Bureau of Local Government Finance Opinion

April 10, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Ms. Angela L. Estipona Accounting and Finance Manager TNC Chemicals Philippines, Inc. Unit 15C, 15th Floor, Petron Megaplaza Sen. Gil J. Puyat Ave. Salcedo Village, Makati City Madam : This refers to your letter dated March 5, 2015 regarding the business tax (permit) payments made by TNC Chemicals Phils., Inc. (TNC for brevity) in relation to the situs of the tax. Representations are made that TNC is currently following the 70%:30% (ratio) sales allocation for local business tax (LBT) payments (not permit as submitted) to Calamba City and Makati City, respectively, pursuant to the Local Government Code (LGC) of 1991. Recently however, TNC received an audit report from the City Treasurer of Calamba and assessing the company for non-payment of the 30% business (permit) tax deficiencies for 5 years, allegedly for reason that the "situs of the tax" is not applicable in the case of TNC. Such assessment made by the City Treasurer of Calamba was based on the Notes to the Financial Statement wherein TNC's business address is its Calamba City factory (plant) thus, as alleged, Calamba City is claiming for 100% declaration. TNC referred the matter to Makati City Treasurer's Office. However, said Office is claiming that since TNC is doing business in Makati, the 30% sales allocation should be applied and thereby denying the request of TNC for refund (return) of the LBT payments already made to the City. Correlatedly, perusal of the attached documents, particularly the Articles of Incorporation of TNC, specifically page 15 thereof, reveals that TNC's official business address is located in Makati, Metro Manila (now a city). Further, copy of BIR Form No. 2303 (Certificate of Registration) filed with the Revenue District No. 049 (Makati City) clearly provides that the Certificate was filed for registration purposes only and not for income tax payment and other national impositions. On the other hand, same BIR Form filed with Revenue District Office No. 056 (Calamba City) was filed for the following purposes, vis. : 1) Income Tax 2) Value-Added Tax 3) Withholding Tax Expanded OTH 4) Registration Fee 5) Withholding Tax Compensation Giving consideration to the above information from the official documents submitted by TNC to this Bureau, it appears that all sales transacted by TNC were consummated and recorded in Calamba City factory/plant. In fact, no part of the sales was declared in Makati City BIR Revenue District Office No. 049 for taxation purposes other than for the registration of TNC's business activity in the City of Makati. In relation to the immediate forgoing discussion, Article 243 of the Implementing Rules & Regulations (IRR) implementing Section 150 of the Local Government Code (LGC) of 1991 provides as follows: "ARTICLE 243. Situs of the Tax . (a) Definition of Terms (1) Principal Office the head or main office of the business appearing in the pertinent documents submitted to the Securities and Exchange Commission, or the Department of Trade and Industry, or other appropriate agencies, as the case may be . The city or municipality specifically mentioned in the articles of incorporation of official registration papers as being the official address of said principal office shall be considered as the situs thereof . In case there is a transfer or relocation of the principal office to another city or municipality, it shall be the duty of the owner, operator or manager of the business to give due notice of such transfer or relocation to the local chief executives of the cities or municipalities concerned within fifteen (15) days after such transfer or relocation is effected. . . . ." (emphasis ours) The provision of law abovequoted is clear that the address appearing in the pertinent documents like the Articles of Incorporation of TNC submitted and approved by the Securities and Exchange Commission (SEC) or any other documents issued by appropriate agencies of the government shall be considered as the official business address of the head or main office of the business, in this case, Makati City. Further, verification made by this Bureau on April 14, 2015 with TNC head office, you submitted that there is no amendment as yet made with regard the original "Articles of Incorporation" of TNC. And that officially the head or main office of TNC's is still located in Makati City. In addition however, some information gathered vital to the resolution of the herein issue is that all sales transactions are consummated and recorded at the Calamba City Plant. In view of the foregoing, Article 243 of the IRR of the LGC is further quoted as follows: "ARTICLE 243. Situs of the Tax . (a) Definition of terms xxx xxx xxx (b) Sales Allocation xxx xxx xxx (1) 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 entitle to the sales allocation provided in this subparagraph. (Underscoring for emphasis) xxx xxx xxx." To reiterate however, TNC presented that all sales transactions are made and recorded in its Calamba City factory/plant in which case, the Makati City Government cannot invoke the 70%-30% sales allocation in view of the clear language of the IRR abovequoted that the LGU where the principal office is located may claim 30% of all sales "recorded in the principal office". Essentially, Section 143 of the same Code basically provides that "business tax" shall be based on the "Gross Sales or Receipts of the Preceding Calendar Year" thereby making any claim for the 30% sales allocation unjustified for lack of legal basis in the law. Moreover, applying the said provision of the LGC, Makati City will have no legal basis for computing the 30% sales allocation in the absence of any gross sales or receipts recorded at TNC's Head Office in Makati City. Thus, relying on the facts and information that you communicated on April 14, 2015 that all sales transactions are recorded in TNC's Calamba City facility, the same therefore validates the demand and claims by Calamba City, based on audit report by City Treasurer of Calamba, for the 100% declaration in favor of same