Bureau of Local Government Finance Opinion

February 13, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Maria Cristina S. Bayhon-Garcia Legal Counsel Suites 1205 & 1206, East Tower Philippine Stock Exchange Center Exchange Road, Ortigas Center Pasig City, Metro Manila 1605 Madam : This refers to your letter dated February 4, 2015 requesting for an opinion on the proper application of Section 150 (b) and (e) of the Local Government Code (LGC) of 1991 which states as follows: Section 150. Situs of the tax . . . . (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 (e) The foregoing sales allocation shall be applied irrespective of whether or not sales are made in the locality where the factory, project office, plant, or plantation is located. In relation to the above request, Alliance Select Foods International, Inc. ("ASFII") made the following representations: 1) It was incorporated in the Philippine Securities and Exchange Commission (SEC) on September 1, 2003. It is a public corporation under Section 17.2 of the Securities Regulation Code and listed in the Philippine Stock Exchange (PSE). ASFII is primarily engaged in the business of manufacturing, canning, importing and exporting of food products such as marine, aquaculture, and other processed seafoods. 2) The principal place of business of ASFII, as stated in its Articles of Incorporation, is at Suite 1205, East Tower, Philippine Stock Exchange Centre, Exchange Road, Ortigas Center, Pasig City, Metro Manila. However, ASFII maintains canned tuna manufacturing facilities at Brgy. Tambler, General Santos City, Mindanao, Philippines. 3) Although its canned tuna manufacturing facilities are located in General Santos City, ASFII negotiates and finalizes all of its tuna sales transactions at its head office in Pasig City. 4) AFSII was registered with the Board of Investments (BOI) on August 24, 2004 on a non-pioneer status as a new export producer of canned tuna. As such, ASFII was entitled to certain incentives, such as being subject to an income tax holiday (ITH) for four years, which was extended for another three (3) years or until August 23, 2011. During the period when ASFII was under ITH regime, it was exempt from paying local business taxes to Pasig City and General Santos City. Sometime in 2011, ASFII started to pay local business taxes. It is claimed that in accordance with the 30%-70% allocation under Section 150 (b) of the LGC, Pasig City collected local business taxes from ASFII on 30% of all sales recorded in the principal office. However, General Santos City collected local business taxes based on 100% of all sales recorded in the principal office. In a letter dated April 24, 2013, ASFII requested the City Government of General Santos City to adjust its local business payments based on 70% of all sales recorded in the principal office of ASFII. A copy of the said letter is attached herewith as Annex "A". CAIHTE In support of its request, ASFII invoked the letter of the Department of Interior and Local Government (DILG) addressed to Mayor Darlene Antonio-Custodio (then Mayor of General Santos City) regarding the case of first Dominion Prime Holdings, Inc. and Containers Printer Pte. Ltd. (FDCP). In the said case, FDCP received an assessment from the City Government of General Santos City for the tax year 2011 charging an alleged tax deficiency of P197,239.55 based on its claimed 100% entitlement to business tax. FDCP referred the matter to Pasig City and the letter insisted that it has the right to the 30% business tax. In its letter, DILG cited Section 150 (b) and (e) of the Local Government Code and stated as follows: Based on the factual representation of FDPC, its 30% sales tax allocation to Pasig City, where its principal office is located, and 70% sales tax allocation to General Santos City, where its manufacturing plant is located, appears to be in accordance with law . The following conclusion is in accordance with BLGF Opinion No. 2003-0401 dated 09 April 2003 which is in reply to query posed by a corporation that is similarly situated as FDCP, i.e., a corporation which maintains in separate locations a manufacturing plant and a principal office and which does not appear to have a branch/sales office. Thus, the clear application of the 30%-70% sales tax allocation between the manufacturing plant and the principal office, respectively . Considering the foregoing, may we request your comments and/or appropriate action on the issue in light of the above opinion of the Department as supported by BLGF Opinion No. 2003-0401. (Underscoring supplied) In a letter dated May 31, 2013, a copy of which is attached as Annex "B," ASFII explained the process flow of its tuna business to the City Government of General Santos City as follows: 1. Our sales of canned tuna is being conducted and concluded in our Head Office in Pasig City through the internet by our Marketing staff headed by our VP Marketing Mr. Randolph H. Rodriguez . The organizational chart of his office is hereto attached as Annex "1". 2. Once done, Mr. Rodriguez will advise the Plant here in General Santos City through our VP Operations Mrs. Herminia B. Narciso by way of Export Order Advise faxed to our Logistics department for schedule and allocation for production and shipment. Sample of an Export Order advice is also hereto attached as Annex 2. 