Situs of Taxation — Taxability of a Company's Personalization Site

December 22, 2016 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Eleanor L. Roque Head, Tax Advisory and Compliance Punongbayan & Araullo 20th Floor, Tower I The Enterprise Center 6776 Ayala Avenue, 1200 Makati City SUBJECT : Situs of Taxation Taxability of a Company's Personalization Site Dear Atty. Roque : This refers to your letter requesting for confirmation, on behalf of your client, Gemalto Philippines, Inc. (GPI), that: (i) the Personalization Site of GPI in Calamba City is not a branch nor sales office, factory, project site, plant or plantation as defined by the Local Government Code (LGC) of 1991 and relevant laws and court decisions; and (ii) the local business tax (LBT) on the distribution of generic card and personalization services are 100% payable in Makati City and that no LBT is payable in Calamba City. AcICHD Per your representation, you argued for GPI that: 1. It is a corporation established and existing under and by virtue of the laws of the Philippines, primarily engaged in two types of activities, namely: (1) sale of generic cards booked under "sale of goods"; and (2) the personalization and sale of cards booked under "sale of services"; 2. Its head office is located in Makati City, but it has a Personalization Site where GPI assigns personnel for purposes of personalizing cards in Calamba City; 3. The activities done in the Personalization Site are personalizing generic cards, receiving card holder data from customer, processing/formatting the data to allow personalization, personalizing cards such as embossing, thermal printing and electrical changes, encoding information on magnetic stripe of the card, chip of the card and adding activation stickers, etc. as needed, personalizing mailers or letters and dispatching to end customers, managing bill of materials or product matrix to identify different products that flow through the line, and managing inventory and storage of cards and collaterals; 4. Cards are personalized only upon order; 5. All sales of goods and services are recorded in the Makati Head Office; 6. There is no sales office in the Calamba site, neither does it issue any invoices or receipts; and 7. The Personalization Site is not a branch nor a sales office, factory, project site, plant or plantation, as defined by the LGC and relevant laws; thus, reiterating the ruling of the Court of Tax Appeals (CTA) in Municipality of Bakun and Luzon Hydro Corporation (LHC) vs. Makati City . To evaluate said representations, the matter was referred to the City Treasurer of Calamba City for full comment. In her letter reply received by this Bureau, the following were asserted: 1. The documents presented by GPI show that it is rendering services to its clients, such as embossing, printing and encoding information to finalize the personalized card, all of which are done in Calamba site; 2. The Audited Financial Statement of GPI shows that it is indeed rendering services to its clients; caITAC 3. That with the City Treasurer concluded that GPI belongs to the category of a "contractor"; hence, Calamba City shall get 70% of its total gross sales; 4. An inspection of GPI's Personalization Site was recommended in order to determine/confirm its line of business and to know how its activities; and 5. A Letter of Authority (LOA) No. 00589 dated 30 June 2014 was issued by the Office of the City Treasurer of Calamba for purposes of verifying GPI's gross sales and its line of business. In the main, this Bureau finds the CTA's decision in Municipality of Bakun and LHC vs. Makati City inapplicable to GPI, since the LHC in the said case does not operate any aspect of its business or primary purposes, as provided for in its Article of Incorporation, in the LGU claiming for share of local business tax. In addressing the issue, Section 131 (o) of LGC is instructive, to wit: " Manufacturer " includes every person who, by physical or chemical process, alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such manner as to have been put in its original condition , or who by any such process alters the quality of any such raw material or manufactured or partially manufactured products so as to reduce it to marketable shape or prepare it for any of the use of industry, or who by any such process combines any such raw material or manufactured or partially manufactured products with other materials or products of the same or of different kinds and in such manner that the finished products of such process or manufacture can be put to a special use or uses to which such raw material or manufactured or partially manufactured products in their original condition could not have been put, and who in addition alters such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption. (emphasis supplied) Clearly, as described above, the activities done in the Personalization Site located in Calamba City, as per representation, may be inferred as acts of altering partially manufactured products for the purpose of being sold or distributed to others. As such, the Personalization Site of GPI should be considered as a manufacturing plant. By way of definition in the Webster's Third New International Dictionary, a manufacturing plant pertains to the "land, building, machinery, apparatus, and fixtures employed in carrying on a trade or mechanical or other industrial business; a factory or workshop for the manufacture of a particular product the total facilities available for production or service in a particular country or place." TAIaHE For purposes of local taxation, the 30%:70% sales allocation, pursuant to Article 243 (b) (3) 1 implementing Section 150 (b) (1) 2 of the LGC, shall therefore apply. In the case of GPI, its Personalization Site, having the character of a plant or plantation in pursuit of business, is liable to pay the local business tax in Calamba City based on the 70% of all sales recorded in the principal office. In summary, it is the Opinion of this Bureau that GPI is subject to the payment of local business taxes and fees, as follows: 1. All sales made in the distribution of generic card shall be recorded in Makati City where the head office is located and shall be 100% taxable by Makati City; 2. The Personalization Site located in Calamba City is considered a manufacturing plant or factory. As such, 30% of all sales recorded in the manufacturing and distribution of personalized cards shall be taxable in Makati City where the head office is located, and 70% of all sales recorded in the head office in the manufacturing and distribution of personalized cards shall be taxable by Calamba City where the manufacturing plant is located; 3. GPI shall secure a separate Mayor's Permit as distributor for the sale of generic card and as a manufacturer for the manufacturing and distribution of personalized cards, and pay the corresponding fees to Makati City; 4. GPI shall likewise secure a Mayor's Permit as a manufacturer and pay the corresponding fee to Calamba City; and 5. Both Makati City and Calamba City may collect other regulatory fees and charges, which may be imposed under their respective duly approved local tax ordinances. This Opinion is issued based on the information provided and representations made. If upon subsequent verification or submission of information proves the contrary, this Opinion will be deemed null and void, and without effect. We hope we have provided clarity on the matter. ICHDca Very truly yours, (SGD.) NIO RAYMOND B. ALVINA OIC Executive Director Footnotes 1. "xxx . . . (b) Sales Allocation xxx . . . (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 entitled to the sales allocation provided in this subparagraph. xxx." 2. "xxx . . . (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 xxx."