Mactan-Cebu International Airport vs.

City of Lapu-Lapu (2015)

Summary Cases:

Mactan-Cebu International Airport vs. City of Lapu-Lapu

Subject: 2006 MIAA case has overrruled and superseded the 1996 MCIAA case; MCIAA is not a GOCC
but a Government instrumentality; Limitations on the taxing powers of Local Government Units (LGUs);
Airports are properties of public dominion owned by the State; Properties of public dominion, being
outside the commerce of man, cannot be the subject of an auction sale; Properties owned by the State
may be titled in the name of the Republic itself or in the name of its agencies or instrumentalities;
Property owned by the State are exempt from real property tax, except when the beneficial use thereof
has been granted to a taxable person

Facts:

Mactan-Cebu International Airport Authority (MCIAA) was created on July 31, 1990 under Republic Act
No. 6958 for the management and supervision of the Mactan International Airport in the Province of
Cebu and the Lahug Airport in Cebu City x x x and such other airports as may be established in the
Province of Cebu.

Under its charter, Section 14 of RA 6958, MCIAA enjoyed exemption from realty taxes imposed by the
National Government or any of its political subdivisions, agencies and instrumentalities

On September 11, 1996, however, the Supreme Court rendered a decision in Mactan-Cebu International
Airport Authority vs. Marcos (the 1996 MCIAA case) declaring that upon the effectivity of Republic Act
No. 7160 (The Local Government Code of 1991 or LGC), MCIAA was no longer exempt from real
estate taxes. The decision stated that:

Since the last paragraph of Section 234 unequivocally withdrew, upon the effectivity of the LGC,
exemptions from payment of real property taxes granted to natural or juridical persons, including
government-owned or controlled corporations (GOCCs), except as provided in the said section, and
[MCIAA] is, undoubtedly, a government-owned corporation, it necessarily follows that its exemption from
such tax granted it in Section 14 of its Charter, R.A. No. 6958, has been withdrawn.

Thus, in January 1997, respondent City of Lapu-Lapu issued to MCIAA a Statement of Real Estate Tax
assessing the lots comprising the Mactan International Airport in the amount of P162,058,959.52, and
later amended down to P151,376,134.66.

MCIAA averred that the assessed amount covered real estate taxes on the lots utilized solely and
exclusively for public or governmental purposes such as the airfield, runway and taxiway, and the lots on
which they are situated.

MCIAA paid the City P4 million monthly, later increased to P6 million monthly. As of December 2003,
MCIAA had paid the City a total of P275,728,313.36.

Upon request of MCIAAs General Manager, the Secretary of the Department of Justice issued DOJ
Opinion No. 50, Series of 1998 took the effect that: the properties used for airport purposes, such as the
airfield, runway and taxiway and the lots on which the runway and taxiway are located, are owned by the
State or by the Republic of the Philippines and are merely held in trust by the MCIAA, notwithstanding
that certificates of titles thereto may have been issued in the name of the MCIAA

| Page 1 of 6
Based on the above DOJ Opinion, the Department of Finance issued a 2nd Indorsement to the City
Treasurer of Lapu-Lapu, essentially granting the MCIAA's request for exemption from payment of real
property tax on the property used for airport purposes.

The City Treasurer Elena Pacaldo sent MCIAA a Statement of Real Property Tax Balances up to the
year 2002 reflecting the amount of P246,395,477.20. MCIAA claimed that the statement again included
the lots utilized solely and exclusively for public purpose such as the airfield, runway, and taxiway and
the lots on which these are built. Pacaldo then issued Notices of Levy on 18 sets of real properties of
MCIAA.

MCIAA filed a petition for prohibition with the RTC of Lapu-Lapu City to to enjoin respondent City from
issuing a warrant of levy against MCIAAs properties and from selling them at public auction for
delinquency in realty tax obligations. MCIAA based its claim of exemption on DOJ Opinion No. 50.

RTC Lapu-Lapu City issued a 72-hour TRO but refused to extend it. Hence, on December 10, 2003, City
of Lapu-Lapu auctioned 27 of MCIAAs properties. As there was no interested bidder who participated in
the auction sale, the City forfeited and purchased said properties. The corresponding Certificates of Sale
of Delinquent Property were issued to the City of Lapu-Lapu.

