Bureau of Local Government Finance Opinion

January 14, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 2nd Indorsement Respectfully returned to the City Treasurer, Lipa City, for appropriate action, the herein preceding indorsement relative to the letter dated August 25, 2010 of Mr. Mariano D. Martinez, President, Bon Giorno Homes, Inc. (BGHI) regarding their query on the contractor's tax. In your reply to our 1st Indorsement dated September 1, 2010, that Office submitted the following comments: 1. "The Office of the City Engineer has its own set of procedures to follow for all its transactions. If contractors fails to pay the contractor's tax, it's their prerogative not to grant them an occupancy permit. However, as claimed, such procedure is not found in the citizen's charter which we've indorsed with the concerned office for appropriate action. 2. "We've made it clear to their query dated July 8, 2010 that our office is merely asking for their assistance to collect contractor's tax for their sub-contractors, being their employer. We've never required or mandated them to withhold said tax and remit them to us. Ours is a plain request which we hope we can collect along with their Building Permit Application. HADTEC 3. "Relatively, we are aware that it is mandatory for contractors to apply for mayor's permit for the construction of building. But such does not hold true for those without branch or office in our locality as provided for in the Revised Local Revenue Code of Lipa City. Hence, we resorted to request developers like Bon Giorno Home, Inc. to assist us in collecting contractor's tax from their sub-contractors. To remedy this problem, we've coordinated with the Sangguniang Panlungsod to amend our existing ordinance." In this connection and for the guidance of that Office this Bureau expresses the following views: Comment No. 1. It is worth mentioning that as part of their specific collection strategies, other local government units (LGUs) require contractors to pay business tax prior to the release of the building permit, excavation permit, and occupancy permit through a memorandum from the Local Chief Executive concerned. It appears that such procedure is being implemented by the Office of the City Engineer. As claimed however by BGHI, such procedure is not found in the citizen's charter thus, as informed by that Office, the matter has been indorsed to the concerned office for appropriate action. In the meantime and in order that the business operations of contractors/sub-contractors thereat may not be unduly disrupted, that Office may coordinate with the Office of the City Engineer and request the Local Chief Executive to issue a memorandum as basis for the implementation of said procedure. SacDIE Comment No. 2. We would like to invite your attention to the provision of Section 130 (c) of the Local Government Code (LGC) of 1991, quoted as follows: Section 130. Fundamental Principles. The following fundamental principles shall govern the exercise of the taxing and other revenue-raising powers of local government units: "(a) . . . "(c) the collection of local taxes, fees, charges and other impositions shall in no case be let to any private person. "xxx xxx xxx." In view of the foregoing, what can be suggested is for Lipa City to require BGHI to furnish a list of its sub-contractors as well as the amount of contract price paid by BGHI for purposes of collecting the contractor's tax imposed under a duly enacted tax ordinance of that city. Comment No. 3. It is informed that Section 5 of Local Finance Circular 3-95 dated May 22, 1995 of the Department of Finance prescribing the guidelines governing the power of cities and municipalities to impose business tax on construction contractors pursuant to Section 143 of the LGC provides as follows: Section 5. Situs of Tax. "(a) . . . "(b) For purposes of collection of tax, the following rules shall apply: "(1) . . . "(2) In cases where there is no branch office, the gross receipts from domestic projects or contracts shall be recorded in the Head/Principal office and the same shall be allocated as follows: (i) Thirty percent (30%) of the gross receipts shall be taxable by the city or municipality where the principal office is located; and (ii) Seventy percent (70%) of the gross receipt shall be taxable by the city or municipality where the project office is located. (Underlining supplied) "(3) . . . ." On the basis of the aforequoted provisions of the LFC, it is clear that a local government unit, like Lipa City can only impose a business tax based on 70% of the gross receipts of a contractor or sub-contractor that maintains a project office located thereat. Said project office shall mean the field office in the construction site used in administering the project or construction being undertaken in pursuit of the business. It may not be a fixed place where administrative work is conducted as the term "office" usually connotes, but one that may be transferred from one project site to another. CacISA Likewise, the contractor or sub-contractor shall be liable to the payment of the Mayor's permit fee and other regulatory fees for maintaining said project office thereat. Advice of action taken hereon within five (5) days from receipt hereof is requested. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director