Presumptive Income Level Assessment Approach (PILAA)

September 4, 2017 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Leonardo A. Aurelio Atty. Henson M. Montalvo A.M. Sison, Jr. & Partners Suite 2002-A Security Bank Centre 6776 Ayala Avenue, Makati City SUBJECT : Presumptive Income Level Assessment Approach (PILAA) Dear Atty. Aurelio and Atty. Montalvo : This refers to your letter dated 17 February 2017, on behalf of The Redsystems Company, Inc. (TRCI) seeking this Bureau's opinion regarding the unrestricted use of Presumptive Income Level Assessment Approach (PILAA) n by the City Treasurer of Tagbilaran City, Bohol. Representations are made that the TRCI is a corporation duly organized and existing under the Republic of the Philippines, that is primarily engaged in the business of providing distribution and warehousing services and maintains numerous branches all over the Philippines, one of which is in Tagbilaran City, Bohol. As represented, TRCI applied for the renewal of its business permit for 2016 and declared its gross receipts from the preceding year amounting to Twenty Seven Million Six Hundred Twenty Seven Thousand Six Hundred Forty Two Pesos and 75/100 (Php27,627,642.75). However, the City Treasurer of Tagbilaran applied the PILAA and the income used for the purpose of computing the local business tax (LBT) amounts to Forty Two Million Seven Hundred Thirty Five Thousand Six Hundred Forty Eight Pesos (Php42,735,648.00). Despite the objection, TRCI paid the assessment made by the City Treasurer on 20 January 2016. Subsequently, TRCI filed a protest with claim for refund on the ground that the use of PILAA in computing the local business tax due for year 2016 was arbitrary and whimsical, without informing TRCI of the reasons, factors and particular information used in arriving at the presumed revenue. Thus, it is said to be a complete disregard of their submitted Sworn Declaration of Actual Gross Sales. To support the above request, TRCI further made the following representations: a) Section 143 (a) of the Local Government Code (LGC) of 1991, for which TRCI's tax liability for 2016 must be based on the actual gross receipts in 2015 amounting to Twenty Seven Million Six Hundred Twenty Seven Thousand Six Hundred Forty Two Pesos and 75/100 (P27,627,642.75), as affirmed in the Sworn Declaration; b) The use of PILAA must meet certain income level standard for various entities based on industry factors and requirements, and the pre-requisites for a valid use of PILAA are not present. In particular, TRCI was not properly informed on the factors used in computing the presumptive income and has no knowledge on how the City Treasurer has come up with its computation. Second, there is lack of an ordinance authorizing the City Treasurer to resort to such presumptive income and assessment, the result of which is that the collection of the additional local business taxes based on PILAA is patently illegal and without basis; c) The case of First Planters Pawnshop, Inc. v. City Treasurer of Pasay City (CTA EB Case No. 501), the Court of Tax Appeals (CTA) En Banc ruled that the PILAA may be used only if financial data is not submitted. By way of information, the City Treasurer of Tagbilaran has acknowledged, in his letter dated 05 June 2017, that the City has no authority to use the PILAA on the assessment of LBT of TRCI. According to the City Treasurer, based on many years of experience, majority of businesses in the City of Tagbilaran do not declare their real receipts of the preceding year, thus resorting then to the use of PILAA. Nevertheless, it is submitted that the assessment made by the City Treasurer for TRCI shall still be subject for reassessment, provided that they submit their respective Income Tax Returns (ITR) or audited financial statements for the prior year. In treating the matter, this Bureau has constantly reminded Local Treasurers that based on Section 143 of the LGC, the LGU may impose taxes on businesses based on their gross sales or receipts of the preceding calendar year. As clearly provided by law, if a taxpayer has submitted or declared its gross sales or receipts, the Local Treasurer shall compute the LBT based on its gross receipts. Conversely, as previously mentioned in the case of First Planters Pawnshop, Inc. v. City Treasurer of Pasay City , the Court held that: "The PILAA is indeed a tax collection tool which enables the local government units to set a certain income level standard for various business entities based on industry factors. However, the PILAA does not give respondent a carte blanche authority to increase the gross sales/receipts of the taxpayer within its jurisdiction and on that basis, assess the local business tax . (emphasis supplied) The Court believes that the PILAA may be used by respondent in computing the local business tax only if the taxpayer is unable to provide proof of its income ." (emphasis supplied) The Court, thus, acknowledged the use of the PILAA as a collection tool which enables local government unit to set a certain income level standard for various businesses. However, the Court in said case, strictly puts a limit to its use and restricted this approach to situations where the "taxpayer is unable to provide proof of its income." 