Bureau of Local Government Finance Opinion

March 17, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully returned to the ICO-Regional Director for Local Government Finance, Department of Finance, Cordillera Administrative Region (CAR), his letter dated March 23, 2009, relative to the letter of Mr. Laurence C. Bayongan, Municipal Administrator, Tabuk, Kalinga, seeking clarification specifically on the following issues: 1. Whether the definitions of the terms Accumulated Reserves and Undivided Net Savings cited under BIR Revenue Regulation 20-2001 are also applicable to local taxation; and 2. Whether the "sales/services" rendered to non-members by the cooperative is based on gross receipts. At the outset, it is informed that this Bureau was looking forward to the approval of Republic Act No. 9520, otherwise known as the "Cooperative Code of 2008", the law amending certain provisions of R.A. No. 6938, the Cooperative Code of the Philippines, causing the delay in responding to the query raised herein. TDCaSE Notably however, neither R.A. No. 9520 nor R.A. No. 6938, as amended provide for the definitions of the terms "Accumulated Reserves" and "Undivided Net Savings" and therefore, this Bureau had to rely solely on the definitions provided under Revenue Regulations No. 20-2001 of the Bureau of Internal Revenue (BIR). Query No. 1 Section 2 of BIR Revenue Regulations No. 20-2001 dated November 12, 2001 defines Undivided Net Savings and Accumulated Reserves as follows: "SEC. 2. DEFINITIONS "xxx xxx xxx "(h) Undivided Net Savings refers to the amount arising from net surplus or any portion thereof which the Board of Directors of the General Assembly of the cooperative decides not to divide or make available to members in the form of interest on share capital, patronage refund, reserves refund, education and training fund, optional fund or any other statutory reserve; this also includes the amount arising from the net surplus or any portion thereof which the cooperative is unable to divide because the General Assembly of the cooperative has not been convened for more than two (2) years: "(i) Accumulated Reserves refers to the amount of accrued sum of money annually retained and deducted from the net surplus which is not intended for allocation or distribution to the members, usually deposited in the bank for the protection of and stability of the cooperative commonly referred to as the General Reserve Fund." For purposes of local taxation, the terms Undivided Net Savings and Accumulated Reserves defined respectively under RR No. 20-2001 of the Bureau of Internal Revenue abovequoted are not applicable to local impositions, e.g., business taxes on cooperatives, for the simple reason that local business taxation is basically based on "gross sales or receipts for the preceding calendar" (Section 143, LGC). IECcaA In the particular case it may be noted from the abovequoted definitions that Undivided Net Savings and Accumulated Reserves are either amounts arising from or retained and deducted from the Net Surplus, which is the profit remaining after subtracting the operating expenses, taxes, interest, insurance, and dividends. In contrast gross sales or receipt applicable to local business tax (LBT), refers to the "total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or materials supplied with the services and deposits or advance payments actually or constructively received during the taxable" * but excludes discounts if determinable at the time of sales, sales return, excise tax, and value-added tax (VAT)." In reply to the first query, the Undivided Net Savings and Accumulated Reserves are therefore not applicable in computing LBT even if applied to transaction by cooperatives to non-member clientele for reason already mentioned above. On Query No. 2 In answer to the second query, and as already mentioned above, local business tax is basically computed based on "gross sales or receipts". However, in dealing with this particular issue, the term "sales or services" mentioned under Article 62 (3) and Section 61 (3) of R.A. No. 6938 and R.A. No. 9520, the law amending certain provisions of the former, has to be applied with caution as regards LBT. In fine, the term "sales or services" rendered by a producer, marketing or service cooperative to non-members has to be determined whether applicable to LBT imposition. AIaHES At this point, it must be stressed that the provisions of Article 62 (3) of R.A. No. 6938 and Section 61 (3) of R.A. No. 9520, speak of sales or services that are subject to the applicable percentage tax, a kind of tax applicable to income taxation under the NIRC but not to LBT. In this regard, this Bureau is of the view that the transactions "sales or services" rendered by said cooperative to non-members are beyond the taxing authority of local government units (LGUs), in this case, the Municipality (now City) of Tabuk. Another issue that needs to be clarified is the alleged "business permit fee" in the amount of Php93,578.61 being imposed by the Municipality of Tabuk on TAMPCO for its Undivided Net Savings and Accumulated Reserves. From a careful scrutiny of the attached copy of the "ANNUAL QUARTERLY BUSINESS TAX RETURNS", it is very clear that out of P93,578.61, which the Municipal Government of Tabuk is requiring TAMPCO to pay, P91,046.61 refers to Business Tax and only P2,532.00 pertains to regulatory fees and other charges, enumerated as follows: Particular Amount of Fee Mayor's Permit Fee P1,000.00 Sanitary Bus. Fee 85.00 Garbage Fee 900.00 Fire Inspection fee 85.00 Fire Code Fee 207.00 Annual Inspection Fee 200.00 Cost of Form 10.00 Business Plate 3 Stickers 45.00 Other Fee - Total P2,532.00 ======= In this connection, this Bureau is of the view that the fees imposed by the Municipality of Tabuk, Province of Kalinga are without legal basis and in direct violation of Section 133 (n) of the LGC, which provides: caTESD "SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: xxx xxx xxx (n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under R.A. No. 68 10 and Republic Act Numbered Sixty-ni ne hundred thirty-eight (R.A. No. 6 938) otherwise known as the "Cooperative Co de of the Philippines" respectively; It bears emphasis however, that the foregoing views are expressed in line with the provisions of Art. 287 of the Implementing Rules and Regulations (IRR) implementing the LGC and not a declaration of the nullity or illegality of the duly-enacted local tax ordinance of the Municipality of Tabuk, a matter which is within the jurisdiction of the Secretary of Justice or a court of competent jurisdiction. Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director