The Supreme Court ruled that submarine communications cables can be classified as taxable real property, affirming the power of local governments to impose real property tax on such cables within their jurisdiction. This decision clarifies that even though these cables are not directly adhered to the soil, they can be considered “machinery” and thus subject to real property tax under the Local Government Code. This ruling impacts telecommunications companies and other entities that own or co-own submarine cables, as it clarifies their tax obligations and the extent of local government authority over these assets.

Undersea Assets: Can Submarine Cables Be Taxed as Real Property?

Capitol Wireless, Inc. (Capwire), an international telecommunications service provider, contested the real property tax assessments imposed by the Provincial Assessor of Batangas on its submarine cable systems. Capwire argued that since the cables were laid in international waters, they were not subject to Philippine real property tax. The case reached the Supreme Court after the Regional Trial Court (RTC) and the Court of Appeals (CA) both ruled against Capwire, citing its failure to exhaust administrative remedies by not appealing to the Local Board of Assessment Appeals (LBAA) and not paying the tax under protest, as required by the Local Government Code.

The central issue before the Supreme Court was whether the tax assessments on Capwire’s submarine cables were valid, considering Capwire’s claim that the cables were located in international waters and, therefore, outside the taxing jurisdiction of the local government units. Additionally, the Court considered whether submarine communications cables could be classified as taxable real property under the Local Government Code. The Court examined the procedural aspects of tax disputes and the substantive issue of whether these cables fell within the definition of real property for taxation purposes.

The Court emphasized the general rule that taxpayers must first exhaust administrative remedies and pay taxes under protest before resorting to judicial action. The exception to this rule applies when the assessment is alleged to be illegal or made without legal authority. However, the Court found that Capwire’s case involved questions of fact, such as the extent of its ownership and the actual location of the cables within Philippine territory. These factual issues should have been resolved by the LBAA before seeking judicial intervention. According to the Supreme Court in Cosmos Bottling Corporation v. Nagrama, Jr.:

There is a question of law in a given case when the doubt or difference arises as to what the law is on a certain state of facts; there is a question of fact when the doubt or difference arises as to the truth or the falsehood of alleged facts.

The Court agreed with the CA that questions such as the extent to which parts of the submarine cable system lie within the territorial jurisdiction of the taxing authorities were factual issues that needed to be resolved administratively. Capwire’s claim that its submarine cable system lies entirely in international waters was a factual assertion that required substantiation before the administrative agencies.

On the substantive issue, the Supreme Court ruled that submarine communications cables can be classified as taxable real property, similar to electric transmission lines. The Court referenced Manila Electric Company v. City Assessor and City Treasurer of Lucena City, where electric transmission lines were deemed no longer exempt from real property tax and could qualify as “machinery” subject to real property tax under the Local Government Code. The Court reasoned that submarine cables, like electric lines, serve the owner’s business and meet the needs of its industry, thus qualifying as real property under Article 415(5) of the Civil Code, which includes:

Machinery, receptacles, instruments or implements intended by the owner of the tenement for an industry or works which may be carried on in a building or on a piece of land, and which tend directly to meet the needs of the said industry or works.

The Court also noted that the Philippines, under the United Nations Convention on the Law of the Sea (UNCLOS), exercises sovereignty over its territorial sea, including the seabed and subsoil, extending up to 12 nautical miles from the baseline. This means that any portion of the submarine cable system within Philippine territorial waters is subject to its jurisdiction and, consequently, its taxing authority. Further, the Local Government Code defines “municipal waters” as including marine waters up to 15 kilometers from the coastline, further extending local authorities’ power to levy real property taxation.

The Court emphasized that taxation is a basic attribute of sovereignty delegated to local governments. Capwire failed to present any evidence of a specific exemption from real property taxation for its submarine cables. Section 193 of the Local Government Code explicitly withdraws tax exemptions previously granted, unless otherwise provided in the Code. Section 234 lists specific exemptions, which do not include submarine cables owned by telecommunications companies. Furthermore, the Court pointed out that under Capwire’s legislative franchise, any prior grant of real property tax exemption had been expressly withdrawn by the Local Government Code, which took effect on January 1, 1992.

FAQs

What was the key issue in this case?	The key issue was whether submarine communications cables could be classified as taxable real property by local governments and whether Capwire followed the correct procedure in contesting the tax assessment.
Why did the Supreme Court deny Capwire’s petition?	The Supreme Court denied the petition because Capwire failed to exhaust administrative remedies by not appealing to the Local Board of Assessment Appeals (LBAA) and because submarine cables can be classified as taxable real property.
What does it mean to exhaust administrative remedies?	Exhausting administrative remedies means that a party must first pursue all available avenues of appeal within the administrative system before seeking judicial relief. In this case, Capwire should have appealed to the LBAA before going to court.
What is the significance of UNCLOS in this case?	The United Nations Convention on the Law of the Sea (UNCLOS) is significant because it defines the extent of a country’s territorial sea and its rights over the seabed and subsoil. The Court used UNCLOS to support its conclusion that the Philippines has jurisdiction over submarine cables within its territorial waters.
How does the Local Government Code impact tax exemptions?	The Local Government Code expressly withdraws tax exemptions previously granted unless otherwise provided in the Code. This means that any prior exemptions, including those in legislative franchises, were revoked upon the Code’s effectivity.
What are the implications of this ruling for telecommunications companies?	The ruling clarifies that telecommunications companies are responsible for paying real property taxes on submarine cables within Philippine territory. They must comply with local tax laws and procedures for assessment and payment.
Can submarine cables be considered real property?	Yes, the Supreme Court has determined that submarine cables can be classified as real property for taxation purposes because they are considered “machinery” that serves the owner’s business and meets the needs of its industry.
What is the role of the Local Board of Assessment Appeals (LBAA)?	The LBAA is a local administrative body that hears and decides assessment appeals related to real property taxes. It is the first venue for taxpayers to contest assessments before seeking judicial relief.

In conclusion, the Supreme Court’s decision in Capitol Wireless, Inc. v. The Provincial Treasurer of Batangas affirms the taxing power of local governments over submarine communications cables located within their territorial jurisdiction. This ruling underscores the importance of exhausting administrative remedies before seeking judicial relief and clarifies the classification of submarine cables as taxable real property. These taxes are essential for local governance and must be followed in accordance with law.

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: Capitol Wireless, Inc. vs. The Provincial Treasurer of Batangas, G.R. No. 180110, May 30, 2016