Bureau of Local Government Finance Opinion

April 23, 2010 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 3rd Indorsement Respectfully returned to the City Treasurer, Butuan City, the within comment under a 2nd Indorsement dated March 19, 2010, relative to the letter dated January 19, 2010 of Mr. Edgardito Lozada, Dealer/Manager of Amparuon Petron Gasoline Station & Enterprise, located at Purok-1, Ampayon, that City, requesting the Department of Finance through this Bureau to "instruct the LGU of Butuan City thru its Sangguniang Panlungsod and the City Treasurer to implement the Exemption from Local Taxation the sales of petroleum products by Gasoline Stations" embodied in the Local Finance Circular No. 1-05 dated December 8, 2005. Local Finance Circular (LFC) No. 1-05, more particularly Section 3 thereof quoted hereunder, provides for the exemptions of petroleum products from local taxes, fees and charges, pursuant to Section 133 (g) of Republic Act No. 7160, otherwise known as the Local Government Code (LGC) of 1991: "SEC. 3. Exemption from Local Taxation . (a) Pursuant to Section 133 (h) of the LGC and Article 232 (h) of the IRR, local government units are prohibited from imposing taxes, fees and charges on petroleum products, which include the sale of petroleum products by gasoline stations, dealers, resellers or retailers . However, the sale of tires, batteries and other accessories (TBA) as well as services rendered by them are subject to business taxes. . . . ." Section 133 (h) of the Local Government Code (LGC) of 1991 states that: "SEC. 133. Common Limitations on the Taxing Powers of Local Government Units . Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: xxx xxx xxx (h) Excise taxes on articles enumerated under the national Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products ;" (Emphasis ours) Based on the abovequoted provision of the LGC, it is clear and explicit that "taxes, fees or charges on petroleum products" are excluded from the taxing powers of provinces, cities, municipalities and barangays. DHcESI The attached copy of SP Ordinance 2424-2003, which was approved on March 28, 2003, amending SP Ordinance No. 2232-99, provides that: "Section 1. . . . 1. (a) Dealers or Distributors of gasoline, diesel or kerosene in the City of Butuan are hereby taxed effective year 2003 which will be maintained at 11% of 1% of gross receipts. (b) That lube oils and accessories and services shall be governed under Article I, Section 21.01 (H) (11) of SP Ordinance No. 894-92. Producers, Manufacturers, and Refineries of oil, gasoline and other products one percent (1%) of the gross receipts." ( Boldfacing and underscoring supplied) Seemingly, Section 1 of SP Ordinance No. 2424-2003 runs counter to Section 133 (h) of LGC, where LFC No. 1-05 was based. It is submitted however, that the City Council and City Legal Officer have a unanimous stand that SP Ordinance No. 2424-2003 is within the ambit of the law. To further support this stand, Section 143 (h) of the LGC was quoted, thus: "SEC. 143. Tax on Business . The municipality may impose taxes on the following businesses: xxx xxx xxx (h) On any business, not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, That on any business subject to the excise , value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year ." (boldfacing and underscoring supplied) Based on the abovequoted provision of the LGC, it is purported that said Section 143 (h) is one of the exemptions propounded in the clause " unless otherwise provided herein " under Section 133 aforequoted. On this note, it is believed that SP Ordinance 2424-2003 does not violate the two kinds of taxes which under Section 133 (h) an LGU cannot impose considering that what is being imposed is the tax on the business or privilege of manufacturing, dealing or selling of [petroleum] products . STHAaD Assuming arguendo that the tax is imposed on the business or for the privilege granted to dealers and distributors of petroleum products to engage in the selling and distribution of said products, a careful and deliberate scrutiny of the provisions of Section 1 of SP Ordinance 2424-2003 clearly manifests that the tax imposed is based on gross sales or receipts which only impliedly indicates that what is being taxed is the product itself which is the very source of said gross sales/receipts. One cannot deviate from the fact that the gross sales/receipts subject and basis of the business tax imposition is the same gross sales/receipt earned by the business for selling petroleum products. Apparently, this is a simple case of getting-around-the-law. By declaring that the tax is imposed on the business itself or for the privilege to engage in the business of selling and distributing of petroleum products, then the imposition will be more appropriate for a franchise tax, which incidentally is in the form of an indirect tax imposed on the rights, privileges, and activities. Further, that Office invoked Supreme Court decision in the case of Philippine Petroleum Corp. vs. Municipality of Pililia, Rizal (G.R. No. 90776, June 3, 1991) where it was ruled that "a tax on business is distinct from a tax on the article itself". With all due respect on the stand taken by that Office, we are not convinced. In fact in one of the decisions rendered, in the case of Mactan Cebu International Airport Authority vs. Hon. Ferdinand J. Marcos, et al. , G.R. No. 120082 dated September 11, 1996, the Court commented, thus: "Accordingly, the position taken by the petitioner is untenable. Reliance on Basco vs. Philippine Amusement and Gaming Corporation 39 is unavailing since it was decided before the effectivity of the LGC . . . . ." (Emphasis ours) Furthermore, in the case of Petron Corporation vs. Mayor Tobias M. Tiangco, et al., G.R. No. 158881, April 16, 2008 , the Court ruled as follows: "The Court defers to the other branches of government in the formulation of oil policy, but when the choices are made through legislation, the Court expects that the choices are deliberate, considering that the stakes are virtually all-in. Herein, respondents may be bolstered by the constitutional and statutory policy favoring local fiscal autonomy, but it would be utter indolence to reflexively affirm such policy when the inevitable effect is an increase in oil prices. Any prudent adjudication should fully ascertain the mandate of local government units to impose taxes on petroleum products, and such mandate should be cast in so specific terms as to leave no dispute as to the legislative