Bureau of Local Government Finance Opinion

January 21, 2013 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Restituto T. Alfonso OIC-Legal Officer V Atty. Christian B. Villar Legal Officer IV Office of the City Legal Officer Pasig City Gentlemen : This refers to your letter dated December 18, 2012 seeking clarification and/or confirmation on the request for tax refund of Affinity Express Philippines, Inc. ("Affinity") pursuant to Section 196 of the Local Government Code of 1991 (LGC) and Article 286 of the Implementing Rules and Regulations (IRR) thereof. cIHSTC It is viewed that generally, a tax-credit should only be granted to the requesting party, but under this particular case, an exemption specifically applies as when a taxpayer "terminates operation of the business involved in the locality". The following facts are admitted, viz. : 1. The taxpayer, "Affinity",is a corporation duly organized and existing under the laws of the Philippines; 2. Affinity is a Philippine Economic Zone Authority ("PEZA")-approved Information Technology (IT) Enterprise under Certificate of Registration No. 07-43-IT; 3. For the taxable years 2007 to November 2009, Affinity maintained its office, operation and conducted its business within the territorial jurisdiction of the City Government of Pasig, specifically at the Orient Square Bldg., Ortigas Centre, Pasig City, a PEZA registered office building (cf. Annex "A" PEZA Certificate of Registration No. 07-43-IT); 4. Starting November 2009 up to present, Affinity ceased to hold its office in Pasig City and start to conduct its business and/or operation at UP Science and Technology Park (North), Quezon City (cf. Annex "B" PEZA Certificate of Registration No. 07-43-IT); 5. On the other hand, the Office of the City Treasurer-Pasig City required Affinity to secure and/or pay its Mayor's permit, local business taxes and/or permit fees for taxable years 2009 to 2010; 6. An assessment was issued by the Office of the City Treasurer-Pasig City and required Affinity to pay (1) P124,925.92 for deficiency tax for the year 2009; and (2) P1,350,014.04 for taxable year 2010; 7. Accordingly, Affinity paid a total amount of One Million Four Hundred Seventy Four Thousand Nine Hundred Thirty Nine Pesos and 96/100 (P1,474,939.96),broken down as follows: DcITaC Date Paid Amount and Purpose Deficiency tax for 2009 15 March 2010 P124,925.92 Taxable Year 2010 15 March 2010 P1,350,014.04 for local business taxes and permit fees P1,474,939.96 Further, the following provisions of laws, issuances and/or agreement were submitted to give light in the particular issue, to wit: 1. Section 196, LGC. Claim for Refund of Tax Credit. No case or proceeding shall be maintained in any court for the recovery of any tax, fee, or charge erroneously or illegally collected until a written claim or refund or credit has been filed with the local treasurer. No case or proceeding shall be entertained in any court after the expiration of two (2) years from the date of the payment of such tax, or charge, or from the date the taxpayer is entitled to a refund or credit; 2. Article 286 of the IRR, LGC. Claim for Refund or Tax Credit. All taxpayers entitled to a refund or tax credit provided in this Rule shall file with the local treasurer a claim in writing duly supported by evidence of payment ( e.g., official receipts, tax clearance, and such other proof evidencing overpayment within two (2) years from payment of the tax, fee or charge. No case or proceeding shall be entertained in any court without this claim in writing, and after the expiration of two (2) years from the date of payment of such tax, fee or charge, or from the date the taxpayer is entitled to a refund or tax credit; The tax credit granted a taxpayer shall not be refundable in cash but shall only be applied to future tax obligations of the same taxpayer for the same business. If a taxpayer has paid in full the tax due for the entire year and he shall have no other tax obligation payable to the LGU concerned during the year, his tax credit, if any, shall be applied in full during the first quarter of the next calendar year on the tax due from him for the same business of said calendar year. Any unapplied balance of the tax credit shall be refunded in cash in the event that he terminates operation of the business involved within the locality . (emphasis supplied) 3. Section 23 of R.A. 7916 as amended by R.A. 8748. Fiscal Incentives. Business establishments operating within the ECOZONE shall be entitled to the fiscal incentives as provided for under Presidential Decree No. 66, the law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987; HCaDIS xxx xxx xxx 4. Article 39 of the Omnibus Investment Code. Incentives to Registered Enterprises . All registered enterprises shall be granted the following incentives to the extent engaged in a preferred area of investment: "(a) Income Tax Holiday . (1) For six (6) years from commercial operation for pioneer firms and four (4) years for non-pioneer firms, new registered firms shall be fully exempt from income taxes levied by the National Government. Subject to such guidelines as may be prescribed by the Board, the income tax exemption will be extended for another year in each of the following cases: ...." 