Real Property Tax: Who Is the Actual User in a BOT Agreement?

The Supreme Court has settled a recurring question in Philippine tax law: when a government-owned or controlled corporation (GOCC) enters into a Build-Operate-Transfer (BOT) agreement with a private corporation, who is considered the "actual, direct, and exclusive user" of the project's machineries and equipment for real property tax purposes? In National Power Corporation v. Central Board of Assessment Appeals (G.R. No. 171470, January 30, 2009), the Court ruled that the private corporation operating the facility—not the GOCC—is the actual user, and therefore the tax exemption does not apply.

The Case: NAPOCOR and the Bauang Diesel Power Plant

In 1993, the National Power Corporation (NAPOCOR) entered into a BOT agreement with First Private Power Corporation for the construction of the 215-Megawatt Bauang Diesel Power Plant in La Union. The agreement created Bauang Private Power Corporation (BPPC) to own, manage, and operate the plant. Under the contract, BPPC would convert NAPOCOR's supplied diesel fuel into electricity and deliver it to NAPOCOR for a fee. After 15 years, the plant would be transferred to NAPOCOR without additional payment.

When the Municipal Assessor of Bauang assessed real property taxes on BPPC's machineries and equipment, NAPOCOR sought exemption under Section 234(c) of the Local Government Code (Republic Act No. 7160). This provision exempts from real property tax "all machineries and equipment that are actually, directly and exclusively used by 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."

The Issue: Who Actually Uses the Machineries?

NAPOCOR argued that the BOT agreement was essentially a financing arrangement. It claimed to be the beneficial owner and actual user of the power plant, with BPPC merely acting as financier-contractor. NAPOCOR also contended that its tax-exempt status should extend to BPPC because BOT projects are essentially government projects where the private sector provides the initial financing.

The Local Board of Assessment Appeals, the Central Board of Assessment Appeals, and the Court of Tax Appeals all rejected NAPOCOR's claim. They found that BPPC—not NAPOCOR—owned, operated, and used the machineries and equipment.

The Supreme Court's Ruling

The Supreme Court denied NAPOCOR's petition, affirming that the tax exemption under Section 234(c) of the Local Government Code did not apply. The Court emphasized that tax exemptions are strictly construed against the claimant.

The BOT concept. The Court explained that under the BOT Law (Republic Act No. 6957, as amended by Republic Act No. 7718), the project proponent constructs, finances, operates, and maintains the facility over a fixed term. The proponent recovers its investment through tolls, fees, and charges, then transfers the facility to the government at the end of the term. This arrangement goes beyond a simple financing scheme—the private proponent operates the facility for its own account, assuming risks and incurring costs.

BPPC as actual user. Applying this concept, the Court found that BPPC had complete ownership—both legal and beneficial—of the machineries and equipment during the BOT period. BPPC operated the plant, used the equipment, and received payment for the electricity generated. NAPOCOR's interest was contingent and would only materialize after the 15-year cooperation period ended.

Tax exemption is personal and non-transferable. The Court reiterated that a tax exemption is a personal privilege that cannot be passed on to another entity through contract. The provision in the BOT agreement where NAPOCOR assumed responsibility for real estate taxes did not justify exemption—such an arrangement between the parties cannot bind the local government unit.

Prior jurisprudence. The Court cited FELS Energy, Inc. v. Province of Batangas, where it similarly held that NAPOCOR could not extend its tax-exempt status to a private party operating a power barge under an agreement with NAPOCOR. The Court also applied the strictissimi juris standard from NAPOCOR v. City of Cabanatuan, requiring clear and convincing evidence of the factual basis for any tax exemption claim.

Assessment level. The Court likewise rejected NAPOCOR's argument that the properties should be classified as "special" for real property tax purposes, entitling them to a lower assessment level. Since the basis for this classification was the same as the claimed tax exemption—actual, direct, and exclusive use by a GOCC—the lower assessment level did not apply. The exact statutory provision on special classification and assessment levels is not quoted here, but the Court's ruling addressed this argument directly.

Practical Takeaways

• A BOT agreement does not make the government agency the "actual, direct, and exclusive user" of project assets during the cooperation period. The private proponent that operates the facility is the user for real property tax purposes.
• Tax exemptions under Section 234(c) of the Local Government Code are personal to the GOCC and cannot be transferred to a private contractor through contractual stipulations.
• Contractual provisions where one party assumes another's tax liability do not affect the government's right to collect real property tax from the actual owner or user.
• Local government units have constitutional protection for their power to tax, and courts will uphold this power even against GOCCs performing public functions.
• Entities claiming real property tax exemptions must prove their entitlement with clear and convincing evidence, as tax exemptions are strictly construed against the claimant.

This article is general information and not legal advice. For your specific situation, consult a lawyer or ask ASG Legal AI.