Bureau of Local Government Finance Opinion

June 17, 2014 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION C & G Law 30/F 88 Corporate Center Sedeo cor. Valero Streets Salcedo Village, Makati City Attention: Atty. Anthony Mark A. Gutierrez Atty. Marie Yasmin M. Sanchez Atty. Aileen M. Sanguir Gentlemen : This refers to your letter dated June 13, 2014 requesting in behalf of your client, Thelma Luzon, Inc. (TLI), confirmation that a mayor's permit fee, being a regulatory measure enacted by virtue of police power, cannot be based on gross receipts from the preceding calendar year. Representations are made as follows: 1. TLI is a corporation duly organized and existing under Philippine law, with principal office at NAC Tower, 32nd Street, Bonifacio Global City, Taguig City. 2. TLI is an Independent Power Producer Administrator ("IPPA") of the Pagbilao Coal-fired Thermal Power Plant (" Pagbilao Plant ") located at Isla Grande in Pagbilao. The Pagbilao plant is currently owned, maintained and operated by TeaM Energy Corporation. As an IPPA, TLI buys and sells the electricity produced by the Pagbilao Plant. 3. TLI has a liaison office in Pagbilao. The function of the liaison office is to monitor coal shipments to be used by the Pagbilao Plant. The liaison office is not engaged in generating sales orders or receiving collections from sales for TLI. 4. In an opinion rendered by BLGF dated May 2, 2014, 1 it was ruled that after the expiration of TLI's tax-exempt status as a Board of Investments ("BOI")-registered enterprise, its liaison office shall not be subject to local business taxes but shall only continue to be liable for mayor's permit and other regulatory fees. 5. TLI has been paying mayor's permit fees to Pagbilao for the issuance of its annual business permits from 2010 to 2014 or for four (4) years. 6. It is submitted however, that Pagbilao has been imposing mayor's permit fees on TLI based on its gross receipts pursuant to Section 3A.01 of the Pagbilao Revised Municipal Revenue Code, 2 which provides: Section 3A.01. Imposition of Fee . There shall be collected an annual fee at the rates provided hereunder for the issuance of a Mayor's permit to every person that shall conduct a business, trade or activity within this municipality. 1. On business subject to the graduated tax imposed in Article A as enumerated under Section 2A.02 a, b, c, d, e, f, g, h, i, j, k, l, the Mayor's Permit fee shall be in accordance with the following schedule: With gross receipts/sales during the Annual Permit Preceding Calendar Year Fee Less than 5,000 26.40 5,000 or more but less than 10,000 33.00 10,000 or more but less than 15,000 44.00 15,000 or more but less than 20,000 55.00 20,000 or more but less than 30,000 66.00 30,000 or more but less than 40,000 77.00 40,000 or more but less than 50,000 88.00 50,000 or more but less than 75,000 110.00 75,000 or more but less than 100,000 132.00 100,000 or more but less than 150,000 165.00 150,000 or more but less than 300,000 206.00 300,000 or more but less than 500,000 220.00 500,000 or more but less than 1,000,000 275.00 For every 100,000 in excess of 1,000,000 5.50 xxx xxx xxx To support the above request, TLI submits the following position: 1. Mayor's permit fee should be a fixed amount commensurate with the cost of regulation, licensing and inspection, and that its imposition on the basis of gross receipts is invalid. 2. The authority of the municipality to impose a mayor's permit fee is based on Section 147 of the Local Government Code ("LGC"), which provides: Section 147. Fees and Charges . The municipality may impose and collect such reasonable fees and charges on business and occupation and, except as reserved to the province in Section 139 of this Code, on the practice of any profession or calling, commensurate with the cost of regulation, inspection and licensing before any person may engage in such business or occupation, or practice such profession or calling. ( Emphasis and underscoring supplied ) 3. The imposition of a mayor's permit fee proceeds from the power of local government units ("LGUs") to regulate any business or undertaking that is being conducted or will be conducted within their territorial jurisdiction. This emanates from police power, which is encapsulated in Section 16 (General Welfare Clause) of the LGC. 3 4. Considering that a mayor's permit fee is imposed in connection with the exercise of police power and is meant to recover costs for regulation, the collection of a mayor's permit fee based on gross receipts is inconsistent with the very concept of "fees". Thus, in Batangas City, et al. v. Pilipinas Shell Petroleum Corporation (" Batangas case "), 4 the Court of Tax Appeals En Banc ("CTA") 5 held: The mayor's permit is imposed in the exercise of police power primarily for purposes of regulation . Being such, it must be reasonable and commensurate with the cost of regulation, inspection and licensing of a business or occupation or practice of a profession or calling. Pertinent to this is Section 147 of the LGC which is quoted hereunder" . . . 