Bureau of Local Government Finance Opinion

March 4, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Joseph Alan Diosana Comptroller Pioneer Hi-Bred Philippines, Inc. 24/F Antel Global Corporate Center Doa Julia Vargas Avenue Ortigas Center, Pasig City Sir : This refers to your letter dated 23 November, 2010 requesting clarification regarding the applicable local business tax on the operations of Pioneer Hi-Bred Philippines, Inc. (PIONEER for brevity) in the Municipality of Polomolok, South Cotabato. As a backgrounder, on May 29, 2009, the Municipal Treasurer of Polomolok issued an Initial Assessment Notice against PIONEER for the alleged local business tax (LBT) deficiencies for 2009 in the amount of Php1,173,544.57 based on the manufacturing, producing, and exporting activities of the company in 2008, broken down as follows: Table 1 Tax As Alleged Tax Due Tax Paid by Alleged Pioneer Deficiency Manufacturer/Producer Php2,313,783.59 Php1,155,504.80 Php1,158,278.79 Exporter 15,265.78 0.00 15,265.78 Total Php2,329,049.37 Php1,155,504.80 Php1,173,544.57 ============== ============== ============== PIONEER paid the total amount of Php2,329,049.37 including the assessment for deficiency taxes amounting to Php1,173,544.57 which was "paid under protest", with the agreement that in case PIONEER can secure a favorable opinion from this Bureau, excess payments shall be tax credited for future assessments. On 26 October 2009, PIONEER through its counsel, Gerodias Suchianco Estrella Law Offices, filed a request for opinion with this Bureau for the following issues: 1) Whether PIONEER is liable for local business tax as an " exporter "; and 2) Whether PIONEER is liable to pay the full rates under Section 2A.01 of the Polomolok Municipal Tax Ordinance even though it is a "producer" of an essential commodity which is corn. In our reply letter dated November 25, 2009 this Bureau issued the following clarification on the matter, to wit: TaDAHE "On the basis of the foregoing, this Bureau expresses the view that exporters of essential commodities like corn are liable to pay the business tax only at the rate of not exceeding one-half (1/2) of the rates prescribed under subsections (a), (b) and (d) of the aforequoted Article 232. Hence, the export sales and domestic sales of such business entity shall be recorded and declared separately for local taxation purposes. It is pointed-out, however, that all exporters, regardless of whether they are exporters of essential or non-essential commodities, shall be taxable at the rate provided under Section 143, par. (c) of the LGC, quoted hereunder. . . ." On the basis of the above clarifications, PIONEER is of the opinion that the LBT payable for the year 2009 should be as follows: Table 2 Tax As Total Tax Paid Per BLGF Overpayment (including paid Opinion (Tax Credit) under protest) Manufacturer/Producer Php2,313,783.59 Php1,156,891.80 1,156,891.80 Exporter 15,265.78 15,265.78 0.00 Total Php2,329,049.37 Php1,155,504.80 Php1,156,891.80 ============== ============== ============== PIONEER "paid under protest" its LBT liability for 2010 on a quarterly basis as agreed upon with the Municipal Treasurer, pending the issuance of a ruling or opinion by this Bureau. The payments were as follows: 1) As a Manufacturer = Php689,952.01 2) As an Exporter = Php4,180.44 Total = Php694,132.45 =========== For 2010 LBT the Municipal Treasurer assessed PIONEER using the same rates which were the subject of your request for opinion, thus: Table 3 Tax As Per MTO Per BLGF-DOF Computation Opinion Manufacturer Php2,759,808.04 Php1,379,904.03 Exporter 16,721.76 16,714.25 Total Php2,776,529.70 Php1,396,618.28 ============== ============== In view of the above representations, PIONEER submitted the following calculation: Particulars Amounts Tax payable for 2010 Php1,396,618.27 Creditable payment for 2009 (Overpayment) (1,156,891.79) Taxes already paid for 2010 (quarterly payment) (694,132.25) Creditable Amount (Php454,405.77) As can be recalled, said letter dated 23 November 2010 was referred to the Municipal Treasurer of Polomolok, South Cotabato, for comment and/or appropriate action under a letter dated December 6, 2010. In reply, in a letter dated February 15, 2011, copy attached, Ms. Constancia A. Licayan , Municipal Treasurer of Polomolok, substantiated her position on the issue as follows: HECaTD 1) The application of new tax rates under the classification of an exporter and of a manufacturer for PIONEER's domestic sales is correct. The change of rates were only affected after the conduct of an examination of books of accounts of PIONEER on March 4-5, 2009 and upon the discovery of the revenue examiners of the MTO (Municipal Treasurer's Office) that PIONEER is actually engaged in the business of exportation as well as domestic sales of its product which is corn. 2) The Articles of Incorporation of the company provides that exporting is also a major market investment aside from producing, manufacturing, planting, etc. 3) The tax credit being claimed by PIONEER, based on the alleged excess amount paid for LBT liability, is not anymore possible as it was already established based on the opinion rendered by this Bureau, that PIONEER is also classified as an EXPORTER. The above premises considered, there is a clear contrast of views between PIONEER and the Municipal Treasurer of Polomolok more particularly on the tax rates of LBT applicable to PIONEER, a manufacturer and exporter entity of essential commodity. For the resolution of the case at hand, the following issues have