Bureau of Local Government Finance Opinion

June 11, 2013 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Anthony Mark A. Gutierrez Atty. Nicolina C. Madrid GATMAYTAN YAP PATACSIL GUTIERREZ & PROTACIO 30/F 88 Corporate Center Sedeo corner Valero Streets Salcedo Village, Makati City 1227 Gentlemen : This refers to your letter dated May 31, 2013 on behalf of your client, Holcim Philippines, Inc. (HPI), requesting for opinion on the proper allocation of gross receipts for the purpose of computing HPI's local business taxes due to various local government units (LGUs) in light of recent claims made by the Municipality of Doa Remedios Trinidad ("DRT'') and Municipality of Norzagaray ("Norzagaray") both of the Province of Bulacan. HPI submitted the following backgrounds: 1. HPI is a corporation organized under Philippine laws with principal office at 7th Floor two World square, Mckinley Hill, Fort Bonifacio, Taguig City. 2. HPI is principally engaged in the business of manufacturing cement and ready-mix concrete products. 3. HPI currently operates four (4) cement manufacturing plants located in (i) the Municipality of Bacnotan, La Union, (ii) Davao City, (iii) the Municipality of Lugait, Misamis Oriental, and (iv) Norzagaray (the Bulacan Plant). TAHIED 4. HPI currently maintains twenty (20) branch or sales outlets in the following locations: 1. Tuguegarao 2. Baguio 3. Vigan 4. Cabanatuan 5. Pampanga 6. Davao 7. General Santos 8. Isabela 9. Iloilo 10. Urdaneta 11. Lugait 12. Pasig 13. Bacolod 14. Zamboanga DCAEcS 15. Las Pias 16. Nueva Vizcaya 17. Cebu 18. Cagayan de Oro 19. Pulilan 20. Calaca, Batangas HPI's cement manufacturing plants in Davao and Lugait, Misamis Oriental also function as branch or sales outlets. 5. HPI has Mineral Production Sharing Agreements with the National Government for the quarrying of limestone, shale and diorite reserves in certain areas in DRT and Norzagaray. HPI uses the limestone, shale and diorite reserves quarried from DRT as part of the raw materials for producing cement in its Bulacan Plant. HPI does not sell the limestone, shale and diorite reserves to other persons. HPI has stopped quarrying limestone, shale and diorite reserves from Norzagaray since around 2004. 6. The quarrying activities being carried out in DRT are outsourced by HPI to Anseca Development Corporation. The quarried limestone, shale and diorite reserves are transported through a 1.5 kilometer merchanized conveyor belt stretching from DRT to Norzagaray. (HPI pays real property taxes on the conveyor belt.) HaAIES 7. Previously, HPI requested for an opinion on the correct interpretation of Section 150 of the Local Government Code (LGC) of 1991 because the City Treasurer of San Fernando City, Pampanga claimed that (i) all gross receipts recorded in HPI's branch in San Fernando City should be allocated to San Fernando City for purposes of determining the local business taxes due from the branch and (ii) the 70%-30% allocation under Section 150 (b) of the LGC should be applied only in cases where no branch or sales outlet is located in the area where the sales are made. 8. On August 29, 2008, BLGF rendered an opinion which reads in part as follows: From the aforequoted provisions of Section 150(b) and 150(a), it may be deduced that the LGU where the plant is located shall have the authority to tax seventy percent (70%) of all sales recorded in the principal office and the LGU where the principal office is located shall tax the remaining thirty percent (30%) of said sales . However, it is also clear that all sales or receipts made in a branch or sales outlet shall be recorded in such branch or sales outlet and shall be taxable by the LGU where said branch or sales outlet is located. Clearly, therefore, the LGU where the factory is situated shall not have a share in the sales or receipts made in a branch or sales outlet for so long as the sale made are recorded in said branch or sales outlet . CacEID In the case at hand, HPI sales at San Fernando City (Pampanga) shall be recorded at its Pampanga branch, in which case, Section 150, abovequoted will apply. Needless to say, whether the products sold in San Fernando were produced or withdrawn from HPI's plant elsewhere, for so long as the sale is recorded in the Pampanga branch, 100% of the tax due from such sales shall be taxable by said city and to the exclusion of the locality where the manufacturing plant is located . (Emphasis supplied) 9. Since then and until this time, HPI has been applying the 2008 BLGF Opinion for the allocation of its gross receipts for purposes of computing the local business taxes due to the various LGUs where its principal office, cement manufacturing plants and sales offices are located. 