Bureau of Local Government Finance Opinion

August 18, 2014 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Rodolfo M. Ordanes City Assessor Quezon City Sir : This refers to your letter dated July 23, 2014 relative to the application for the transfer of a parcel of land and improvement situated along E. Rodriguez Jr. Avenue, Libis, Quezon City with an area of 20,000.80 sq. meters, more or less, and covered by TCT No. 004-2012000656, by virtue of a Deed of Absolute Sale dated January 17, 2014 executed by and between Republic Glass Holdings Corporation, as seller, and Robinsons Land Corporation, as buyer. Representations are made that considering that the aforestated sale of real property involves corporations, business tax payment is one of the documentary requirements for the ownership transfer of the subject parcel of land. In your aim to verify the correctness of the business tax computation, that Office sought the assistance of the Commission on Audit, Quezon City, which accordingly acted and in its letter-reply dated June 30, 2014 it was stated that the computation shows a discrepancy. The computation is based on Section 19 L (14) of the Quezon City Revenue Code (QCRC) where sellers, dealers, agents, developers of real estate are imposed taxes at the rate of 2% of the gross receipts of the preceding calendar year. Thus, 2% tax is multiplied with the amount of selling price per Deed of Absolute Sale. DETACa On the other hand, the City Treasurer per letter dated July 17, 2014 claimed that the business tax at the rate of 2% on the contract price is assessed when the seller-corporation is engaged in the real estate business in consonance with Section 19 (H) of the Quezon City Revenue Code, as amended by Ordinance No. SP-2236, S-2013. However, when the business undertaking of the seller-corporation is other than the real estate business, the business tax shall be computed on the prescribed tax rate depending on its business classification. Accordingly, the seller (Republic Glass Holdings Corporation), being engaged in Management Service, falls under the category of a contractor as defined by RA 7160 and the QCRC. Pursuant to Section 19 (E) of the QCRC, contractors with gross receipts of more than P2,000,000.00 shall be taxed at the rate of 75% of 1% of its gross receipts for the preceding calendar year. In view of the different positions of the City Treasurer's Office and the Commission on Audit on the imposition of the 2% business tax on the sale of real property and interpretation of Article 8, Section 19 (L) of the QCRC of a seller who is not engaged in the real estate business, hence the request for opinion from this Office. In this connection reference is made to the provisions of Section 131 (d) of the Local Government Code (LGC) of 1991, quoted as follows: "Section 131. Definition of Terms. When used in this Title, the term: "(a) . . .; "(d) Business means trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit; aDSIHc "xxx xxx xxx." Based on the aforequoted provision of law, it may be stated that to be subject to local business tax, two basic elements should be present: (1) the intent to derive profit; and (2) regularity of the business activity. While there is the intent to derive profit or income from the sale of real property, there is lacking in the issue at hand which is the element of regularity. Stated otherwise, the sale transaction involved is not the regular and normal course of business of the seller, Republic Glass Holdings Corporation. The sale is just an isolated transaction and cannot be regarded as a "business" as defined in the abovementioned provision of the LGC. Moreover and as stated above, the main business of the seller (Republic Glass Holdings Corporation), is service contractor being engaged in Management Service, subject to the business tax pursuant to Section 19 (e) of the QCRC. It is emphasized however that the business tax should be based on its gross receipts as a service contractor and not on income realized on the sale of the real property mentioned above, an incidental transaction outside of the company's regular business operation that of a Management Service contractor. Accordingly, the sale of the above property being a transfer shall only be subject to the tax on transfer of real property ownership pursuant to Section 135 of the LGC in relation to Section 151 thereof, as implemented under the QCRC but it cannot be subject to, or be liable to pay any local business tax for such sale. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director