City of Lapu-Lapu vs. Philippine Economic Zone Authority

The Philippine Economic Zone Authority (PEZA) is an instrumentality of the national government performing essential governmental functions, not a government-owned or controlled corporation, and is therefore exempt from payment of real property taxes under the inherent limitations on local taxing powers provided in Section 133(o) of the Local Government Code of 1991; furthermore, real properties registered in its name are owned by the Republic of the Philippines and constitute property of public dominion exempt from taxation under Section 234(a) of the same Code.

The case stems from the legislative policy to establish export processing zones to encourage foreign commerce and industrialization. Originally created as the Export Processing Zone Authority (EPZA) under Presidential Decree No. 66 in 1972, the entity was declared non-profit and explicitly exempt from all taxes including real property taxes. In 1995, Republic Act No. 7916 (the Special Economic Zone Act) created the PEZA to operate, administer, and manage economic zones, mandating that the EPZA evolve into the PEZA. Executive Order No. 282 subsequently directed the PEZA to assume all powers, functions, and responsibilities of the EPZA not inconsistent with the new law. The Local Government Code of 1991, which took effect in 1992, withdrew tax exemptions previously granted to all persons, including government-owned or controlled corporations, but maintained the inherent limitation that local government units cannot tax the national government and its instrumentalities.

• In G.R. No. 184203, the City of Lapu-Lapu, through its Treasurer, demanded payment of real property taxes from PEZA for the period 1992 to 1998, and subsequently up to 2002, citing Sections 193 and 234 of the Local Government Code which withdrew tax exemptions, and arguing that no provision in Republic Act No. 7916 specifically exempted PEZA unlike Section 21 of Presidential Decree No. 66 which explicitly exempted EPZA.
• In G.R. No. 187583, the Province of Bataan, through its Provincial Treasurer, likewise demanded real property taxes from PEZA for the period June 1995 to December 2002, issuing a warrant of levy, notice of delinquency, and notice of public auction against PEZA's properties in Mariveles, Bataan.
• PEZA filed a petition for declaratory relief before the Regional Trial Court of Pasay City (Branch 111) against the City of Lapu-Lapu, praying that it be declared exempt from real property taxes, which the RTC granted on June 14, 2006.
• PEZA also filed a petition for injunction with prayer for temporary restraining order before the Regional Trial Court of Pasay City (Branch 115) against the Province of Bataan to enjoin the auction sale, which the RTC denied on January 31, 2007, ruling that PEZA was liable for real property taxes.
• The City of Lapu-Lapu filed an ordinary appeal under Rule 41 before the Court of Appeals, which dismissed the appeal on January 11, 2008 for being the wrong mode of appeal since only pure questions of law were raised which should have been appealed via certiorari under Rule 45 directly to the Supreme Court.
• PEZA filed a petition for certiorari before the Court of Appeals assailing the RTC Branch 115 decision, which the Court of Appeals granted on August 27, 2008, ruling that the trial court gravely abused its discretion and that PEZA was exempt from taxes.
• Both the City of Lapu-Lapu and the Province of Bataan filed separate petitions for review on certiorari before the Supreme Court, which were consolidated by resolution dated March 14, 2011.

• The City of Lapu-Lapu argued that the Court of Appeals erred in dismissing its appeal for raising pure questions of law, contending that the issues involved mixed questions of fact and law regarding whether PEZA performed governmental functions.
• The City maintained that the RTC of Pasay had no jurisdiction because the real properties were located in Lapu-Lapu City, and that PEZA should have impleaded other local government units making similar tax demands.
• The City and the Province of Bataan argued that the PEZA is not exempt from real property taxes because the exemption under PD 66 was not carried over to RA 7916, and under the rule in statutory construction, provisions omitted in revised statutes are deemed repealed.
• The Province of Bataan argued that the Court of Appeals had no jurisdiction over PEZA's petition for certiorari because the Court of Tax Appeals has exclusive appellate jurisdiction over local tax cases decided by the RTC.
• Both argued that Section 24 of RA 7916 subjects developers of economic zones to real property taxes, and that PEZA acts as a developer, not a mere government regulator.
• They cited a Department of Justice legal opinion stating that PEZA is not exempt from real property taxes under the Local Government Code.

