Bureau of Local Government Finance Opinion

September 14, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Virgilio B. Castillejo, Jr. Accountant Triplex Enterprises Incorporated 2244 Chino Roses Ave., Makati City Sir : This refers to your letter dated June 19, 2015 seeking advice on the Letter of Authority (LOA) of Paraaque City classifying the warehouse of Triplex Enterprises Incorporated (Triplex for brevity) as a manufacturing plant subject to business taxes. Representations are made that Triplex principal office is located in Makati City where all sales and marketing are done. Hence, the request for opinion on the following issues: 1. Triplex warehouse in Paraaque is doing cutting and sheeting of Paper rolls it imports from abroad and buys from local paper manufacturer. Triplex does not put/add or process anything on the said paper except to cut it to the size requirement of its customer as part of its sales service. With the above procedure, is it right that Triplex be classified as a manufacturer? 2. When Triplex put its brand or label on said cut paper, is it considered manufacturing? 3. Triplex never does any sales or manufacturing in Paraaque, except warehousing and cutting facilities. With the above activity, can Triplex be legally compelled to pay local taxes to Paraaque when the sales involved are already taxed and paid in Makati? 4. Is it not that Section 150 (b) applicable only to manufacturers with factories, project plants and plantations on the pursuit of their business outside of the locality where the principal office is located. 5. Isn't it very clear that a company is classified and defined as manufacturer in Section 131 (20) "Only if by any process it alters the form and exterior of any product."? Said letter was referred to the City Treasurer of Paraaque for comment under a 1st Indorsement dated June 25, 2015. In a reply-letter dated July 27, 2015, copy enclosed, the City Treasurer submits as follows: 1. Triplex stated in their letter dated June 19, 2015 that their warehouse in Paraaque City is "doing cutting and sheeting of Paper rolls we import from Abroad and buy from Local Paper manufacturer." Thus, there is no doubt that the warehouse activity of Triplex involves the physical means of cutting and sheeting of paper rolls which has altered the exterior from the said paper rolls which is clearly the raw material used. There is the need for the cutting and sheeting to prepare the paper rolls to be sold to customers as Triplex cannot possibly sell to its customers uncut and not sheeted paper rolls. Clearly, the activity of Triplex's warehouse is manufacturing as defined in Section 131 (o) of Republic Act No. 7160, also known as the Local Government Code of 1991, to quote: (o) " Manufacturer includes every person who, by physical or chemical process, alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such manner as to prepare it for special use or uses to which it could not have been put in its original conditions , or who by any such process, alters the quality of any such raw material or manufactured or partially manufactured products so as to reduce it to marketable shape or prepare it for any of the use of industry, or who by any such process, combines any such raw material or manufactured or partially manufactured products with other materials or products of the same or of different kinds and in such manner that the finished products of such process or manufacture can be put to a special use or uses to which such raw material or manufactured or partially manufactured in their original condition could not have been put, and who in addition, alters such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption ; (Underscoring supplied) 2. Since Triplex's warehouse is engage in manufacturing, the putting of its own brand or label on the cut paper necessarily forms part of the manufacturing process so that Triplex can sell the finished paper products to others and not for its own consumption. 3. Since Triplex's warehouse is engaged in the manufacturing of paper products, 70% of the local business tax must be paid to the City of Paraaque as stated in Section 150 of the Local Government Code of 1991. And since Triplex's warehouse is engaged in manufacturing, it is in the same category as a factory, project office, plant or plantation. Thus, under the abovecited law, Triplex should pay 70% local business tax to the City of Paraaque where the warehouse is located. 4. Thus, the delinquency assessment made on Triplex is therefore in accordance with law. The assessments include delinquent regulatory fees which they incurred when these failed to disclose their activity of fabrication of their raw materials in their warehouse. In this connection, Triplex submitted a letter dated September 15, 2015 to supplement its letter-query dated June 19, 2015. As an additional information, Triplex has been religiously paying about ninety percent (90%) of its local tax in Makati City and never considered its warehouse in Paraaque City as engaged in manufacturing or treated it in the same category as a factory, project office, plant or plantation. However, sometime in year 2015, Triplex received a letter from the City of Paraaque requiring it to pay additional business tax (deficiency), including surcharges and penalties for the years 2010-2014 for a total amount of Php11,303,462.54, based on their findings that Triplex's warehouse is engaged in manufacturing. Hence, Triplex sought a reconsideration which was denied citing Section 150 of the LGC. Triplex contends that if the position by the City of Paraaque is correct, then starting year 2016, Triplex will be forced to declare (and be classified) its warehouse in that City as manufacturer. Further, Triplex will be requesting for a tax refund from Makati for the amount which Paraaque is charging as tax deficiencies for the last five (5) years based on the principle of " Solutio Indebiti ". Triplex likewise submitted the following additional information: Makati Office: a. All sales and invoicing are done, received and declared at the Makati Office. b. Makati Office is also being utilized for warehousing. No cutting, slitting