The basis of local business taxes

The 20th day of January marks an important day in Philippine history. On this day in the year 2001 our current and, in a few months, soon to be ex-president, was sworn in as the 14th President of the Republic of the Philippines following the fall of former President Joseph Estrada and less than four years later subsequently elected to a full six-year presidential term. Thus how one would view the significance of the 20th of January may depend on what side of the political fence one is on. As an African proverb states, “Until lions have their historians, tales of the hunt shall always glorify the hunters. “

From a tax perspective, the 20th of January may also be considered an important date as it is the date when local taxes for the New Year fall due. Local taxes are those that are imposed by local government units such as Provinces, cities, municipalities and barangays in contrast to national internal revenue taxes that are those imposed by the National Government through the Bureau of Internal Revenue and the Bureau of Customs. Each local government unit shall exercise its power to create its own sources of revenue and to levy taxes, fees, and charges consistent with the basic policy of local autonomy.

Under Section 167 of the Local Government Code (LGC) all local taxes, fees, and charges shall be paid within the first 20 days of January or, if paid quarterly, on or before the 20th of each month beginning each subsequent quarter. By the time you read this article you may have already renewed or are already in the process of renewing your business permit. It may be helpful to understand some basic concepts of local taxation.

Firstly, local taxation is governed by a number of fundamental principles. One of these basic principles is that taxation has to be uniform in each local government unit. What this basically means is that local taxes have to be equitable and based as far as practicable on the taxpayer’s ability to pay. Further local taxes can only be collected and used for public purposes. In addition, the tax must not be unjust, excessive, oppressive, or confiscatory as well as not contrary to law, public policy, national economic policy, or in restraint of trade.

In addition to the principle on the uniformity of taxation, another precept is that the collection of local taxes, fees, charges and other impositions shall in no case be delegated to any private person. Also, the revenue collected shall inure solely to the benefit of, and be subject to disposition by, the local government unit levying the tax,. Finally, each local government unit shall, as far as practicable, evolve a progressive system of taxation. While cynics among us may view these fundamental principles as nothing more than lofty ideals, these principles do in fact ensure that a local government unit is able to self sufficient and rely less on the National Government for its financial requirements.

Another fundamental concept is that the power to tax is not a power that is inherent to a local government unit. It is in fact a power that is delegated to it by law which in this case is the LGC. Consequently, there are certain kinds of taxes that a local government unit is not allowed to impose and a limited number which it may.

Some common examples of taxes which provinces, cities, municipalities, and barangays are not allowed to impose are income taxes, except when levied on banks and other financial institutions, documentary stamp taxes, customs duties, taxes, fees and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units, excise taxes on articles enumerated under the National Internal Revenue Code, as well as percentage or value-added taxes (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided in the LGC. 

The kind of taxes that a local government unit can impose would depend on the local government unit. For example, a province may impose a tax on Transfer of Real Property Ownership, a Tax on Business of Printing and Publication, a Franchise Tax, a Tax on Sand, Gravel and Other Quarry Resources as well as a Professional Tax and Amusement tax, among others. On the other hand, a municipality may impose. a tax on business on manufacturers, wholesalers, distributors, retailers, contractors banks and financial institutions as well as peddlers engaged in the sale of merchandise. In fact, if the local legislative body chooses, it may in fact impose a business tax on any business, not otherwise specified in the LGC which the local legislative body may deem proper to tax. Note that the business tax that may be imposed by the municipality may be imposed by a city as well although the LGC allows the city to impose a higher rate of business tax.

One of the tax issues surrounding the imposition of the local business tax is the proper tax base. The LGC provides that the local business tax payable would depend on the amount of gross sales or gross receipts of the previous taxable year which a business has to declare. For example, the local business tax that is payable for the year 2010 would be based on the gross sales or gross receipts in the year 2009. As local governments may rely on the audited financial statements of a business to determine the local business tax payable, the question arises as to whether the revenues as declared in the audited financial statements represents an accurate basis for declaring gross sales or receipts for local business tax.

This issue appears to have been settled by the Philippine Supreme Court. In this case, a local government unit assessed a taxpayer for deficiency local business based on its gross revenue as reported in its financial statements. The local government unit argued that gross receipts are synonymous with gross earnings/revenue, which, in turn, includes uncollected earnings.

The Supreme Court disagreed with the position taken by the local government unit. In its decision, the Supreme Court held that gross receipts include money or its equivalent actually or constructively received in consideration of services rendered or articles sold, exchanged or leased, whether actual or constructive. It concluded that the local government unit erred when it assessed the taxpayer’s local business tax based on gross revenue as declared in its audited financial statements, which included accrued revenues or revenues that were not actually or constructively received since the LGC provides that the tax should be computed based on gross receipts.   

Let me end this article with another ancient proverb, this time from Haiti. ““Dèyè Mon Gin Mon…Behind the mountains are more mountains.” In order to hurdle the challenges that taxation issues throw our way, one must manage to overcome so many obstacles. I hope this article has provided information that will enable you to overcome local business tax issues.

(Manual P. Salvador III is a Tax Director of Manabat Sanagustin & Co., CPAs, a member firm of KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity

The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines. For comments or inquiries, please email [email protected])