Title
Metropolitan Waterworks and Sewerage System vs. Local Government of Quezon City
Case
G.R. No. 194388
Decision Date
Nov 7, 2018
MWSS, a government instrumentality, challenged Quezon City's real property tax assessments, claiming exemption under the Local Government Code. The Supreme Court ruled MWSS properties exempt unless leased to private entities, reversing the Court of Appeals' decision.

Case Summary (G.R. No. 1053)

Legal Question Presented

Whether a local government unit may lawfully assess and levy real property taxes on the real properties of MWSS — specifically whether MWSS is exempt from such local taxation as a government instrumentality exercising corporate powers, or whether it is a government-owned or controlled corporation (GOCC) whose tax exemptions were withdrawn by the Local Government Code.

Threshold Procedural Issue: Hierarchy of Courts

Respondents argued MWSS violated the doctrine of hierarchy of courts by directly filing in the Court of Appeals rather than the Regional Trial Court, which shares concurrent jurisdiction over special civil actions. The Supreme Court observed the doctrine and its exceptions, recognized that the Court of Appeals exercised discretion to take the petition on the ground that it raised a pure question of law, and found no reversible error in that determination. Accordingly, the Supreme Court proceeded to address the merits.

Statutory Framework on Local Real Property Taxation

  • Local governments may levy annual ad valorem real property tax (Local Government Code, Section 232).
  • Section 133(o) of the Local Government Code generally prohibits local taxation “on the National Government, its agencies and instrumentalities,” subject to any express provision to the contrary.
  • Section 234 enumerates specific exemptions from real property tax, including property owned by the Republic or political subdivisions, “except when the beneficial use thereof has been granted, for consideration or otherwise, to a taxable person,” and provides that previously granted exemptions to GOCCs are withdrawn upon the Code’s effectivity, with certain exceptions.

Precedential Parameters: Government Instrumentality vs. GOCC

The Court relied on prior jurisprudence distinguishing (a) government instrumentalities vested with corporate powers (instrumentalities/corporate entities) and (b) government-owned or -controlled corporations (GOCCs). Key points distilled from precedent:

  • An “instrumentality” (per Administrative Code definition) is an agency of the national government, usually created by charter, vested with special functions and some corporate powers, administering special funds and enjoying operational autonomy. Government instrumentalities are generally exempt from local taxation under Section 133(o) absent an express legislative intent to tax them.
  • A “GOCC” is organized as a stock or non-stock corporation, performing governmental or proprietary functions, and is subject to the Local Government Code’s provision that withdraws prior exemptions from GOCCs (Section 234 proviso), unless a specific exemption remains.
  • Properties that are part of the public dominion (devoted to public use, held in trust for the Republic) are not subject to levy, encumbrance or sale; however, portions leased to private taxable persons may lose exemption because beneficial use has been granted to a taxable person.

Application of Legal Tests to MWSS’s Nature

The Supreme Court examined MWSS’s statutory charter and amendments:

  • MWSS was created by statute in 1971 as a government corporation without capital stock and expressly declared exempt from taxes in Section 18 of its charter. PD No. 425 (1974) authorized capital stock of P1,000,000,000 subscribed and paid for by the Government of the Philippines, with shares non-transferable and non-pledgeable. MWSS exercises corporate powers, operational autonomy, authority to acquire/transfer/encumber property, to sue and be sued, to fix rates, and to enter into commercial arrangements, and was attached administratively to the DPWH.
  • The Court observed that MWSS’s charter grants broad proprietary powers (e.g., to acquire, sell, lease, mortgage and otherwise dispose of property), indicating it holds and deals in property in its corporate capacity rather than as canonical properties of the public dominion that cannot be transferred or encumbered.
  • Congress’s subsequent actions, Executive Order No. 596 and Republic Act No. 10149, classified MWSS among “Government Instrumentalities with Corporate Powers” / “Government Corporate Entities,” aligning it with entities previously recognized by the Court as exempt (e.g., MIAA, PFDA). The Court treated these executive and legislative categorizations as confirming the entity’s character.

Effect of Privatization and Functional Changes

The decision notes legislative and administrative developments including the National Water Crisis Act (RA 8041, 1995) and privatization of certain MWSS functions through concession agreements. The Court applied existing precedent distinguishing properties used directly for public functions from those portions whose beneficial use has been granted to private, taxable persons: where beneficial use to a taxable person is alleged and proven, tax exemption does not apply to those portions.

Court’s Reasoning and Distinction from GOCC Status

Although MWSS exercises commercial/proprietary functions and was converted to capital-stock form, the Supreme Court concluded that, under the applicable tests and precedent, MWSS is to be treated as a government instrumentality vested with corporate powers rather than as a GOCC subject to the broad withdrawal of exemptions in Section 234’s proviso. The Court relied on:

  • MWSS’s charter, historical exemption in Section 18, and the non-transferable, government-subscribed capital stock arrangement;
  • Executive and legislative classifications grouping MWSS with other government instrumentalities that the Court has previously held to be tax-exempt; and
  • The principle that real property owned by the Republic or its instrumentalities remains exempt unless beneficial use has been granted to a taxable person.

Burden Regarding Beneficial Use to Taxable Persons

The Court emphasized that a government instrumentality exercising corporate powers is not liable for payment of real property taxes on its properties unless it is alleged and proven that the beneficial use of its properties has been extended to a taxable person. Here, respondents did not allege or prove that the beneficial use of any MWSS properties in Quezon City had been granted to taxable private parties (excepting th

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