Situs of Taxation of Krispy Kreme-Pineda Commissary

July 20, 2017 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Stephen O. Uy Tax Planning, Risk and Compliance Head The Real American Doughnut Company, Inc. Penthouse, Ecoplaza Building 2305 Chino Roces Ave. Extension Makati City SUBJECT : Situs of Taxation of Krispy Kreme-Pineda Commissary Dear Mr. Uy : This refers to your letter dated 02 June 2017 regarding your request for opinion on the situs of taxation of Krispy Kreme-Pineda Commissary ('Factory'). Representations are made that The Real American Doughnut Company, Inc. ('Company'), duly incorporated in the Philippines and with principal office in Makati City, has an existing factory located at #151 Pasig Blvd., Pineda, Pasig City. Furthermore, it is represented that no sales are being made in the said factory, since the doughnuts baked and produced in the said factory are being delivered to different sales outlets or branches which are outside the territorial jurisdiction of Pasig City. However, the said factory of the Company is being assessed by the Business Permit and Licensing Office (BPLO) of Pasig City on its Local Business Tax (LBT) based on Section 23 (c) (2) 1 of the Pasig City Ordinance No. 13-93, where the said city believes that 30% of the consolidated sales of branches shall be subject to LBT. In contrast, the Company believes that the LBT shall accrue on the sales made in the branch or outlets making the sale transactions, and that the plant or factory where the doughnuts were produced has no share on the sales to be subjected to the LBT. Meanwhile, the Office of the City Legal Officer of Pasig City, in its 4th Indorsement dated 17 May 2017, clarified that the assessment of LBT on the subject factory shall be based on Section 23 (c) (1) (3) 2 and not Section (c) (2) of the said Pasig City Ordinance, considering that the doughnuts baked and produced in its factory in Pineda, Pasig City are delivered and sold to different sales outlets or branches outside the City, then the 70% sales allocation applies to the said company. In treating the issue, a discussion of the situs of taxation is deemed proper for clarification and guidance of the parties involved. Section 150 of Republic Act No. 7160, otherwise known as the Local Government Code of (LGC) of 1991, provides, as follows: " Section 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. 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 . (b) The following sales allocation shall apply to manufacturers , assemblers, contractors, producers, and exporters with factories , project offices, plants, and plantations in the pursuit of their business : (1) Thirty percent (30%) of all sales recorded in the principal office shall be taxable by the city or municipality where the principal office is located; and (2) Seventy percent (70%) of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant, or plantation is located ." (emphasis supplied) Moreover, Article 243, paragraph (b) of the Implementing Rules and Regulations (IRR) of the LGC discusses the procedure on the allocation of sales of manufacturers, producers, distributors, etc., for purposes of determining the situs of tax, as follows: "(b) Sales Allocation . (1) All sales made 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 . (2) In cases where there is no such branch, sales office, or warehouse in the locality where the sale is made , the sale shall be recorded in the principal office along with the sales made by said principal office and the tax shall accrue to the city or municipality where said principal office is located . (3) In cases where there is a factory, project office, plant or plantation in pursuit of business, thirty percent (30%) of all sales recorded in the principal office shall be taxable by the city or municipality where the principal office is located and seventy percent (70%) of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant or plantation is located ." (emphasis supplied) xxx xxx xxx (6) The sales allocation in paragraph (b) hereof shall be applied irrespective of whether or not sales are made in the locality where the factory, project office, plant or plantation is located . In case of sales made by the factory, project office, plant or plantation, the sale shall be covered by subparagraphs (1) or (2) above." (emphasis supplied) From the above quoted provisions of the LGC and its IRR, it is clear that in case a factory with no sales or transactions made in the LGU where it is located, and if there are no other branch or sales outlet located in the same locality where sales are made and recorded, 70% of all the sales recorded in the principal office shall be taxable by the municipality where the said factory is located. Further, 30% of the said sales recorded in the principal office shall be taxable by the LGU where the principal office is located. The interpretation of the provisions of Article 243 (b) (6) should not, however, be confused with the provisions of subparagraphs b (1) and b (2). It must be pointed out that subparagraph b (1) is clear and specific, i.e. , that the sales made in the sales/branch offices shall be recorded thereat and the tax shall be payable to the LGUs where such sales/branch offices are located. While subparagraph b (2) provides that if there are no sales or branch office in the locality where the sale is made, said sales shall be recorded in the principal office. Thus, the 30%-70% sales allocations under subparagraph b (3) cannot apply on the consolidated sales of Krispy Kreme from all of its other branches, provided that said sales were recorded in the branch where it is located. To emphasize, only those sales recorded in the principal office shall be taxable by the City of Pasig. In the interest of clarity, this Bureau reiterates its earlier view in BLGF Opinion dated 29 August 2008, copy hereto attached, which is analogous to the instant case, that all sales or receipts made and recorded in a branch or sales office shall be taxable by the LGU where said branch or sales office is located, to wit: "From the aforequoted provisions of Section 150(b) and 150(a), it may be deduced that the LGU where the plant is located shall have the authority to tax seventy percent (70%) of all sales recorded in the principal office and the LGU where the principal office is located shall tax the remaining thirty percent (30%) of said sales . However, it is also clear that all sales or receipts made in a branch or sales outlet shall be recorded in such branch or sales outlet and shall be taxable