The RTC initially granted the permanent injunction in favor of MCIAA. However, upon motion by the City
of Lapu-Lapu, the RTC reversed itself and reasoned that the City has presented Ordinance No. 44
(Omnibus Tax Ordinance of the City of Lapu-Lapu), Section 25 which authorized the collection of a rate
of one and one-half (1 ) [per centum] from.. any real estate lying within the jurisdiction of the City of
Lapu-Lapu...Though this ordinance was enacted prior to the effectivity of Republic Act No. 7160 (LGC),
to the mind of the Court this ordinance is still a valid and effective ordinance in view of Sec. 529 of RA
7160.

The RTC further ruled that, without an ordinance , the City can still collect the additional 1% tax on real
property in view of Republic Act No. 5447 which created the Special Education Fund constituted from the
proceeds of the additional tax on real property imposed by the law.

The RTC likewise ruled that when MCIAA failed to redeem the parcels of land acquired by the City, the
ownership thereof became fully vested on the City without the latter having to perform any other acts to
perfect its ownership.

On appeal by MCIAA, the Court of Appeals (CA) held that MCIAA is a government-owned or controlled
corporation (GOCC) and its properties are subject to realty tax and the special education fund.

MCIAA, in its motion fore reconsideration, cited Manila International Airport Authority vs. Court of
Appeals (the 2006 MIAA case) where the Manila International Airport Authority had been described as a
government instrumentality. It is alleged that the the 2006 MIAA case has overturned the 1996 MCIAA
case.

The CA, in denying the motion for reconsideration, refused to apply the ruling in the 2006 MIAA case on
the premise that the same had not yet reached finality, and that as far as MCIAA is concerned, the 1996
MCIAA case is still good law.

The CA nevertheless held that the auction sale on the tax delinquent assets of MCIAA was void since
under Republic Act No. 6958 (MCIAA charter), the properties of MCIAA may not be conveyed or
transferred to any person or entity except to the national government.

| Page 2 of 6
Hence, the present petition.

Held:

2006 MIAA case has overrruled and superseded the 1996 MCIAA case

1. The Court of Appeals erred in declaring that the 1996 MCIAA case still controls and that petitioner
MCIAA is a GOCC.

2. In the 2006 MIAA case, it was held that MIAAs airport lands and buildings are exempt from real estate
tax imposed by local governments; that it is not a GOCC but an instrumentality of the national
government, with its real properties being owned by the Republic of the Philippines, and these are
exempt from real estate tax.

3. The 2006 MIAA case had, since the promulgation of the questioned Decision and Resolution, reached
finality and had in fact been either affirmed or cited in numerous cases by the Court. The decision
became final and executory on November 3, 2006. Furthermore, the 2006 MIAA case was decided by
the Court en banc while the 1996 MCIAA case was decided by a Division. Hence, the 1996 MCIAA case
should be read in light of the subsequent and unequivocal ruling in the 2006 MIAA case.

MCIAA is not a GOCC but a Government instrumentality

4. Many government instrumentalities are vested with corporate powers but they do not become stock or
non-stock corporations, which is a necessary condition before an agency or instrumentality is deemed a
government-owned or controlled corporation. Examples are the Mactan International Airport Authority,
the Philippine Ports Authority, the University of the Philippines and Bangko Sentral ng Pilipinas. All these
government instrumentalities exercise corporate powers but they are not organized as stock or
non-stock corporations as required by Section 2(13) of the Introductory Provisions of the Administrative
Code. These government instrumentalities are sometimes loosely called government corporate entities.
However, they are not government-owned or controlled corporations in the strict sense as understood
under the Administrative Code, which is the governing law defining the legal relationship and status of
government entities.

