Bureau of Local Government Finance Opinion

September 7, 1987 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Ms. Pacita P. Maosca Vice-President & Treasurer Mantanco Manufacturing Corporation 161 M. Paterno San Juan, Metro Manila M a d a m : This refers to your letter dated November 7, 1986 requesting this Department to render "a clear and definitive clarification on the proper and correct classification of your business establishment and which request is reiterated in your letter dated December 29, 1986. In your two letters, you merely stated that since the start of the operation of your business, Mantanco Manufacturing Corporation, in 1987 under the SEC Registry No. 45016, you have been religiously paying all taxes assessed against your Corporation. You also submitted three annexes in your second letter to support your contention that your corporation is engaged in import and export business. However, you did not explain how your corporation operates in the pursuit of its business activities. On the other hand, the Municipal Treasurer of San Juan, to whom your letters were referred, submitted his comment on the issue you raised in your said letter. Based on his comment, it appears that the said business establishment acquires its raw materials from foreign sources on consignment basis as authorized by Republic Act No. 3137, otherwise known as the Embroidery Law. It likewise appears that Mantanco is engaged in the manufacture of various types of garments with the Board of Investments pursuant to the provision of Republic Act No. 6135. It further appears that per BIR Form 2528, Mantanco has been paying Privilege Tax Receipt (PTR) for the years 1983, 1984 and 1985 as "Labor Contractor-Sewing." Finally, the Municipal Treasurer averred that the Comparative Income Statement indicates the line of business of the said Corporation. Based on the above findings of the Municipal Treasurer, Mantanco is a contractor and therefore it is a business establishment principally rendering services. Accordingly, it is subject to the payment of local business tax under Section 19(c) of the Local tax Code, as amended. It is to be stressed that a careful evaluation of the facts of the issue under consideration shows that Mantanco is not a manufacturer in the strict sense of the word but, rather, merely performs labor on the garments consigned to it per design, specifications, order of the foreign consignor and export the finished products to said foreign consignors. In other words, that manufacturing and exporting aspects of the business of Mantanco are only incidental to the service contract to process the raw materials into finished products solely intended for the foreign consignors. Finally, this Department observes that in the computation of the deficiency tax against Mantanco, the Municipal Treasurer imposed surcharges and interest to the unpaid tax. Justice and equity dictates that surcharges and interest should not be imposed under above circumstances. Where taxpayers "honestly paid their taxes within the time required by the Code to pay, but that, due to the wrong interpretation and erroneous assessments subsequently by the . . . (municipality) this resulted in the undercollection or short collection of the tax due, these taxpayers who paid their taxes on the time and in the honest belief that the tax assessed and collected from them are correct should not be required to pay the surcharge and interest in the guise of late payment of tax, since the truth is that the late payment of the under-collection might have been attributed to the erroneous interpretation of the provision of law, if not due to negligence for failure to exercise the diligence and prudence required to a good collector "(Letter dated February 10, 1975, Department of Finance, to B.G. Sabater of Caloocan City). Premises considered, this Department is of the opinion that Mantanco Manufacturing Corporation is a business establishment principally rendering service under Section 19(c) of the Code; however, no surcharge and/or interest should be included in the computation of the deficiency tax due to the Municipality of San Juan. Very truly yours, By Authority of the Secretary: GREGORIO A. BARRETO Acting Assistant Director for Local Fiscal Operations Officer-in-Charge Bureau of Local Government Finance