Bureau of Local Government Finance Opinion

November 4, 2014 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully returned to the City Treasurer of Cabanatuan, her within letter dated October 10, 2014 requesting clarification and guidance whether that Office can still collect business taxes from Cabanatuan Electric Corporation (CELCOR) five (5) years back, including the interests and surcharges. The request is made in view of the desire to increase the available resources of that City and to improve efficiency in the collection of local revenues. It was noticed that in view of the stressful job or lapses of then City Treasurer, the collection of taxes, fees and charges were not implemented properly in accordance with the provisions of Section 151 of the Local Government Code (LGC) of 1991, as implemented by Article 237 of the Implementing Rules and Regulations (IRR) of the Code, which provides: "Article 237. Scope of Taxing Powers of Cities . The City (a) May levy and collect any of the taxes, fees, charges and other impositions that the province and the municipality may impose. 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. "(b) May levy and collect a percentage tax on any business not otherwise specified under paragraphs (a) to (g), Article 232 of this Rule, at rates not exceeding three percent (3%) of the gross sales or receipts of the preceding calendar year." Further, records of that Office shows that one of the huge taxable items that should have been levied but failed is business tax on CELCOR, a local private utility company engaged in the distribution of electricity. While CELCOR regularly pays its franchise tax obligation, that Office believes that CELCOR is also liable to pay business tax apart from the franchise tax as enunciated in the case of "MERALCO vs. Province of Laguna and Municipality of San Pedro" embodied under DOJ Resolution dated February 27, 2004, the dispositive portion provides: "In other words business tax is a tax imposed on the trade or commercial activity, while franchise tax is a tax imposed on the right or privilege. "Business tax and franchise tax" impositions being of different characters and purpose can be validly imposed simultaneously by a municipality and a provincial/city, respectively." ( Emphasis and underscoring supplied ) Needless to state, the abovecited DOJ Ruling is applicable in case of Cabanatuan City pursuant to Section 151 of the LGC, which provides: "SEC. 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. 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." Applying the above quoted provisions of the LGC in the case of Cabanatuan, a city, it may therefore impose simultaneously Franchise Tax and Business Tax on CELCOR at rates not exceeding fifty percent (50%) higher than the rates prescribed for a province, in case of a franchise tax, and a municipality, in the case of local business tax. Incidentally, the question of double taxation will not be an issue considering that the impositions are characterized by different purposes, one is for a franchise tax and the other is business tax. As regards back taxes, Section 194 of the LGC provides as follows: "Section 194. Periods of Assessment and Collection . (a) Local taxes, fees, or charges shall be assessed within five (5) years from the date they became due. No action for the collection of such taxes, fees, or charges, whether administrative or judicial, shall be instituted after the expiration of such period: Provided , That, taxes, fees or charges which have accrued before the effectivity of the Code may be assessed within a period of three (3) years from the date they became due. "(b) In case of fraud or intent to evade the payment of taxes, fees, or charges, the same may be assessed within ten (10) years from discovery of the fraud or intent to evade payment. "(c) Local taxes, fees, or charges may be collected within five (5) years from the date of assessment by administrative or judicial action. No such action shall be instituted after the expiration of said period: Provided, however, That taxes, fees or charges assessed before the effectivity of this Code may be collected within a period of three (3) years from the date of assessment. "(d) The running of the periods of prescription provided in the preceding paragraphs shall be suspended for the time during which: "(1) The treasurer is legally prevented from making the assessment of the collection; "(2) The taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess or collect; and "(3) The taxpayer is out of the country or otherwise cannot be located." The immediate preceding provision of law is clear that local taxes, fees, or charges shall be assessed within five (5) years from the date they became due. However, it may be clarified that if a local taxing authority fails or omit to assess and collect a local tax, fee, or charges within five (5) years from the date they became due, the same may no longer be collected because of the prescription provision in the law itself. On the issue of surcharges and interests, this Bureau believes that the issue needs a second look. Based on earlier representations that CELCOR has been regularly paying its franchise tax obligations and that the former City Treasurer had some lapses in the collection of taxes, fees and charges, the imposition of surcharges and interest on local business tax liability pursuant to Section 194, supra , would seem unjust on the part of CELCOR to be burdened with paying surcharges and interests on local business tax which the City of Cabanatuan failed to impose, supposedly simultaneous with franchise tax, on the one hand. On the other hand, CELCOR has been religiously and in good faith paying its franchise tax obligation to the City Government guided by a firm belief that it was only liable for such obligation. In this regard, it is our view that Cabanatuan City may no longer impose surcharges and interests on the intent of that Office to collect business taxes for CELCOR five (5) years back. Be guided accordingly. (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director