Bureau of Local Government Finance Opinion

April 23, 2012 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Hon. Alain Jerico S. Perez Municipal Mayor San Manuel, Pangasinan Sir : This refers to your letter dated January 9, 2012 relative to our letter dated November 29, 2011 addressed to the Sangguniang Bayan of San Manuel, Pangasinan opining among others that since there is no mention of branch office of China CAMC Engineering Co., Ltd. (CAMCE for brevity) in the Municipality of San Manuel, Pangasinan, said municipality cannot collect local business tax. It is claimed that your letter dated September 28, 2011 may not have mentioned the presence of a branch office of CAMCE in your municipality but the fact is CAMCE maintains an office particularly in the project site since it started the project. To support the above claim you attached photographs of the site where the project is taking place, including offices, yards, motor pools and other facilities. It is claimed further that according to your consultant, the underlying principle of "situs of taxation" is the protection or convenience being accorded by a jurisdiction like the Municipality of San Manuel, Pangasinan to a business activity. The power of taxation is exercised upon the assumption of an equivalent granted to the taxpayer in the protection of his person and property, in adding to the value of such property, or in the creation and maintenance of public convenience in which he shares. . . . Property, however, may be taxed in two different states on the same day, as when it is taxed both in the domicil of the owner and in a state in which it has acquired a business situs. 1 aAHTDS It is likewise claimed that the actual situs of visible tangible property (where it is physically located), and not on the domicil of its owner, determines the place of taxation, "for purposes of taxation, rights in tangibles are regarded as localized at the place where the tangible itself is located. This is upon the basis of the sound theory that inasmuch as the property enjoys the protection of the state where it is located, it should be made to contribute to the expenses incident to its protection in the state where it is located, in common with all other property with the jurisdiction. 2 Moreover, the municipality cited Section 150 (a) of the Local Government Code (LGC) which provides among others that "[i]n 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 ." The Municipality contends that the phrase " to such city or municipality " refers to San Manuel, Pangasinan, stating further that by these provisions, the LGC recognizes the fact that taxpayer may not establish any office or outlet in a municipality but this fact is not an excuse to pay the local business tax to the municipality. The law says that the transaction shall be recorded in the principal office but the taxes shall be paid in the municipality where the business activity is situated. (Emphasis supplied) While this Bureau may agree with the opinion rendered by your consultants, it must be stressed that business operations, most often than not, span multiple jurisdictions as evidenced by the presence of a branch or sales office, factory, project office, plant or plantation in different localities. To avoid any conflict in the exercise of taxing jurisdictions of different LGUs, the rules on the situs of local business tax are clarified and provided under Section 150 of the LGC as implemented under Article 243 of its Implementing Rules and Regulations (IRR) quoted as follows: IDcHCS "Article 243. Situs of the Tax. (a) Definitions of Terms "(b) Sales Allocation (1) All sales made in a locality where there is a branch or sales office or warehouse shall be recorded in said branch or sales office or warehouse and the tax shall be payable to the city or municipality where the same is located . "(2) In cases where there is no such branch, sales office or warehouse in the locality where the sale is made, the sale shall be recorded in the principal office along with the sales made by said principal office and the tax shall accrue to the city or municipality where the said principal office is located . "(3) In cases where there is a factory, project office , plant or plantation in pursuit of business, 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 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 . LGUs where only experimental farms are located shall not be entitled to the sales allocation herein provided for. "(4) In case of a plantation located in a locality other than that where the factory is located, said seventy percent (70%) sales allocation shall be divided as follows: "(i) Sixty percent (60%) to the city or municipality where the factory is located; and "(ii) Forty percent (40%) to the city or municipality where the plantation is located. DcTaEH "(5) In cases where there are two (2) or more factories, project offices, plants or plantations located in different localities, the seventy percent (70%) sales allocation shall be prorated among the localities where such factories, project offices, plants and plantations are located in proportion to their respective volumes of production during the period for which the tax is due. In the case of project offices or service and other independent contractors, the term production shall refer to the cost of projects actually undertaken during the tax period. "(6) The foregoing sales allocation under paragraph (3) hereof shall be applied irrespective of whether or not the sales are made in the locality where the factory, project office, plant or plantation is located. In the case of sales made by the factory, project office, plant or plantation, the sale shall be covered by paragraph (1) or (2) above. "xxx xxx xxx". (Emphasis ours) Moreover this Bureau cannot agree to your claim that the phrase "to such city or municipality" refers to San Manuel, Pangasinan. Section 150 of the LGC clearly states that "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." Under the doctrine of the last antecedent, the phrase "such city or municipality" should be construed as referring to the place where the principal office is located, rather than to the place where the sale is made. The IRR followed said doctrine so that Article 243 (b) (2) clearly set forth that "In cases where there is no such branch, sales office, or warehouse in the locality where the sale is made, the sale shall be recorded in the principal office, along with the sales made by such principal office, and the tax shall accrue to the city or municipality where the said principal office is located. CDaTAI In reply to your request for your confirmation that the municipality may collect local business tax from CAMCE, it is emphasized that the views embodied in our letter dated November 29, 2011 are expressed on the basis of earlier representations made by that municipality. As stated in our letter dated November 29, 2011, the municipality failed to mention whether CAMCE has a project office located thereat. However, that Municipality now claims that CAMCE maintains a project office thereat. It is worth noting that the Department of Finance (DOF) in its letter dated August 30, 1994 expressed the view that the term "project office", as applied to contractors shall mean the office or headquarters used in administering the project or construction being undertaken in pursuit of the business. However, it may not be a fixed place where administrative work is conducted as the term "office" usually connotes, but one that may be transferred from one project site to another. On the basis of the photographs on the site submitted there is no doubt that CAMCE maintains a project office in the project site. In this connection, Section 150 (b) (3) of the LGC, as implemented under Article 243 (b) (3) of the IRR previously quoted shall apply. Stated otherwise, 70% of the gross receipts recorded in the principal office shall be taxable by the municipality of San Manuel where the project office is located. We hope that we have clarified matters. AHCETa Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director Footnotes 1. 71 Am Jur 2d, page 907. 2. Rivera, Taxation Self Taught, Book I, page 372.