• PEZA argued that the Court of Appeals correctly dismissed the City's appeal because it raised pure questions of law proper for a Rule 45 petition, not an ordinary appeal.
• PEZA maintained that it is an agency and instrumentality of the National Government exempt from real property taxes under Sections 133(o) and 234(a) of the Local Government Code.
• It argued that it assumed the tax-exempt status of its predecessor EPZA under Section 51 of RA 7916 (the Ipso-Facto clause) and Executive Order No. 282, which transferred all EPZA powers, functions, and responsibilities to PEZA.
• PEZA contended that its properties are lands of public dominion reserved for public use under Proclamation No. 1811 (Mactan) and Republic Act No. 5490 (Bataan), and thus owned by the Republic of the Philippines, rendering them exempt under Section 234(a) of the Local Government Code.
• It argued that Section 24 of RA 7916 applies only to business establishments operating within economic zones, not to the PEZA itself which performs governmental functions.
• PEZA asserted that the RTC of Pasay had jurisdiction over its petition for declaratory relief under Rule 63, and that it need not implead other local government units whose demands came after the petition was filed.

• Procedural Issues: Whether the Court of Appeals erred in dismissing the City of Lapu-Lapu’s appeal for raising pure questions of law; whether the Regional Trial Court of Pasay had jurisdiction to hear the petition for declaratory relief; whether the petition for injunction is a local tax case appealable to the Court of Tax Appeals; and whether the Court of Appeals had jurisdiction over the petition for certiorari filed by PEZA.
• Substantive Issues: Whether the PEZA is exempt from payment of real property taxes.

• Procedural: The Court held that the Court of Appeals did not err in dismissing the City’s appeal because the issues raised were pure questions of law regarding jurisdiction and statutory interpretation, which should be appealed via Rule 45, not Rule 41; however, the Supreme Court relaxed the rules to decide the case on the merits in the interest of justice. The Court ruled that the RTC of Pasay had no jurisdiction over the petition for declaratory relief because the City had already issued demand letters and assessments, constituting a breach of the statute, making the remedy improper as declaratory relief requires no prior breach. The Court held that the Court of Appeals had no jurisdiction over PEZA’s petition for certiorari because the Court of Tax Appeals has exclusive appellate jurisdiction over local tax cases decided by the RTC under Section 7(a)(3) of Republic Act No. 1125 as amended by Republic Act No. 9282, and the denial of the petition for injunction became final and executory; nevertheless, the Court again relaxed the rules to resolve the substantive issue to avoid conflicting decisions and for judicial economy.
• Substantive: The Court held that PEZA is exempt from real property taxes because it is an instrumentality of the national government performing governmental functions, not a government-owned or controlled corporation subject to the test of economic viability, and thus falls under the inherent limitation in Section 133(o) of the Local Government Code prohibiting local taxes on national government instrumentalities. The Court further held that PEZA assumed the tax-exempt status of its predecessor EPZA under Executive Order No. 282 and Section 51 of RA 7916, and that the properties held by PEZA are properties of public dominion owned by the Republic of the Philippines under Section 234(a) of the Local Government Code, specifically being reserved lands for public use under Proclamation No. 1811 and Republic Act No. 5490.

• Inherent Limitations on Local Taxing Power — Section 133(o) of the Local Government Code embodies the inherent limitation that local government units cannot impose taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, which exemption is not withdrawn by Section 193 or 234 of the same Code.
• Government Instrumentality vs. Government-Owned or Controlled Corporation — An instrumentality is an agency of the National Government vested with special functions by law, endowed with corporate powers, administering special funds, and enjoying operational autonomy, which need not meet the test of economic viability unlike GOCCs which perform proprietary functions and compete in the marketplace.
• Declaratory Relief Requirements — A petition for declaratory relief is proper only when there has been no breach of the statute or contract, there is an actual justiciable controversy, and no other adequate remedy is available; once a breach occurs, the proper remedy is an ordinary civil action such as injunction.
• Tax Remedies for Erroneous vs. Illegal Assessments — For erroneous assessments challenging the correctness of the amount, taxpayers must exhaust administrative remedies by paying under protest and appealing to the Local Board of Assessment Appeals and Central Board of Assessment Appeals; for illegal assessments issued without authority, taxpayers may directly resort to judicial action via injunction without exhausting administrative remedies.
• Jurisdiction of the Court of Tax Appeals — The Court of Tax Appeals has exclusive appellate jurisdiction over local tax cases decided by Regional Trial Courts in the exercise of original jurisdiction under Section 7(a)(3) of Republic Act No. 1125 as amended by Republic Act No. 9282.

