Bureau of Local Government Finance Opinion

March 4, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Elizabeth E. Peralta-Loriega, et al. Puno & Puno Law Offices 12th Floor, East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Gentlemen : This refers to your letter dated September 23, 2010, requesting in behalf of your client, Manila North Tollways Corporation (MNTC), a partial reconsideration of the ruling issued by this Bureau dated April 23, 2010, which essentially provides that toll fees collected by the toll booths of MNTC shall be recorded thereat and local business tax (LBT) based on 100% of the gross receipts of the toll booths shall be payable to the local government units (LGUs) where such toll booths are located. The above request for a partial reconsideration is based on the following reasons: I. MNTC's LBT liability cannot be based on the first sentence of Section 150 (a) of the Local Government Code of 1991 (LGC) because MNTC does not maintain or operate a branch office or sales outlet anywhere. II. The LBT liability of MNTC cannot be based on the first sentence of Section 150 (a) of the LGC even if some toll fees are paid in cash at the toll plazas because the place of payment is not the situs of the sale. Jurisprudence has established that the source of the income is not the place of payment but where the service is rendered. In the case of MNTC, the source of the gross receipts is the entire 84 km. stretch of the NLEX where the expressway services are made available. III. Given the unique nature of the expressway business, a useful and equitable approach to assure the LGUs their proportionate share of the LBT due is to invoke by analogy the allocation scheme in Section 150 (b) and (d) of the LGC. Hence, thirty percent (30%) of MNTC's gross receipts may be taxable in Caloocan City, where MNTC's principal place of business is located, while the remaining seventy percent (70%) may be allocated among the various LGUs passed through by the entire expressway based on the actual lane kilometrage traversed by the NLEX in each relevant LGU. caAICE We commend your meaningful proposition concerning the allocation of the gross receipts of MNTC's operation of the North Luzon Expressway (NLEX) primarily intended for the proportionate sharing of the LBT paid by the Company to LGUs affected by the operation of the expressway. The proposition is centered on the 30%-70% share allocation of the gross receipts realized by MNTC in the operation of NLEX and based on the kilometrage traversed in each LGU along the expressway system. Without disregarding the substance of the discussion and citations presented in your letter, it is our view that Item No. I has to be resolved as to whether the 30%-70% allocation is applicable in the case at bar, before the other issues can be resolved. Necessarily, toll plazas are conveniently installed elsewhere along the 84-kilometer stretch of the tollways to provide the essential services which the principal office may not be able to instantly provide or do to motorist/clients but only through these toll plazas which house the toll booths and other services for the convenience of its clientele. Indispensable therefore, to the resolution of the issue is the determination of whether toll plazas, which are strategically situated along the stretch of the NLEX can be considered as branch or sales offices/outlets. Undeniably, these toll booths perform functions/services that the principal or head office may otherwise perform if not for the impracticality, taking into consideration the proximity of these toll booths in the entry/exit points along the expressway system. Needless to say, toll plazas are vital installations in carrying out MNTC's contractual obligations with PNCC in the operation of the NLEX. Banking on the implication of the first sentence of Section 150 (a) of the LGC requiring two (2) elements for its application, namely: 1) there must be a branch or sales outlet "elsewhere"; and 2) the sale or transaction must be made in such branch or sale outlet, it is contended that these are not present in the case of MNTC's operation within the NLEX. In support hereto are the following submissions: 1) MNTC does not maintain or operate a single branch office or sales outlet outside of Caloocan City. 2) All day to day business activities of MNTC are conducted in its one and only office and the entire business organization, senior management, staff, records, files, computer system servers are housed in its current office at Balintawak, Caloocan City. 3) MNTC does not have personnel, records or files deployed elsewhere. 4) All MNTC corporate functions covering marketing, accounting, auditing, operations and maintenance assurance services, corporate communications, legal services, contracts management and procurement, finance, administrative services, human resource development and security are done in the same office. 5) Other physical facilities and toll plazas that exist in other areas of the Expressway do not have separate organizations and staff, nor do they keep and maintain separate sales records, books of account and the like. 6) Toll plazas simply provide support functions and are not authorized to conduct business nor generate any "sales" income on their own. DCcHIS 7) The toll plazas are transit ticket dispensing stations when the motorist enters the closed system, as well as venues for cash payment in the open system. Toll plazas also house the electronic readers of the EC Tax for cashless transactions and accept payment for reloading the stored value of the EC Tax in both systems. Some toll plazas also have weighing stations for enforcement of truck overloading and storage facilities for equipment and immobilized vehicles. Viewed in the light of all the foregoing propositions, it is concluded that while toll plazas are an essential part of the automated expressway system, they do not have the capability to earn business income. Toll plazas are neither branches nor sales outlets citing as basis the second sentence of Section 150 (a) of the LGC, as follows: "In cases where there is no such branch or sales outlet in the city or municipality where the sale or transaction is made, the sale shall be duly recorded in the principal office and the taxes due shall accrue and shall be paid to such city or municipality" . From your contention, toll plazas, although they are essential parts of the facility do not earn business income. They are only transit ticket dispensing stations, which among others, house the electronic readers of the EC Tag for cashless transactions as well as accept payments for reloading the stored value of the same, in both the closed and open systems. If in spite of the functions and services toll plazas render to MNTC's clients and being mere installations along the