Bureau of Local Government Finance Opinion

March 25, 2010 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Francis C. Aguilar FC Aguilar Law Office 1407-G Morong Street Brgy. Poblacion, Makati City Sir : This refers to the subjoined letters dated 9 February 2010 and 15 July 2010 and the 1st Indorsement dated June 22, 2010 of Atty. JESUS B. DOQUE IV, Director III, DILG, all requesting for a confirmatory opinion that your client, DMC-Construction Equipment Resources, Inc. is exempt from the payment of local business tax. Representation is made that DMC-Construction, Equipment Resources, Inc. (DMC for brevity) is engaged in the business of shipping, specifically the transportation of coal for its clients. It is submitted that DMC sought a request for a tax credit and a re-classification of its business from a service contractor to common carrier or shipping contractor from the City Government of Makati. Under a letter dated 22 January 2010, the request was denied on the ground that DMC should be categorized as Service Contractor and not as a Common Carrier due to the following grounds. acADIT 1. Common carriers charge passengers or freights "fare" while DMC is under contract to transport coal; 2. DMC's contract is exclusive to its clients while common carriers ply and travel regular routes of transport without exclusivity. It is contended however, that Makati City had misread the provision of Section 133 (j) of R.A. No. 7160, otherwise known as the Local Government Code (LGC) of 1991, quoted as follows. " SEC. 133. Common Limitations on the Taxing Powers of Local Government Units . Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extent to the levy of the following: (a) . . . (j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire common carriers by air, land or water , except as provided in this Code; (Emphasis Ours) Based on the abovequoted provision of law, it is submitted that there are actually two (2) types of businesses that are being granted exemption from business taxes, viz .: gross receipts of transportation contractors or freight by hire and common carriers. EAcTDH As stated, the Makati City government in denying the request for tax credit and reclassification, erroneously concluded that only common carriers are exempt from business taxes. Hence, Makati City is firm regarding its view that DMC is a service contractor and not a common carrier thus, subject to business tax. On the contrary, it is believed that since DMC is engaged in the business of transporting coal by vessel for hire , it shall be exempted from business taxes and the issue of whether DMC is a common carrier or not is immaterial to the grant of any business tax exemption. In this connection, the issue to be resolve is whether DMC, based on the nature of business it is engaged in, falls under the category of either a " transport contractor ", " freight for hire ", or " common carrier " mentioned in the abovequoted provision of the LGC to be eligible for business tax exemption thereof. It is informed that the LGC does not provide any definition of the terms " transportation contractor ", " freight by hire " or " common carrier ". In view hereof, we find no other recourse but to look for definitions of the terms from other sources, some of which provide as follows: DAaIHT A) Contractor For a better understanding of the terms relative to the issue, the term " contractor ", Section 131 (h) of the LGC is quoted in full, as follows: "(h) Contractor includes persons, natural or juridical, not subject to profession 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. As used in this Section, the term contractor shall include general engineering, general building and specialty contractors as defined under applicable laws; filling, demolition and salvage works contractors; proprietors or operators of mine drilling apparatus; proprietors or operators of dockyards; persons engaged in the installation of water system, and gas or electric light, heat, or power; proprietors or operators of smelting plants; engraving, plating, and plastic lamination establishments; proprietors or operators of establishments for repairing, repainting, upholstering, washing or greasing of vehicles, heavy equipment, vulcanizing, recapping and battery charging; proprietors or operators of furniture shops and establishments for planning or surfacing and recutting of lumber, and sawmills under contract to saw or cut logs belonging to others; proprietors or operators of dry-cleaning or dyeing establishments, steam laundries, and laundries using washing machines; proprietors or owners of shops for the repair of any kind of mechanical and electrical devices, instruments, apparatus, or furniture and shoe repairing by machine or any mechanical contrivance; proprietors or operators of establishments or lots for parking purposes; proprietors or operators of tailor shops, dress shops, milliners and hatters, beauty