1 The foregoing premises and the provisions of law considered, this Bureau is of the opinion that the City Treasurer of Tagbilaran City has no authority to impose local business tax on TRCI based on PILAA, provided that TRCI shall duly submit or present its ITR or audited financial statement for 2016, which should be used as basis for computing its local business tax. This Bureau hastens to emphasize that any unauthorized practice or use of the PILAA should not be conveniently enforced nor continued by the City Treasurer of Tagbilaran City for lack of legal bases, as such will only result in undue harassment and unintended consequences. As to the allegation of non-declaration of true gross receipts of TRCI, the City Treasurer may avail of Section 171 2 of the LGC to examine its books of accounts, subject to existing rules and regulations. Further, this Bureau has issued Memorandum Circular No. 01-001-2017, dated 05 January 2017, copy hereto attached, to provide again, if not to reiterate, reminders in the assessment of local business tax, registration and renewal of business permits and licenses, and payment of community tax, for the guidance of all concerned. This Opinion is issued based on the information provided. 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 Memorandum Circular No. 01-001-17 January 5, 2017 Law Office of A.M. Sison, Jr. & Partners Suite 2002-A Security Bank Centre Tel. Nos.: 891-1338 to 40 6776 Ayala Avenue, 1226 Makati City Fax: (632) 891-1136 Philippines, P.O. Box 3222, MCPO e-mail: [emailprotected] February 17, 2017 MR. NIO RAYMOND B. ALVINA OIC-Executive Director BUREAU OF LOCAL GOVERNMENT FINANCE Department of Finance 8th Floor EDPC Building, Bangko Sentral ng Pilipinas Complex, Roxas Boulevard, Manila Dear Mr. Alvina: THE REDSYSTEMS COMPANY, INC. REQUEST FOR OPINION REGARDING THE UNRESTRICTED USE OF PRESUMPTIVE INCOME LEVEL ASSESSMENT APPROACH (PILAA) For and on behalf of our client, THE REDSYSTEMS COMPANY, INC. ("TRCI" for brevity), we would like to request for an opinion of your good office regarding the unrestricted use of the Presumptive Income Level Assessment Approach (PILAA) in computing the local business tax for purposes of renewal of business permit and license. TRCI is a corporation duly organized and existing under the Republic of the Philippines, with principal address at 2A M.B. Aguirre Building, Felix Reyes St. Brgy. Balibago, Sta. Rosa, Laguna. It is primarily engaged in the business of providing distribution and warehousing services and maintains numerous branches all over the Philippines, one of which is located at 154 CPG North Avenue, Cogon District, Tagbiliran City, Bohol . In its application for renewal of business permit for 2016, TRCI declared gross receipts from the preceding year amounting to TWENTY SEVEN MILLION SIX HUNDRED TWENTY SEVEN THOUSAND SIX HUNDRED FORTY TWO PESOS AND 75/100 (P27,627,642.75) . However, the City Treasurer of Tagbiliran applied the PILAA, wherein the income used for purposes of computing local business tax amounts to FORTY TWO MILLION SEVEN HUNDRED THIRTY FIVE THOUSAND SIX HUNDRED FORTY EIGHT PESOS (Php42,735,648.00) . The breakdown of the assessed taxes and fees is as follows: Tax Description Tax Base Total Due Business Tax: Contractor P42,735,648.00 P332,767.39 Mayor's Permit 450.00 Garbage Fee 1,200.00 Reg. of Employees 480.00 Reg. of Vehicles 4,000.00 Total P42,735,648.00 P328,897.39 In order not to risk operating without business permit and to avoid imposition of 25% surcharge and 2% interest resulting from late payment of taxes, TRCI paid the above assessment on 20 January 2016. Thereafter, TRCI filed a formal protest with claim for refund against the assessment made by the City Treasurer. TRCI contested that the use of PILAA in computing for the local business tax due for year 2016 is clearly arbitrary and whimsical without informing TRCI of the reasons, factors and particular information used in arriving at the presumed revenue and is a complete disregard of the submitted Sworn Declaration of Actual Gross Sales. Sec. 143 (a) of the Local Government Code (LGC), provides that the basis for the business tax shall be the gross sales or receipts of the preceding calendar year. As such, TRCI's business tax liability for 2016 must be based on the actual gross receipts for 2015 amounting Php27,627,642.75, which was affirmed in the Sworn Declaration of Gross Sales/Receipts. While the LGC allows the use of PILAA, such collection tool was designed to enable LGU's to set a certain income level standard for various entities based on industry factors and requirements, such as: a) Is an assumed level based on known or proven factors, e.g. , industry information such as average customers per day; b) Inventory turnover and mark-ups; c) Other measurable and verifiable indicators specific to the nature of business; d) Taxpayer should be properly informed of the factors used in determining the presumptive income; e) Taxpayer should agree to such level of presumptive income applicable to their industry; f) Must have governing ordinance authorizing the use of PILAA; otherwise such method is illegal; g) No sufficient proof of income for the City Treasurer to compute LBT due. Some of the above pre-requisites for a valid use PILAA are not present. First, TRCI was not properly informed on the factors used in computing the presumptive income. TRCI has no any knowledge on how the City Treasurer has come up with the presumptive income. Second, there is lack of ordinance authorizing the City Treasurer to resort to such presumptive income and assessment. In the absence of such ordinance embodying the presumptive income levels to be used by the City Treasurer, the collection of additional local business taxes based on such PILAA is patently illegal and without basis. In fine, such action of the City Treasurer is plain guessing. It is noteworthy to point out that in the case of First Planters Pawnshop, Inc. v. City Treasurer of Pasay City (CTA EB Case No. 501) , the Court of Tax Appeals (CTA) En Banc ruled that PILAA may be used only if