expressway as stated, they cannot be considered as performing the functions of the head or principal office, supra , therefore the definition of the term branch or sales office under Article 243 (a) (2) of the IRR of the LGC, would be considered pointless and defies logic. As a matter of right, the entire gross receipts of MNTC should be allocated to Caloocan City. With due respect to the position taken by that office, we beg to disagree. Toll plazas are not mere installations, as you would want to project and whose functions do not suitably fit that of branches or sales offices/outlets. Viewed in the context of the definition of a branch or sales office under Article 243 (a) (2) as follows "a fixed place in a locality which conducts operations of the business as an extension of the principal office . . ." , the functions and services performed by the toll plazas satisfy the requirements for these installations to be considered as branch or sales offices/outlets. Toll plazas need not be independent with the principal or head office to be considered as branch or sales outlet. To support our position, the two (2) basic requisites in the definition of the term "branch or sales outlet" have been met. The toll plazas are fixed structures in the locality inside the expressway system and they conduct the operations of MNTC as an extension of MNTC's principal office in Caloocan City. cEDaTS As to the contention that toll booths do not generate income of their own, we also disagree. Logically, toll plazas need not generate income of their own because they are performing the functions as extensions of the head or principal office. The collection function is a task that these toll plazas perform for and in behalf of the head or principal office. Therefore, whether their collection function is for their own account or that of the head or principal office is immaterial. As previously stated, toll booths not only serve as transit ticket dispensing stations, house the electronic readers for the EC Tax for cashless transactions, and accept payment for reloading the stored value for the EC Tax in both closed and open systems but also accept cash payments from both open and closed system patrons. In fact, during the meeting with MNTC official on April 6, 2010, it was categorically admitted to the BLGF Team by one officer that the daily collections of each toll booth is readily available and its actual collection can be produced if needed. Further, during the inspection tour at the MNTC facility in Balintawak, Caloocan City, it was observed that each computer unit at the toll booths is connected to the main server at MNTC's head office through a computer network and to where each and every transaction is recorded. The team was clarified further that the computer system can produce both the consolidated and individual statement of collections which only means that the total daily or periodic collections of each and every toll plaza or toll booth in particular can be easily generated. For this particular record to be available, the computer system is also programmed to record every transaction of a particular location as recording and maintaining a consolidated recording of all the collection transactions generated by all the collection booths of the entire tollways system. Reasonably, after having established that toll plazas may be considered as branch or sales outlets, taking into consideration the functions and services rendered in behalf of the head or principal office, to NLEX motorists as well as the electronic and cash collections rendered to motorists at the designated toll plaza, it will be more sound and prudent to apply Section 143 (c) and Article 243 of the Implementing Rules and Regulations (IRR) implementing Section 150 of the Local Government Code (LGC) of 1991, quoted as follows: "SEC. 143. Tax on Business. The municipality may impose taxes on the following businesses: "xxx xxx xxx (e) On contractors and other independent contractors , in accordance with the following schedule: With gross sales or receipts for the Rate of Tax Per Annum preceding calendar year in the amount of: xxx xxx xxx xxx xxx xxx 2,000,000.00 or more at a rate not exceeding fifty-percent (50%) of one percent (1%) xxx xxx xxx." (emphasis ours) "Article 243. Situs of the Tax. (a) . . . . xxx xxx xxx (b) Sales Allocation (1) All sales in a locality where there is a branch or sales office or warehouse shall be recorded in said branch or sales office or warehouse and the tax shall be payable to the city or municipality where the same is located . xxx xxx xxx." (Boldfacing and underscoring ours) IAEcCT With regard to the determination of the source of income, and without prejudice to LGUs that do not host any toll plaza or booth, it is viewed that the citations which determine the source of income of personal services are unnecessary. The provisions of the LGC will suffice to determine whether the collections made by toll booths at the designated toll plazas can be considered as business transactions attributable, for taxation purposes, to the locality where such toll plaza or booth is situated. In this regard, the 30%-70% share allocation of the gross receipts realized by MNTC in the operation of NLEX based on the kilometrage traversed in each LGU along the expressway system is not appropriately applicable. We therefore hold that the first sentence of Section 150 (a) quoted hereunder, is the applicable provision which will govern the allocation of the gross sales or receipts of MNTC relative to its business tax liability to LGUs affected by its operation of the NLEX, thus: "SEC. 150. Situs of the Tax. (a) For purposes of collection of the taxes under Section 143 of this Code, manufacturers, assemblers, repackers, brewers, distillers, rectifiers and compounders of liquor, distilled spirits and wines, millers, producers, exporters, wholesalers, distributors, dealers, contractors , banks and other financial institutions and other businesses, maintaining or operating branch or sales outlet elsewhere shall record the sale in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the municipality where such branch or sales outlet is located. . . . ." With regard to other issues, it is our view that further discussion will not serve the purpose considering that we have justifiably proven that toll plazas which house toll booths, can be considered as falling within the description of branches or sales outlets. All of the foregoing premises considered, we regret that we cannot give due course to your request to reconsider our previous ruling on the herein issue for lack of legal basis that will compel a reconsideration and disturb our ruling dated April 23, 2010. We hope that this will help clarify matters. AcICTS Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director