Taxing Government Entities: Local Government Power and Exemptions Under the LGC

The power of local governments to tax property owned by government-owned and controlled corporations (GOCCs) is a recurring question in Philippine tax law. In Mactan Cebu International Airport Authority v. Marcos (G.R. No. 120082, September 11, 1996), the Supreme Court settled a key aspect of this issue: the withdrawal of real property tax exemptions under the Local Government Code of 1991 (LGC) applies to GOCCs, even those performing governmental functions. The ruling balances the constitutional policy of local autonomy against the traditional immunity of national government instrumentalities from local taxation.

Facts of the Case

The Mactan Cebu International Airport Authority (MCIAA) was created under Republic Act No. 6958 to manage the Mactan and Lahug airports. Its charter, Section 14, expressly exempted it from realty taxes imposed by the National Government or any political subdivision.

In 1994, the City of Cebu demanded real property taxes on several parcels of land owned by MCIAA, totaling over P2.2 million. The city relied on provisions of the LGC that withdrew tax exemptions previously granted to GOCCs. MCIAA objected, arguing that it was an instrumentality of the National Government performing governmental functions. Under the LGC, local governments cannot levy taxes, fees, or charges of any kind on the National Government, its agencies, and instrumentalities. The trial court ruled against MCIAA, and the case reached the Supreme Court.

The Issue

The central question was whether MCIAA, as a government-owned corporation, could still claim exemption from real property tax under its charter after the LGC took effect, or whether the LGC's withdrawal of exemptions applied to it.

The Ruling

The Supreme Court denied MCIAA's petition, holding that its exemption from real property tax had been validly withdrawn.

The Court explained that while the LGC generally prohibits local governments from taxing national government agencies and instrumentalities, this rule must be read together with the provisions on real property tax and its exemptions. The LGC allows provinces and cities to levy real property tax, while the exemption provision lists specific exemptions and explicitly withdraws all others.

The Court noted a crucial distinction in the language of the LGC. The provision on limitations of local taxing power refers to the "National Government, its agencies and instrumentalities," but the exemption for real property tax covers only real property owned by the Republic of the Philippines or any of its political subdivisions. The term "Republic of the Philippines" is broader than "National Government," yet the exemption was deliberately narrowed. The Court observed that the predecessor provision under P.D. No. 464 had explicitly included government-owned or controlled corporations exempt by their charters, but this phrase was omitted in the LGC. This omission signaled a clear legislative intent to limit tax exemption privileges.

The Court also rejected MCIAA's argument that it was not a "taxable person." Since its charter granted it only a specific exemption from real property tax, the grant itself implied that MCIAA was otherwise subject to taxation. Furthermore, the Court found that the lands in question had been transferred to MCIAA as part of its capital, meaning MCIAA owned them outright. The exemption for property owned by the Republic did not apply because ownership had passed to MCIAA.

Finally, the Court distinguished its earlier ruling in Basco v. Philippine Amusement and Gaming Corporation, which held that local governments cannot tax national government instrumentalities. That case was decided before the LGC took effect. The Court emphasized that Congress can validly subject even government instrumentalities to tax when doing so serves the constitutional policy of local autonomy and addresses the erosion of the local tax base.

Practical Takeaways

• GOCCs are generally taxable on real property. After the LGC took effect on January 1, 1992, exemptions from real property tax previously granted to GOCCs by their charters are deemed withdrawn, unless the property falls under the specific exemptions in the LGC.
• "National Government" and "Republic of the Philippines" are not interchangeable. The LGC's exemption for property owned by the Republic does not automatically cover property owned by GOCCs, even if they perform governmental functions.
• Check the specific exemption. A GOCC may still be exempt if its property falls under the LGC's enumerated exemptions, such as property owned by the Republic or political subdivisions (where beneficial use has not been granted to a taxable person), or property used for charitable, religious, or educational purposes.
• Local governments have broad authority to tax GOCCs. The ruling reinforces local autonomy by allowing local governments to impose real property taxes on GOCCs, subject only to the explicit exemptions in the LGC.
• Charter exemptions are not permanent. Exemptions granted in a GOCC's charter can be withdrawn by a later law, unless the exemption is contractual in nature, which is rare for government entities.

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