3. After we finished production of the order, after labeling and completion of the required documentation, we then shipped it to the buyer at any point of destination in the world through Delivery Receipt and Bill of lading Annex 3 and. 4. Thereafter, Mr. Rodriguez issues our sales Invoice in Pasig City compromising all the details of the transactions including the terms and conditions thereof. Annex 5. (Underscoring supplied) In a letter dated August 2, 2013, the City Government of General Santos City ruled that ASFII's plant in General Santos City is a branch, thus, it should pay local business tax based on 100% of gross sales. It arrived at this conclusion based on its findings that offers are made and orders are accepted at the ASFII plant in General Santos City, and based on the premise that "sales are being considered upon shipment of the tuna products to the buyer's destination", and "that the operation of ASFII General Santos City is not only manufacturing but also selling, thus it is considered a branch." A copy of the said letter from General Santos City is attached herewith as Annex "C". Based on the foregoing, ASFII requests for confirmation of its opinion that, pursuant to Section 150 (b) of the LGC, it is subject to local business taxes as follows: A. Thirty percent (30%) of all sales recorded in ASFII's principal office in Pasig City shall be taxable in Pasig City; and B. Seventy percent (70%) of all sales recorded in ASFII's principal office in Pasig City shall be taxable in General Santos City, where the ASFII plant is located. In this connection and for purposes of discussion it is reiterated and emphasized that: 1. The tuna sales of AFSII are negotiated, concluded, recorded and booked at the principal office in Pasig City; 2. All tuna sales invoices are issued in the principal office in Pasig City; DETACa 3. The plant is being used for processing and manufacturing of our tuna products; 4. ASFII maintains an administrative office in the plant. However, no tuna sales are made or booked in the Plant or Administrative Office in General Santos City. In this regard, it is your opinion that ASFII is subject to Section 150 (b) of the Local Government Code on the 30%-70% allocation of sales between the principal office and the plant for purposes of computing local business taxes. This is the same interpretation taken by Pasig City as shown by the fact that since 2011, they have only been assessing and collecting based on 30% of all sales recorded in ASFII's principal office in Pasig City. In support to said position ASFII cited several rulings and opinions issued by this Bureau bearing on similar issues. It is further claimed that the City Government of General Santos City may have misunderstood the procedures and processes when it found that offers are made and orders accepted at the ASFII plant in General Santos City and concluded that "that the operation of ASFII General Santos City is not only manufacturing but also selling, thus it is considered a branch." However it is the position of ASFII that its plant in General Santos City should not be considered a branch since all tuna sales are concluded and recorded in Pasig City. Said position is supported by BLGF Opinion dated March 21, 2005 addressed to the City Treasurer of General Santos City which pertinently states: "However, Zuellig maintains its non-liability of paying the local business tax in General Santos City since it is only operating a Customer Service Center therein. Such contention is based on various rulings and opinions, one of which embodied in the DOF Opinion dated October 7, 1993, the dispositive portion of which reads: " where there were no receipts (or sales) recorded in an alleged 'branch office', such office is not a 'branch office' within the contemplation of the law . . . . ." (Underscoring supplied) Likewise, ASFII clarifies the misimpression of General Santos City that "sales are being considered upon shipment of the tuna products to the buyer's destination". ASFII believes that the place of shipment is not controlling for purpose of determining where a sale is made. In this regard, ASFII cited BLGF Opinion dated February 13, 2009 addressed to Ms. Rosemarie P. Leviste of LBP Service Corporation which clarifies the place where a sale is made as follows: "In addition, under the Civil Code of the Philippines, a sale is deemed made or perfected upon the meeting of the minds of the buyer and seller. The perfection of the contract of sale occurs when the buyer and the seller agree as to the terms of the sale or when the seller accepts the buyer's purchase order. The place of perfection of the contract shall be deemed to be the place where the sales are made ." (Underscoring supplied) The perfection of all of our tuna sales happens at the Pasig City office since all tuna sales are negotiated, concluded, recorded and booked at the Pasig City office. Further ASFII involved Section 150 (e) which states that: "The foregoing sales allocation shall be applied irrespective of whether or not sales are made in the locality where the factory, project office, plant, or plantation is located." Based on its understanding of the quoted provision, even assuming there are sales made in the locality where the plant is located, the sales allocation would still apply. However, in the case of ASFII, no tuna sales are being concluded and booked in the plant. Lastly, based on principles of equity, it is believed that ASFII is unjustly burdened with the obligation to pay taxes in Pasig City based on 30% of sales recorded and in General Santos City based on 100% of sales recorded thus, effectively paying local business taxes based on 130% of sales recorded. Based on the aforequoted provisions of Section 150 of the LGC and its IRR, this Bureau expresses the following: 1. Considering the representations made that the tuna sales of AFSII are negotiated, concluded, recorded and booked at the principal office in Pasig City and all tuna sales invoices are issued thereat, thirty percent (30%) of all sales recorded in ASFII's principal office shall be taxable in Pasig City. 2. Considering further that the plant is being used for processing and manufacturing of tuna products and no tuna sales are being made or booked therein, although an administrative office is maintained, seventy percent (70%) of all sales recorded in ASFII's principal office in Pasig City shall be taxable in General Santos City, where the ASFII plant is located. aDSIHc 3. To further clarified the application of the aforecited Section 150 (e) of the LGC, Article 243 (b) (6) of the IRR, quoted hereunder thus: "Article 243. Situs of the Tax . (a) . . . "(b) Sales Allocation (1) . . . "(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. . . . . (Emphasis ours) "xxx xxx xxx." It bears emphasis, however, that the above views are expressed based on the facts presented in the above letter dated February 4, 2014. However, if upon verification and investigation the same shall be proven to the contrary, then the views rendered shall be considered null and void. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director