5. Instrumentality refers to any agency of the National Government, not integrated within the
department framework, vested with special functions or jurisdiction by law, endowed with some if not all
corporate powers, administering special funds, and enjoying operational autonomy, usually through a
charter. (Section 2(10) of the Introductory Provisions of the Administrative Code of 1987)

6. The definition of instrumentality uses the phrase includes x x x government-owned or controlled

corporations which means that a government instrumentality may or may not be a government-owned
or controlled corporation. Obviously, the term government instrumentality is broader than the term
government-owned or controlled corporation. (see Manila International Airport Authority v. City of
Pasay)
7. Government-owned or controlled corporation refers to any agency organized as a stock or
non-stock corporation, vested with functions relating to public needs whether governmental or
proprietary in nature, and owned by the Government directly or through its instrumentalities either wholly,
or, where applicable as in the case of stock corporations, to the extent of at least fifty-one (51) percent of
its capital stock. (Section 2(13) of the Introductory Provisions of the Administrative Code of 1987)

8. A government-owned or controlled corporation must be organized as a stock or non-stock

corporation. In the 2006 MIAA case, it was held that MIAA is not a stock corporation because it has no
| Page 3 of 6
capital stock divided into shares. MIAA is also not a non-stock corporation because it has no members.
Even if we assume that the Government is considered as the sole member of MIAA, this will not make
MIAA a non-stock corporation. Non-stock corporations cannot distribute any part of their income to their
members. Section 11 of the MIAA Charter mandates MIAA to remit 20% of its annual gross operating
income to the National Treasury. This prevents MIAA from qualifying as a non-stock corporation. (See in
relation to Section 3, 87 and 88 of the Corporation Code)

9. When the law vests in a government instrumentality corporate powers, the instrumentality does not
become a corporation. Unless the government instrumentality is organized as a stock or non-stock
corporation, it remains a government instrumentality exercising not only governmental but also corporate
powers.

10. Petitioner MCIAA, with its many similarities to the MIAA, should be classified as a government
instrumentality, as its properties are being used for public purposes. MCIAA is vested with corporate
powers but it is not a stock or non-stock corporation, which is a necessary condition before an agency or
instrumentality is deemed a government-owned or controlled corporation. Like MIAA, petitioner MCIAA
has capital under its charter but it is not divided into shares of stock. It also has no stockholders or voting
shares.

Limitations on the taxing powers of Local Government Units (LGUs)

11. Section 133(o) of the Local Government Code recognizes the basic principle that local governments
cannot tax the national government, which historically merely delegated to local governments the power
to tax. While the 1987 Constitution now includes taxation as one of the powers of local governments,
local governments may only exercise such power subject to such guidelines and limitations as the
Congress may provide.

12. When local governments invoke the power to tax on national government instrumentalities, such
power is construed strictly against local governments. The rule is that a tax exemption is strictly
construed against the taxpayer claiming the exemption. However, when Congress grants an exemption
to a national government instrumentality from local taxation, such exemption is construed liberally in
favor of the national government instrumentality. 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.
Airports are properties of public dominion owned by the State

13. Properties of public dominion mentioned in Article 420 of the Civil Code, like roads, canals, rivers,
torrents, ports and bridges constructed by the State, are owned by the State. The term ports includes
seaports and airports.

14. The Airport Lands and Buildings are devoted to public use because they are used by the public for
international and domestic travel and transportation. The fact that the [MIAA] collects terminal fees and
other charges from the public does not remove the character of the Airport Lands and Buildings as
properties for public use. The Airport Lands and Buildings of [MIAA] are properties of public dominion
because they are intended for public use. As properties of public dominion, they indisputably belong to
the State or the Republic of the Philippines.

15. The terminal fees [MIAA] charges to passengers, as well as the landing fees MIAA charges to
airlines, constitute the bulk of the income that maintains the operations of [MIAA]. The collection of such
fees does not change the character of [MIAA] as an airport for public use. Such fees are often termed
users tax. This means taxing those among the public who actually use a public facility instead of taxing
| Page 4 of 6
all the public including those who never use the particular public facility. A users tax is more equitable -
a principle of taxation mandated in the 1987 Constitution.

