Bureau of Local Government Finance Opinion

April 16, 2010 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Elizabeth E. Peralta-Loriega Atty. Cecily Nerisse C. Ramirez-Dela Cruz Puno & Puno Law Offices 12th Floor, East Tower Philippine Stock Exchange Center Exchange Road, Ortigas Center Pasig City Mesdames : This refers to your letter dated 13 April 2010 requesting for a confirmation of your opinion that Tollways Management Corporation (TMC), as a sub-contractor of Manila North Tollways Corporation, is liable for local business tax and regulatory fees only in Caloocan City, where its principal place of business is located pursuant to Section 150 of the Local Government Code (LGC) of 1991. That office submitted the following representations: 1) In April 1998, the Manila North Tollways Corporation (MNTC), the Philippine National Construction Corporation (PNCC), and the Republic of the Philippines through the Toll Regulatory Board (TRB) signed a Supplemental Toll Operation Agreement (STOA) which granted MNTC the concession to finance, design, rehabilitate, expand, operate, and maintain the North Luzon Expressway (NLEX). Under the STOA, MNTC was permitted to appoint an Operation and Maintenance Contractor (O & M Contractor) to undertake any aspect of the defined operation and maintenance under the Operation and Maintenance Contract. 2) Pursuant to relevant STOA provisions, TMC was incorporated in 2000 with the primary purpose to, among others, engage in and carry on the operations and maintenance of tollways, its facilities, interchanges and related works. TMC's Articles of Incorporation indicate that its principal place of business is at the OMC Building, Balintawak Toll Plaza, KM 12, North Luzon Expressway, Caloocan City, where it regularly and religiously pays its local business tax (LBT) as a "sub-contractor". 3) An O & M Contract was entered into by and between MNTC and TMC on 06 July 2001. TMC began its operations in 10 February 2005, with its principal functions being toll collection, maintenance of toll systems and roadways and traffic operations . 4) TMC, by paying one hundred percent to its LBT in Caloocan City as a sub-contractor, is merely following the clear mandate of the situs rules of the LGC. DHACES It is also submitted that TMC, by the nature of its business, qualifies as " contractor " as defined under Section 131 (h) of the LGC, quoted as follows: "SEC. 131. Definition of Terms . When used in this Title, the term: xxx xxx xxx (h) "Contractor" includes persons, natural or juridical, not subject to professional tax under Section 139 of this Code, whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractor or his employees . xxx xxx xxx." Further, as stated, TMC does not maintain an office, branch or sales outlet within the territorial jurisdiction of any LGU other than Caloocan City thus, Section 150 (a) of the LGC which provides that "In cases where there is no such branch or sales outlet in the city or municipality where the sale or transaction is made, the sale shall be duly recorded in the principal office and the taxes due shall accrue and shall be paid to such city or municipality." Furthermore, it is contented that even if TMC has an office at Sta. Rita, Guiguinto, Bulacan, it is a mere support facility which does not do business in Guiguinto, and does not generate any income on its own, either as a branch or sales outlet . Whatever income derived by TMC from operating and maintaining the NLEX pertains to and is reported in its principal place of business, which is in Caloocan City. Based on the above the representations and for the prompt resolution of the issue at hand, this Bureau expresses the views on the following issues: 1) TMC, by the nature of its business is qualified as a "contractor" as defined under the pertinent provision of the LGC . Section 131 (h) of the LGC is re-quoted as follows: "SEC. 131. Definition of Terms . When used in this Title, the term: xxx xxx xxx (h) "Contractor" includes persons, natural or juridical , not subject to professional tax under Section 139 of this Code, whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractor or his employees . xxx xxx xxx." By representation made and by the nature of its contract with MNTC, there is no doubt that TMC falls within the purview of the definition of the term " contractor ". Item 6.5 of the Agreement between MNTC and TMC provides that "Unless officially authorized by the Employer to act as its agent, the Operator shall undertake all obligations under this Agreement as an independent contractor." (emphasis ours) 2) TMC does not maintain an office, branch or sales outlet elsewhere except Caloocan City . Article 243 of the Implementing Rules and Regulations (IRR) implementing Section 150 of the LGC provides as follows: "Article 243. Situs of the Tax. (a) For purposes of collection of the taxes under Article 232 of this Rule, the following definition of terms and guidelines shall be strictly observed. (1) Principal Office the head or main office of the business appearing in the pertinent documents submitted to the Securities and Exchange Commission, or the Department of Trade and Industry, or other appropriate agencies, as the case may be. acAESC The city or municipality specifically mentioned in the Articles of Incorporation or official registration papers as being the official address of said principal office shall be considered as the situs thereof. xxx xxx xxx (2) Branch or sales office a fixed place in a locality which conducts operations of the business as an extension of the principal office. . . ." From the decisions, this Bureau agrees with the contentions raised. Moreover, per ocular inspection conducted by the BLGF Team on April 6, 2010, it was established that TMC's principal office is located at OMC Building, Balintawak Toll Plaza, North Expressway, Caloocan City. The same information is indicated in the Company's Articles of Incorporation. Perusal of the supporting documents submitted show that TMC is principally engaged in the operation and maintenance of the tollways. It does not own any structure within the stretch of the tollways. Further, toll booths strategically located along the stretch of the expressway do not belong to TMC neither they are owned by MNTC. In view hereof, TMC shall be liable to the payment of local business tax to Caloocan City where the principal office is located, based on total taxable compensation that the company receives from its employer, MNTC, including but not limited to Base Fee, additional variable amounts and fees stipulated in the Agreement between the company and MNTC. 3) Basis in the computation of business tax With regard to the computation of business tax, Section 143 of the LGC provides as follows: "SEC. 143. Tax on Business . The municipality may impose taxes on the following businesses: xxx xxx xxx. (e) On contractors and other independent contractors , in accordance with the following schedule: With gross sales or receipts for the Rate of Tax Per preceding calendar year in the amount of: Annum xxx xxx xxx 1,000,000.00 or more but less than 2,000,000.00 11,500.00 2,000,000.00 or more at a rate not exceeding fifty-percent (50%) of one percent (1%) xxx xxx xxx." (Emphasis ours) Based on the abovequoted provision of the LGC, this Bureau concurs with the following propositions: TcIHDa (1) TMC, as an independent contractor, shall be liable to the payment of local business tax, computed at the rate of fifty percent (50%) of one percent (1%) of total gross sales/receipts it realized for the preceding calendar year. (2) TMC's total gross sales/receipts will include service fees and other similar fees or amounts it receives for services rendered in the operation of NLEX. LBT shall be payable only to Caloocan City where the principal office is located and to the exclusion of other jurisdictions traversed by the NLEX. In the same manner, TMC shall only be liable for the payment of regulatory fees and charges to Caloocan City as it does not have or maintain any branch, sales outlet or office elsewhere aside from Caloocan City where its principal office is located. cHaICD We hope that we have clarified matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director