UP Tax Exemption: Balancing Public Benefit and Local Revenue

The Supreme Court has ruled that the University of the Philippines (UP) is exempt from real property tax on its land leased to Ayala Land, Inc. (ALI) for the UP-Ayala Technohub. The decision clarifies how the UP Charter of 2008 interacts with the Local Government Code's rules on taxing government property leased to private entities. This ruling matters because it defines the limits of local governments' power to tax national government instrumentalities and clarifies when a legislative charter can override general tax laws.

The Case: UP vs. City Treasurer of Quezon City

In G.R. No. 214044, decided on June 19, 2019, UP challenged the City Treasurer of Quezon City's attempt to collect real property tax on a 985,597-square-meter parcel of land along Commonwealth Avenue. UP had leased a 380,630-square-meter portion to ALI in 2006 under a Contract of Lease with Development Obligations, which became the UP-Ayala Technohub.

In 2014, the City Treasurer issued a Statement of Delinquency and a Final Notice of Delinquency demanding over P117 million in real property taxes from UP for 2009 to 2014, threatening to sell the land at public auction. UP argued it was exempt under Republic Act No. 9500, the UP Charter of 2008.

The Legal Framework: Two Competing Rules

The Local Government Code provides the general rule on taxing government property. Section 234(a) exempts real property owned by the Republic of the Philippines from real property tax, but with an important exception: the exemption does not apply when the beneficial use of the property has been granted to a taxable person. Section 205(d) complements this by requiring such property to be assessed in the name of the beneficial user.

Under these provisions, when a government-owned property is leased to a private entity like ALI, the property becomes taxable, and the lessee is generally liable for the tax.

However, RA 9500 provides a different rule for UP. Section 25(a) states that all revenues and assets of UP used for educational purposes or in support thereof shall be exempt from all taxes and duties. Section 22 allows UP to lease its land, provided the income derived from such development is used to further the ends of the national university.

The Court's Ruling: RA 9500 Supersedes the LGC

The Supreme Court granted UP's petition, declaring UP exempt from real property tax on the land leased to ALI. The Court held that RA 9500, enacted in 2008, superseded Sections 205(d) and 234(a) of the Local Government Code with respect to UP's property.

The Court explained that before RA 9500, the test for taxability was who held beneficial use of the property. After RA 9500, the test changed: what matters is whether UP's property is used for educational purposes or in support thereof. Since the development of the UP-Ayala Technohub was intended to create a science and technology park where research and technology-based collaborative projects between technology and the academe thrive, the Court found this clearly served an educational purpose.

Distinguishing the NPC Case

The Court distinguished this case from National Power Corporation v. Province of Quezon (2009), which the City Treasurer relied upon. In that case, NPC assumed the real property tax liability of its private BOT partner in their contract, then claimed tax exemption as a government-owned corporation. The Court found this arrangement "essentially wrong" because it allowed NPC to avoid taxes through a contractual arrangement without congressional authority.

The present case differs because RA 9500 provides the congressional authority UP needed. The Court noted that while the 2006 lease contract may have been problematic before RA 9500's enactment, the Charter's passage in 2008 "obliterated what was essentially wrong" in the arrangement.

Important Limitation: Improvements Not Covered

The Court's ruling applies only to the land owned by UP. The improvements introduced by ALI on the leased property are not covered by UP's tax exemption. Under the lease contract, ALI owns these improvements during the term of the lease. Since they are not assets of UP, the tax exemption under RA 9500 does not extend to them.

Practical Takeaways

• Legislative charters can override the Local Government Code. A specific law granting tax exemption to a government instrumentality prevails over the general provisions of the LGC, being the later expression of legislative will.
• The "beneficial use" test has limits. While Sections 205(d) and 234(a) of the LGC generally make government property taxable when leased to private parties, a specific statutory exemption can change this analysis.
• Educational purpose is the key test for UP property. Under RA 9500, UP's assets used for educational purposes or in support thereof are exempt, regardless of who holds beneficial use.
• The ruling does not cover private improvements. Local governments may still collect real property tax on improvements owned by private lessees on government land.
• Contractual arrangements cannot substitute for legislative authority. Without a specific law like RA 9500, government entities cannot contractually assume tax liabilities of private parties and then claim exemption.

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