Properties owned by the State may be titled in the name of the Republic itself or in the name of
its agencies or instrumentalities

16. The real properties owned by the Republic are titled either in the name of the Republic itself or in the
name of agencies or instrumentalities of the National Government. The Administrative Code allows real
property owned by the Republic to be titled in the name of agencies or instrumentalities of the national
government. Such real properties remain owned by the Republic and continue to be exempt from real
estate tax.

17. The Republic may grant the beneficial use of its real property to an agency or instrumentality of the
national government. This happens when title of the real property is transferred to an agency or
instrumentality even as the Republic remains the owner of the real property. Such arrangement does not
result in the loss of the tax exemption. Section 234(a) of the Local Government Code states that real
property owned by the Republic loses its tax exemption only if the beneficial use thereof has been
granted, for consideration or otherwise, to a taxable person. MIAA, as a government instrumentality, is
not a taxable person under Section 133(o) of the Local Government Code. Thus, even if we assume that
the Republic has granted to MIAA the beneficial use of the Airport Lands and Buildings, such fact does
not make these real properties subject to real estate tax.

18. The Court in the 2006 MIAA case held that MIAA is merely holding title to the Airport Lands and
Buildings in trust for the Republic under Section 48, Chapter 12, Book I of the Administrative Code
which allows instrumentalities like MIAA to hold title to real properties owned by the Republic.
Property owned by the State are exempt from real property tax, except when the beneficial use
thereof has been granted to a taxable person

19. The Court in the 2006 MIAA case that Section 234(a) of the Local Government Code exempts from
real estate tax any real property owned by the Republic of the Philippines. The Court emphasized,
however, that portions of the Airport Lands and Buildings that MIAA leases to private entities are not
exempt from real estate tax. For example, the land area occupied by hangars that MIAA leases to
private corporations is subject to real estate tax. In such a case, MIAA has granted the beneficial use of
such land area for a consideration to a taxable person and therefore such land area is subject to real
estate tax.

20. Like in MIAA, the airport lands and buildings of MCIAA are properties of public dominion because
they are intended for public use. As properties of public dominion, they indisputably belong to the State
or the Republic of the Philippines, and are outside the commerce of man. This, unless MCIAA leases its
real property to a taxable person, the specific property leased becomes subject to real property tax; in
which case, only those portions of petitioners properties which are leased to taxable persons like private
parties are subject to real property tax by the City of Lapu-Lapu.

21. Hence, the properties of MCIAA that are actually, solely and exclusively used for public purpose,
consisting of the airport terminal building, airfield, runway, taxiway and the lots on which they are
situated, EXEMPT from real property tax imposed by the City of Lapu-Lapu.

Properties of public dominion, being outside the commerce of man, cannot be the subject of an
auction sale

22. The Court has ruled that property of public dominion, being outside the commerce of man, cannot be
| Page 5 of 6
the subject of an auction sale. Properties of public dominion, being for public use, are not subject to levy,
encumbrance or disposition through public or private sale. Any encumbrance, levy on execution or
auction sale of any property of public dominion is void for being contrary to public policy. Essential public
services will stop if properties of public dominion are subject to encumbrances, foreclosures and auction
sale. (see Municipality of Cavite vs. Rojas)

23. Thus, unless the President issues a proclamation withdrawing the Airport Lands and Buildings from
public use, these properties remain properties of public dominion and are inalienable. Since the Airport
Lands and Buildings are inalienable in their present status as properties of public dominion, they are not
subject to levy on execution or foreclosure sale. As long as the Airport Lands and Buildings are reserved
for public use, their ownership remains with the State or the Republic of the Philippines.

24. In Philippine Fisheries Development Authority vs. Court of Appeals, the Court held that the [PFDA]
is not a GOCC but an instrumentality of the government. [Thus] the real property tax assessments
issued by the City of Iloilo should be upheld only with respect to the portions of the IFPC leased to
private persons. In case the [PFDA] fails to pay the real property taxes due thereon, said portions cannot
be sold at public auction to satisfy the tax delinquency.

25. Hence, the Court declares NULL and VOID the sale in public auction of 27 of MCIAAs properties
and the eventual forfeiture and purchase of the said properties by respondent City of Lapu-Lapu.

| Page 6 of 6