Bureau of Local Government Finance Opinion

February 10, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Edwin T. Avillon Chief Financial Officer Republic Chemical Industries, Inc. 731 Aurora Blvd. Bagong Buhay, Quezon City Sir : This refers to your letter dated February 5, 2015 relative to the assessment made by the City Treasurer of Calamba City on your company, Republic Chemical Industries, Inc. (RCII) with Principal Office in Quezon City and Manufacturing Plant in Calamba City, Laguna. Representations are made that RCII is currently under assessment by the City Treasurer of Calamba City per Letter of Authority (LOA) No. 00443, dated May 7, 2014 for Calendar Years 2009-2013. After having submitted the required documents and after the assessments (Examination of Books of Account) , RCII received a Letter of Assessment (1st Notice) dated December 15, 2014 assessing the amount of Eight Million One Hundred Sixty-three Thousand Eighteen and 12/100 (Php8,163,018.12) based on the difference in the sales amount declared to the City of Calamba brought about by the failure of said company to apply the seventy percent (70%) situs of taxation as provided in the Local Government Code (LGC) of 1991. It was also stated that as an additional information, RCII responded on January 7, 2015 by explaining that the alleged sales amount difference was properly declared in Quezon City for which appropriate taxes were paid. Hence a request is being made on how the assessment could be resolved considering that RCII already paid the amounts of taxes, which is the subject of the Assessment Notice of the Treasurer's Office of Calamba City, to Quezon City. On the basis of the foregoing representations, the applicable provision of law is Article 243 (b) (3) of the Implementing Rules and Regulations (IRR) of the LGC, quoted as follows: "Article 243. Situs of the Tax . (a) Definitions of Terms . . . "(b) Sales Allocation (1) . . . "(2) In cases where there is no such branch, sales office or warehouse in the locality where the sale is made, the sale shall be recorded in the principal office along with the sales made by said principal office and the tax shall accrue to the city or municipality where the said principal office is located. "(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. LGUs where only experimental farms are located shall not be entitled to the sales allocation herein provided for." Upon review of the documents submitted, The City of Treasurer of Calamba, in assessing RCII of deficiency taxes, was guided by the fact that said company maintains its manufacturing plant in said city and also guided by the abovequoted provisions of the IRR of the LGC. In this connection, this Bureau finds the assessment made by the City Treasurer of Calamba in full accord of the law. AaCTcI However, considering the representations made that amounts of taxes being claimed by the City of Calamba had been paid to Quezon City the important issue that will have to be clarified is the procedure in claiming tax refund and/or tax credit of the amount illegally or erroneously collected. In this regard, Section 196 of the LGC is quoted as follows: " Sec. 196. Claim for Refund or Tax Credit . No case or proceeding shall be maintained in any court for the recovery of any tax, fee or charge erroneously or illegally collected until a written claim for refund or credit has been filed with the local treasurer. No case or proceeding shall be entertained in any court after the expiration of two (2) years from the date of payment of such tax, fee or charge, or from the date the taxpayer is entitled to a refund or credit ." (Underscoring ours) Viewed from the abovequoted provision of the LGC, the taxpayer must satisfy the requisites to be able to claim for tax refund or tax credit, viz. : 1) A written claim must be filed with the office of the local treasurer; and 2) The claim must be made within two-year prescriptive period reckoned from the date of the payment of such tax or from the date the taxpayer is entitled to a refund or credit. The first requisite provides that a written claim must be filed with the office of the local treasurer, in this case, the City Treasurer's Office of Quezon City. Such written claim should, however, be supported with the necessary documents evidencing payments made. With regard to the second condition, this Bureau believes its inapplicability for the simple reason that the taxpayer cannot be faulted for the prescription of the tax refund claim. When the tax claimed to be refunded is illegally or erroneously collected, the principle of solutio indebiti shall govern and not the two (2)-year prescriptive period pursuant to Section 196 of the LGC, supra . The principle of solutio indebiti should apply in the case at hand, thus: "In any case, a taxpayer should not be held to suffer loss by his good intention to comply with what he believes is his legal obligation, where such obligation does not really exist." (Ramie Textiles v. Hon. Ismael Mathay Sr., G.R. L-32364, 30 April 1979) Furthermore, Article 2154 under the principle of solutio indebiti , which is classified as quasi-contract under Section 2, Chapter I, both of the Civil Code, provides that: "[I]f something is received when there is no right to demand it, and it was unduly delivered through mistake, the obligation to return it arises ." And "since the collection was illegal, the obligation to return or refund the same would be in the nature of solutio indebiti, which by the Civil Code, prescribes in 6 years." (Victorias Milling Co., Inc. vs. Central Bank of the Philippines, [G.R. No. L-17798 March 31, 1965]) Relatedly, in the book of ATTY. CIPRIANO P. CABALUNA, JR., retired Regional Director of BLGF, Region VI, the following annotations states that: EcTCAD "The fact that petitioner paid thru ERROR OR MISTAKE, and the government accepted the payment, gave rise to the application of SOLUTIO INDEBITI under Article 2154 of the New Civil Code, which provides that "IF RECEIVED WHEN THERE IS NO RIGHT TO DEMAND IT, and it was UNDULY DELIVERED THROUGH MISTAKE, THE OBLIGATION TO RETURN IT ARISES ." The quasi contract of solutio indebiti is one of the concrete manifestation of the ancient principle that NO ONE SHOULD ENRICH HIMSELF AT THE EXPENSE OF ANOTHER. Hence, it would seem unedifying for the government, that knowing it has no right to collect or to receive money for alleged taxes paid, it would be reluctant to return the same." SOLUTIO INDEBITI is a quasi-contract , and the instant case being in the nature of solutio indebiti , the claim for refund must commence within six (6) years from the date of payment pursuant to Article 1145(2) of the New Civil Code." (Ramie Textile, Inc. vs. Mathay, 89 SCRA 586) Conclusively, this Bureau is of the view that RCII's entitlement to a tax credit for the payments made covering the period CY 2009 to CY 2013 is meritorious and should be given due course, and the running of the prescriptive period applicable is Article 1144 of the Civil Code, supra. Provided, however, that the claim is duly supported by evidence of payment ( e.g. , official receipts and such other proof evidencing payment). In summary, RCII should be guided as follows: 1. Settle its business tax obligations to the City of Calamba based on the 70% of all sales transacted and recorded in the principal office. 2. File a written claim for tax credit to the City Treasurer of Quezon City to be applied to its future tax obligations of the same nature as provided for under Section 196 of the LGC. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director