Bureau of Local Government Finance Opinion

March 10, 2003 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Joselito M. Laniwan Licensing Officer Catarman, Northern Samar Sir : This refers to your letter dated January 12, 2003 requesting assistance on the following queries: "1. Real properties such as commercial buildings and other businesses operated and owned by the diocese. These buildings were leased to businessman. Query: Are they liable to pay business license as real estate lessor? Are they liable to pay real property taxes? Mayor's Permit? caTIDE "2. Private educational institution (kindergarten, elementary, secondary, tertiary and post graduate studies) and private technical schools ( i.e., computer school, etc.) Query: Are they liable to pay business license? Mayor's permit? Are they liable to pay real property tax? "3. Professionals exercising their profession (doctors, dentist, optometrist, lawyers etc. with regards to their clinics) Query: Are they liable to pay business license? Mayor's Permit? "4. Gasoline Station (Caltex, Shell, Petron, etc.) Query: Are they liable to pay business license? Regulatory Fees? Real property tax? "5. Contractors (all types) EAIcCS We know that they are liable to pay business license, our problem starts when they willfully misdeclare their gross receipts from the preceding year or not telling at all that they have projects last year they just simply say "we don't have projects so my taxes would be the same as last year." Worst, they would never bother to get a business permit and license. Our municipality is the capital town of our province so most of the offices of the national government were located here ( i.e., DPWH, NIA, DECS, etc.). Infrastructure projects such as roads, bridges, buildings, etc., were all bidded here in our municipality and awarded mostly to our local contractors, but still they refuse to declare their contract price. Almost, if not all, infrastructure projects implemented by the different national agencies were bidded here. The perfection of the contract was also made in our municipality. Projects awarded to other contractors aside from the local ones, were permitted by the national agency concerned with the implementation of said project even without the necessary business permits and licenses. Query: Is the provision of Section 150 of the R.A. 7160 applicable to contractors of all types? Is there a possibility to require such national agencies like DPWH to divulge to us the names of the contractors transacting business with them and their corresponding gross receipts from such transaction (maybe a certified copy of the voucher wherein the contractor is the payee)? Is there any law, rules and regulations or national policy which govern the situs of taxation of contracts of infrastructure projects like as to whose LGU's jurisdiction to tax the contractor? Is it in the LGU where the contract was perfected or in the LGUs where the contract was consummated? Is it valid not to issue business permit and/or license to contractors not yet accredited by the Philippine Contractors Accreditation Board? "6. Banks (private & GFI's) & Financial Institutions (pawnshop, insurance co., lending investors, money shops, etc.) Query: What appropriate document should we require from this business establishments that could fairly show their gross receipts/sales from the preceding year? We usually require the comparative Financial Statement particularly Income Statement from the last two preceding years. Nevertheless, they cannot comply with this, in the case of private banks and GFI's they just submit a certification of their gross income/receipts from the preceding year. ETHCDS "7. Public Utility Vehicle (Jeepneys, bus, mega-taxis, multi-cabs, etc.) Query: Are they liable to pay Mayor's Permit? Regulatory fees? "8. Electric Cooperatives Query: Are they liable to pay business permits/licenses? Real property tax? "9. Community Development Tax Certificate Query: It is possible to have a memorandum of agreement between LGU's and the National Government, including its agencies, bureaus, GOCC, GFI's that requires the latter to furnish the former with the list of the annual salaries of the employees residing within the jurisdiction of the said LGU in connection with its collection of the Community Development Tax Certificate? DTAESI On Issue No. 1 The Local Government Code (LGC) of 1991 specifically provides that a local government unit may impose a business tax based on the gross sales and/or receipts realized by a business entity for the preceding year. Section 131 (d) of the same Code states that "Business means trade or commercial entity regularly engaged in as a means of livelihood or with a view of profit." Moreover, real estate broker includes any person, other than a real estate salesman as hereinafter defined, who for another, and for a compensation or in the expectation or promise or receiving compensation, (1) . . .; (3) or leases or offers to lease or negotiates the sale, purchase or exchange of a lease, or rents or places for rent or collects rent from real estate or improvements thereon; . . . . (Sec. 3 (e-2), Local Tax Code) On the basis of the above provisions, the municipality may