Distributorship Income as Tax Base in the Computation of Local Business Tax

December 21, 2017 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Prudencio F. Tatunay Managing Partner P.F. Tatunay and Co. 3B-20 Francesca Tower Condominium Scout Borromeo cor. EDSA, South Triangle Quezon City SUBJECT : Distributorship Income as Tax Base in the Computation of Local Business Tax Dear Mr. Tatunay : This has reference to your request for opinion on the Distributorship Income of Right Moves, Inc. (RMI), a company organized and existing under Philippine law, as tax base for purposes of computing the local business tax, pursuant to Article 2, Section 143 (b) of the Local Government Code (LGC) of 1991. Representation is made that on 7 July 2014, RMI, a company duly registered with the Securities and Exchange Commission (SEC), entered into a Distribution Agreement with Nestle Philippines, Inc. (NPI) as a non-exclusive distributor of NPI-branded products, subject to the conditions stipulated therein. While the LGC does not provide the definition of the term "distributor," the term may be defined as "any person to whom a consumer product is delivered or sold for purposes of distribution in commerce, except that such term does not include a manufacturer or retailer of such product." 1 In view of the preceding paragraph and taking into consideration the case of RMI, it is our view that the distributorship agreement of RMI with NPI falls within the definition of a distributor aforementioned. Under Section 1 of the attached copy of the Distribution Agreement with NPI, it is provided that RMI is the appointed non-exclusive "Distributor" of NPI's food, ready to drink beverage products. Further, Section 5 of the Agreement provides, as follows: " 5. Pricing of the Products NPI shall sell the Products to DISTRIBUTOR at FOB price less the corresponding distributor's discount indicated in Annex A (Distributor's Product Portfolio) plus Value Added Tax (VAT) . For the interest of the consumer, DISTRIBUTOR shall sell the Products listed in Annex A at prices suggested by NPI in the Distributor Price List (and in no case higher or lower) plus VAT. The Distributor Price List shall be provided by NPI to DISTRIBUTOR from to time [sic]. DISTRIBUTOR is aware that as a matter of policy, NPI may refuse to sell to distributors who fail to adhere to the resale price suggested by NPI and this shall be sufficient ground for the termination or non-renewal of this Agreement. The suggested resale prices under this Agreement are subject to change by NPI from time to time upon prior written notice to DISTRIBUTOR; DISTRIBUTOR shall be notified accordingly. Similarly, the rate of discounts (specified in Annex A) is subject to change by NPI from time to time upon prior written notice to DISTRIBUTOR. " Based on the pertinent portion of the aforequoted agreement, it is claimed that RMI's "real revenue" is reflected in the Gross Profit of the Financial Statement, which represents the "commission" after the discounts to trade. In resolving the issue, Section 131 (n) of the LGC is quoted, 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 sale, sales return, excise tax, and value-added tax (VAT) ;" (emphasis supplied) Given the preferred literal meaning of the abovequoted provision of the LGC, it is clear that 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 sale, sales return, excise tax and VAT. In this case, the total amount of sales generated from selling the products of NPI shall constitute the gross sales receipts of RMI as contemplated under Section 133 (n) of the LGC, to the exclusion of discounts, if determinable at the time of sale, sales return, excise tax and VAT. It must appear, however, that there was no showing in the agreement that RMI is selling NPI's products on consignment or commission basis, in which case they (RMI) shall pay the manufacturer (NPI) only when the goods are sold and retain certain amount of the sales as commission. Under the Agreement, RMI is under the obligation to pay NPI in full for the products purchased not later than the next banking day following receipt of the products at RMI's warehouse. This situation contemplates that RMI has acquired the right over the products and assumed ownership of the same upon payment and delivery thereof and the only remaining influence of the manufacturer (NPI) in the transaction is the pricing of the products based on the stipulation in the Agreement. Having assumed ownership of the products, it may be assumed also that sales reported by RMI in their respective books of accounts shall form part of the gross sales or receipts referred to in Section 133 (n) and may only be lowered by the allowable deductions enumerated thereof. In this regard, and unless RMI can prove that, indeed, its only source of income is the commission gained from the distributors "discount," 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 distributors to its clienteles. Stated otherwise, the claim that only the commission should be considered in the computation of LBT, RMI will have to show that the amounts in excess of the commission are remitted to NPI. 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 distributors. Conversely, if RMI can substantiate that its only income is the commission, then there is no other option left but to compute the LBT based on said amount of commission. This Opinion is based on the information and documents submitted. However, in the event that subsequent verification proves the contrary, this opinion will be deemed null and void. We hope that this clarifies the matters. Thank you. Very truly yours, (SGD.) NIO RAYMOND B. ALVINA OIC Executive Director Footnotes 1. Article 4, Section ac) Republic Act No. 7394 (Consumer Act of the Philippines).