BLGF Opinion No. 041-2016 CO-LFPS-PPPSD

December 28, 2016 BLGF OPINION NO. 041-2016 CO-LFPS-PPPSD 2nd Indorsement Respectfully returned to the OIC Regional Director, BLGF Region X, Cagayan de Oro City, the herein preceding Indorsement relative to the letter dated 18 July 2016 of Mayor Meraluna S. Abrogar of Municipality of Claveria, Misamis Oriental, requesting for an opinion on the taxability of Philip Morris Fortune Tobacco Corporation, Inc. (PMFTC) in the operations of a buying station with curing facility in the said municipality. It is noted that the request is based on the 17 February 2015 letter of the PFMTC attached to the aforementioned latter of the Mayor. HSAcaE Representations are made that PMFTC is a domestic corporation engaged in the manufacture and sale of various tobacco products, with principal office located in Marikina City, has two (2) factories located in Marikina City and Tanauan City, and operates various sales offices and warehouses throughout the country. In the subject request, PMFTC operates in the Municipality of Claveria a buying station with curing facility that (i) buys tobacco leaves from farmers, (ii) cures the tobacco leaves, and (iii) transfers the cured tobacco leaves to its facility in Vigan City. PFMTC also provides farm inputs ( e.g. , fertilizers, pesticides, etc.) as advance purchase price to planters/farmers who agreed beforehand to sell their tobacco leaves to PMFTC. PMFTC submits that it is not liable to pay the business tax to the Municipality for operating a buying station with curing facility and for providing advance purchase price to farmers in the form of farm inputs because it does not derive gross sales or receipts from such activities, as the tobacco leaves purchased from farmers are not sold to third parties, but instead ultimately used on the production of tobacco products like cigarettes in their factories in Marikina City and Tanauan City, and that the mere buying of farm inputs does not yield gross sales or receipts that can in turn be the basis of the LBT. It adds that the monetary value of farm inputs is treated as an advance purchase price given to farmers who agreed beforehand to sell their tobacco leaves to PMFTC, which is then deducted from the proceeds of the purchase price paid by PMFTC to the farmers upon delivery of the tobacco leaves, thus the farmers generate sales revenue and not the PMFTC. Further, PMFTC cited Section 5, Article X of the 1987 Constitution, Section 143 of the Local Government Code (LGC) of 1991, Paragraphs (a) and (b) of Section 150 of the LGC, and BLGF Opinion dated 18 January 2012 where this Bureau opined that the coffee buying station of Nestle Philippines, Inc. (NPI) in the Municipality of San Francisco, Agusan del Sur is not subject to local business tax. AScHCD On the other hand, the Municipality of Claveria believes that PMFTC is liable to pay the local business tax (LBT) even if it does not derive gross sales from its buying station, pursuant to the sales allocation rules provided under Section 2B.01 (b) of the Revenue Code of the municipality. Moreover, the Municipality claims that PMFTC's provision of farm inputs to the planters/farmers can be considered as a sales transaction subject to the LBT as dealer/retailer of farm inputs pursuant to section 2A.01 (c) (5) of the same Revenue Code. Premises considered, this Bureau expresses the following views: 1. Gross Sales or Receipts as Basis for Local Business Taxation. The LGC has so specifically provided that a city or municipality unit may impose a business tax based on the gross sales or receipts of a business entity of the preceding year . Stated otherwise, the absence of a gross sales or receipts of a business will render any assessment for LBT illegitimate for lack of legal basis in the law. 2. No Sales are Made in Buying Station. The basic rule in determining the situs of the local business tax is the location where the transactions are made and recorded. In order for the sale to be recorded and be subject to local business in the city or municipality other than where the principal office is located, the taxpayer should have a branch or sales outlet in such city or municipality, where a sale or transaction is made. Consequently, all sales made and recorded in such branch or sales office shall be 100% taxable by the city or municipality where such branch or sales office is located, pursuant to Paragraph (a) of Section 150 1 of the LGC. It is noted that said Section 150 of the LGC is implemented under Section 2B.01 (b) of the Revenue Code of Claveria. On the basis of the aforementioned provisions of the LGC and Revenue Code Claveria, if the buying station is utilized as a branch or sales office, then the municipality may validly impose a local business tax. It is worth emphasizing that PMFTC's buying station is similarly situated as that of the coffee buying station of Nestle Philippines, Inc. (NPI), which is the subject of the BLGF Opinion dated 18 January 2012, whereby we opined that NPI's coffee buying station will not be subject to or be liable to pay any local business tax since the sole activity of said buying station is to buy coffee beans; thus, there is no gross sales/receipts realize to base the computation of tax. HESIcT Accordingly, inasmuch as the buying station only buys tobacco leaves from farmers, cures the tobacco leaves, and then transfers the processed leaves to its facility in Vigan City, PMFTC cannot be subject or be liable to pay any local business tax to the said municipality. The Municipality may only impose the Mayor's Permit fee and other regulatory fees and service charges as may have been provided for in a duly enacted local tax ordinance. 3. PMFTC may be Considered as a Distributor. As stated above, the monetary value of farm inputs is treated as an advance purchase price given to farmers who agreed beforehand to sell their tobacco leaves to PMFTC, which is then deducted from the proceeds of the purchase price paid by PMFTC to the farmers upon delivery of the tobacco leaves. We agree that the monetary value of farm inputs forms part of the payment of leaf tobacco to the farmers. It is emphasized, however, that PMFTC should be able to substantially prove that the monetary value of farm inputs are indeed deduced from the purchase price; otherwise, PMFTC is considered engaged in business as a distributor of someone else's products, who may be also engaged as a manufacturer of tobacco products. If such will be the case, then PMFTC shall be subject or liable to pay the local business tax on manufacturers and distributors, and a separate permit or license for each business is required. This Opinion is issued based on the information provided and the representations made. However, if upon verification and investigation the same shall be proven to the contrary then the view rendered herein shall be considered null and void. Please be guided accordingly. (SGD.) NIO RAYMOND B. ALVINA OIC Executive Director Footnotes 1. Section 150. Situs of the Tax. (a) For purposes of collection of the taxes under Section 143 of this Code, manufacturers x x x, and other businesses, maintaining or operating branch or sales outlet elsewhere shall record the sale in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the municipality where such branch or sales outlet is located. In cases where there is no such branch or sales outlet in the city or municipality where the sales transaction is made, the sale shall be duly recorded in the principal office and the taxes due shall accrue and shall be paid to such city or municipality.