parlors, barbershops, massage clinic, sauna, Turkish and Swedish baths, slenderizing and building saloons and similar establishments; photographic studios, funeral parlors; proprietors or operators of hotels, motels, and lodging houses; proprietors or operators of arrastre and stevedoring, warehousing, or forwarding establishments, master plumbers, smiths, and house or sign painters; printers, bookbinders, lithographers; publishers except those engaged in the publication or printing of any newspapers, magazine, review or bulletin which appears at regular intervals with fixed prices for subscription and sale and which is not devoted principally to the publication of advertisements; business agents, private detective or watchman agencies, commercial and immigration brokers, and cinematographic films owners, lessors and distributors." cAIDEa As can be gleaned from the abovequoted provision of law, the initial criterion sets forth for an entity to be considered as a " contractor " is for its activity to consist 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. At this point, it may be said that DMC does not fall within the ambit of a general contractor. Notable however, is the absence of the term " transportation contractors " from the enumeration of the various businesses deemed to fall within the category of " contractor ", or for that matter any other business engaged in transportation activity except perhaps " forwarding establishments ". This is so for the reason that " transportation contractors " are among the common limitations explicitly mentioned in Section 133 (j) of the LGC. B) Freight by Hire simply means an act of transporting goods or individuals for a fee. C) Common Carrier is defined as follows: ICcaST 1) Article 1732 of the Civil Code : Any person, corporation, firm or association engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public. 2) An individual or business that advertises to the public that it is available for hire to transport people or property in exchange for a fee. An individual, a company, or a public utility (like municipal buses) which is in the regular business of transporting people and/or freight. This is distinguished from a private carrier which only transports occasionally or as a one-time-only event. 1 3) At common law , a common carrier is one which holds itself out to the public as being ready to carry for hire, not as a casual employment but as a business, the goods of all persons who see fit to employ it, without retaining the right as to what or for whom it should carry or restricting shipments to full loads. . . . A common carrier is one which professes to be ready to carry for everybody. 2 4) It is an individual or a company that transports people or goods on hire from one place to another for a specific amount of fees charged. Private carriers on the other hand transport goods or people for special purposes or on a one time basis only. 3 5) In one of the court decisions, it was held that the test for determining whether a party is a common carrier of goods are: "1. He must be engaged in the business of carrying goods for others as a public employment, and must hold himself out as ready to engage in the transportation of goods for person generally as a business and not as a casual occupation; "2. He must undertake to carry goods of the kind to which his business is confined; "3. He must undertake to carry by the method by which his business is conducted and over his establishment roads; and "4. The transportation must be for hire." Seemingly, the common denominators for a " common carrier " are as follows: 1) It must be engaged in the business of carrying or transporting passengers or goods or both; ISADET 2) That the transport of passengers or freight is either by land, water, or air ; 3) That the transaction is for a fee or compensation; and 4) Offering their services to the public. Based on the above definitions and requisites, DMC's activity may be regarded as a common carrier cased on its actual business operation of engaging in transporting or carrying of goods, such as coal , by vessel for hire. However, before arriving to any conclusion on holding DMC's operation as that of a " common carrier ", it is prudent to consider other factors that may support DMC's claim. Per "Amended Articles of Incorporation of DMC-Construction Equipment Resources, Inc." it appears that the primary purpose of the corporation is as follows: "PRIMARY To explore, extract, dig, and drill for, exploit, produce, purchase, or otherwise conduct and carry on the business of mining coal, peat, asphalt, sand, gravel, stone, marble, clay, and the like; to search for claims, grounds, or lodes and record the same in ( sic ) pursuant to the laws of the Philippines, and to bore, drill, prospect and mine in such mining claims, grounds or lodes of coal, chromite, and other metals and minerals of all kinds, and to store, hold, use, refine, prepare