Bureau of Local Government Finance Opinion

December 16, 2010 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully returned to the ICO-Regional Director for Local Government Finance, Department of Finance, 2nd Floor, Land Bank of the Philippines Building, 84 Harrison Road, Baguio City, his within letter dated August 25, 2010, seeking clarification, in behalf of the Municipal Government of Itogon, Province of Benguet, relative to the collection of local business tax (LBT) and Mayor's permit fee from Philex Mining Corporation (Philex for brevity) for its mining operations in the said locality. Based on the attached series of communications between LGU-Itogon and Philex, the following information was established: 1) In a letter dated February 4, 2010, Ms. Angela C. Cario, Municipal Treasurer of Itogon, Benguet, requested Philex to submit a true and complete return setting forth the gross receipts of the Company (Philex) for its mining operations covering the period 2003-2009 for purposes of determining the taxes, fees and charges due; ECDaAc 2) In reply, under a letter dated 19 February 2010, Mr. Eulalio B. Austin, Jr. VP/Resident Manager of Philex refuted the request of Treasurer Cario citing the following objections: (a) There exists a prohibition under the Local Government Code (LGC) of 1991 against the imposition of Excise Taxes on articles enumerated under the National Internal Revenue Code (NIRC) and Percentage or Value-added Tax (VAT) sales, barters or exchanges or similar transaction on goods or services except as otherwise provided in the LGC, citing Section 133 (h) of R.A. No. 7160 (LGC); (b) If Philex accedes to the demand of LGU-Itogon, it will result in double taxation ; (c) Based on the records of the Mines and Geosciences Bureau (MGB), there are no sales transactions that are being conducted/recorded within the Municipality of Itogon because these are already done in Pasig City where the head (perhaps, principal office) of the Company is located; and DcAaSI (d) Philex is not extracting ores within the territory of the Municipality of Itogon. 3) On the other hand, under a letter dated March 15, 2010, the Municipal Treasurer of Itogon, issued the following comments: (a) What the Municipality of Itogon is trying to impose is not the Excise Tax on mineral products which Philex is already paying to the National Government but rather the Mayor's permit fee and business tax on its mining operations within the territorial jurisdiction of Itogon; (b) The imposition of said Mayor's permit and LBT does not constitute double taxation as the same (Excise Tax and LBT) are imposed by two separate and distinct taxing authorities, specifically the National Government and the Municipal Government of Itogon; and (c) Local Finance Circular No. 2-09 dated August 20, 2009, in effect, prescribes the guidelines governing the power of provinces, cities and municipalities to impose taxes, fees and charges in mining companies pursuant to the pertinent provisions of the LGC and its Implementing Rules and Regulations (IRR). SDIaHE 4) On 07 June 2010, Mr. Eulalio B. Austin, Jr., in reply to the preceding communication of Ms. Cario, took exception to the contents of said letter dated March 15, 2010, the particular portions of which are as follows: (a) Based on Article F Municipal Ordinance No. 15-S-2002 ("Ordinance"), LGU-Itogon is imposing a 2% tax based on the gross receipts of the preceding year of mining operation, which, in effect, is a percentage tax, a prohibition under the aforementioned Section 133 (h) of the LGC; (b) That although Article F of the Ordinance relates to the business tax, the rules on situs of the tax under Section 150 of the LGC and Article 243 (b) (5) of the IRR shall be complied with. He mentioned however, that in the tax ordinance, "the mining area is declared to be the only place of taxation" which runs contrary to Section 150 of the LGC or the situs of taxation; SDIaCT (c) That there is an ongoing boundary dispute between the Municipalities of Itogon and Tuba, wherein the Ordinance provides that " in case the mining area covers two or more local government units, payment shall be made to the 'municipality having the largest area' "; and (d) LFC 2-09 is not self-executory and its provisions are merely guidelines which must be implemented through a local ordinance, thus, there is no basis for LGU-Itogon to collect from Philex. Item No. 1 The request of the Office of the Municipal Treasurer to Philex to submit a true and complete return setting forth the gross receipts of the Company (Philex) for its mining operations covering the period 2003-2009 for purposes of determining the taxes, fees and charges due is within the inherent functions of the Office. It must be stressed that the assessment/determination of the true and correct gross sales/receipts of a taxpayer is the initial step to be taken before arriving at the resultant tax due. TDcEaH The Office of the Municipal Treasurer, in particular, and LGU-Itogon, in general, has the right to demand from any taxpayer within its territorial jurisdiction examination not only of books of accounts but also other pertinent records for proper ascertainment of the correct gross sales and eventually correct tax due of the taxing authority concerned. With regard to the Mayor's permit, Philex must be reminded that even if it has an existing mining agreement with the national government, such agreement does not exempt it from the Mayor's permit issued by a local government unit that hosts such mining activity. Further, it is worth mentioning that the imposition of the Mayor's permit and/or business permit fees proceeds from the power of LGUs to regulate any business, activity or undertaking conducted or to be conducted within their territorial jurisdictions. This power to regulate emanates