special functions but not necessarily organized as a corporation.
Why are government instrumentalities generally exempt from local taxes?	Government instrumentalities are exempt to prevent the unnecessary transfer of public funds between different levels of government, ensuring resources are used for public services.
What does the Local Government Code say about taxing national government entities?	Section 133(o) of the LGC generally prohibits local governments from taxing the National Government, its agencies, and instrumentalities, with certain exceptions.
What kind of properties are considered ‘of public dominion’?	Properties of public dominion include those devoted to public use, such as roads, ports, and airports, which are owned by the State and outside the commerce of man.
Are there any exceptions to MCIAA’s real property tax exemption?	Yes, portions of MCIAA’s properties that are leased to private, taxable entities are subject to real property tax.
What happened to the auction of MCIAA’s properties in this case?	The Supreme Court declared the public auction of MCIAA’s properties and the subsequent purchase by the City of Lapu-Lapu as null and void.
What was the impact of the 2006 MIAA case?	The 2006 MIAA case, which clarified the tax-exempt status of government instrumentalities, effectively reversed an earlier ruling that had subjected MCIAA to real property taxes.
How does this ruling affect local government taxing powers?	This ruling clarifies the limitations on local government taxing powers, particularly concerning national government instrumentalities and properties dedicated to public use.

This ruling underscores the balance between local autonomy in taxation and the need to protect national government instrumentalities that provide essential public services. It provides a clear framework for determining the tax-exempt status of government entities and ensures that local government units do not unduly burden national agencies performing public functions.

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: MACTAN-CEBU INTERNATIONAL AIRPORT AUTHORITY (MCIAA), VS. CITY OF LAPU-LAPU AND ELENA T. PACALDO, G.R. No. 181756, June 15, 2015