10. On January 24, 2012, HPI received a Notice of Assessment from Norzagaray's Municipal Treasurer for alleged deficiency local business tax on account of HPI's purportedly unreported sales which was arrived at by multiplying (i) the total number of bags of cement produced by the Bulacan Plant for the years 2005 to 2010 by (ii) the average price per bag of cement during those years. Norzagaray claimed that it has authority to assess local business tax upon the presumed value of 70% of all bags of cement produced by the Bulacan Plant whether or not they are sold, or if indeed sold, irrespective of the place where the sales transactions were made or consummated. HPI informed Norzagaray of the 2008 BLGF Opinion. The assessment was cancelled so that Norzagaray could conduct further investigation and without prejudice to issuing a new assessment. DScTaC 11. Sometime in February 2013, DRT (through its Mayor and Municipal Budget Officer) asserted that it is entitled to an allocation equivalent to 40% of 70% of HPI's gross receipts recorded in its principal office pursuant to Section 150 (c) (2) of the LGC. DRT is of the view that term "plantation" under Section 150 (c) (2) means the "source of raw materials" used by HPI for cement production in its Bulacan Plant. In view of the foregoing, HPI request for opinion on the following matters: 1. Whether Norzagaray (the municipality where the Bulacan Plant is located) is entitled to impose local business taxes upon the presumed value of 70% of all bags of cement produced by the Bulacan Plant regardless of whether these are sold, or if indeed sold, irrespective of the place where the sales transactions were made or consummated. 2. Whether DRT (the municipality which is the source of the limestone, shale and diorite reserves used as raw material for cement production in the Bulacan Plant) is entitled to an allocation equivalent to 40% of 70% of HPI's gross receipts recorded in its principal office pursuant to Section 150 (c) (2) of the LGC. Furthermore, inasmuch as HPI's payment of local business taxes is guided by the 2008 BLGF Opinion, HPI is requesting for a clarification that if any revision in the current allocation of gross receipts is warranted, such revision should be applied prospectively. Any revision would have a direct impact on the gross receipts allocated and the local business taxes being paid by HPI to the LGUs where its principal office, cement manufacturing plants and sales offices are located. HPI request is anchored on the fundamental principle that tax laws should be applied prospectively unless it is expressly provided to apply retroactively. ICaDHT HPI cited some rulings and opinions where the courts and this Bureau recognized the principle of prospective application of laws and administrative rulings mentioned below: 1. In Albino S. Co. v. Court of Appeals (G.R. No. 100776, October 28, 1993, 227 SCRA 444), the Supreme Court held that pursuant to Article 4 of the New Civil Code, laws shall have no retroactive effect, unless the contrary is provided. According to the Supreme Court, the principle of prospective application of statutes is similarly applicable to administrative rulings and circulars. 2. In BLGF Opinion dated April 17, 2007, BLGF allowed the prospective application of the allocation of gross receipts prescribed under BLGF 2nd Indorsement dated February 26, 2007 based on the principle of prospective application of laws. 3. In BLGF Opinion dated September 1, 2000, BLGF took note of Opinion No. 209 issued by the Office of the Government Corporate Counsel which stated that, while the LGC abolished the exemption from payment of real property taxes of coal operators under PD 972, the withdrawal of exemption should operate prospectively applying the principle of prospective application of laws. 4. In BLGF dated June 19, 1998, BLGF opined that the ruling regarding National Power Corporation's entitlement to a refund of the local franchise tax payments under Sections 252 and 253 of the LGC should be applied prospectively. STEacI 5. In BLGF Opinions dated October 16, 1997 and January 26, 1998, BLGF similarly applied the principle of prospective application of tax laws when it ruled that Section 270 of the LGC, which provides for the prescriptive period within which to collect real property taxes, only applies to real property taxes that became due or payable beginning January 1, 1992, the date when the LGC became effective. Query No. 1 The answer is in the negative. The Municipality of Norzagaray cannot impose local business tax (LBT) on HPI based on the presumed value of 70% of all bags of cement produced by the Bulacan plant regardless of whether these are sold, or if indeed sold, irrespective of the place where the sales transactions were made or consummated. In view thereof, Section 143 of the LGC therefore, is quoted as follows: " Section 143. Tax on Business . The municipality may impose taxes on the following businesses: xxx xxx xxx " With gross sales or receipts for the preceding calendar year in the amount of: . . . ." (Emphasis ours) Clearly, based on the immediate preceding provision of the LGC, LBT, except in the case of "Peddler's Tax" [Section 