Bureau of Local Government Finance Opinion

February 23, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Hon. Herbert M. Bautista City Mayor Quezon City Sir : This refers to your letter dated February 10, 2011 requesting this Bureau to comment on the Proposed Ordinance No. PO2011-31 entitled "AN ORDINANCE PROVIDING INCENTIVES TO ALL INDIVIDUALS AND COMMERCIAL ENTITIES DOING BUSINESS WITHIN THE TERRITORIAL JURISDICTION OF QUEZON CITY, PROVIDING PENALTIES THEREFOR AND OTHER PURPOSES." Section 3 of the proposed ordinance provides as follows: "Section 3. Incentive for Employment of Quezon City Voters and Residents . Pursuant to the power granted to the City Council by Section 192 of Republic Act No. 7160, all individuals and commercial entities doing business within the territorial jurisdiction of Quezon City employing at least fifty (50) employees will be entitled to a reduction of business taxes to which they are liable to pay based on the gross sales or receipts for the preceding calendar year for employment of employees who are registered voters and bona fide residents of Quezon City according to the following schedule: cEDIAa Percentage of Employees Who Percentage Reduction from the are Registered Voters and Bona Applicable Business Tax Fide Residents of Quezon City Imposed on the Individual or Commercial Entity Less than 50% 0% 50% or more, but less than 60% 10% 70% or more, but less than 80% 20% 80% or more, but less than 90% 30% 90% or more 40% In this connection, reference is made on the provisions of Article 282 of the Implementing Rules and Regulations (IRR) implementing Section 192 of the Local Government Code (LGC) of 1991 provides as follows: "Article 282. Authority to Grant Tax Exemption Privileges . (a) While local sanggunian may grant tax exemption, incentive or tax relief, such grant shall not apply to regulatory fees which are levied under the police power of the LGUs. Such tax exemption shall be conferred through the issuance of a tax exemption certificate, which shall be non-transferable." "(b) The sanggunians granting tax exemptions, tax incentives and tax reliefs may be guided by the following: caIACE "(1) . . . "(2) On the grant of tax incentives: "(i) The tax incentive shall be granted only to new investments in the locality and the ordinance shall prescribe the terms and conditions that must be complied with for such grant or tax incentive; "(ii) The grant of the tax incentive shall be for a definite period not exceeding one (1) calendar year; "(iii) The grant of the tax incentive shall be by ordinance passed prior to the first (1st) day of January of any year; and "(iv) Any tax incentive granted to a type or kind of business shall apply to all businesses similarly situated." Upon perusal of subject ordinance, this Bureau recommends the following: l. Section 3 of the Ordinance states that "all individuals and commercial entities doing business within the territorial jurisdiction of Quezon City employing at least fifty (50) employees will be entitled to a reduction of business taxes". It must be pointed out that the incentives provided under Article 282 of the IRR are for new investments in the locality. The term "new" shall mean only those engaging in new products or activity. Thus, it is suggested that the Sangguniang Panlungsod thereat amend Section 3 of said ordinance to ensure compliance with the provisions of Article 282 (2)(i) of the IRR implementing Section 192 of the LGC. 2. The period of tax exemption in the Ordinance should not exceed one (1) calendar year from the actual date the business started operations. 3. The ordinance should be passed prior to the 1st day of January of any year. It bears emphasis however, that the above findings are expressed in accordance with Article 287 of the IRR of the Code and should not be construed as a declaration of the legality or illegality of the said ordinance for reason that such function falls exclusively within the jurisdiction of the Department of Justice. TICAcD At this juncture, the Bureau would like to recommend that the city address the following issues: 1. The city may also consider the financial impact of the reduced business taxes as this may deprive the city of a considerable amount of revenues for its own operational expenses and delivery of basic services. Based on the List of Top 100 taxpayers (tax year 2007) from the Book II: Retracing the Roadmap to Financial Stability by Dr. Victor B. Endriga, initial estimates show that the city stands to lose Php88,450,000 in revenues if the top 100 business taxpayers will employ at least 50% of their employees from Quezon City and as high as Php353,800,000, if they will employ 90% or more residents from said city. (See Attachment "A") 2. While the proposed ordinance will promote greater employment opportunities among its residents, existing businesses might discriminately terminate its non-Quezon City residents employees to be able to avail of the incentive package. This might result in unfair labor practice. 3. The quality of operations of businesses operating within Quezon City might be compromised if the businesses are made to choose between 40% reduction on tax due or quality performance of their employees. DAaHET 4. Instead of losing Php353 M annually from the incentive package, it is suggested that the equivalent amount be appropriated from the city's annual budget to provide training and scholarship opportunities to all Quezon City residents to provide them a competitive advantage on employment opportunities. We hope that this will help clarify matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director