Bureau of Local Government Finance Opinion

March 28, 2011 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 2nd Indorsement Respectfully returned to the OIC-Regional Director for Local Government Finance, Region VI, Iloilo City, the herein preceding indorsement relative to the letter dated January 14, 2011 of Mr. Tomas E. Alpon, requesting further clarification on the propriety of imposing the community tax on businessmen based on their gross sales pursuant to Article 246, paragraph (b) of the Implementing Rules and Regulations (IRR) of the Local Government Code (LGC) of 1991, quoted as follows: "Article 246. Levy or Imposition. The levy or imposition of a community tax by a city or municipality shall be governed by the following rules and procedural guidelines: "(a) Individuals liable to the payment of the Community Tax. "xxx xxx xxx. "(b) Rate of Community Tax payable by individuals (1) The rate of the annual community tax that may be levied and collected from said individuals shall be Five Pesos (P5.00) plus an annual additional tax of One Peso (P1.00) for every One Thousand Pesos (P1,000.00) of income regardless of whether from business, exercise of profession, or from property but which in no case shall exceed Five Thousand Pesos (P5,000.00). CADSHI "xxx xxx xxx. "(c) Juridical persons liable to the payment of the Community Tax Every corporation, no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines shall pay an annual community tax of Five Hundred Pesos (P500.00) and an annual additional tax, which, in no case, shall exceed Ten Thousand Pesos (P10,000.00) in accordance with the following schedule: "xxx xxx xxx. "(2) For every Five Thousand Pesos (P5,000.00) of gross receipts or earnings derived from the business in the Philippines during the preceding year Two Pesos (P2.00). "xxx xxx xxx." To support the above request, Mr. Alpon cited the following case: "A government employee with an annual income of say P300,000.00 and businessmen with an annual gross sale of P300,000.00, will they be paying same amount of community tax? (sic) The businessmen may earn only 15% out of their gross sales or P45,000.00 which will be the amount subject to community tax." Under a 1st Indorsement dated March 24, 1995 the former Executive Director, in the case of Mr. Antonio V. Ulangkaya, Sr., Proprietor-General Manager, A. V. Ulangkaya Rice and Corn Mill, clarified the definition of Income as basis for the computation of Community Tax, the pertinent portion of which is quoted as follows: STaCcA "As applied to a rice miller like Mr. Ulangkaya, the term 'income' should include only his gross sales or receipts from his business and not the earnings of the farmers who sell palay to him. Such earning or income of the farmers shall be included in the computation of the community tax to be paid by the farmer themselves. "xxx xxx xxx." Moreover, under a letter dated September 10, 2010, the OIC-Regional Director for Local Government Finance, Region VI, opined that "the tax base of a business for purposes of local government taxation is based on gross sales or receipts. The term is synonymous or interchangeably used with the word income. Hence, a businessman with an annual sale of P300,000.00 and a government employee with the same annual income would therefore be paying the same amount of community tax at one peso (P1.00) for every one thousand pesos (P1,000.00) of income but in no case shall exceed Five Thousand Pesos (P5,000.00)." However, Mr. Alpon contends that the opinion of the former Executive Director is only an opinion, thus, not absolute or final. Likewise, the Department of Finance, which is an Executive Branch of government, that implements laws including tax laws, is not in a position to interpret laws when questions of application arise. Hence, the request to refer the matter to a higher level or to the appropriate office that has jurisdiction over the interpretation of laws enacted by Congress. The above premises considered, Mr. Alpon's concerns may be confined to the issue of whether a government employee with an annual income of P300,000.00 and a businessman with P300,000.00 annual gross sales, will be paying the same amount of Community Tax. From the above representation, Mr. Alpon is of the view that the imposition of Community Tax on businessman based on gross sales is UNFAIR and violates the fundamental principle of taxation on the uniformity of application. This view rests on his analysis that the P300,000.00 gross receipts of a businessman, as compared to the income of an individual, may only amount to 15% of the gross receipts or P45,000.00 after allowable deductions. This amount according to him should be the amount subject to Community Tax. HcTEaA For guidance and clear understanding, Article 246 of the IRR, implementing Section 156 of the LGC, governing the levy or imposition of community tax is quoted as follows: "ART. 246. Levy or Imposition . The levy or imposition of community tax by a city or municipality shall be governed by the following rules and guidelines: (a) Individuals liable to the payment of community tax (1) Every inhabitant of the Philippines eighteen (18) years of age or over who has been regularly employed on a wage or salary basis for at least thirty (30) consecutive working days during any calendar year; (2) An individual who is engaged in business or occupation ; (3) An individual who owns real property with an aggregate assessed value of One Thousand Pesos (P1,000.00) or more; (4) An individual who is required by law to file an income tax return. (b) Rate of community tax payable by individuals (1) The rate of community tax that may be levied and collected from said individuals shall be Five Pesos (P5.00) plus an additional tax of One