Bureau of Local Government Finance Opinion

February 22, 2012 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Patrick Duffy Finance & Administration Manager Sagittarius Mines, Inc. (SMI) Yakal St. corner Talisay St. Poblacion, Tampakan South Cotabato 9507 Attention: Atty. Clarizza Doloroso Tax Adviser Sir : This refers to your letter dated December 12, 2011 requesting opinion on the following issues, viz. : 1) What should be the SMI's (Sagittarius Mines, Inc.) classification for local business tax (LBT) purposes? 2) What should have been the basis for computation of SMI's liability as a newly-started business in Tampakan in 2004? 3) What should be the basis for the computation of SMI's liability in the succeeding years, 2005 onwards, while it is still in exploration stage? As a backgrounder, on October 27, 2011, this Bureau had the occasion to meet with Atty. Doloroso, Tax Adviser of SMI and the local officials of Tampakan, South Cotabato, represented by Mr. James S. Cagas, Municipal Administrator, Ms. Jeanylin S. Roca, Admin Assistant, and Minihaha D. Escobillo, Legal Technical Assistant, where it was agreed that both LGU-Tampakan and SMI will submit their respective queries and/or position papers on the taxability issue of SMI. EIDTAa It was also agreed that this Office will treat the queries/position papers as a single request so that we will be issuing a consolidated ruling and/or opinion on the LBT issue. It is informed however that up to this date, LGU-Tampakan has not submitted its position papers thus the delay in issuing the necessary ruling and/or opinion on the matter. Without discussing at length the representations made on the issue, this Bureau hereby resolves the above issues as follows: 1. Classification of SMI for LBT purposes Section 3 (Business Tax on Mining Companies) of Local Finance Circular (LFC) No. 2-09 issued by the Department of Finance on August 20, 2009, provides that mining companies may be classified and taxed as follows: "a) Mining companies which exclusively operate for the extraction of minerals, metallic or non-metallic, the tax rate shall not exceed two percent (2%) of their gross receipts pursuant to Section 143(h) of the LGC imposed under the ordinance of the LGU concerned. b) Mining companies whose operations include the processing of extracted minerals to finished products shall be taxed on their gross receipts pursuant to Section 143(a) of the LGC imposed under the ordinance of the LGUs concerned." As can be deduced from the abovequoted provisions of LFC, a mining company "which exclusively operate for the extraction of minerals, metallic or non-metallic" is classified as falling under the category "[O]n any business" of Section 143 (h) of R.A. No. 7160, otherwise known as the Local Government Code (LGC) of 1991, which provides: "Section 143. Tax on Business. The municipality may impose taxes on the following businesses: cEHSTC 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." (Underscoring for emphasis) On the other hand, if a mining company whose operations include the processing of extracted minerals to finished products shall be taxed on their gross receipts pursuant to Section 143 (a) of the LGC, which provides: "Section 143. Tax on Business. The municipality may impose taxes on the following businesses: (a) On manufacturers, assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever kind or nature , in accordance with the following schedule: xxx xxx xxx Applying the above representations, SMI may be classified as a "manufacturer of any article of commerce" in view of the submission that SMI's mining operation entails extraction of ores from the open-pit mining area and the processing of the ores into copper-gold concentrates, which are considered finished products ready for the market. [Section 3 (b) of LFC 2-09 and Section 143 (a) of the LGC] 2. SMI's initial LBT liability as a newly-started business in 2004 The LGC, which is the governing law in the affairs of local government units (LGUs), including taxation, does not provide for the imposition of an initial local business tax on newly-started business, the exception of which are Section 136 (Tax on Business of Printing and Publication) and Section 137 (Franchise Tax) of the same Code, both of which are provincial imposition. In view thereof, this Bureau, consistent with its previous stand on cases similarly situated, is steadfast on its view that businesses enumerated under Section 143 of the LGC are not subject to and/or liable to the payment of an initial LBT. What is clear in the law (Section 143, LGC) is that LBT is computed based on "gross sales or receipts for the preceding calendar year". Stated otherwise, the absence of a "gross sales or receipt" of a business will render any assessment for LBT illegitimate for lack of legal basis in the law. This also answers Issue No. 3 and therefore no longer needs any further discussions. ITECSH It is informed however, that the above views are expressed, particularly concerning Issue Nos. 2 & 3, in line with Article 287 of the Implementing Rules and Regulations (IRR) of the LGC and not a declaration of the illegality or nullity of the duly-enacted tax ordinance of the LGU(s) concerned as the same rests solely within the jurisdiction of a competent court. We hope that that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director