Bureau of Local Government Finance Opinion

January 10, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Esther R. Ibaez Chato & Vinzons-Chato Law Offices 8th Floor, Strata 2000 F. Ortigas Jt. Road Ortigas Center 1605 Pasig City Madam : This refers to your letter dated January 4, 2011, requesting in behalf of your client, Crown Asia Compounders Corporation (Crown Asia for brevity) confirmation that its administrative office in Quezon City is not liable for business tax. Representations are made that Crown Asia is a domestic corporation engaged in the business of manufacturing plastic products with principal office at KM 33 McArthur Highway, Bo. Tuktukan, Guiguinto, Bulacan, where the following activities are conducted: a. Production; b. Executive Office receiving and processing of deliveries to customers; c. Issuance of sales invoices and processing of deliveries to customers; d. Delivery of goods to customers; cIHDaE e. Keeping of books of accounts; f. Purchasing and internal audit; and g. Logistics Moreover, its warehouses and factory are also located in Guiguinto, Bulacan where the following offices are situated: a. Executive offices; b. Human Resources Office; c. Research and Development/Quality Assurance; and d. Engineering and Maintenance. Likewise, Crown Asia maintains an administrative office in Timog Ave., Quezon City which houses the following offices: a. Extension of executive office for administration of Branch purposes; b. Treasury delivery of salaries/petty cash to Branch employees; and c. Property Administration of Branch properties. As informed by that Office, the administrative office which was registered with the Quezon City (QC) local government as "Administrative Office" regularly pays its mayor's permit fee and other regulatory fees. IcTEaC It is claimed that the QC local government issued a letter of authority dated September 17, 2010 seeking to examine Crown Asia's books of accounts and other pertinent records of its business for the following purpose: ". . . to ascertain, assess and collect the correct amount of the taxes, fees and charges due from you during the period from the unexamined years to December 31, 2009." Hence, in compliance with the aforesaid authority, Crown Asia submitted the following documents on October 11, 2010: a. Community tax certificate; b. Business permit; c. Official receipts and tax bills for Timog Office for the years 2009 to 2010; and d. Letter of confirmation of audit for the years 2005 to 2007. It is likewise informed that on December 6, 2010, an ocular inspection of the Timog office was conducted. The QC local government claimed that Crown Asia's Timog office is subject to business tax as it allegedly generates sales orders and receives collections, thus partakes the nature of generating sales. The QC local government likewise requested that the books of records of the principal office be inspected. However, that Office maintains that its client's administrative office in Timog Ave., Quezon City is not liable for business tax stating that from the provisions of Section 150 of the Local Government Code (LGC), it can be gleaned that the following are liable to pay business tax to the city or municipality where they are located at the rates prescribed by the LGC: a. principal office; b. branch; c. sales outlet; d. factories; e. project office; and f. plants and plantations in the pursuit of their business. DTEAHI On the basis of the abovesaid Section that Office contends that Crown Asia's administrative office shall not be liable for the payment of business tax as it does not qualify as a branch, sales outlet, factory, project office, plant or plantation as defined in Article 243 (a) of the Implementing Rules and Regulations of the LGC. Generating sales orders and receiving collections are insufficient to hold an office liable for business tax as long as it does not generate sales. The administrative office in Quezon City does not generate sales, hence, it cannot qualify as a branch or sales outlet subject to the imposition of business tax. In this connection, please be informed that this Bureau has consistently expressed the view that an administrative office shall not be subject to the local business tax considering that it is merely maintained for the following purposes: 1. serves as a showroom, display area; 2. houses supplementary offices to perform purely corporate and administrative matters; 3. monitoring bases of orders placed by prospective buyers However, in resolving the above issue, this Bureau takes cognizance of the provisions under Section 150 of the LGC as implemented by Article 243 (a)(2) and (b)(1) of the Implementing Rules and Regulations (IRR), quoted 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: "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. 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 sales office shall be considered as a sales office . (Underlining supplied) "xxx xxx xxx. "(b) Sales Allocation (1) All sales made 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. "xxx xxx xxx." It must be pointed out that in the aforequoted provision, the use of the conjunction and/or in the statement connotes that a warehouse may be considered as a sales office under the following scenarios: HcSCED (1) if the warehouse accepts orders only but does not issue sales invoices; (2) if the warehouse does not accept orders but issues sales invoices; and (3) if the warehouse accepts orders and issues sales invoices. Similar to a warehouse, an administrative office that accepts orders and receives collections shall be considered as a sales office. Accordingly, and in view of the findings of the Quezon City local government that Crown Asia's Timog office generates sales orders and receives collections, said administrative office shall be liable to pay the business tax. Crown Asia is likewise required to pay the Mayor's permit fee and other regulatory fees imposed by said city. We hope that this will help clarify matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director