6 5. This is also consistent with the case of American Mail Line, et al. v. City of Basilan, et al. , 7 where the Supreme Court invalidated the imposition of "anchorage fees" by the City of Basilan. Pertinently, the Court held: "Appellants also argue that the ordinance in question was validly enacted in the exercise of the city's police power and that the fees imposed therein are for purely regulatory purposes. In this connection, it has been held that the power to regulate as an exercise of police power does not include the power to impose fees for revenue purposes ( Cu Unijeng vs. Patstone , 42 Phil. 818; Pacific Commercial Co. vs. Romualdez etc., et al. , 46 Phil. 917; Arquiza etc. vs. Municipality of Zamboanga , 55 Phil. 653). In the Cu Unijeng case it was held that fees for purely regulatory purposes 'may only be of sufficient amount to include the expenses of issuing the license and the cost of the necessary inspection or police surveillance, taking into account not only the expense of direct regulation but also incidental expenses .' In Manila Electric Co. vs. Auditor General , 73 Phil. 129-135, it was also held that the regulatory fee 'must be no more than sufficient to cover the actual cost of inspection or examination as nearly as the same can be estimated . If it were possible to prove in advance the exact cost, that would be the limit of the fee'." 8 6. In the Batangas case, the CTA further stated that the imposition of mayor's permit fees based on gross receipts was grossly excessive and unreasonable, thus: Article 233 of IRR provides for a clear limit on what reasonable fees and charges should be. This provision complements with Section 147 of the LGC. It reads, as follows: xxx xxx xxx Based on the above-quoted provision, for fees and charges to be reasonable: fees and charges should be proportionate/equal to the cost of issuing the license or permit and the expenses incurred in the conduct of the necessary inspection or surveillance. The last paragraph of Article 233 merely affirms the basis of the reasonableness of the fees and charges by saying that no fee/charge shall be based on capital investment or gross receipts of the person or business . In this case, the mayor's permit being imposed is based on the gross receipt of the preceding calendar year although in a graduated scale. This is in clear violation of Section 147 of the LGC, as implemented by Article 233 of IRR . 9 7. In line with this, Article 233 of the Rules and Regulations Implementing the LGC ("LGC IRR") proscribes the imposition of such fees based on gross sales or receipts, thus: Article 233. Fees and Charges . The municipality may impose and collect such reasonable fees and charges on businesses and occupations and, except as reserved to the province under Article 228 of this Rule, on the practice of any profession or calling before any person may engage in such business or occupation, or practice such profession or calling provided that such fees and charges shall only be commensurate to the cost of issuing the license or permit and the expenses incurred in the conduct of the necessary inspection or surveillance . No such fee or charge shall be based on capital investment or gross sales or receipts of the person or business liable therefor . 10 8. BLGF has also issued several opinions stating that a mayor's permit fee should only be in an amount sufficient to cover expenses for regulation, and that it cannot be based on gross receipts. These include the following: (a) In the Bureau of Local Government Finance ("BLGF") Opinion dated October 28, 2002, 11 it was explained that there are two (2) conditions in the imposition of fees and charges provided under Article 233 of the IRR: 1) that it should be reasonable, and 2) that it should be only commensurate with the cost of regulation, inspection and licensing before any person may engage in such business or occupation, or practice such profession or calling. 12 (b) In BLGF Opinion dated March 10, 2003, 13 it was stated that mayor's permit fees should not be based on capital investment or gross receipts, having been enacted under the police power, thus: As regards the Mayor's permit fees, the same are enacted under the police power and it is mandatory for the owner or operator of any business or calling to secure such permit from the local government unit concerned before its operation. However, the amount thereof should be reasonable and commensurate to the cost of regulation, inspection and licensing. It should not be based on capital investment or gross receipts by the person or business liable thereof pursuant to Article 233 of the IRR, implementing Section 147 of the Code . 14 (c) BLGF Opinion dated January 15, 2007 15 upheld the same position, your office ruling that pursuant to the LGC and the LGC IRR, the fees and charges imposed by municipalities cannot be based on capital investment or gross receipts, to wit: However, in relation herewith, it is informed that pursuant to Article 233 of the Implementing Rules and Regulations (IRR) implementing Section 147 of the Local Government Code (LGC) of 1991, and as expressed in several previous cases by this Bureau, the fees and charges that the municipality may impose shall be only commensurate to the cost of issuing the license or permit and the expenses incurred in the conduct of the necessary inspection or surveillance and shall not be based on capital investment or gross sales or receipts of the person or business liable for said permit and/or license fees . 16 (d) In the same vein, in BLGF Opinion dated September 25, 1998, 17 your office stated that mayor's permit fees should not be based on gross receipts, to wit: Article 233 of the Implementing Rules and Regulations (IRR) implementing Section 147 of the LGC provides as follows: Article 233. Fees and Charges . The municipality may impose and collect such reasonable fees and charges on businesses and occupations and, except as reserved to the province under Article 228 of this Rule, on the practice of any profession or calling before any person may engage in such business or occupation, or practice such profession or calling provided that such fees and charges shall only be commensurate to the cost of issuing the license or permit and the expenses incurred in the conduct of the necessary inspection or surveillance. No such fee or charge shall be based on capital investment or gross sales or receipts of the person or business liable thereof. Although the LGC has not prescribed any rate for the fees which a local government unit may impose and collect, nevertheless the aforequoted Article requires that such fees be reasonable and commensurate with the cost of regulation, inspection and licensing . Accordingly, the imposition of Mayor's permit fees should not be based on the gross receipts prescribed under Section 143 of the LGC . 