financial data is not submitted, to wit: "The PILAA is indeed a tax collection tool which enables the local government units to set a certain income level standard for various business entities based on industry factors. However, the PILAA does not give the respondent a carte blanche authority to increase the gross sales/receipts of the taxpayers within its jurisdiction and on that basis, assess the local business tax . This Court believes that the PILAA may be used by the respondent in computing the local business tax only if the taxpayer is unable to provide proof of its income . The word "presumptive" is defined as "based on a presumption." A "presumption" is "a legal inference or assumption that a fact exists, based on the known or proven existence of some other fact or group of facts." Based on the foregoing definition, the "presumptive income" is a presumed or assumed income level based on known or proven factors. These factors may include information from the industry such as average customers per day, inventory turnover and mark-ups, and other measurable and verifiable indicators specific to the nature of business. With the petitioner's submission of its sworn declaration of gross income together with its audited financial statements, the respondent could have sufficiently computed the local business tax due without resort to the PILAA. There was no need for the respondent to use a "presumptive income level" since the petitioner has already provided its actual gross income for the taxable years in question. If the respondent believed that the petitioner underdeclared its gross income, the remedy should have been to compute the local business tax on the petitioner's declared income and then subsequently issued a Letter of Authority for the examination and audit of petitioner's books of accounts and other records. If petitioner fails to present its books of accounts and other records or if the petitioner has no such records to validate its declared income, then the respondent may use the presumptive income level for the assessment of deficiency taxes . It is also noted that the use of the PILAA is not provided for in the Local Revenue Code of Pasay City. While the Local Government Code of 1991 (LGC) grants local government units (LGU) the power to create its own sources of revenue, the same is subject to the limitation that the tax be imposed through an appropriate ordinance. Admittedly, the City Treasurer of Pasay is authorized to collect local business taxes under both the LGC and the Pasay Revenue Code. However, if the City Treasurer intended to use the PILAA, the same should have been subject to the procedures provided in the LGC regarding public hearings and publication. This is to ensure that the taxpayers are properly informed of the factors used in determining the presumptive income and for the taxpayers to agree to such level of presumptive income applicable to their industry. Absent such ordinance authorizing the use of the PILAA and embodying the presumptive income levels to be used by the City Treasurer, the collection of additional local business taxes based on such PILAA was illegal and the petitioner may properly claim the refund of the excess business taxes collected." (Bold and underscoring ours) The tax court categorically held in the above decision that whenever the City Treasurer believes that the taxpayer underdeclared its income, the remedy of the City Treasurer is to compute the local business tax on the declared income and then subsequently issue an authority for the examination and audit of the taxpayer's records. It is only when the taxpayer fails to present its books and other records or has no records to validate its declared income that the city treasurer may use the presumptive income-level assessment approach in determining deficiency taxes. Later, the City Treasurer's Office of Tagbiliran, in its letter dated June 23, 2016, informed TRCI that the latter's protest with claim for refund/tax credit is granted and such tax credit shall be applied for year 2017. Moving forward, considering that the City Treasurer Office is still using the PILAA in assessing TRCI and other taxpayers without giving credence and significance on the submitted sworn declaration of gross sales/receipts, we hereby pose this inquiry: DOES THE CITY OF TAGBILIRAN HAVE THE AUTHORITY TO IMPOSE LOCAL BUSINESS TAX ON TRCI BASED ON PILAA AND NOT ON ITS GROSS RECEIPTS DURING THE PRECEDING YEAR? Hoping for your preferential attention on this matter. Yours Very Truly, A.M. SISON, JR. & PARTNERS Suite 2002-A Security Bank Centre 6776 Ayala Avenue, Makati City Tel. Nos. 891-1338 to 40 Email: [emailprotected] By: (SGD.) ATTY. LEONARDO A. AURELIO (SGD.) ATTY. HENSON M. MONTALVO Footnotes 1. First Planters Pawnshop, Inc. v. City Treasurer of Pasay City , (CTA EB Case No. 501), dated December 10, 2010. 2. Section 171. Examination of Books of Accounts and Pertinent Records of Businessmen by Local Treasurer . The provincial, city, municipal or barangay treasurer may, by himself or through any of his deputies duly authorized in writing, examine the books, accounts, and other pertinent records of any person, partnership, corporation, or association subject to local taxes, fees and charges in order to ascertain, assess, and collect the correct amount of the tax, fee, or charge. Such examination shall be made during regular business hours, only once for every tax period, and shall be certified to by the examining official. Such certificate shall be made of record in the books of accounts of the taxpayer examined. n Note from the Publisher: Written as "Presumptive Income Level Approach (PILAA)" in the original document.