It is common knowledge that those engaged in business are required to make contributions to the LGUs in order to help them perform the functions for which they have been organized. Such power is a direct grant to the LGUs by the Constitution to acquire their own revenue-raising powers consistent to the policy of local autonomy and subject only to the limitations found in the Local Government Code (LGC).
As a matter of regulation, taxes are paid at the beginning of the year in order to allow the business to operate for the rest of the year. This is a requirement to avail of the business and other permits for conduct of business.
According to law, the taxes shall be paid for every separate or place where the business subject to tax is conducted, with one line of business not becoming exempt by being conducted with some other business for which the taxes have been paid. And it is established that the tax on a business has to be paid by the person operating the same.
But what if a company undergoing expansion establishes its own branch or sales office in another municipality? Would it be a fair assumption that the different LGUs where the business units are operational would be able to subject all the establishments to taxes under the pretext of their revenue-raising powers?
Legally speaking, the answer would be in the negative as the LGC already provides for source or situs rules for the payment of business taxes. The LGC proponents have made sure that all LGUs get a fair share from businesses operating within their zone of control. The following rules are provided under the law to wit:
• Where there is a branch or sales office, or warehouse which accepts orders and/or issues its own sales invoices, the tax shall accrue and be paid to the municipality where such branch, sales office, or warehouse issuing its own invoice is located;
• In case there is no branch, sales office, or warehouse, the sale must be recorded in the head office and the taxes must be paid to the city or municipality where the latter is located;
• If there is no branch but the company maintains a factory, project office, plant or plantation, the 30/70 sales allocation rule between the LGUs where the head office, plant, or plantation is located applies. In this case, 30% of all the sales recorded in the head office shall be taxable by the city or municipality where it is located. And 70% of all the sales recorded in the head office shall be taxable by the city or municipality where the factory, plant or plantation is located.
Further, the Implementing Rules of the Code provide that if sales are made through Route Trucks or Vans, the tax must be paid to the LGU where the branch, sales office or warehouse is located. And in cases where it does not have a branch, sales office or, the tax must be paid to the LGU where the branch or sales office from where the products are withdrawn for sale by the vehicles.
To illustrate, the Bureau of Local Government Finance stated in a 2016 opinion that a business engaged in leasing land located in various parts of the Philippines must declare all its revenues and pay the local business tax to the city where its principal office is located and not to the LGU where the land is being leased. Provided, it is not maintaining any sales or branch office outside of the LGU of its principal office and that it records all its transactions and issues invoices and official receipts therein.
The Supreme Court expounded in the case of Philippine Match vs. City of Cebu that for purposes of local business taxation, the company’s sales must always be recorded in the branch if one is established. And that the sales allocation rules will only apply if there is no branch, given that sales allocations will be followed irrespective of whether or not sales are made in the locality where a factory, project office, plant or plantation is located.
Given this, it would be relevant to know the proper place where local business tax must be paid. For improper compliance, the LGU may impose surcharges not exceeding 25% of the amount not paid on time and an interest at the rate not exceeding 2% per month of the unpaid taxes. Also, wrong payment to one city will not prevent another city from making its own assessment.
The LGUs may have different interpretations of the situs rules on payment. And based on experience, each will protect its share of the prosperity pie by passing ordinances taxing the business. Even in the case of entities registered with the Philippine Economic Zone Authorities (PEZA), some LGUs have established agreements with economic zone authorities to subject such enterprises to taxation. This practice has yet to be decided upon by the Supreme Court and could be an issue regarding the extent of the taxing power of the local government.
In conclusion, the revenue-making powers of LGUs will have a direct impact on the business decisions of a company. Time and again we have seen business transfers happening due to the inflexible tax rates and impositions which presents taxpayers with no choice.
The situs rules must be adhered to. These were legislated precisely to avoid double taxation and ensure that each local government unit gets its fair share from businesses.
Of utmost importance is that taxpayers must be proactive in knowing how the rules work in order to enjoy the privilege of conducting their businesses. This is also critical in making decisions to stay or move to another location.
Let’s start the year right!
