Bureau of Local Government Finance Opinion

March 10, 2010 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Reynaldo E. Antiola City Treasurer City Treasurer's Office Tayabas City, Quezon Sir : This refers to your letter dated February 18, 2010 requesting for a copy of any resolution or memorandum in relation to the determination of " gross sales/receipts for the preceding calendar year " of a business entity engaged in marketing or distributorship. In a letter dated February 4, 2010 of Atty. Francis Xavier C. Sia, Counsel for Mr. & Mrs. Chun Chua, owners of Thoch Marketing and Chris Jann Marketing, relative to the PROTEST filed before that Office, it was requested that immediate rectification and adjustment be made on the assessment thereof. At the outset it is informed that the Department of Finance or this Bureau had not issued a memorandum or guideline governing the determination of gross sales/receipt of a retained amount by a Distributor covered by Distributorship Contract Agreement. In this respect and based on the available information supplied that the subject taxpayer/s are under Distributorship Contract Agreement (DCA for brevity), this Bureau, by way of comment, expresses the following explication. Section 131 (n) of the Local Government Code (LGC) of 1991, defines gross receipts as follows: " SEC. 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) In the case of Commissioner of Internal Revenue vs. Torres Specialists, Inc. , the Supreme Court held that: " Gross receipts subject to tax under the Tax Code do not include monies or receipts entrusted to the taxpayer which do not belong to them and do not redound to the taxpayer's benefit; and it is not necessary that there must be a law or regulation which would exempt such monies and receipts within the meaning of gross receipts under the Tax Code . . . ." While the above ruling involves national internal revenue taxes, the principle enunciated by the Supreme Court, may very well apply to local business taxes considering that the definition of "gross receipts" under the LGC and the Tax Reform Act of 1997 are exactly the same. Viewed in the light of the foregoing, it may be stated that the tax base from the respective business taxes due from Thoch Marketing and Chris Jahnn Marketing (herein collectively referred to as "Distributors") , shall be based on the total amount of gross sales/receipts less the amounts which correspond to the 95% share of the Principal. Stated otherwise, the tax base for both Distributors shall be equivalent to only 5% of the total sales, from which the corresponding business taxes due from the individual Distributor shall be computed. It is worth mentioning however that the amount equivalent to 95% of the total sales/receipts represents the total amount of sales earmarked under the account of the principal alleged to have been stipulated under the DCA thus, the corresponding business tax due thereon shall be imposed and collected from the Principal by the taxing authority concerned. We hope that this will help clarify matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director