Bureau of Local Government Finance Opinion

November 27, 2002 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Virgilio R. Santos Managing Partner VRS & Co. Certified Public Accountants Suite 412 Pasda Mansion 77 Panay Avenue Quezon City Sir : This refers to your letter-query dated October 10, 2002, regarding the maximum rate of local business tax on restaurant operators and caterers that may be imposed by the local government unit. Representations are made that your client Bistro Americano (Q.C.) Corporation (Bistro Americano for brevity) was registered with the Philippines Securities and Exchange Commission on July 15, 1999 primarily to establish and maintain restaurants, coffee shops and the like; and to make, cook and serve food, drinks and other services and merchandise to the public in connection with the operation of restaurants and catering services. Bistro Americano started its commercial operations on December 16, 1999 by operating The Friday's Restaurant located at Rembrandt Hotel at Tomas Morato Street, Quezon City. For the years 2000 and 2001, the City (not Municipal) Treasurer of Quezon City assessed your client as retailer subject to the percentage tax as follows: TcIAHS For the first P400,000. 3% Excess over P400,000. 1.20% And for the year 2002, the City Treasurer assessed the same at 3% of gross sales in accordance with the provision of Ordinance No. SP-1080 dated December 31, 2001. That Office cites the provision of the Local Government Code (LGC) of 1991 defining manufacturer and contractor. However, it claims that an enumeration of various type of contracting services followed the definition but there is no specific exclusion therefrom, hence the City Council of Quezon City, imposed a different rate of tax on services not included in the enumeration in the LGC including those services which as far as the BIR's definition is concerned should fall within the definition of Contractor; quoted hereunder: "The phrase 'sale or exchange of services' means the performance of all kinds of services in the Philippines for others for a fee, remuneration or consideration, including those . . . properties or operators of restaurants, refreshment parlors, cafes and other eating place, including those . . . proprietors or operators of restaurants, refreshment parlors, cafes and other eating place including clubs and caterers; . . . ." That office contends that since the definition of "sale or exchange of service" includes the services of operators of restaurant and caterers, then it follows that the local business tax on operators of restaurant and caterer should also be the same rate as the contractor enumerated in the LGC as subject to 50% of 1%. DaAISH In view of the above, that Office poses the following queries: 1. What is the maximum rate of Local Business Tax that may be imposed by Quezon City on operators of restaurant and caterers? 2. What are the remedies available to the taxpayer assuming that the tax rate imposed by Quezon City on restaurant operators and caterers is not correct? 3. Can the taxpayer offset any overpaid tax as a consequence of erroneous imposition against any tax deficiency which may be assessed against it by the LGU? Query No. 1 A reading of the provision of Section 143 of the Local Government Code (LGC) of 1991, will reveal that there is no specific provision expressly subjecting restaurant and caterers to local taxes. In this regard, attention is invited to Article 232 (h) of Implementing Rules and Regulations (IRR) implementing Section 143 (h) of the Code which provides that: "Article 232 . Tax on Business The municipality may impose taxes on the following businesses: CDcHSa "xxx xxx xxx "(h) On any business, not otherwise specified in the preceding paragraphs which the sanggunian concerned may deem proper to tax provided that on any business subject to the excise, value added or percentage tax under the NIRC, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year, and provided further that in line with existing national policy, any business engaged in the production, manufacture, refining, distribution or sale of oil, gasoline and other petroleum products shall not be subject to any local tax imposed under this provision." The above quoted provision is a "catch-all" provision of the Code. This means that any business not specifically covered by the preceding paragraphs of the said provision may be subjected to business tax. It is clear therefore that operators of restaurant should be taxable under Section 143 (h) of the LGC. Likewise, a city may levy the abovesaid taxes and may exceed the maximum rate allowed for the municipality of not more than fifty percent (50%) pursuant to Section 151 of the same Code, quoted as follows: Section 151. Scope of Taxing Powers . Except as otherwise provided in this Code, the City may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however, that the taxes, fees, and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code. AIHDcC The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes. It is noted that Ordinance No. SP-1080 of Quezon City contains a similar provision as that of Section 143 (h) of the LGC in Section 19 (h), also quoted as follows: "Section 19. Imposition of Tax . There is hereby levied an annual tax on business mentioned in this chapter at the rates mentioned herein." a) . . . h) On any other business, not otherwise specified in the preceding paragraphs, shall be taxed at the rate of 3% of the gross sales or receipts of the preceding calendar year, such as but not limited to the following: 1. . . . 5. eating places or establishments such as, but not limited to restaurants, cafes, cafeterias, ice cream or refreshment parlors, carinderias, soda fountains, food caterers, fast food centers and snack counters CDaTAI xxx xxx xxx." Accordingly, Bistro Americano (Q.C.) Corporation as restaurant operators and caterers shall be subject to the business tax at the rate of 3% of the gross sales or receipts of the preceding calendar year, pursuant to Section 143 (h) of the LGC in relation with Section 151 thereof as implemented under Section 19 (h) (5) of Ordinance No. SP-1080 of Quezon City. It must be pointed out that the definition of "sale or exchange of service" under the National Internal Revenue Code of 1997 which include proprietors or operators of restaurants, refreshment parlors, caf and other eating places, including clubs and caterers, shall not apply as basis in classifying operator of restaurant and caterer as contractor for purposes of local taxation, for reason that taxes are imposed by two separate and distinct taxing authorities, that is, the National Government and the local government. Hence, in case of local taxes, the basis for the imposition is the Local Government Code (LGC) of 1991, not the National Internal Revenue Code of 1997. Query No. 2 Pursuant to Section 195 of the LGC, the taxpayer may file within sixty (60) days from receipt of the notice of assessment a written protest with the local treasurer contesting the assessment, otherwise, the assessment shall become final and executory. Query No. 3 Any overpaid tax as a consequence of erroneous imposition shall be entitled to a refund in the form of a tax credit to be applied to future tax obligations of the same taxpayer for the same business. aIEDAC The City Treasurer of Quezon City is being furnished a copy of this letter for his information and guidance. We hope that this will help clarify matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director