conduct an ocular inspection to verify as to whether or not the diocese can qualify as real estate broker for purposes of local taxation. It must be stressed that a one-time or an isolated transaction cannot be regarded as a "business" as defined in the abovementioned provision, thus the same shall not be subject to the local business tax. However, the income derived from the rental of said buildings shall be subject to the income tax imposed by the national government. AHCaED It is worth mentioning that the municipality may impose a business tax on the business regularly engaged in by the lessor of the commercial buildings owned by the diocese. On Issue No. 2 In a ruling of the Ministry of Finance dated February 25, 1983, it was opined that schools are not business establishments. Moreover, under the 1987 Constitution, educational institutions are granted tax exemption as provided for in the following provisions: "Art. VI, Sec. 28, . . . (3) Charitable institutions, churches and parsonages or convents appurtenant thereto, mosques, non-profit cemeteries, and all lands, buildings, and improvements actually , directly, and exclusively used for religious, charitable, or educational purposes shall be exempt from taxation. (Underscoring supplied) xxx xxx xxx. "Art. XIV, Sec. 4, . . . aTHCSE (3) All revenues and assets of non-stock, non-profit educational institutions used actually, directly and exclusively for educational purposes shall be exempt from taxes and duties." The above constitutional provisions expressly grant exemption to non-stock and non-profit educational institutions. However, there are educational institutions which are operated for profit or for business purposes, hence, the said ruling of the Ministry of Finance that schools are not business establishments should be qualified. It depends on whether the educational institution is a stock or a non-stock corporation. Accordingly, if such private educational institutions are organized as non-profit, non-stock educational institutions, the same shall be exempt from the local business tax. On the other hand, privately-owned educational institutions which are organized as stock corporations are considered as operating for profit, thus engaged in business and therefore, subject to local business tax and other regulatory fees. Hence, the municipality may require said educational institutions to submit their Articles of Incorporation in order to determine whether the same are stock or non-stock corporations. It must be pointed out, however, that there is no specific provision in the LGC expressly subjecting schools to local taxes. In this regard, attention is invited to Article 232 (h) of the Implementing Rules and Regulations (IRR), implementing Section 143 (h) of the Code, which provides thus: DaTICE "Article 232. Tax on Business . The municipality may impose taxes on the following businesses: "(a) . . . "(h) On any business, not otherwise specified on the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, 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. "xxx xxx xxx." The abovequoted provision is a "Catch-all" provision of the Code. This means that any business not specifically covered by the preceding paragraph of the said provision may be subjected to business tax. On Issue No. 3 Section 139 (b) of the LGC provides as follows: aHADTC "Sec. 139. Professional Tax . (a) . . . "(b) Every person legally authorized to practice his profession shall pay the professional tax to the province where he practices his profession or where he maintains his principal office in case he practices his profession in several places; Provided, however, That such person who has paid the corresponding professional tax shall be entitled to practice his profession in any part of the Philippines without being subjected to any other national or local tax, license, or fee for the practice of such profession. "xxx xxx xxx." On the other hand, Section 147 of the same Code provides as follows: "Sec. 147. Fees and Charges . The municipality may impose and collect such reasonable fees and charges on business and occupation and, except as reserved to the province in Section 139 of this Code, on the practice of any profession or calling, commensurate with the cost of regulation, inspection and licensing before any person may engage in such business or occupation, or practice such profession or calling." It may be deduced from the aforequoted provisions of Sections 139 and 147 of the Code that: EAISDH 1. The exemption of a professional from any national or local tax, license, or fee after payment of the professional tax is for the practice of his profession. 