The commercial transaction is not the only basis for imposing the local business tax

Local government units have the power to create their own sources of revenue by nothing less than the Philippine Constitution. This power is further defined in the 1991 Local Government Code (LGC). And provided there is a valid tax ordinance enacted by the respective local legislative body or sanggunian, such power may be imposed on properties and business activities located or conducted within the jurisdiction of the relevant LMU.

Like the national tax agency, LGUs had become so aggressive in their assessment and collection efforts. In fact, in many cases, two or more LGUs attempt to impose taxes on the same subject. This is not surprising, especially in the case of local business taxes, where the earning process can involve a series of activities carried out in different localities. The premise is that where there is commercial activity, there should be a tax.

Indeed, the rule is that local taxes are due for each separate or distinct establishment or place where taxable activities are carried out. Thus, it is not uncommon for a locality where part of the activities are carried out to claim its share of the business tax, or even impose all income, on the pretext that the employee is carrying out an activity in its territory. But local taxation is not as simple as that. Doing business in a locality, even if this activity constitutes a commercial activity, is not necessarily covered by the taxing power of the relevant LMU. There are parameters defined in the LGC that indicate when and where local taxes can be imposed.

Without dwelling on specific cases, let me consider in general the extent of the power of LGUs to impose local taxes, particularly where a taxpayer carries on business in different LGUs or where the transactions span more than an LGU. The situs rule of local taxation is very clear. Businesses, which maintain or operate a branch or outlet elsewhere, must register the sale at the branch or outlet conducting the sale or transaction, and tax accrues and must be paid to the LMU where that branch or outlet is located. If there is no branch or point of sale in the locality where the sale or transaction is made, the sale is duly recorded at the principal office and the taxes accrue and are paid to such city or municipality. A specific allocation rule is provided when the company has factories, project offices, factories and plantations in different localities. And this applies regardless of whether or not the sales are made in the locality where the factory, project office, factory or plantation is located.

Local taxes are therefore only taxable by the LGUs where the main offices, branches/sales outlets/warehouses, factories, project offices, factories and plantations are located.

Clearly, with respect to local taxation, doing business or having part of the business transacted in an LGU does not make the company liable for taxes in that city/municipality. To be covered or not by the power of taxation by the locality located outside its principal place of business, it is not only the fact of doing or not doing business in the said locality that is considered. The presence or absence of a branch or factories, project offices, factory or plantation.

The rules presumably specify that sales made in a locality where there is no branch are recorded at the main office and that the taxes due go to the city or municipality where the main office is located. A branch is a fixed place in a locality, which carries out the activities of the company as an extension of the head office. An office where orders can be received is not a branch or sales office.

Perhaps it is unfair for LGUs where businesses are partly compromised not to have their share of tax revenue, while their community is disrupted by the presence of commercial activities in its region. Indeed, there should be a fairer distribution of local taxes. As one city treasurer put it, no matter how much business is done in his area, presence contributes to the city’s woes. However, current local tax rules do not include these reasons as bases for imposing local taxes.

The current local tax system often leads to misunderstandings between LGUs and their taxpayers as to which LGU has the power to impose the tax. The dispute over which LGU has jurisdiction to impose tax often comes at the expense of businesses. Perhaps local taxation should be included in the next administration’s tax reform agenda, to spare both LGUs and taxpayers confusion and establish fairer local taxation.

The author is the managing partner of Du-Baladad and Associates Law Offices (BDB Law), a member firm of WTS Global.

The article is provided for general information only and is not intended, nor should it be construed, as a substitute for tax, legal or financial advice on any specific subject. The applicability of this article to any actual or particular tax or legal matter should therefore be supported by professional study or advice. If you have any comments or questions regarding the article, you can email the author at [email protected] or dial 8403-2001 loc 310.