Bureau of Local Government Finance Opinion

January 6, 2016 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Ma. Corazon M. Mendoza GM-Finance and Accounting Kawasaki Motors (Phils.) Corporation KM. 23 East Service Road Cupang, Muntinlupa City Madam : This refers to your letter of December 4, 2015 seeking further clarifications on the following issues, viz. : 1. Whether regional offices of Kawasaki Motors (Phils.) Corporation maintaining warehouses and accepts sales orders are considered as branches; 2. Whether the 70%-30% allocation is applicable even if this Bureau has expressed opinion that regional offices are branches; and 3. In case that the 70%-30% allocation is not applicable, what shall be the basis of the assessment by the local governments concerned? Is it 100% of all sales ordered in each offices? Representations are made that after this Bureau issued an Opinion dated August 6, 2015 concerning Situs rule, local treasurers of local governments concerned, where Kawasaki Motors (Phils.) Corporation ("KMPC" for brevity) operates, issued the following views: 1. Muntinlupa favored the opinion that 100% of all sales shall be declared and taxable in Muntinlupa based on argument that since all sales invoices are printed and recorded in the principal office in Muntinlupa and where the factory is also located, so sale transaction are consummated thereat. The impending action of Muntinlupa Treasurer's Office is to apply 100% sales allocation retroactively from years 2013 to present in the succeeding payments of business taxes and business permit renewal. Furthermore, they also explained that even if KMPC maintains a branch in any city/locality, they will still implement the 100% sales allocation since the principal office and the factory are both located in Muntinlupa. 2. Mandaue Considered the opinion of this Bureau that 100% of sales ordered in the cities of Mandaue and Davao shall be declared therein since the regional offices maintain warehouses and accept sales orders . The legal action of Mandaue Treasurer's Office is to take back the tax credit initially granted, and to implement 100% of sales allocation in the succeeding business permit renewal and payment of business taxes. Mandaue City Treasurer however is compassionate enough to suspend imposition of this year's re-assessed taxes. They will start the collection next year without imposing interests and surcharges. SaCIDT 3. Davao maintained the position that 100% of the sales made in the regional office in Davao shall be declared in their city . In resolving the herein issues, Article 243 of the Implementing Rules and Regulations (IRR) of the Local Government Code (LGC) of 1991 is quoted 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 . x x x. (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 . (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 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 entitle to the sales allocation provided in this subparagraph. (4) xxx (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 of service and other independent contractors, the term production shall refer to the cost of projects actually undertaken during the tax period. (6) The sales allocation in paragraph (b) hereof shall be applied irrespective of whether or not sales are made in the locality where the factory , project office, plant or plantation is located . In case of sales made by the factory, project office, plant or plantation, the sale shall be covered by subparagraphs (1) or (2) above. (Emphasis supplied) Applying the aforequoted provisions of the IRR of the LGC on the herein issues, this Bureau hereby expresses the following views: Issue No. 1. Whether regional offices of Kawasaki Motors (Phils.) Corporation maintaining warehouses and accept sales orders are considered as branches. Yes. Considering that the Regional Offices in the Cities of Davao and Mandaue are maintaining warehouses which, as represented in the previous query of July 10, 2015, are accepting sales orders then Article 243 (a) (2) of the IRR applies, which explicitly provides that: " [A] warehouse which accepts orders and/or issues sales invoices independent of a branch with sales office shall be considered as a sales office ." While we are mindful of your previous representation that regional offices serve as extension of the principal office in Muntinlupa City, we cannot ignore the applicability of the provision of law abovequoted in this particular issue. The operative phrase of Article 243 (a) (2) is " accepts orders and/or issue sales invoices " which is separated by a grammatical conjunction " and/or " which indicates that a warehouse may be considered as a sales office if it accepts orders or issue sales invoices or accepts order and issue invoices . With this, any of the three (3) instances will qualify a warehouse as sales office. cHECAS In the situation at hand, while the regional offices, which maintain warehouses, are the ones accepting sales orders, it cannot be disregarded that the products being delivered to customers (dealers) are taken from said warehouses which stored stock-in-trade (motorcycles) inventories. In this regard, warehouses serve as integral parts of the regional offices. Without these warehouses the operation of regional offices would be more of administrative offices. The issue therefore that has to be resolved is the sales allocation concerning regional offices, principal office and factory. The provisions of Article 243 of the IRR are clear and need no further interpretation, thus: Article 243. Situs of the Tax. x x x 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 said principal office is located . (Emphasis ours) In the case herein and as communicated by you, KMPI can generate and submit report of sales pertaining to the respective sales realized by the regional offices. Therefore Article 243 (b) (1), supra , shall apply. In short, all sales transacted by the regional offices shall be 100% taxable by the LGUs where said regional offices are located. On the other hand, all sales of the principal office for its Luzon Area operation shall be recorded thereat and the tax shall be 100% taxable by the City of Muntinlupa, where both the principal office and factory are located and in conformity with Article 243 (b) (2), supra. However, as matter of advice, KMPI method recording sales should conform to the aforequoted provisions of Article 243 (b) (1) and (2) of the IRR of the LGC to avoid any complication in determining the rightful taxing jurisdiction, where to declare gross sales or receipts and pay the corresponding LBT. The foregoing considered, there is no need to discuss Issues Nos. 2 & 3. Another matter that needs to be clarified is how the regional offices should be classified for local business purposes. There is no denying that KMPI is a manufacturer of motorcycles. As represented, regional offices serves as extension of the principal office therefore there is no doubt that the regional office, although considered by this Bureau in its previous action as branch office, should be classified as " manufacturer " of motorcycle product. The essence of this view is that the distribution function by a manufacturing concern is both incidental and essential to its business operations. For without these ancillary services of a manufacturing entity will not be able to distribute or deliver its product to customers, usually dealers. In the case at hand, one of the functions of the regional offices is to deliver motorcycles to its customers which are dealers of motorcycles and it is without mistake that dealers commonly procure their products from manufacturer as the former is considered as "middleman" between the manufacturer and the retailer and in the same way that a retailer is the "middleman" between the dealer and the end-users. In this respect it our view that regional offices should be classified as "manufacturers." By the very nature of their operation, that of extension of the principal office, they operate in the same way that principal office, factory and warehouse in the case of "Central Azucarera" and we therefore supports the citation. It may worth mentioning that any previous rulings or opinions issued by this Bureau on the same issue inconsistent to the herein views are hereby modified accordingly. We hope that we have clarified matters. Very truly yours, (SGD.) JOCELYN T. PENDON OIC-Executive Director