Bureau of Local Government Finance Opinion

April 8, 2013 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Erwin D. Limsui President SYL Hermanos Trade Center, Inc. Roscom Warehouse, Muelle Loney St. Iloilo City Sir : This refers to your letter dated April 1, 2013 requesting opinion in determining the basis of tax assessment on renewal of business permit as provided in the Local Government Code (LGC) of 1991, quoting Section 131 (n) thereof which defines gross sales or receipts as follows: ETDAaC "Section 131. Definition of Terms . When used in this Title, the term: "xxx xxx xxx; "(n) Gross Sales or Receipts include the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person excluding discounts if determinable at the time of sales, sales return, excise tax, and value-added tax (VAT) ; (Emphasis ours) "xxx xxx xxx." Representations are made that SYL Hermanos Trade Center, Inc. (SYL for brevity) is engaged in an exclusive distributorship of the following products in Western Visayas: Energizer Philippines, Inc. (EPI), Del Monte Philippines, Inc. (DMPI), Wyeth Philippines, Inc. (WPI) and Foodsphere, Inc. (CDO) and as such, SYL is bound by a Distributorship Contract Agreement. Under the agreement, SYL may earn a distributor allowance/trade discount only by selling and merchandising the full range of the principal's product in the area of coverage a percentage of CNF (Cost, No insurance, Freight) price ranging from 7% to 14%, meaning that the total amount of gross sales/receipts less the percentage given as distributor allowance/trade discount corresponds to the share of the Principal(s). It is claimed that since 2006, SYL is being assessed by the local government units based on the total amount of gross sales/receipts which is not equitable since it includes receipts entrusted to SYL but does not belong to nor redound to the benefit of SYL. Gross Sales or Receipts for Purposes of Local Business Taxation In the attached Distributorship Agreement between SYL and EPI, it provides as follows: HAICET "1. The Company shall establish a distributor allowance which the Distributor may earn by selling and merchandising the full range of EPI product in the area of coverage designated below: . . . . Schedule A of the Distributorship Agreement provides: 6. The Distributor will sell at Company-established prices. He will distribute EPI products without passing the distributor allowance to the trade. . . . ." Based on the abovecited excerpts of the Agreement, it is claimed that your tax base should be equivalent only to not more than the distributor allowance/trade discounts of 7% to 14% of the total gross sales. Given the preferred literal meaning of the above-quoted provision of the LGC, it is clear that the gross sales or receipts shall be the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person excluding discounts if determinable at the time of sales, sales return, excise tax, and value-added tax (VAT). It may be worth noting that one of the terms in the Agreement provides that: "3. The Distributor will be granted a thirty (30)-day credit term on his purchases based on a credit limit to be determined by the Company." Likewise, Schedule A of the Distributorship Agreement provides: "5. The Distributor shall be entitled to the Prompt Payment Discount subject to the following conditions: a) Discount of two percent (2%) for dues paid within five (5) days from invoice date; and b) Discount of One percent (1%) for dues paid from the sixth (6th) day to the fifteenth (15th) day from invoice date." SDEHIa In this case, the total amount of sales generated from selling the EPI products shall constitute the gross sales or receipts of the Distributor as contemplated under the aforequoted Section 131 (n) of the LGC, to the exclusion of discounts, if determinable at the time of sale, sales return, excise tax, and value-added tax (VAT). There was no showing however, in the Agreement that SYL is selling EPI products on consignment or commission basis in which case SYL shall pay the manufacturer (EPI) only when the goods are sold and retain certain amount of the sales as commission. Based on the above provision of the Agreement, it contemplates that the Distributor has acquired the right and title over the products and assumed ownership of the same upon payment and delivery thereof. (Sec. 1477, Civil Code of the Philippines) . Having assumed ownership of the products, it may be assumed also that sales reported by the Distributor in its book of accounts shall form part of the gross sales or receipts referred to in Section 131 (n), supra , and may only be lowered by the allowable deductions enumerated thereof. In this regard, unless SYL is able to prove that indeed, its only source of income is the distributor allowance/trade discounts, then computing the LBT shall be based on the gross sales or receipts accounted on the basis of official receipts and/or invoices issued by the distributor to its clienteles. Stated otherwise, the claim that only the distributor allowance/trade discounts should be considered in the computation of LBT, the Distributor will have to show that the amount in excess of the distributor allowance/trade discounts are remitted to EPI or other manufacturers of products being sold by the Company, otherwise there is no other recourse but to include the said amount and be considered as part of the gross sales or receipts of the distributor, in this case, SYL. Conversely, if the distributor is able to substantiate that its only income is distributor allowance/trade discounts, then there is no option left but to compute the LBT based on said amount of distributor allowance/trade discounts. We hope that this will help clarify matters. cASEDC Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director