and/or packaging activity is done here. Paraaque Site: a. Paraaque warehouse is purely utilized for warehousing. It is where cutting, slitting and/or packing is being done. b. The cutting and/or slitting consist of cutting the paper rolls into different sizes as needed by our customers without any process of either adding or altering its composition or substance. c. Triplex also sells paper/paper rolls to its customers in their original state (from the suppliers to warehouse to customers) without any changes or intervention, not even cutting or slitting. Triplex is a manufacturer . In resolving the issue of whether or not Triplex operations in Paraaque City be considered as that of a manufacturer, the provisions of Section 131 of the LGC is quoted once more for ready reference: (o) "Manufacturer includes every person who, by physical or chemical process, alters the exterior texture or form or inner substance of any raw material or manufactured or partially manufactured product in such manner as to prepare it for special use or uses to which it could not have been put in its original conditions , or who by any such process, alters the quality of any such raw material or manufactured or partially manufactured products so as to reduce it to marketable shape or prepare it for any of the use of industry, or who by any such process, combines any such raw material or manufactured or partially manufactured products with other materials or products of the same or of different kinds and in such manner that the finished products of such process or manufacture can be put to a special use or uses to which such raw material or manufactured or partially manufactured in their original condition could not have been put, and who in addition, alters such raw material or manufactured or partially manufactured products, or combines the same to produce such finished products for the purpose of their sale or distribution to others and not for his own use or consumption ; (Underscoring supplied) Based on the representations made that Triplex warehouse in Paraaque is doing the cutting and sheeting of Paper rolls it imports from abroad and buys from local paper manufacturer, aside from putting brand name or label on the finish product, we therefore agree with the position of the City Treasurer of Paraaque which is hereby being re-stated for emphasis: "Thus, there is no doubt that the warehouse activity of Triplex involves the physical means of cutting and sheeting of paper rolls which has altered the exterior from the said paper rolls which is clearly the raw material used. There is the need for the cutting and sheeting to prepare the paper rolls to be sold to customers as Triplex cannot possibly sell to its customers uncut and not sheeted paper rolls. Clearly, the activity of Triplex's warehouse is manufacturing as defined in Section 131(o) of Republic Act No. 7160, also known as the Local Government Code of 1991 . . .:" In view thereof, the warehouse in Paraaque shall be considered a manufacturing "plant" as defined in Webster's Third New International Dictionary (1986 ed.) as follows: "plant" the land, building machinery, apparatus, and fixtures employed in carrying on a trade or mechanical or other industrial business; a factory or workshop for the manufacture of a particular product; the total facilities available for production or service in a particular country or place. In this connection and for purposes of local taxation the 30%-70% sales allocation pursuant to Article 243 (b) (3) implementing Section 150 (b) (1) of the LGC, quoted hereunder shall apply: "(b) Sales Allocation (1) . . . "(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 be entitled to the sales allocation herein provided for. (Underscoring ours) Claim for refund/tax credit. In view of the claim that Triplex has been religiously paying about ninety percent (90%) of its local tax in Makati, Triplex may therefore file a written claim for tax refund/credit with the City Treasurer of Makati. However the two-year prescription period shall not apply for the simple reason that the taxpayer cannot be faulted for the prescription of the tax refund claim. When the tax claimed to be refunded is illegally or erroneously collected, the principle of solutio indebiti shall govern and not the two (2)-year prescriptive period provided under Section 196 of the LGC. The principle of solutio indebiti should apply in the case at bar, thus, " In any case, a taxpayer should not be held to suffer loss by his good intention to comply with what he believes is his legal obligation, where such obligation does not really exist." (Ramie Textiles vs. Hon. Ismael Mathay Sr., G.R. L-32364, 30 April 1979) Furthermore, Article 2154 under the principle of solutio indebiti , which is classified as quasi-contract under Section 2, Chapter I, both of the Civil Code, provides that "[I]f something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises." And "since the collection was illegal, the obligation to return or refund the same would be in the nature of solutio indebiti, which by the Civil Code, prescribes in 6 years." (Victorias Milling Co., Inc. vs. Central Bank of the Philippines, G.R. No. L-17798 March 31, 1965) Conclusively, this Bureau is of the view that Triplex's application for tax credit is meritorious and should be given due course and the running of the prescriptive period applicable is Article 1144 of the Civil Code, supra . Provided, however, that the claim is duly supported by evidence of payment ( e.g. , official receipts and such other proof evidencing payment). Triplex is likewise considered as a wholesaler or retailer . On the basis of the claim of Triplex that it also sells paper/paper rolls to its customers in their original state (from the suppliers to warehouse to customers) without any changes or intervention, not even cutting or slitting, the warehouse in Paraaque City shall likewise be considered as a Sales Office and 100% of such sales recorded thereat shall be taxable by said City on the basis of the rates imposed on wholesaler or retailer under its duly-enacted ordinance. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director