by the LGU where said branch or sales outlet is located. Clearly, therefore, the LGU where the factory is situated shall not have a share in the sales or receipts made in a branch or sales outlet for so long as the sale made are recorded in said branch or sales outlet . In the case at hand, HPI sales at San Fernando City (Pampanga) shall be recorded at its Pampanga branch, in which case, Section 150, abovequoted, will apply. Needless to say, whether the products sold in San Fernando were produced or withdrawn from HPI's plant elsewhere, for so long as the sale is recorded in the Pampanga branch, 100% of the tax due from such sales shall be taxable by said city and to the exclusion of the locality where the manufacturing plant is located . Accordingly, the CTO as such made a correct assessment that 100% of HPI's sales shall be taxable by said city. Likewise, this Bureau upholds the CTO's view that the 70%-30% allocation shall be used only in cases where there are no branches or sales outlets in the area where the sale transactions are made ." Granting your claim that the doughnuts baked and produced in the said factory are delivered to sales outlets or branches outside the jurisdiction of Pasig City, it can then be inferred that the Company does not maintain any branch or sales outlet in the said city. Premises considered, this Bureau holds the view that Pasig City, where the Company is maintaining its factory, cannot assess the LBT on 70% of its gross receipts, if there are no sales recorded in its principal office. However, if there are sales recorded in the principal office, Pasig City may impose an LBT on 70% of its gross receipts and the remaining 30% of the same shall be taxed by Makati City, where the principal office is located. Likewise, Pasig City cannot get a share in any of the sales recorded in the branch or sales office of the Company since 100% of the said sales shall accrue to the municipality or city where such branch or sales outlet is located, as clearly provided for by the LGC. This Opinion is issued based on the information provided and to guide local treasury offices in collecting taxes and other local impositions. If upon subsequent verification or submission of information proves the contrary, this Opinion will be deemed null and void. We hope we have provided clarity on the matter. Very truly yours, (SGD.) NIO RAYMOND B. ALVINA OIC Executive Director ATTACHMENT BLGF Opinion August 29, 2008. KRISPY KREME DOUGHNUTS June 2, 2017 MR. NIO RAYMOND B. ALVERIA n OIC-Executive Director Bureau of Local Government Finance Department of Finance 8th Floor EDPC Building Banko Sentral ng Pilipinas Complex City of Manila Dear Sir Alveria: We would like to seek clarification the imposition of local business taxes for the taxable year 2017 of Krispy Kreme-Pineda Commissary ("Factory," for brevity) by City of Pasig. The Real American Doughnut Company, Inc. (The Company) was incorporated in the Philippines. The Company's registered address was located at 11th Floor, Ecoplaza Building, 2305 Don Chino Roces Avenue Extension, Makati City. The Company has existing factory located in #151 Pasig Blvd., Pineda, Pasig City. No sales are being made in the factory. Instead, doughnuts baked and produced in the said factory are being delivered to different sales outlets or branches which are outside the territorial jurisdiction of City of Pasig. The Real American Doughnut Company, Inc.-Pineda Commissary (Krispy Kreme Commissary) is being assessed by the Business Permit and Licensing Office (BPLO) of Pasig on LBT. The assessment of the BPLO is based on Section 23 (c) (2) of Pasig City Ordinance No. 13-93, which states that: "Thirty percent (30%) of all sales recorded in the Municipality of by its principal office shall be taxable by the Municipal government." The City of Pasig believes that 30% of the consolidated sales of branches shall be subjected to local business tax. The Company believes otherwise on the legal ground that local business tax shall accrue on the sales made in the branch or outlets making the sale transaction. And, the plant or factory where the doughnuts were produced has no share on the sales to be subjected to local business tax. "Section 150. Situs of the Tax. (a) For purposes of collection of the taxes under Section 143 of this Code, manufacturers, . . . producers, exporters, wholesalers, distributors, dealers, contractors, bank and other financial institutions, and other businesses, maintaining or operating branch or sales outlets elsewhere shall record the sale in the branch or sales outlets 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. 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." Emphasis ours. (b) The following sales allocation shall apply to manufacturers, assemblers, contractors, producers, and exporters with factories, project offices, plants, and plantations in the pursuit of their business : (1) Thirty percent (30%) of all sales recorded in the principal office shall be taxable by the city or municipality where the principal office is located; and (2) Seventy percent (70%) of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant, or plantation is located . Attached herewith are the following documents: 1. Response of Pasig City Business Permit and License Office to our letter dated January 20, 2017; 2. Payment under Protest on the 1st Quarter 2017 local business tax; 3. Q1 and Q2 Business Permit Assessments by Pasig City Hall; and 4. Various BLGF opinion. We're hoping that your opinion would enlighten and clarify the issue at hand. Hope this merits your prompt attention. Very truly yours, (SGD.) STEPHEN O. UY Tax Planning, Risk and Compliance Head Noted by: (SGD.) CATHLEYA S. GENORING Group Comptroller Footnotes 1. "(2) Thirty percent (30%) of all sales recorded in the Municipality by its principal office shall be taxable by the Municipal government." 2. (c) The following sales allocation shall apply to manufacturers, assemblers, contractors, producers and exporters with factories, project offices, plants and plantations: (1) Seventy percent (70%) of all sales made outside the municipality of Pasig recorded in the principal office shall be taxable by the Municipality in cases where the factories, project offices or plants are found in the municipality of Pasig; xxx xxx xxx (3) The foregoing sales allocation shall be applied irrespective of whether or not sales are made in the locality where the factory, project office, plant or plantation is located. n Note from the Publisher: Copied verbatim from the official copy.