Bureau of Local Government Finance Opinion

December 2, 2009 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Ms. Ma. Cecilia B. Sierra AVP and Head of Financial Accounting Services Nestle Philippines, Inc. No. 31 Plaza Drive Rockwell Center Makati City Madam : This refers to your letter dated November 19, 2009 requesting opinion on whether Nestle Philippines, Inc. (NPI) is liable to pay local business tax to the City of Bacolod for maintaining administrative offices therein. Representations are made that NPI is a domestic corporation with business operations throughout the country. It is engaged in the manufacture and sale of various products, such as dairy products, instant coffees and tea drinks and confectionery. Its Head Office is located in Cabuyao, Laguna. It appears that NPI maintained two (2) warehouses in Bacolod that were used as storage places for its products until their closure in CY 2006. Thereafter, NPI opened two (2) administrative offices (Admin Offices) located at the Convention Plaza Hotel, Magsaysay Avenue, Singcang and Yakal St. Capitol Shopping Center, Villamonte, Bacolod. Said Admin Offices serve purely as stations for NPI's employees who coordinate NPI's promotional activities and assist NPI's distributors located in Bacolod which are separate and independent from NPI. For a clearer understanding of the sales transactions of NPI: 1. NPI does not issue sales invoices at the Admin Offices nor store products therein which are intended for sale to the public. cCAIaD 2. Occasionally though, and only for convenience to NPI customers, orders of NPI products may be received therein. These sales orders are then forwarded to either the warehouse in Calamba, Laguna (Calamba) or Cagayan de Oro (CDO), where the orders are accepted and processed. 3. NPI products delivered to the Distributors are withdrawn directly from NPI's distribution centers in Calamba or CDO pursuant to orders accepted by NPI Calamba or CDO. 4. The Calamba and CDO sales offices issue the corresponding sales invoices for such orders. 5. The Calamba and CDO sales offices report the sales in Calamba, Laguna and Cagayan de Oro, respectively, and pay the local business taxes due therein. 6. The Nestle branded products sold by the Calamba and CDO sales offices to the Distributors are in turn sold by the Distributors to their own customers, such as supermarkets, grocery stores, sari-sari stores, and similar establishments and issue their own invoices for sales made to their customers. To support the above request NPI cited the applicable statutory provisions of the Local Government Code (LGC) of 1991, quoted 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, 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. "Article 243. Situs of the Tax. (a) Definitions of Terms . . . . "(2) Branch or sales office a fixed place in a locality which conducts operations of the business as an extension of the principal office. Offices used only as display areas of the products where no stocks or items are stored for sale, although orders for the products may be received thereat, are not branch or sales offices as herein contemplated. A warehouse which accepts orders and/or issues sales invoices independent of a branch with sales office shall be considered as a sales office. caADIC "(3) Warehouse a building utilized for the storage of products for sale and from which goods or merchandise are withdrawn for delivery to customers or dealers, or by persons acting in behalf of the business. A warehouse that does not accept orders and/or issue sales invoices as aforementioned, shall not be considered a branch or sales office. "xxx xxx xxx. "(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 the 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. LGUs where only experimental farms are located shall not be entitled to the sales allocation herein provided for. "(4) In case of a plantation located in a locality other than that where the factory is located, said seventy percent (70%) sales allocation shall be divided as follows: "(i) Sixty percent (60%) to the city or municipality where the factory is located; and "(ii) Forty percent (40%) to the city or municipality where the plantation is located. "(5) In cases where there are two (2) or more factories, project offices, plants or plantations located in different localities, the seventy percent (70%) sales allocation shall be prorated among the localities where such factories, project offices, plants and plantations are located in proportion to their respective volumes of production during the period for which the tax is due. In the case of project offices or service and other independent contractors, the term production shall refer to the cost of projects actually undertaken during the tax period. ATHCDa "(6) The foregoing sales allocation under paragraph (3) hereof shall be applied irrespective of whether or not the sales are made in the locality where the factory, project office, plant or plantation is located. In the case of sales made by the factory, project office, plant or plantation, the sale shall be covered by paragraph (1) or (2) above. "(7) In case of manufacturers or producers which engage the services of an independent contractor to produce or manufacture some of their products, the rules on situs of taxation provided in this Article as clarified in the paragraphs above shall apply except that the factory or plant and warehouse of the contractor utilized for the production and storage of the manufacturers' products shall be considered as the factory or plant and warehouse of the manufacturer. "xxx xxx xxx." In addition, NPI cited several opinions of the DOF and BLGF on situs of taxation, as follows: 1. Where goods sourced from a sales office and delivered to buyers in another local government unit (LGU) where there is no branch, sales office or warehouse, the sales shall be considered sales made by route trucks and should be recorded, and the tax thereon paid to the city or municipality where the said sales office is located. (BLGF Letter, June 29, 2001 to Nestle Philippines, Inc.; DOF 2nd Indorsement, September 14, 1998.) 2. The situs of taxation on "warehouse", "sales office" and "branch office" is not applicable where independent distributors engaged in their own businesses are selling the products for their own account. BLGF Letter, May 31, 2001 to Quisumbing Torres Law Office) 3. The commissary operation of Wenphil Corporation located in Marikina City cannot be taxed because no sales were made or recorded in the said commissary . Hence 100% of all sales made in Wenphil's outlets shall be taxable by the local government units where the sales outlets are located pursuant to Article 243 (b) (1) of the IRR. (DOF 3rd Indorsement, October 5, 1999) TIaCcD 4. A branch or sales office where no receipts are issued nor recorded is not a branch office within the contemplation of Section 150 (a) of the LGC. (DOF 1st Indorsement, January 4, 1996) 5. An office which merely serves as a showroom, display area and documentation office for development project is not a branch or sales office. (DOF Letter, December 18, 1997) 6. An office which merely serves as a monitoring base of orders placed by prospective buyers does not constitute a sales office. (BLGF Letter, April 10, 2000 to Filinvest Land, Inc.) 7. An office that merely houses supplementary offices and employs additional staff who can no longer be accommodated in the principal office, and where it houses the accounting department and few executive offices to perform purely corporate and administrative matters may not be considered a branch office. (BLGF Letter, June 13, 2001) 8. If all sales are invoiced and recorded in the warehouse located in General Santos City including those made by the taxpayer's toll mill in Gingoog City, 100% of the sales shall be taxable in General Santos City. Makati City, where the taxpayer's principal office is located, is not entitled to any share. (DOF Letter, May 27, 1998) It appears that the administrative offices in Bacolod do not fall within the definition of Article 243 (2) of the Implementing Rules and Regulations (IRR), quoted above, implementing Section 150 of the LGC which defines "Branch or Sales Office". In view of the foregoing and the representations made as follows: 1. no sales are made at the NPI's Administrative Offices, 2. no stocks are maintained thereat as products are withdrawn directly from the distribution centers in Calamba or CDO, and 3. no delivery of products takes place nor are sales invoices issued thereat, HaTSDA hence, there are no sales transactions in Bacolod, that may be taxed by the said City. Such being the case, there is no basis for the imposition of business tax by the City of Bacolod. However, the City of Bacolod may collect the Mayor's permit fee and other regulatory fees provided under the existing local tax ordinance therein. We hope that this will help clarify matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director