from police power which is expressly provided under Section 16 (General Welfare Clause) of the LGC. Business establishments are subject to these regulatory fees unless expressly declared by law to be exempt therefrom. Item No. 2 & 3 The stand taken by Philex on the issue of LBT being imposed on its gross sales for the preceding years (2003-2009), with reference to Section 133 (h) of the LGC, is to our view, not correct. To substantiate, let us consider the following: TAHCEc Sub-item 2 (a) A careful analysis of the provisions of the LGC, specifically Section 133 (h) and Section 143 (h) will prove that LGUs are not absolutely restrained from imposing a percentage tax on gross sales of a business entity. What is certain is that LGUs are authorized to impose LBT pursuant to Section 143 (h) which provides: " SEC. 143 . Tax on Business . The municipality may impose taxes on the following businesses:" xxx xxx xxx "(h) On any business, not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, however, That on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year . ( Boldfacing and underscoring supplied for emphasis ) TADcCS Philex' claim that it is not liable for LBT imposed under the Ordinance of Itogon, appears to be correct based on Section 133 (h), when it provides that " the taxing powers of provinces, cities, municipality, and barangays shall not extend to the levy of . . . Excise tax on articles enumerated under the National Internal Revenue Code , as amended, . . . ." Mr. Austin claimed further that the prohibition or specific limitations on the taxing powers of LGUs include the provisions that LGUs cannot impose not only Excise Tax on articles enumerated under the NIRC, as amended, but Percentage or Value-added Taxes on sales, barters or exchanges or similar transactions on goods or services. However, a careful reading of Section 143 (h), supra , clearly manifests that an LGU may tax any business subject to the excise, value-added or percentage tax under the NIRC but at a rate not exceeding two percent (2%) of gross sales or receipts of the preceding calendar year. For purposes of clarification, the nature of excise taxes is that they are imposed directly on specific goods and therefore, they are taxes on property ( See Medina vs. City of Baguio, 01 Phil. 854 ). " A tax is not excise where it does not subject directly the produce or goods to tax but indirectly as an incident to, or in connection with, the business to be taxed. " ( Petron Corp. vs. Mayor Tiangco, et al., G.R. No. 158881, citing Nolledo, The National Internal Revenue Code annotated [5th ed., 1994] pp. 471-472 ) IDCScA In the case of Philex, LBT is not imposed directly on the articles (ores extracted) but rather on the gross sales/receipts it realized during the preceding years (2003-2009) and therefore, such imposition does not fall squarely on either excise, percentage or value-added taxes as contemplated under the provisions of the NIRC. It is a basic precept in statutory construction that " in interpreting statutory provisions on municipal fiscal powers, doubts will have to be resolved in favor of municipal corporations. " Moreover, " [S]uch policy is also echoed in Section 5 (a) of the Code (LGC), which states that "[a]ny provision on a power of a local government unit shall be liberally interpreted in its favor, and in case of doubt, any question thereon shall be resolved in favor of devolution of powers and of the lower local government unit. ( Petron Corp. vs. Mayor Tiangco, et al., G.R. No. 158881 ) Further, it may be observed that Section 133 precedes Section 143 and in this sequential order, Section 133 (h) cannot in any way, amend, modify or repeal Section 143 (h), which is the later provision in the order of sequence. Suffice it to say, unless there is another provision in the LGC or for that matter of another law, which will refute Section 143 (h), then the same, broad in scope as it is, would certainly cover the mining operation of Philex even if it is already paying excise tax under the NIRC. HDIaST Sub-item 2 (b) On the issue raised by Mr. Austin that once Philex agrees to the demand of the Municipal Treasurer for the payment of LBT, it will result in " double taxation ", it may be emphasized that unless the levy is imposed twice by the same taxing authority on the same tax base and for the same purpose, such will not result to double taxation. Aptly stated, excise, percentage or value-added taxes are imposed by the National Government pursuant to NIRC, while LBT is imposed by LGU-Itogon pursuant to the pertinent provisions of the LGC as implemented under its duly-enacted tax ordinance and therefore, double taxation is of no moment. Sub-item 2 (c) The allegation based on the records of MGB that no sales transactions are being conducted/recorded in the Municipality of Itogon because these are already done in Pasig City where the head office of the Company is located, is not acceptable even if Philex presents the document to support its assertion. In this connection attention is invited to Article 243 of the IRR implementing Section 150 of the LGC, quoted as follows: cDAEIH "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. 