Bureau of Local Government Finance Opinion

April 10, 2013 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 4th Indorsement Respectfully returned to the Municipal Treasurer, Camaligan, Camarines Sur her letter dated January 24, 2013 relative to the letter dated March 26, 2012 of Ms. Rosielyn Baclig, former Accounting Manager of South Star Drug, Inc. (SSDI), addressed to the Municipal Mayor of Camaligan, Camarines Sur, posing certain queries on the assessment (a hand-written computation of business tax due hereinafter referred to as the second assessment) issued by that Office on the business tax liability of SSDI amounting to P6,233,079.77 for calendar year 2012. That Office under a letter dated April 16, 2012 to the OIC-Regional Director for Local Government Finance, Region V, requested for technical assistance and legal advice in the implementation of the tax ordinance of said Municipality in connection with the imposition of business tax on SSDI. CScTED Consequently, the OIC-Regional Director, under a 1st Indorsement dated March 31, 2012, forwarded said letter of April 16, 2012 to this Bureau for appropriate action. In the said letter of March 26, 2012, Ms. Baclig alleged that the second assessment is without basis for the following reasons: 1. SSDI is engaged in the business of " retailing of pharmaceutical, medial, cosmetic and toilet articles " as stated in the Certificate of Registration issued by the Bureau of Internal Revenue (copy is attached as Annex C). SDDI sells its products directly to the end users or consumers and not to resellers or small retailers. 2. SSDI's official head office is situated at #403 F. Legaspi St., Maybunga Pasig City. 3. The office in Camaligan, Camarines Sur serves as SSDI's Bicol Office only and not as the official head office or principal headquarters of the business in the Philippines. Moreover, the Bicol Office serves only as the cross-docking, transit point or stock transfer shipment for delivery to other branches in Region V. It does not sell to end users or consumers. All sales are transacted at their various branches nationwide. 4. The amount of tax due in the second assessment is considerably more than the amount in the first assessment and the assessment issued against SSDI for the previous years (copies are attached as Annexes "D" to "E"). The Municipal Treasurer did not cite a change in circumstances which would warrant a change in the treatment of SSDI's business within the municipality. Under a 2nd Indorsement dated June 25, 2012, this Bureau, based on the representations made by Ms. Baclig, concurred that the line of business of SSDI is that of a " retailer ", the classification stated in the Certificate of Registration issued by the BIR. As such, the applicable provision of law is Sec. 143 (d) of the Local Government Code (LGC) of 1991, which provides: "Sec. 143. Tax on Business . The municipality may impose taxes on the following businesses: "(a) . . . "(d) On retailers, With Gross sales or receipts Rate of Tax for the preceding calendar Per Annum year of: P400,000.00 or less 2% More than 400,000.00 1% "Provided, however, That barangay shall have the exclusive power to levy taxes, as provided under Section 152 hereof, on gross sales or receipts of the preceding calendar year of Fifty Thousand Pesos (P50,000.00) or less, in the case of cities, and Thirty Thousand Pesos (P30,000.00) or less in the case of municipalities. STcADa "xxx xxx xxx." Moreover, this Bureau stated that SDDI's principal office appearing in its SEC registration is 777 Nueve de Pebrero St., Mandaluyong City. However, that Office assessed SSDI as a " distributor " and considered their Office in Bicol as principal/head office, hence, the said second assessment of tax amounting to P6,233,079.77. On the basis of the above representations, this Bureau is inviting the attention of that Office to the provisions of Article 243 of the Implementing Rules and Regulations (IRR), implementing Sec. 150 of the LGC, quoted as follows: "Art. 243. Situs of the Tax . (a) For purposes of collection of the taxes under Art. 232 of this Rule, the following definition of terms and guidelines shall be strictly observed: "(1) Principal Office the head or main office of the business appearing in the pertinent documents submitted to the Securities and Exchange Commission, or the Department of Trade and Industry , or other appropriate agencies, as the case may be. (Emphasis ours) "The city or municipality specifically mentioned in the Articles of Incorporation or official registration papers as being the official address of said principal office shall be considered as the situs thereof. "xxx xxx xxx." In connection with the above, this Bureau requested to be enlightened as to the basis of the second assessment declaring a gross receipts of P3,454,877,650.83. In reply, under a letter dated July 20, 2012, that Office furnished this Bureau a photocopy of 2010 BIR Annual Income Tax Return of SSDI which was the basis in computing the herein referred tax. Under the 3rd Indorsement dated August 22, 2012, this Bureau informed that