intendment to extend such power in the name of local autonomy. What we have found instead, from the plain letter of the law is an explicit disinclination on the part of the legislature to impart that particular taxing power to local government units. EaCSTc While Section 133(h) does not generally bar the imposition of business taxes on articles burdened by excise taxes under the NIRC, it specifically prohibits local government units from extending the levy of any kind of "taxes, fees or charges on petroleum products." Accordingly, the subject tax assessment is ultra vires and void." (Emphasis ours) In view hereof, we stand by the provision of the LFC No. 1-05 which exempts petroleum products from local taxes, fees and charges, pursuant to Section 133 (g) of Republic Act No. 7160, otherwise known as the Local Government Code (LGC) of 1991. It is clarified however, that the views expressed herein is in line with Article 287 of the IRR of the Code and not a declaration of nullity or illegality of the provisions of the said SP Ordinance 2424-2003 as the same solely rests within the jurisdiction of a court of justice of competent authority. Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA Executive Director ATTACHMENT Republic of the Philippines Office of the Treasurer City of Butuan 2nd Indorsement March 19, 2010 Respectfully returned to Executive Director, Ma. Presentacion R. Montesa, Bureau of Local Government Finance, Department of Finance, Manila the herein comment relative to the letter of Mr. Edgardito Lozada requesting the Sangguniang Panlungsod of Butuan and this office to implement Local Finance Circular No. 1-05 thereby declaring SP Ordinance No. 2424-2003 inoperative. With all due respect, the City Council and our City Legal Officer have unanimous stand that the above stated Ordinance is within the ambit of the law. Reiterating the two pertinent provisions of R.A. 7160, viz. : Section 133. Common Limitations on the Taxing Powers of Local Government Units . Unless otherwise provided herein , the exercise of the taxing powers of provinces, cities, municipalities, and barangay shall not extend to the levy of the following: xxx xxx xxx (h) Excise taxes on article enumerated under the National Internal Revenue Code, as amended, and taxes, fees, or charges on petroleum products ; (Emphasis Supplied). xxx xxx xxx Section 143 (h) provides; "On any business, not otherwise specified in the preceding paragraph, which the Sanggunian concerned may deem proper to tax: Provided, that on any business subject to the excise , value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year. " (Emphasis Supplied) TASCEc It can be gleaned from the above that Section 143 (h) is one of the exemptions propounded in the clause " unless otherwise provided herein " of Section 133. The two kinds of taxes you mentioned which LGU's cannot impose under Section 133 (h) have not exacted by Butuan City since what we are imposing is the tax on the business or privilege of manufacturing, dealing or selling on those products . This is in consonance with the opinion elucidated by then COA Commissioner Honorable Sofronio B. Ursal on his book Philippine Law on Taxation pp. 92-93. Moreover, the Supreme Court Second Division on its decision between Philippine Petroleum Corp. vs. Municipality of Pililia, Rizal (G.R. No. 90776, June 3, 1991) had said that " a tax on business is distinct from a tax on the article itself. " (Emphasis Supplied) Thus, Art. 232 (h) of the IRR of RA 7160 and Local Finance Circular No. 1-05 particularly Section 3 which includes the exemption on the sale of petroleum products by gasoline stations, dealers, resellers or retailers are deemed to have contravened the law from where they derived their very existence. (Section 143 (h) of RA 7160). It is a well settled rule that administrative regulation must be in harmony with the provision of law. In case of discrepancy between the basic law and its implementing rule or regulation, the former prevails. Before enacting City Tax Ordinance No. 2232-99, as amended by City Tax Ordinance No. 2424-2003, an ordinance imposing business tax on gross sales or receipts of petroleum dealers in Butuan City, the City Council of Butuan City conducted public hearing attended by the petroleum dealers and their consensus was to agree in the passage of the said tax Ordinance as a gesture of their contribution to the city's coffers, provided that the rates of tax shall be pegged at eleven percent (11%) of one percent (1%) of the gross sales or receipts of the preceding year. As a result, the City Tax Ordinance No. 2232-99, as amended by Ordinance No. 2424-2003 was enacted by the City Council of Butuan City and enforced by this office on January 2003 without any protest filed questioning its legality before the Department of Justice which is mandated by law to decide the legality of a tax ordinance pursuant to Section 187 of R.A. No. 7160, otherwise known as "The Local Government Code of 1991," copy of the Ordinance No. 2424-2003 is hereto attached for your reference. With regard to R.A. 8479 in relation to Executive Order 226, it provides that only investments of new industry participants shall be entitled to incentives provided in the said Code for a period of Five (5) years. Gasoline Stations here who are distinct and independent of that new players are not covered with that exemption especially on business taxes unless registered with BOI as pioneer or non-pioneer for a period of 6 and 4 years respectively. The imposition of less than Five-Centavo per liter (0.0495) or 11% of 1% not 2% on the gross sales of business tax equivalent is a tip of an iceberg or a small residual amount left inside their tanks, does not even commensurate to the protection given to them from our law enforcement agencies, and the repair and maintenance of our streets deteriorated by their hauler contractor who enjoyed the exemption granted under Section 133 (j) of RA 7160 which we believed is unfair and give undue advantage from other businesses. TDaAHS The deregulation of oil industry paves the way of discretionary prices of petroleum products thereby abandoning the national policy of controlling its prices which our imposition can easily be integrated without causing an impact on our local economy as manifested and concurred by gasoline dealers during the public hearing conducted for the purpose. In the light on the foregoing, we hope and pray that the letter request of Mr. Lozada be set aside. (SGD.) ADULFO A. LLAGAS City Treasurer BLGF Opinion dated February 3, 2010