2. The income or receipts derived from the exercise of such profession are not deemed exempt from national taxes, as for example the income tax, or from local taxes imposed on the business he is engaged in. 3. A professional, however, may be considered exempt from the Mayor's permit fee but if he is engaged in business like operating a medical or dental clinic, the business or clinic shall be subject to the Mayor's permit fee and such other regulatory fees or service charges imposed by local government units. Moreover, it may be stated that the professional tax is a tax on the professional imposable by a province, or city, while the business tax is a tax on the business based on gross receipts levied by a municipality or city. As regards the Mayor's permit fees, the same are enacted under the police power and it is mandatory for the owner or operator of any business or calling to secure such permit from the local government unit concerned before its operation. However, the amount thereof should be reasonable and commensurate to the cost of regulation, inspection and licensing. It should not be based on capital investment or gross receipts by the person or business liable thereof pursuant to Article 233 of the IRR, implementing Section 147 of the Code. DaScAI In view thereof, a Mayor's permit fee may no longer be collected from professionals who are paying the professional tax like doctors and dentists. However, if they maintain a clinic, the operation of such clinic shall be subject to the payment of Mayor's permit fee, the business tax based on gross receipts, as well as the regulatory fees or service charges imposed by the cities or municipalities. On Issue No. 4 Article 232 (h) of the IRR implementing Section (h) of the LGC, provides as follows: "Article 232. Tax on Business . . . . . "(a) . . . "(h) . . . any business engaged in the production, manufacture, refining, distribution or sales of oil, gasoline and other petroleum products shall not be subject to any local tax . . . ." It is clear from the abovequoted provisions that any business engaged in the production, manufacture, refining, distribution or sale of oil, gasoline and other petroleum products shall not be subject to any local tax. However, the business tax on sale of tires, batteries, and accessories (TBA) as well as for other services that gasoline dealers or stations are rendering to their customers or clientele may be collected. aESTAI It bears emphasis that gasoline stations shall still be liable to pay the Mayor's permit and other regulatory fees or service charges that the local government unit may impose, the exemption being applicable to local taxes only. On Issue No. 5 Section 132 (h) of the LGC provides that contractor includes persons, natural or juridical, not subject to professional tax under Section 139 of this Code, whose activity consists essentially of the sale of all kinds of services for a fee, regardless of whether or not the performance of the service calls for the exercise or use of the physical or mental faculties of such contractor or his employees. On the other hand, Section 150 (a) of the LGC provides as follows: "Sec. 150. Situs of the Tax . (a) For purposes of collection of the taxes under Section 143 of this code, manufacturers, assemblers, repackers, brewers, distillers, rectifiers and compounders of liquor, distilled spirits and wines, millers, producers, exporters, wholesalers, distributors, dealers, contractors , banks and other financial institutions, and other businesses, maintaining or operating branch or sales outlet elsewhere shall record the sale in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the municipality where such branch or sales outlet is located. In cases where there is no such branch or sales outlet in the city or municipality where the sale or transaction is made, the sale shall be duly recorded in the principal office and the taxes due shall accrue and shall be paid to such city or municipality. (Underlining supplied) cHCaIE "xxx xxx xxx." It may be noted from the abovequoted definition that the term contractor shall include all contractors without any distinction and be covered by the provisions of Section 150 of the LGC. Moreover, enclosed for your information and reference is a copy of Local Finance Circular No. 3-95 dated May 22, 1995 of the Department of Finance prescribing guidelines governing the power of cities and municipalities to impose business tax on construction contractors pursuant to Section 143 (e) of the LGC. Section 5 (b) of LFC No. 3-95, quoted hereunder shall apply: "Section 5. Situs of Tax . "(a) . . . "(b) For purposes of collection of the tax, the following rules shall apply: (1) All gross receipts realized from domestic projects or contracts undertaken by the branch office shall be recorded in the said branch office and the tax thereon shall be payable to the city or municipality where the said branch is located; TEAICc (2) In cases where there is no branch office, the gross receipts from domestic projects or contracts shall be recorded in the head/principal office and the same shall be allocated as follows: (i) Thirty percent (30%) of the gross receipts shall be taxable by the city or municipality where the principal office is located; and (ii) Seventy percent (70%) of the gross receipts shall be taxable by the city or municipality where the project office is located. (3) In cases where there are two (2) or more project offices located in different localities, the seventy percent (70%) allocation stated in subparagraph (2) (ii) above shall be prorated among the localities where such project offices are located in proportion to the work accomplished. "xxx xxx xxx." The municipality may request the necessary information from the DPWH like the name