Bureau of Local Government Finance Opinion

January 7, 2004 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Pio B. Castillo, Jr. Executive Vice Pres. & CEO International Pharmaceuticals, Inc. Juan Luna Avenue Mabolo, Cebu City Sir : This refers to your basic letter dated July 8, 2002 requesting opinion on the situs of taxation more particularly on Sales Allocation, in the light of the conflicting interpretations on the provisions of Article 243 of the Implementing Rules and Regulations (IRR) implementing Section 150 of the Local Government Code (LGC) of 1991. Representations are made that International Pharmaceuticals, Inc. (IPI) is engaged in the manufacture of pharmaceutical products. It is represented further that both its factory and head office are located in Cebu City and that it operates branches or sales offices in various localities such as Las Pias City, Davao City, Bacolod City, Zamboanga City, Cagayan de Oro City, Dagupan City, Naga City, and the Municipality of Manapla, Negros Occidental. Sales by the Head Office are recorded in Cebu City where the corresponding local business taxes are paid while sales from branches/sales offices are recorded at the respective localities where such branches or sales offices are located and the corresponding local business taxes are paid to the city or municipality where the same is located. However, the City Treasurer of Cebu is assessing IPI seventy percent (70%) of sales made by the branches/sales offices of which the local treasurers concerned are not agreeable since it would affect their respective revenue collections. Section 150 of the Local Government Code (LGC) of 1991 as implemented under Article 243 (b) (1) of the IRR, is quoted hereunder provides as follows: " ART. 243. Situs of the Tax. x x x. "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 . (Underlining supplied) "xxx xxx xxx." From the aforequoted provisions of Article 243 (b), it is clear that all sales or receipts made in the branch or sales office shall be recorded therein and taxable by the Local Government Unit (LGU) where such branch or sales office is located. Clearly, the LGU where the head office and factory are situated will not have a share in the sales or receipts made by the branches or sales offices. The city or municipality where the head office or factory is located may legally share in the sales or receipts only under conditions prescribed under Art. 243 (b) (3) of IRR implementing Section 150 of the LGC, as follows: " ART. 243. Situs of the Tax. x x x. "xxx xxx xxx. "(b) Sales Allocation. (1) x x x. "xxx xxx xxx. (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. x x x." However, in the spirit of fairness, this Bureau wrote a letter dated September 20, 2002 to the City Treasurer of Cebu for comment. In response, the City Treasurer of Cebu, consistent with her previous stand, insisted that the seventy percent (70%) of all sales made by your branch/sales offices should be taxable in said city considering, that all sales are allegedly recorded at the principal office located in Cebu City. In addition, she asserted that the IPI's consolidated financial reports show that all sales made by various branches/sales offices are recorded at the principal office. On the other hand, that Office, in a follow up letter dated 25 November 2003, attached photo copies of Mayor's permits issued by different LGUs where IPI has branch or sales office, to prove that indeed IPI's branches/sales offices are paying their local business taxes to the respective LGU where such branch or sales office is located. In view of the foregoing, this Bureau expresses the view that the City Government of Cebu may not have a share in the said local business taxes pursuant to Section 150 of the LGC as implemented under Article 243 of the IRR of the same Code. It is hoped that this clarifies matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director ATTACHMENT Bureau of Local Government Finance Opinion December 4, 2002