143 (g), LGC], should be based on gross sales or receipts realized during the preceding calendar year. Stated otherwise, the use of the presumptive value of bags of cement produced by the Bulacan Plant, whether sold or not, cannot be made as basis for the computation of LBT even in the application of situs rule provided under Section 150 of the LGC and as implemented under Article 243 of the Implementing Rules and Regulations (IRR). EcHaAC In this connection, Norzagaray may be guided by Section 131 (n) of the Local Government Code (LGC) of 1991 which provides: " Section 131 . Definition of Terms . When used in this Title, the term: xxx xxx xxx (n) 'Gross Sales or Receipts' include the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person excluding discounts if determinable at the time of sales, sales return, excise tax, and value-added tax (VAT); (Emphasis ours) Further, Section 150 of the Local Government Code (LGC) of 1991 is quoted as follows: " Section 150 . Situs of the Tax. (a) For purposes of collection of the taxes under Section 143 of this Code, manufacturers , . . . producers, exporters, wholesalers, distributors, dealers, contractors, bank and other financial institutions, and other businesses, maintaining or operating branch or sales outlets elsewhere shall record the sale in the branch or sales outlets 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 sale or 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 . (Underlining supplied) IaAEHD "(b) The following sales allocation shall apply to manufacturers , assemblers, contractors, producers, and exporters with factories, project offices, plants , and plantations in the pursuit of their business: "(1) Thirty percent (30%) of all sales recorded in the principal office shall be taxable by the city or municipality where the principal office is located; and "(2) Seventy percent (70%) of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant , or plantation is located. "xxx xxx xxx "(d) In cases where a manufacturer , assembler, producer, exporter, or contractor has two (2) or more factories, project offices, plants or plantations located in different localities, the seventy percent (70%) sales allocation mentioned in subparagraph (b) of subsection (2) above shall be prorated in proportion to their respective volumes of production during the period for which the tax is due. (Emphasis ours) "xxx xxx xxx." In view of the above-quoted provisions of law, the issue is therefore resolved as follows: aSIETH 1) 30% of all sales or receipts recorded in the principal office shall be taxable by Taguig City where the principal office is located, and the remaining 70% shall be taxable by Norzagaray where the Bulacan Plant is located; and 2) Norzagaray shall not share in the allocation pertaining to sales recorded in the branch or sales outlet elsewhere except if such branch or sales outlet is located thereat. Query No. 2 The allegation of the Municipal Mayor and Municipal Budget Officer of Doa Remedios Trinidad (DRT) that the term "plantation" under Section 150 (c) (2) of the LGC means the "source of raw materials" is not in full accord to the definition of the term "plantation" provided under Article 243 (a) (4) of the Implementing Rules and Regulations (IRR), implementing Section 150 of the LGC, which reads as follows: "Art. 243. Situs of the Tax. (a) . . . "(4) Plantation a tract of agricultural land planted to trees or seedlings whether fruit bearing or not, uniformly spaced or seeded by broadcast methods or normally arranged to allow highest production. For purposes of this Article, inland fishing ground shall be considered as plantation. "xxx xxx xxx." In view of the abovequoted provisions of law, the application of the term "plantation" is limited only to " a track of agricultural land planted to trees or seedlings and inland fishing ground". To agree with the claim of DRT that the "source of raw materials" falls under the coverage of the term "plantation" would be extending the application of the term which is beyond what is provided in the law. Therefore, DRT is not entitled to the allocation equivalent to 40% of 70% of HPI's gross receipts recorded in the principal office for lack of legal basis in the law. TSHIDa As regards the payment of HPI's business taxes that should be applied prospectively, the rulings, opinions and views issued by this Bureau were issued in order to determine and establish the rights and obligations of the parties in a particular case specifically between an LGU and a taxpayer. Said rulings, opinions and views prevail at the time of its issuance so that prior inconsistent ones are deemed reversed or modified accordingly as may be stated therein. Accordingly, this Bureau finds no merit in disturbing the judicial interpretations made by competent authority regarding the fundamental principles that tax laws should be applied prospectively. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director