18 (e) Similarly, BLGF opinion dated June 18, 2008 19 affirmed the position that mayor's permit fees and other regulatory fees cannot be based on commission, thus: On the basis of the abovequoted provisions, it is clear that Lotto Outlets are required to secure a Mayor's permit and subject to other regulatory fees that the City of Marikina may impose. However, it is clarified that such regulatory fees shall not be based on commission , which operators derive from the sale of lotto tickets. The provision of law is also clear that "such fees and charges shall only be commensurate to the cost of issuing the license or permit and the expense incurred in the conduct of the necessary inspection or surveillance " and therefore not based on either gross sales or receipts of commission, otherwise the imposition would be considered as a tax . In this connection, this Bureau concurs with the view expressed in the letter dated January 29, 2008 of Atty. Patiag that a regulatory fee is imposed only to cover the cost of regulation, issuance of the license and inspection or surveillance expenses . 20 9. As a matter of fact, the Department of Justice ("DOJ") has referred to the immediately preceding opinion rendered by your office, as cited in a letter between an officer of the City Legal Office of Marikina City and an officer from the Legal Department of the Philippine Charity Sweepstakes Office ("PCSO"). In DOJ Opinion No. 017 dated February 8, 2013, 21 the DOJ clarified that although the City Government of Marikina may require the payment of mayor's permit and regulatory fees for PCSO outlets, the amount corresponding to such fees shall not be based on the commission derived from the sale of the lotto tickets. In this connection please be informed that this Bureau maintains its previous stand with respect to the basis for the imposition of the Mayor's permit fees, as embodied in several opinions mentioned in your letter. Likewise, this Bureau finds no merit in disturbing the judicial interpretations made by competent authority (Court of Tax Appeals and the Supreme Court) regarding the basis for the imposition of the herein referred fees. Be that as it may, it is worth noting that the Municipality of Pagbilao has enacted the Pagbilao Revised Municipal Revenue Code which has been the basis for the collection of the Mayor's Permit fees from TLI. Hence, unless declared by competent authority that the said Revenue Code is illegal or unconstitutional, the Municipal Treasurer of Pagbilao has no other option but to collect the mayor's permit fees imposed therein, otherwise, he can be charged of remission and/or dereliction of duty for not implementing a valid ordinance. CHTAIc It is worth mentioning that in a Resolution issued by the Supreme Court in the case of Social Justice, et al. vs. Hon. Jose L. Atienza, Jr. (G.R. 156052, February 13, 2008), it was cited that: "Statutes and ordinances are presumed valid unless and until the courts declare the contrary in clear and unequivocal terms. The mere fact that the ordinance is alleged to be unconstitutional or invalid, will entitle a party to have its enforcement enjoined. The presumption is all in favor of validity." On the part of TLI, it may either agree to pay the fees levied or file its protests which should be resolved pursuant to the provisions of the LGC. We hoped that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director Footnotes 1. BLGF Opinion dated May 2, 2014 addressed to Atty. Anthony Mark A. Gutierrez. 2. Municipal Tax Ordinance No. 1, Series of 2001. 3. BLGF Opinion (1st Indorsement) dated December 16, 2010 returned to ICO-Regional Director of Local Government Finance, Department of Finance. 4. C.T.A. EB CASE NO. 350, January 22, 2009. 5. The Supreme Court has held that it "will not set aside lightly the conclusions reached by the Court of Tax Appeals which, by the very nature of its functions, is dedicated exclusively to the resolution of tax problems and has accordingly developed an expertise on the subject, unless there has been an abuse or improvident exercise of authority." ( Panasonic Communications v. Commissioner of Internal Revenue , G.R. No. 178090, February 8, 2010); See also Commissioner of Internal Revenue v. Cebu Toyo Corporation , G.R. No. 149073 February 16, 2015; Hitachi Global Storage Technologies v. Commissioner of Internal Revenue , G.R. No. 174212, October 20, 2010. 6. Emphasis and underscoring supplied. 7. G.R. No. L-12647, May 31, 1961. 8. Emphasis and underscoring supplied. 9. Emphasis and underscoring supplied. 10. Emphasis and underscoring supplied. 11. 3rd Indorsement returned to the OIC-City Treasurer, City of Davao. 12. Emphasis and underscoring supplied. 13. Addressed to Mr. Joselito M. Laniwan. 14. Emphasis and underscoring supplied. 15. Addressed to Mr. Ismael R. Cabonse. 16. Emphasis and underscoring supplied. 17. Addressed to Ms. Nila B. Suan. 18. Emphasis and underscoring supplied. 19. Addressed to PCSO On-Line Lottery Agent c/o Carmelita M. De Guzman. 20. Emphasis and underscoring supplied. 21. Addressed to Government Corporate Council Raoul C. Creencia.