Bureau of Local Government Finance Opinion

April 29, 2003 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 2nd Indorsement Respectfully returned to the OIC, Regional Director for Local Government Finance, Cordillera Administrative Region, 2nd Floor, LBP Building, Harrizon Road, Baguio City, the herein preceding indorsement relative to the letter dated January 17, 2003 of Hon. Nestor B. Fongwan, Municipal Mayor of La Trinidad, Benguet, requesting opinion/comments on the retirement of the distributorship business of Philip Morris Philippines, Inc. (PMPH) and the registration as cigarette manufacturer of Philip Morris Philippines Manufacturing, Inc. (PMPMI). HCSEcI Under a letter dated January 13, 2003 of Atty. Carmen Laysa-Herce, Tax Manager of PMPMI, representations are made that Marlboro and Philip Morris products were introduced in the Philippine market in 1955 when Philip Morris International entered into an exclusive license agreement with local manufacturer, La Suerte Cigar and Cigarette Factory. That in 1995, PMPH was established to manufacture proprietary flavors to be supplied to La Suerte whereupon in June 2000, it took over the exclusive distributorship of the licensed products in the Philippines. That PMPH flagship brands were previously produced at La Suerte's manufacturing plant in Paraaque City, and distributed through the sales and distribution network located all over the country, thus, PMPH is registered as a cigarette distributor. Representations are made further that sometime in 2000 a Board Approval was secured for the construction of a modernized cigarette manufacturing plant in the province of Batangas and an affiliate company PMPMI was established for the purpose. Said plant will support the growing tobacco business in the Philippines, its product of which shall be exported to the rest of the Asia-Pacific region. It started commercial production of Marlboro and Philip Morris brands in November 2002. That upon operation of the new plant, approval from the Securities and Exchange Commission was secured for the merger of PMPH (The Distribution Company) and PMPMI (The Manufacturing Company) with the latter being the servicing corporation. Said merger became effective on January 1, 2003. In view of the above, it is the contention of the Tax Manager that inasmuch as PMPMI is engaged in the manufacture of cigarettes, other tobacco products and non-tobacco materials, the distribution thereof is incidental to its line of business thus, retiring the distributorship business of PMPH and registering PMPMI as a manufacturer. It appears that as of the time of its retirement of business in December 31, 2002, PMPH has already paid business taxes in the said municipality amounting to P2,018,964.08. On the other hand, for the period of January 1, 2002 until the time of its retirement of business, PMPH realized gross sales of P427,569,915.67, thus the business tax due on this amount of gross sales would be P2,137,849.58. Citing the provisions of Section 145 of the Local Government Code (LGC) of 1991, quoted hereunder, it is contended that PMPH should only be required to pay the additional business tax pertaining to the difference of P118,885.50. cSDIHT "Sec. 145. Retirement of Business . A business subject to tax pursuant to the preceding sections shall, upon termination thereof, submit a sworn statement of its gross sales or receipts for the current year. If the tax paid during the year be less than the tax due on said gross sales or receipts of the current year, the difference shall be paid before the business is considered officially retired." Hence, the following requests of PMPMI: 1. PMPHI to be registered as a manufacturer in La Trinidad, Benguet beginning January 1, 2003; 2. The distributorship business of PMPH be considered retired as of December 31, 2002; 3. The business tax liability of PMPH as a retiring business be limited to the difference pursuant to Section 145 of the LGC and as interpreted by the BLGF-DOF in its decision dated July 26, 2001; and 4. The issuance of a tax credit certificate or refund in favor of PMPMI in the event of an overpayment of local business taxes by PMPH upon the retirement of the latter. In this connection and on the basis of the above representations, it may be stated that PMPH's business has not been retired or terminated. Rather, a transfer of ownership occurred between PMPH and PMPMI. In case of a retiring business, what the law contemplates under Article 241 of the Implementing Rules and Regulations (IRR) implementing Section 145 of the LGC is a complete cessation or stoppage of business operations. The circumstances obtaining in the case of PMPH is not one of termination because the business continues under a new name. There is no newly-started business in the real sense of the word neither could the same business be considered as officially terminated for purposes of computing the tax due on retiring business. PMPMI, as the new owner of the business, is charged with the knowledge that it will have to assume or shoulder the payment of all the taxes due on the business, in the same manner that it carried over to its books the former owner's prepaid taxes. In view of the foregoing, PMPMI is liable to the payment of the full amount of P2,137,849.58 corresponding to the gross sales realized by the business from January 1, 2002 to December 31, 2002. Be guided accordingly. HEaCcD (SGD.) MA. PRESENTACION R. MONTESA Executive Director