the attached BIR Annual Income Tax Return of SSDI is for 2010 and not for 2011 which should be the basis for computing the 2012 business tax of SSDI. SIDTCa Further, this Bureau reiterated that SSDI should be classified as a " retailer " based on its actual business operation and Certificate of Registration issued by the BIR. In fact, SSDI submitted that it sells its products directly to the end-users and not to resellers or small retailers which in turn will sell the products to end-users. On January 24, 2013, that Office submitted a copy of the 2011 Annual Income Tax Return of SSDI. It is worth mentioning that the now Accounting Manager of SSDI sent a letter dated February 18, 2013 certifying that the Income Tax Return (ITR) submitted by SSDI is a consolidation of all financial information of its branches nationwide, which is in compliance with BIR regulation. As a large taxpayer, all tax returns and payments are filed and remitted at RDO 116, BIR Large Taxpayers Division. In this connection this Bureau expresses the following views: No branch office of SSDI in Camaligan The basic rule in determining the situs of the local business tax is where the transactions are made and recorded. In order for the sale to be recorded and subject to the local business tax 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, other than where its principal office is located. 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. Considering that SSDI's Office in Camaligan serves only as the cross-docking, transit point or stock transfer shipment for delivery to other branches in Region V, said office cannot be considered as sales or branch office as contemplated in the LGC. To our view, the facility is more of a " warehouse " where products are withdrawn for delivery to other branches covered by its operation but does not generate sales. Hence, the Municipality of Camaligan cannot share in the business tax paid by SSDI based on its gross sales reflected in its Annual Income Tax Return as these gross sales are realized by its branches nationwide. TIaCHA It is suggested however, that Office conduct an ocular inspection to determine the nature or actual business operation of SSDI's office thereat. No sales are made in Camaligan It may be worth mentioning that basically local business tax under Section 143 of the LGC, except for Peddler's Tax, is computed based on the gross sales or receipts of a business entity for the preceding year . However, as represented that no sales are made in the Camaligan Office, SSDI will not be subject to, or liable to, pay any business tax to said Municipality. Said Municipality may only collect Mayor's Permit fee and other regulatory fees provided for under its existing local tax ordinance. The 30%-70% sales allocation will not apply In the documents submitted and as mentioned above, SSDI's principal office appearing in its SEC registration is Mandaluyong City. However, SSDI emailed on April 16, 2013 its amended Articles of Incorporation indicating that SSDI's principal office is now in Camaligan. Be that as it may, the 30%-70% sales allocation, based on information submitted and representations laid down, shall not apply. Section 150 (b) (1) & (2) of the LGC provides as follows: "Section 150. Situs of the Tax . (a) . . . (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 : (Emphasis ours) (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." Based on the foregoing provisions of the LGC, certain conditions must be met before the allocation applies. HSCAIT Foremost, the sales allocation shall apply only to manufacturers , assemblers , contractors , producers , and exporters . This enumeration in the abovequoted Section 150 of the LGC is very specific and therefore those business classifications not included in the list should not be subjected to the sales allocation provided for in the law abovequoted. As already mentioned above, SSDI is engaged in the business of " retailing of pharmaceutical, medial, cosmetic and toilet articles". It may be worth stressing that from the aforequoted provision of the LGC it is clear that a " retailer " is not among the entities included in the enumeration upon which the sales allocation may apply. For this reason, the 30% sales allocation being claimed by Camaligan from the gross sales or receipts realized by the branch offices of SSDI is not untenable in view of the fact that SSDI operates as a " retailer " and therefore beyond the coverage of Section 150, par. (b), subpars. (1) and (2), supra . Moreover, the sales allocation shall apply when the enumerated businesses have or maintaining certain facilities in locations other than where the principal office is situated. These facilities are limited to: factories, project offices, plant or plantation . Nowhere in the enumeration is a branch office mentioned. Therefore, the Municipality of Camaligan cannot validly claim 30% sales allocation from gross sales or receipts realized by the branches of SSDI for lack of legal basis in the law. Be guided accordingly. (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director