• "There must be express language in the law empowering local governments to tax national government instrumentalities. Any doubt whether such power exists is resolved against local governments." — Citing Manila International Airport Authority v. Court of Appeals.
• "While it is true that rules of procedure are intended to promote rather than frustrate the ends of justice, and while the swift unclogging of the dockets of the courts is a laudable objective, it nevertheless must not be met at the expense of substantial justice." — Citing Municipality of Pateros v. Court of Appeals.
• "The Court has allowed some meritorious cases to proceed despite inherent procedural defects and lapses. This is in keeping with the principle that rules of procedure are mere tools designed to facilitate the attainment of justice, and that strict and rigid application of rules which should result in technicalities that tend to frustrate rather than promote substantial justice must always be avoided."
• "Instrumentalities perform essential public services for the common good, services that every modern State must provide its citizens. These instrumentalities need not be economically viable since the government may even subsidize their entire operations."

• Manila International Airport Authority v. Court of Appeals, 528 Phil. 181 (2006) — Controlling precedent establishing that MIAA is a government instrumentality exempt from local taxation under Section 133(o) of the Local Government Code, distinguishing instrumentalities from GOCCs, and holding that properties of public dominion are exempt from real property taxes.
• Municipality of Pateros v. Court of Appeals, 607 Phil. 104 (2009) — Cited for the doctrine that rules of procedure may be relaxed in the interest of substantial justice to prevent technicalities from frustrating the ends of justice.
• Ty v. Trampe, 321 Phil. 81 (1995) — Cited for the distinction between erroneous and illegal assessments of real property taxes, and the remedies available for each.
• Ollada v. Central Bank of the Philippines, 115 Phil. 284 (1962) — Cited for the rule that declaratory relief is improper once there has been a breach of the statute or right.
• The City of Manila v. Hon. Grecia-Cuerdo, G.R. No. 175723, February 4, 2014 — Cited for the doctrine that the Court of Tax Appeals has exclusive jurisdiction over local tax cases and petitions for certiorari in aid of its appellate jurisdiction.
• Republic v. City of Parañaque, G.R. No. 191109, July 18, 2012 — Cited for the definition of government instrumentalities and the test of economic viability for GOCCs.
• Indoyon, Jr. v. Court of Appeals, G.R. No. 193706, March 12, 2013 — Cited for the principle that ignorance of procedural rules on appeals is not tolerated and that the Supreme Court is not tasked to determine proper remedies for litigants.

• Section 133(o), Local Government Code of 1991 (Republic Act No. 7160) — Prohibits local government units from levying taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities.
• Section 193, Local Government Code of 1991 — Withdraws tax exemptions or incentives granted to all persons, whether natural or juridical, including government-owned or controlled corporations, except local water districts, cooperatives, non-stock and non-profit hospitals and educational institutions.
• Section 234(a), Local Government Code of 1991 — Exempts from real property tax real property owned by the Republic of the Philippines or any of its political subdivisions except when the beneficial use has been granted to a taxable person.
• Section 24, Special Economic Zone Act of 1995 (Republic Act No. 7916) — Exempts business establishments operating within economic zones from national and local taxes except real property taxes on land owned by developers, and imposes a five percent final tax on gross income earned.
• Section 51, Special Economic Zone Act of 1995 — Provides that all privileges, benefits, advantages or exemptions granted to special economic zones under Republic Act No. 7227 shall ipso-facto be accorded to special economic zones created under RA 7916.
• Section 21, Presidential Decree No. 66 — Declares the Export Processing Zone Authority non-profit and exempt from all income taxes, franchise taxes, realty taxes and all other kinds of taxes.
• Section 7(a)(3), Republic Act No. 1125 as amended by Republic Act No. 9282 — Grants the Court of Tax Appeals exclusive appellate jurisdiction over decisions of Regional Trial Courts in local tax cases originally decided by them.
• Rule 41, Rules of Court — Governs ordinary appeals from Regional Trial Court decisions, allowing questions of fact or mixed questions of fact and law.
• Rule 45, Rules of Court — Governs appeals by certiorari to the Supreme Court, allowing only questions of law.
• Rule 63, Rules of Court — Governs declaratory relief proceedings requiring no prior breach and an actual justiciable controversy.
• Article 420, Civil Code of the Philippines — Defines property of public dominion as those intended for public use or for public service.
• Section 16, Article XII, 1987 Constitution — Provides that government-owned or controlled corporations may be created or established by special charters in the interest of the common good and subject to the test of economic viability.