Bureau of Local Government Finance Opinion

February 10, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Robert C. Tiu General Manager Himmel Industries, Inc. 6/F Allied Bank Center 6754 Ayala Avenue Makati City 1200 Sir : This refers to your letter dated January 30, 2015 requesting guidance and ruling on the proper application of the Situs of the Tax rule under R.A. No. 7160, also known as the Local Government Code (LGC) of 1991. Representations are made that Himmel Industries, Inc. (HII), is engaged in the importation of different kinds of chemicals that are being used as raw materials and for resale to customers. The Company's principal place of business is in Pasig City, with its Head Office located in Makati. It also maintains storage tanks, which serve as warehouses for imported bulk chemicals and from where deliveries to customers in Metro Manila and nearby provinces are withdrawn. Further, every year HII pays its business taxes and other fees as follows: 1) Makati City 70% of gross sales transacted and recorded thereat 2) Pasig City 30% of gross sales recorded in Sales Office in Makati 3) Batangas City (Warehouses) none Last year, HII received a letter from ATTY. TEODULO A. DEQUITO, City Legal Officer of Batangas, requesting the Company to pay the 35% based on gross sales of HII or equivalent to 50% of the local business tax (LBT) paid to Makati City. On January 29, 2015, HII requested the City Treasurer of Batangas City to allow the Company to renew its business permit while waiting for the reply of Office of the City Treasurer of Makati on its request for guidance on the issue of sharing 50% of the LBT paid to said City. However, the request was denied unless the Company pay the equivalent of 50% of LBT paid to Makati City on or before February 2, 2015. HII also request the Batangas City for the stoppage of period (sic) to avoid surcharges and penalties should it failed to renew its business permit before the deadline. This Bureau, on even date contacted Ms. MARIA TERESA T. GERON, City Treasurer of Batangas, and inquired on the basis of the assessment of 35% of the 70% allocation to Head Office or equivalent to 50% of the LBT paid to Makati City. In reply, Ms. Geron cited Section 24 (f) of the Batangas City Revenue Code of 2009, copy of the excerpts attached for reference, which provides: ATICcS "SECTION 24. Situs of Taxes. (a) . . . . xxx xxx xxx (f) Where the manufacturer, assemblers, producers, contractors, or exporters have two or more factories, project offices, plants and plantations located in different cities or municipalities including Batangas City, the seventy percent (70%) above-mentioned shall be pro-rated between Batangas City and the localities where such factories, project offices, plants and plantations are located in proportion to the respective volumes of production during the period for which the tax is due." In relation to the letter of the City Legal Officer of Batangas of December 22, 2014, this Bureau, on this date, requested confirmation with HII on the actual operations of its various offices in said localities and validated the following: 1) Pasig City Principal Office (per SEC Registration) 2) Makati City Sales Office 3) Batangas City Storage Tanks used as Warehouses HII also confirms that the Company is neither a manufacturer nor producer but a "trading" business engaged in the distribution of chemicals and therefore may be classified either as "wholesaler'', "distributor" or "dealer". It was also confirmed that no sales is generated at its warehouses in Batangas City as the same are exclusively used as storage for its bulk chemicals from where deliveries are drawn for its customers in Metro Manila and nearby provinces. For better understanding in resolving the herein issue, the following definition of terms under Article 243 of the Implementing Rules and Regulations (IRR) implementing Section 150 of the LGC are quoted as follows: "Article 243. Situs of the Tax. (a) Definition of terms: (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. 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. However, offices used only as display areas of the products where no stocks or items are stored for sale, although orders for the products may be received thereat, are not branch or sales offices as herein contemplated. A warehouse which accepts orders and/or issues sales invoices independent of a branch with (sic) sales office shall be considered as a sales office . (3) Warehouse a building utilized for the storage of products for sale and from which goods or merchandise are withdrawn for delivery to customers or dealers, or by persons acting in behalf of the business. A warehouse that does not accept orders and/or issue sales invoices as aforementioned, shall not be considered a branch or sales office ." (Underscoring for emphasis) In addition, Article 243 of the IRR further provides as follows: TIADCc "(b) Sales Allocation (1) All sales in a locality where there is a branch or sales office or warehouse shall be recorded in said branch or sales office or warehouse and the tax shall be payable to the city or municipality where the same is located. (2) In cases where there is no such branch, sales office or warehouse in the locality where the sale is made, the sale shall be recorded in the principal office along with the sale made by said principal office and the tax shall accrue to the city or municipality where said principal office is located. (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 sale allocation herein provided for." xxx xxx xxx Based on the preceding provisions of the IRR of the LGC, this Bureau expresses the following: 1) Considering the representation made that all sales transactions are conducted and recorded at Sales Office in Makati City, 100% of the gross sales or receipts shall be taxable by said City; 2) Since no sales is generated in the Principal Office in Pasig City, said City will not share in the gross sales transacted and recorded in Makati Sales office in view of Section 143 of the LGC which provides that tax on business shall be based on ". . . gross sales or receipts of the preceding calendar year . . . ". 3) In like manner, Batangas City will not share in the gross sales generated and recorded in Makati City Sales Office. However, if Batangas City can establish that HII warehouses thereat are generating sales or accept order and/or issue sales invoices independent of the branch or sales office then said City may assess HII 100% of the gross sales or receipts transacted by said warehouse and recorded thereat. 4) Considering also that HII is either a manufacturer or producer, neither it maintains any factory, project office, plant or plantation , therefore the 70%-30% allocation will not apply in the case of Batangas City in view of the provisions of Section 150 (b) of the LGC, which provides: " Section 150. Situs of the Tax . (a) . . . . xxx xxx xxx (b) The following sales allocation shall apply to manufacturers, assemblers, contractors, producers, and exporters with factories, project offices, plants, and plantations in the pursuit of their business ." (emphasis ours) 5) HII shall be liable to Pasig City, Makati City and Batangas City for Mayor's permit and other regulatory fees and charges that may have implemented under their respective duly-enacted revenue code. AIDSTE It bears emphasis however that the foregoing views are expressed based on the information provided and in line with the provisions of Article 287 of the IRR of the LGC. However, if upon verification and investigation the same shall be proven to the contrary then the views rendered herein shall be considered null and void. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director