Peso (P1.00) for every One Thousand Pesos (P1,000.00) of income regardless of whether from business, exercise of profession, or from property but which in no case shall exceed Five Thousand Pesos (P5,000.00). CDHacE xxx xxx xxx." (Emphasis supplied) Applying the abovequoted provision of the IRR of the LGC on the issue of UNJUST TAXATION posed by Mr. Alpon, in view of his representation that a businessman earning an annual gross sales of P300,000.00 will be paying the same amount with that of a fixed earner, say, a government employee earning an annual income of P300,000.00, accordingly and using the BIR Form 0016, the two (2) individuals will be paying their respective Community Tax as follows: a) Individual Community Tax for a fixed earner (on the assumption that the individual paid the tax prescribed under Section 161 of the LGC) "Profession/Occupation/Business Taxable Community Amount Tax Due A. BASIC COMMUNITY TAX (P5.00) P5.00 Voluntary or Exempted (P1.00) B. ADDITIONAL COMMUNITY TAX (tax not to exceed P5,000.00) 1. . . . 2. SALARIES OR GROSS RECEIPT P300,000.00 30.00 OR EARNINGS DERIVED FROM EXERCISE OF PROFESSION OR PURSUIT OF ANY OCCUPATION (P1.00 FOR EVERY P1,000) 3. . . . TOTAL P35.00 INTEREST - TOTAL AMOUNT PAID P35.00" b) Individual Community Tax for a businessman (the same assumption) EHTIcD "Profession/Occupation/Business Taxable Community Amount Tax Due A. BASIC COMMUNITY TAX (P5.00) P5.00 Voluntary or Exempted (P1.00) B. ADDITIONAL COMMUNITY TAX (tax not to exceed P5,000.00) 1. GROSS RECEIPTS OR EARNINGS P300,000.00 30.00 DERIVED FROM BUSINESS DURING THE PRECEDING YEAR (P1.00 FOR EVERY P1,000) 2. . . . 3. . . . TOTAL P35.00 INTEREST - TOTAL AMOUNT PAID P35.00" Clearly, from the above illustration, both the fixed earner earning an annual salary of P300,000.00 and the businessman realizing annual gross receipts of P300,000.00 will be liable to pay a similar amount Community Tax for individual (including the Basic Tax) of P35.00. This will now bring us to the issue of UNJUST TAXATION, which according to Mr. Alpon violates the "fundamental principle of taxation on the uniformity of application". In one of the decisions rendered by the Supreme Court bearing on the same issue herein being resolved, the Court held, and we quote: "A tax is considered uniform when it operates with the same force and effect in every place where the subject may be found. (G.R. Nos. L-46255, 46256, 46259 and 46277, January 23, 1940, PHILIPPINE TRUST COMPANY, et al. vs. A.L. YATCO, as Collector of Internal Revenue , citing State v. Railroad Tax Cases, 92 U.S. 575, 595, 612, 23 Law. ed. 363, 373 ) Further, in the article of Mr. Frank I. Cueto entitled "UNIFORM TAXATION IN CONFORMITY TO THE DICTATES OF JUSTICE AND EQUITY" it was explained, thus: SDITAC "Equality and uniformity in taxation means that all taxable articles or kinds of property of the same class shall be taxed at the same rate. The taxing power has the authority to make reasonable and natural classifications for purposes of taxation. As clarified by Justice Tuason, where the differentiation complained of conforms to the practical dictates of justice and equity, it is not discriminatory and is therefore uniform. ( Eastern Theatrical Co. v. Alfonso, 83 Phil. 852, 862 (1949).) There is quite a similarity then to the standard of equal protection for all that is required is that the tax applies equally to all persons, firms and corporations placed in similar situation. xxx xxx xxx Then comes Republic Act No. 8424, otherwise known as the Comprehensive Tax Reform Act of 1997. Under this new tax code, the provision on the simplified net income tax for the professionals/self-employed has been deleted. In other words, both salaried individuals and professionals/self-employed are now subject to the new graduated rate of tax . . . . " Based on the above citations it can now be deduced that the application of Article 246 of the IRR of the LGC in the case of a salaried individual and a businessman, both of whom are earning P300,000.00 annually do not transgress the "fundamental principle of uniformity in taxation". What Mr. Alpon failed to consider is that the implementation of Community Tax provision is equally and equitably applied to a similar class or category, meaning that individual fixed earners shall be liable to pay the Community Tax based on their individual annual income sourced from salaries and other taxable compensation . On the other hand, all businessmen shall be liable to pay the Community Tax based on their individual annual gross receipts , the definition of which is provided under Section 131 (n) of the LGC. In this instance, there is no violation of principles of both rule of uniformity in taxation and the equal protection clauses of the law. (Paragraph 1, Sec. 28, Article VI and Section 1, Art. III, Constitution) IcSEAH On the assertion of Mr. Alpon that the Department of Finance (DOF) being under the Executive Branch of the Government and therefore not in a position to interpret laws but rather only to implements laws, including tax laws, we agree. There is no question that when it comes to the interpretation of laws, it is the call of the judiciary. However, attention is invited to Article 287 of the IRR of the LGC which provides that " [T]he Secretary of Finance shall, in consultation with the various leagues, formulate and prescribe, from time to time, procedures and guidelines as may be necessary for the proper, efficient and effective implementation of the provisions of Title I, Book II of the Code ." It is under this proviso of the IRR that the DOF through this Bureau issues rulings and opinions relating to local taxation. Be guided accordingly. (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director