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 sales office shall be considered as a sales office. TADaES On the other hand, Section 2 of LFC 2-09, provides the following definition of terms: " Head Office refers to the main office of the mining company indicated in pertinent documents submitted to the Securities and Exchange Commission (SEC) and to other appropriate agencies. The city or municipality specifically mentioned in the Articles of Incorporation and official registration papers as being the official address of said "Head Office" shall be considered as the site thereof." Section 2 further provides as follows: " Mining Area shall mean a portion of the contract area identified by the contractor ( mining company ) for purposes of development, mining, utilization and sites for support facilities or in the immediate vicinity of the mining operations. Mining area shall be synonymous to project site ." ( Underscoring for emphasis ) HTAEIS " Project Office shall mean a fixed office of a mining company in the mining or project site." Assuming, for the purpose of discussion, that Philex sales transactions are recorded 100% at its head office in Pasig, still it does not preclude LGU-Itogon from collecting LBT from Philex for its gross sales or receipts realized for the period 2003-2009. This ratiocination is based on Section 4 of LFC No. 2-09 dated August 20, 2009 quoted hereunder. It may be mentioned that LFC was issued "PRESCRIBING THE GUIDELINES GOVERNING THE POWER OF PROVINCES, CITIES AND MUNICIPALITIES TO IMPOSE LOCAL TAXES, FEES AND CHARGES ON MINING COMPANIES PURSUANT TO THE PERTINENT PROVISIONS OF REPUBLIC ACT NO. 7160, OTHERWISE KNOWN AS THE LOCAL GOVERNMENT CODE OF 1991 AND ITS IMPLEMENTING RULES AND REGULATIONS IRR , thus: "Section 4. Situs of the Tax . For purposes of collection of the tax, the following shall apply: (a) All sales/transactions filed with or negotiated in the branch office in the mining area shall be recorded therein and the gross receipts derived from said transaction shall be taxable by the city or municipality where such branch office is located. EIDATc In cases where there is no such branch or sales office in the city or municipality where the sale or transaction is made, the sale/transaction shall be duly recorded in the principal office and the taxes due shall accrue and shall be paid to such city or municipality. (b) The following sales allocation shall apply to manufacturers, contractors , producers, processors and exporters with project offices/mining areas in the pursuit of their business: (1) 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 (2) 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. CSHEAI In the case of mining areas that are geographically located in two (2) or more localities, the allocation of the business tax imposed by LGUs concerned shall be decided by the "Committee" which will be created in localities where there are mining operations." Sub-item 2 (d) With regard to the declaration that Philex is not extracting ores within the territory of the Municipality of Itogon, Province of Benguet, this Bureau declines to comment or issue any opinion for lack of information as basis of our action. Item No. 4 Sub-item 4 (a) The 2% rate of levy for local business tax pursuant to Article F Municipal Ordinance No. 15-S-2002 does not constitute the imposition of a Percentage Tax as contended. Such rate finds basis in Section 143 (h) abovequoted but is re-quoted for clarification, to wit: " SEC. 143 . Tax on Business . The municipality may impose taxes on the following businesses:" HEacAS xxx xxx xxx "(h) On any business , not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, however, That on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year . ( Boldfacing and underscoring supplied for emphasis ) It may be observed that the qualifying expression that differentiates an LBT from a percentage tax is the phrase "gross sales or receipts of the preceding calendar year". In the case of a percentage tax, the tax is levied directly on sales, barters or exchanges or similar transactions on goods or services . Sub-item 4 (b) Once again, this Bureau declines any comment on the issue raised by Mr. Austin for the simple reason that this Bureau does not have a copy of the Ordinance mentioned or excerpt thereof, in which case, any expression of opinion will be presumptuous and may be bereft of any factual basis. cEATSI However, on the issue relating to situs of taxation, the same has already been discussed above and needs no further discussion. Sub-item 4 (c) We agree with the observation of Mr. Austin pertaining to a specific provision of the Ordinance which allegedly states that " in case the mining area covers two or more local government units, payment shall be made to the municipality having the largest area ". Needless to say, local taxation is governed primarily by the LGC and one of the governing provisions is the situs of taxation under Section 150 thereof which is presented in a more detailed fashion by Article 243 of the Implementing Rules and Regulations implementing said Section 150. Sub-item 4 (d) Mr. Austin may be correct in saying that the provisions of Local Finance Circular No. 2-09, on condition that its issuance is within legal bounds, is not self-executory, meaning, that there must be an enabling tax ordinance or revenue measure enacted for the purpose. Relative hereto, it may be stated that guidelines like Local Finance Circulars, issued by this Department relative to the levy and administration of local taxes, fees and charges pursuant to Article 287 of the IRR are only intended to, among others: SECIcT (a) guide local elective officials in the enactment of local tax ordinances or revenue codes; (b) guide local treasury offices in collecting taxes and other local impositions, as well as in determining or computing tax discounts or penalties and surcharges, and (c) inform the taxpaying public as to the proper interpretation and application of the law and rules governing local taxation, Such guidelines, however, cannot, as they are not meant to, amend provisions of law, particularly the LGC of 1991. In view of all the foregoing discussions, it is hoped that we have adequately addressed all concerns, with the end in view that this will help clarify matters both for LGU-Itogon and the taxpayers, particularly Philex Mining Corporation. HCTDIS Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director