to be resolved, namely : 1) Whether PIONEER is liable for LBT as an " exporter "; and 2) Whether PIONEER as a " manufacturer/producer " of "corn", an essential commodity under Section 143 (c) (1) of the LGC, is subject to the provision of Section 143 (a) of the LGC and as implemented under Section 2A.01 (a) of Polomolok Municipal Tax Ordinance No. 1, S. 2007; Issue No. 1. The first issue had already been resolved in our letter dated November 25, 2009, addressed to Gerodias Suchianco Estrella Law Firm, the deciding portion of which is quoted as follows: "[A]lthough PIONEER, as submitted, may not be principally engaged in the business of exporting goods and services, the abovequoted provision is clear that business entities like manufacturers and producers whose goods or services are both sold domestically and abroad may be considered as "exporter." (Underscoring for emphasis) Issue No. 2. "SEC. 143. Tax on Business. The municipality may impose taxes on the following businesses:" "xxx xxx xxx "(a) On manufacturers , assemblers, repackers, processors, brewers, distillers, rectifiers, and compounders of liquors, distilled spirits, and wines or manufacturers of any article of commerce of whatever kind or nature, . . . ." "With gross sales or receipts for the Rate of Tax Per Annum preceding calendar year in the amount of: xxx xxx xxx xxx xxx xxx 6,500,000.00 or more at a rate not exceeding thirty-seven and a half percent (37 1/2%) of one percent (1%) Further, Section 143 (c) provides: "SEC. 143. Tax on Business. The municipality may impose taxes on the following businesses:" "xxx xxx xxx "(c) On exporters , and on manufacturers , millers, producers , wholesalers, distributors, dealers or retailers of essential commodities enumerated hereunder at a rate not exceeding one-half (1/2) of the rates prescribed under subsections (a), (b) and (d) of this Section : "(1) Rice and corn ; TSHEIc "xxx xxx xxx." Based on the abovequoted Section 143 (a) of the LGC, PIONEER as a manufacturer is subject to LBT at a rate not exceeding thirty-seven and a half percent (37 1/2%) of one percent (1%) in excess of P6,500,000.00. However, considering that PIONEER, as a manufacturer is engaged in the production of corn, an essential commodity as enunciated in Section 143 (c) abovequoted, all its gross sales pertaining to the sales of said product is subject to only one-half (1/2) of the rate prescribed in Section 143 (a), supra , and as implemented under Section 2A.01 (a) of the Polomolok Municipal Tax Ordinance No. 1, S. 2007. To summarize, PIONEER, taxed as an exporter of essential commodity like corn, is subject to only one-half (1/2) of the rate prescribed in Section 143 (a) as provided under Section 143 (c), both of the LGC. As a manufacturer , PIONEER is likewise subject to the same tax rate considering that its product, corn, clearly is one of the items enumerated under Section 143 (c) and therefore falls within the classification of " essential commodity ". However, in conformity with the provisions of both the LGC and LFC 4-93, PIONEER has to record its sales and maintain separate books of accounts both for its transactions as " exporter " and " manufacturer " of its essential commodity corn. In this connection, Section 2 of LFC 4-93 is quoted as follows: "Section 2. Business Tax on Exporters. Exporters shall be subject to the business tax as follows: (a) the gross sales/receipts on goods or products sold domestically shall be subject to the business tax at rates prescribed under paragraphs (a), (b) and (d) of Section 143 of the LGC; (b) the amount of export sales as defined in Section 2(b) shall be subject to the business tax at a rate not exceeding one-half (1/2) of the rates stated in (a) above. For this purpose, the amount of export sales shall be excluded and declared separately from the total sales and shall be subject to the rates prescribed in (b) above. Failure to make this separate declaration of export sales shall subject the total sales to the rates prescribed in (a) above. " (Emphasis supplied) All the foregoing premises considered, and after establishing that PIONEER is an exporter and at the same time a manufacturer engaged in the production and selling of essential commodity corn, it is subject to one-half (1/2) of the tax rate prescribed under Section 143 (a) of the LGC thus, the LBT re-computation shall be as follows: ASaTHc COMPUTATION OF BUSINESS TAX * Per Tax Data & Assessment Form (Section 2A.01 (a) of Ordinance No. 1, S. 2007) Export Sales Tax Due Total Tax Due Total Sales: Php7,491,614.00 Less: 6,500,000.00 Php26,813.00 Php991,614.00 x 0.00375 3,718.55 Php30,531.55 2 Php15,265.78 Domestic Sales Total Sales: Php616,358,824.00 Less: 6,500,000.00 Php26,813.00 Php609,858,824.00 x 0.00375 2,286,970.59 Php2,313,783.59 2 Php1,156,891.80 ** GRAND TOTAL Php1,172,157.58 =============== Notes: 1) The illustrative Computation is based on figures per attached Assessment Notice (Initial) dated May 29, 2009 of the Office of the Municipal Treasurer, Polomolok, South Cotabato, and may differ from the viewpoint of PIONEER. 2) * Although the domestic sales of PIONEER is subject to Section 2A.01 (a) of Ordinance No. 1, S. 2007, PIONEER, being engaged in the manufacture of essential commodity corn, is only liable to one-half (1/2) of the resulting amount pursuant to Section 143 (c) of the LGC. The Municipal Treasurer is being furnished a copy of this letter for her guidance and information. We hope that this will help clarify matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director