of contractors transacting business with them and the cost of projects for purposes of local taxation. EHCcIT The municipality may likewise require the contractors to submit a copy of the contract of projects to be undertaken thereat before the issuance of a Mayor's permit. Under Section 147 of the LGC, quoted above, it is mandatory for the operator of any business or calling to secure a Mayor's permit to operate. The non-issuance of such permit may constitute sufficient ground for closure or stoppage of the operation of a business or establishment. Hence, contractors regardless of whether they are accredited by the Philippine Contractors Accreditation Board are required to secure Mayor's permit. On Issue No. 6 Pursuant to Section 171 of the LGC, the municipal treasurer or his representative may examine the books of accounts of the businesses operating within their respective localities in order to ascertain the correctness of the amounts that they paid during the current year. The tax period that may be examined by the treasurer or his representative is limited to the year immediately preceding the examination. The intent of the law is to remind, if not direct, local treasurers that they should examine every year the books of accounts of said businesses. It is therefore suggested that the Municipal Treasurer conduct an examination of books of accounts of businesses. Such examination is one way of preventing tax loss through underdeclaration of gross sales/receipts. This is an inherent function of local treasurers, and, therefore, may be performed or enforced without need of an implementing ordinance of the sanggunian . cIaHDA Likewise, enclosed for your information and guidance is a copy of Local Finance Circular No. 1-93 dated June 16, 1993 of the DOF, which provides the prescribed form to be submitted by the bank upon which the declaration of gross receipts for the preceding calendar year has been based and the tax paid thereon. On Issue No. 7 Operators of public utility vehicles maintaining booking office, terminal or waiting station for the purpose of carrying passengers from the municipality under a Certificate of Public Convenience and Necessity or similar franchises shall be liable to pay the business tax, Mayor's Permit and other regulatory fees. It bears emphasis, however, that the tax shall not be based on the gross receipts but on the basis of the number of units. On Issue No. 8 This Bureau has consistently expressed the view that for so long as a cooperative is duly-registered with the Cooperative Development Authority under the provisions of R.A. 6938, it shall remain exempt from local taxation. However, as regards electric cooperatives, the Supreme Court issued a Temporary Restraining Order docketed as G.R. No. 143076 to Phil. Rural Electric Cooperative, Inc. (PHILRECA), Agusan del Norte Electric Cooperative, Inc. (ANECO), Iloilo Electric Cooperative, Inc. (ILECO I), and Isabela Electric Cooperative, Inc. (ISECO I) vs. Secretary, Department of Interior and Local Government (DILG) and the Secretary, Department of Finance (DOF) , restraining the implementation of Sections 193 and 234 of R.A. 7160. Thus, this Bureau on August 25, 2000 has directed the Regional Directors of Local Government Finance to instruct all treasurers and assessors within their jurisdiction to cease and desist from implementing the questioned provision of Sections 193 and 234 of the LGC until further orders from the said court. According to the July 25, 2000 SC Resolution, the TRO is still in force until further orders from the Higher Court. DcICEa It may be emphasized, however, that the said TRO specifically affects only the parties mentioned in the case, otherwise the exemption proviso of Section 193 of the LGC shall prevail. On Issue No. 9 Enclosed for your information and ready reference is a copy of BLGF Memorandum Circular No. 18-95 dated August 15, 1995 prescribing the guidelines and procedures in the Implementation of the Memorandum of Agreement dated August 25, 1995, between the Bureau of Internal Revenue (BIR) and the Bureau of Local Government Finance (BLGF) adopting certain measures to improve both national and local tax collections. In the said MOA, the BIR shall, through its Revenue District Officer, provide the Treasury/Assessment Officer with the following: a. Annual List of Income Tax Filers; b. Quarterly List of Capital Gains Tax Filers; c. Updated Schedule of Approved Zonal Values; d. Quarterly Lists of Bank Taxpayers; and e. List of Branches and Warehouses. As regards the issue pertaining to real property taxes, enclosed is a copy of the letter dated March 14, 2003 of this Bureau, addressed to that Office, for your information and guidance. THCASc It must be stressed that before any tax, fee or charge may be collected from a taxpayer, the same must first be levied under a duly-enacted tax ordinance. In the absence of such tax ordinance, there will be no basis for the collection of any tax, fee or charge. If desired, this Bureau may extend technical assistance to that Office and/or the Sangguniang Bayan in the enactment/updating the tax ordinance/revenue code of that municipality. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director