form market, by ( sic ), sell, distribute, import, export and transport or otherwise deal in minerals of whatever nature, whether similar or dissimilar thereto , there ( sic ) products, compounds, and derivatives and other mineral and chemical substances, in crude of ( sic ) refined condition, and to engage generally, as may be permitted by law, in the business of, and or investing in mining within the Philippines. ( As amended by the Stockholders and Directors on May 23, 1998 )" aCIHAD Further, Paragraphs 4 & 6 of its Secondary Purposes are quoted as follows: "4. To engage in shipping, barging, and allied or similar business, incidental to the main purposes of the corporation , . . . ." xxx xxx xxx "6. To enter into , make, perform, and carry out contracts of every kind and for any lawful purposes , pertaining to the business of the corporations , or in any manner incident thereto , as principal, agent, or otherwise, with any person, firm association, or corporation ." Apparently, the business of transporting is one of the primary purposes DMC is authorized to engage in. It must be stressed however, that DMC's transporting activity refers to the transport of mining products, their by-products, compounds, derivatives and other mineral and chemical substances, etc. which the company is able to source out from its mining activity. On the other hand, under its Secondary Purpose, particularly Par. 4 thereof, DMC is authorized to engage in shipping, barging, and allied or similar business " but incidental to the main purposes of the corporation ". We have to consider this aspect in relation to one of the primary purposes, which is the transport of mining products, their by-products, compounds, derivatives and other mineral and chemical substance. HCITcA Still, Par. 6 of the Secondary Purposes provides that DMC can enter into and carry out contracts of every kind and for any lawful purpose, not only pertaining to the business of the corporation or incidental thereto, but also with any person, firm, association, or corporation . Other relevant evidence to confirm that DMC qualifies either as a " Freight-by-hire " or a " common carrier " is its Certificate of Authority engage in "DOMESTIC SHIPPING BUSINESS" issued by the MARITIME INDUSTRY AUTHORITY under Certificate No. DSO 2006-003-013 (2010) dated 18th day of March 2010. Based on the foregoing discussions and relevant documentation submitted, it is the view of this Bureau that DMC may be considered either as a " freight-for-hire " or " common carrier " as contemplated in the above definitions. Section 131 (h) aforequoted, is too general an application to apply to DMC in view of the condition set forth in Section 131 (h) that to be considered as a "contractor" the " activity consists essentially of the sale of all kinds of services for a fee , . . .". HIACac On the other hand, and as abovecited, the primary and secondary purposes specified in DMC's Amended Articles of Incorporation provide a clear description of the activities that the company may engage in. In addition, the MARINA Certificate of Authority to engage in DOMESTIC SHIPPING BUSINESS further validates DMC's activity of transporting coal by means of shipping, barging, and other allied marine services. In view of all the foregoing and taking into consideration the requisites for an entity like DMC to be considered as a " common carrier " under the above definitions, it is our opinion that DMC falls within the aforecited classification, either as a " freight-for-hire " or " common carrier " pursuant to Section 133 (j) of the LGC, which provides: "Section 133. Common Limitations on the Taxing Powers of Local Government Units . Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: "xxx xxx xxx "(j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carrier by air, land or water, . . . ." SCaIcA On the basis of the express prohibition by the abovequoted provision of law, it is very clear that local government units, in this case, the City Government of Makati, may not impose business taxes on the gross receipts of DMC derived from its contract of transporting coal by means of shipping, barging or any other kind of marine vessels which the law may have accorded the company to employ. It bears emphasis, however, that the foregoing views are expressed in line with the provisions of Article 287 of the Implementing Rules and Regulations (IRR) implementing the LGC and not a declaration of the nullity or unconstitutionality of the duly enacted tax ordinance of Makati City as the matter falls exclusively within the jurisdiction of the Department of Justice or a court with competent jurisdiction. We hope that this will help clarify matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA, CESO III Executive Director Footnotes 1. http://legal-dictionary.thefreedictionary.com . 2. The Canadian Encyclopedia Digest (of law), 2009. 3. www.legal-explanations.com.