5. Article 78 of E.O. 226. Additional Incentives .A zone registered enterprise shall also enjoy all the incentive benefits provided in Article 39 hereof under the same terms and conditions stated therein. In additional zone registered enterprises shall also be entitled to the following: (a) Exemption from Local Taxes and Licenses, Notwithstanding the provisions of law to the contrary, zone registered enterprises shall, to the extent of their construction, operation or production inside the zone be exempt from the payment of any and all local government imposts, fees, licenses or taxes except real estate taxes which shall be collected by the Province/City/Municipality responsible for the collection thereof under the provisions of the Real Property Code :... 6. PEZA Memorandum Circular No. 2004-24 dated 24 September 2004 ;and 7. Memorandum of Agreement between the City Government of Pasig and the Philippine Economic Zone Authority dated 29 January 2010. In resolving the main issue of tax credit/refund being pursued by Affinity, it is important to discuss related issues and the governing provisions of law for better understanding. HCEISc As stated, starting November 2009 Affinity ceased to operate in Pasig City and transferred its business operation at UP Science and Technology Park. However, on taxable years 2009-2010, the City Treasurer of Pasig assessed Affinity for the payment of Mayor's Permit and other regulatory fees as well as local business tax (LBT),which the latter paid, broken down as follows: Year/Period Purpose Date Paid Amount 2009 Deficiency 15 March 2010 P124,925.92 2012 LBT & Regulatory Fees 15 March 2010 P1,350,014.04 Total P1,474,939.96 ============ For easy reference Section 23 of R.A. No. 7916, as amended, is hereby quoted as follows: "Section 23. Fiscal Incentives . Business establishments operating within the ECOZONES shall be entitle to the fiscal incentives as provided under Presidential Decree No. 66, of the law creating the Export Processing Zone Authority, or those provided under Book VI of Executive Order No. 226, otherwise known as the Omnibus Investment Code of 1987." Relatedly, Articles 39 and 78 of E.O. No. 226, also known as the Omnibus Investment Code provides: "Article 39. Incentives to Registered Enterprises . All registered enterprises shall be granted the following incentives to the extent engaged in a preferred area of investment: (a) Income Tax Holiday . (1) For six (6) years from commercial operations for pioneer firms and four (4) years for non-pioneer firms ,new registered firms shall be fully exempt from income taxes levied by the National Government. Subject to such guidelines as may be prescribed by the Board, the income tax exemption will be extended for another year in each of the following cases: ...." "Article 78. Additional Incentives . a zone registered enterprise shall also enjoy all the incentive benefits provided in Article 39 hereof under the same terms and conditions stated therein. In addition zone registered enterprises shall also be entitled to the following: ADaECI (a) Exemption from Local Taxes and Licenses .Notwithstanding the provisions of law to the contrary, zone registered enterprise shall, to the extent of their construction, operation or production inside the zone be exempt from the payment of any and all local government imposts, fees, licenses or taxes except real estate taxes which shall be collected by the * In view thereof, it may be stated that Affinity should not have been assessed for regulatory fees and LBT for the period 2009-2010 considering it still enjoy its ITH exemption, supra , under its PEZA-Certificate of Registration in relation to the abovequoted Section 23 of R.A. No. 7916 and as provided in Articles 39 and 78 of E.O. No. 226. In this connection and in consideration of the fact that Affinity no longer operates within the territorial jurisdiction of the City Government of Pasig hence, no future obligation in the form of taxes and regulatory fees can be envisaged, it (Affinity) is therefore entitled for a cash refund for the amounts it paid for the years 2009 to 2010 in the total amount of P1,474,939.96. Provided however, that the basic requirement, a written claim for refund or tax credit, had been filed with the local treasurer, duly supported by evidence of payment and such other proof evidencing that the claim for overpayment is within two (2) years from the payment of the tax pursuant to the aforecited provisions of the LGC and its IRR. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director