City. Conclusively, the 70%-30% sales allocation under Section 150 of the LGC, quoted hereunder, is not applicable in the herein case in view of the condition set by law itself that LGU, where the principal or head office is located, may claim for the 30% sales allocation provided that such sales made must be recorded in said principal or head office, thus: "Section 150. Situs of the Tax . (a) . . . (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 : (Emphasis ours) (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 (Emphasis ours) (2) 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." In view of the foregoing, it is the view of this Bureau that TNC is subject to the payment of business taxes and other regulatory fees and charges as follows: 1. All sales transactions made and recorded in Calamba City shall be 100% taxable thereat; 2. Makati City may not avail of the 30% sales allocation unless it can prove that there are sales transactions recorded in TNC's principal office thereat and for which it is entitled to such share; and 3. Both cities may collect Mayor's permit and other regulatory fees. Now, on the issue of refund of the amount of taxes erroneously paid to or collected by Makati City, the governing provision of law is Section 196 of the LGC, which provides: "SEC. 196. Claim for Refund of Tax Credit . No case or proceeding shall be maintained in any court for the recovery of any tax, fee, or charge erroneously or illegally collected until a written claim for refund or credit has been filed with the local treasurer. No case or proceeding shall be entertained in any court after the expiration of two (2) years from the date of the payment of such tax, fee, or charge, or from the date the taxpayer is entitled to a refund or credit." However, while Section 196 of the Code provides for the requirements before any case or proceeding for the recovery of any tax, fee or charge erroneously or illegally collected may be filed in any court, a written claim for refund or credit has to be filed with the Local Treasurer. However, Section 196 does not provide for the procedures and requirements for filing a written claim for refund or credit. The other provision in the Code which provides for the procedure in claiming tax refund or credit is Section 253 regarding illegal or erroneous assessment of basic real property tax which cannot be applied to LBT. For local business taxes, the local treasurer has to rely solely on Section 196 which is lacking in important details in order to be operative. In order to carry out the provisions of Section 196, the details in claiming tax refund or credit were filled in by Article 286 of the Implementing Rules and Regulations (IRR) of the LGC, which was promulgated well within the limits of the authority granted, which provides: "ART. 286. Claim for Refund of Tax Credit . All taxpayers entitled to a refund or tax credit under this Rule shall file with the Local treasurer a claim in writing duly supported by evidence of payment ( e.g. , official receipts, tax clearance, and such other proof evidencing overpayment) within two (2) years from payment of the tax, fee or charge. No case or proceeding shall be entertained in any court without this claim in writing, and after the expiration of two (2) years from the date of payment of such tax, fee or charge, or from the date the taxpayer is entitled to a refund or tax credit. The tax credit granted a taxpayer shall not be refundable in cash but shall only be applied to future tax obligations of the same taxpayer for the same business. If a taxpayer has paid in full the tax due for the entire year and he shall have no other tax obligation payable to the LGU concerned during the year, his tax credits, if any, shall be applied in full during the first quarter of the next calendar year on the tax due from him for the same business of said calendar year. Any unapplied balance of the tax credit shall be refunded in cash in the event that he terminates operations of the business involved within the locality ," (Emphasis ours) Clearly, the law provides that if there are no future obligations to be incurred on the part of the taxpayer, any amount in excess of what is legally due the LGU concealed shall be refunded in cash. Interestingly, it may said that administrative regulations and statutes enjoy the presumption of legality and constitutionality to which they are entitled until such statute or regulation is repealed or amended or until set aside in appropriate cases by the Supreme Court. (Eslao vs. COA, G.R. No. 108310, Sept. 1, 1994) Moreover, this Bureau is of view that TNC is entitled to claim for refund for business taxes paid to Makati City in view of the ratiocination of the Supreme Court in the case of Ramie Textile vs. Mathay , 89 SCRA 586, pertinent portions of which are quoted as follows: "The fact that petitioner paid thru ERROR OR MISTAKE, and the government accepted the payment, gave rise to the application of SOLUTIO INDEBITI under Article 2154 of the new Civil Code, which provides that "IF RECEIVED WHEN THERE IS NO RIGHT TO DEMAND IT, and it was UNDULY DELIVERED THROUGH MISTAKE, THE OBLIGATION TO RETURN IT ARISES." "The quasi contract of solutio indebiti is one of the concrete manifestation of the ancient principle that NO ONE SHOULD ENRICH HIMSELF AT THE EXPENSE OF ANOTHER. Hence, it would seem unedifying for the government, that knowing it has no right to collect or to receive money for alleged taxes paid, it would be reluctant to return the same." SOLUTIO INDEBITI is a quasi-contract , and the instant case being in the nature of solutio indebiti , the claim for refund must commence within six (6) years from the date of payment pursuant to Article 1145(2) of the New Civil Code. 1 The above views are expressed based on the documents, facts and information presented and/or submitted to this Bureau. However, if upon verification and investigation the same shall be proven to the contrary then the views rendered shall be considered null and void. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director Footnotes 1. Ramie Textile, Inc. vs. Mathay , 89 SCRA 586.