Bureau of Local Government Finance Opinion

November 27, 2009 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Imelda A. Manguiat, et al. Sycip Salazar Hernandez & Gatmaitan Attorneys-at-Law SSHG Law Center 105 Paseo de Roxas, Makati City Gentlemen : This refers to your letter dated June 3, 2009; requesting for confirmation of your opinion that GE Philippines, Inc. ("GE Phils.") is not liable for local business tax in Batangas City for the lease of its reverse osmosis units ("ROUs") to Shell Philippines ("Shell") and Shell Philippines Exchanges ("SPEX"). As represented, the presence of the ROUS in Batangas City does not constitute a principal office, branch or sales outlet, factory, project office, and plantation or plant thereat, and therefore, not considered as a business situs as required by Section 150 of the Local Government Code of 1991 ("LGC"). That Office submitted the following representations: 1. GE Phils. leases its ROUs to Shell and SPEX. In turn, Shell and SPEX are paying a fixed monthly service charge, which covers the rental, operation and maintenance of the ROUs; 2. GE Phils.' principal office is located at Bonifacio Global City, Taguig City while the ROUs are situated within the plant boundaries of Shell and SPEX in Brgy. Tabangao Ambulong, Batangas City. The ROUs are used to process raw water into water suitable for the operation of their refinery and gas plants of Shell and SPEX; 3. GE Phils. has three (3) employees assigned at the site for the operation and maintenance of the ROUs leased to Shell and SPEX; and 4. Other than the ROUs, GE Phils. has no physical presence in Batangas City. All receipts relating to the ROUs are recorded at the Company's principal office in Taguig City. CSIHDA As an alternative to the above request, you further requested that in case GE Phils. shall be liable to local business tax (LBT) in Batangas City, only seventy percent (70%) of the total gross receipts relating to such ROUs shall be paid to Batangas City while the remaining thirty percent (30%), to Taguig City where the principal office is located. Without setting aside the discussion offered and for a better appreciation and understanding of the herein issue, we are obliged to make a simple description and analysis of what an ROU is and how it works or operates. According to the website www.reverseosmosiscanada.com , a Reverse Osmosis (RO) is a filtration process that is often used for water. It works by using pressure to force a solution through a membrane, retaining the solute on one side and allowing the pure solvent to pass to the other side. This is the reverse of the normal osmosis process, which is the natural movement of solvent from an area of low solute concentration, through a membrane, to an area of high solute concentration when no external pressure is applied. Relative hereto, presented below is an illustration of an ROU. A Typical Reverse Osmosis Installation How does an RO Water Filter Work? Reverse Osmosis water filtration is a process where water is forced through a semi-permeable membrane, leaving unwanted pollutant and contaminants behind. A Reverse Osmosis unit will provide you with clear, clean, fresh drinking water. The process uses no chemicals or electricity. It's the most effective technology known for the improvement of drinking water. The reverse osmosis filter membrane pores range from 0.0005 to 0.0000002 microns (um). Therefore, contaminants larger than the membrane size will be rejected. Since the membrane pore is close to water molecular structure, you will get almost pure water. (Source: reverseosmosiscanada.com ) Relative to the issue, it is argued whether ROUs owned and leased by GE Phils. to SHELL and SPEX can be considered a "Plant". In the customary usage, the term "plant" generally refers to the place where products sold by a manufacturer, assembler or producer are manufactured, assembled or produced. Thus, in Webster's Third New International dictionary (1986 ed.) said term is defined as follows: "plant" the land, building, machinery, apparatus, and fixtures employed in carrying on a trade or mechanical or other industrial business' a factory or workshop for the manufacture of a particular product; the total facilities available for production or service in a particular country or place. Note that "plant" as defined above refers to the total facilities available for production or services . Further: A "plant" may include fixtures, machinery, tools, apparatus, appliances, etc., necessary to carry any trade or mechanical business or any mechanical operation or process. The word is broadly and liberally applied and no special form of machinery or appliance is necessary to constitute a plant. (Words and Phrases, vol. 32A, p. 224) IDTcHa Furthermore, a "plant" may be a group of parts in machinery, machine equipment or the like, functioning together, as an interlocking plant in a railroad switch mechanism. It has been held that a disposal or sewer, although not yet connected with any machinery is considered a plant. The word plant has even been extended to cover the tracks of a municipal street car system and even a ladder has been considered a part of a plant and the word has included land on which a mill is situated. A store, either wholesale or retail might be considered a plant and a mill or factory which purchases its power from an outside source may be a plant and the same might be said of a bottling or packing establishment which is merely for the arrangement and distribution of foods or beverages produced at some distant point. ( ibid. ) Based on the above definition and illustration, and applying the customary usage of the term "plant", it may be construed that GE Phils.' ROUs in Batangas City leased to SHELL and SPEX constitute a "plant". In this regard, the applicable provision of law is Article 243 of the Implementing Rules and Regulations (IRR) implementing Section 150 of the LGC, quoted as follows: "ART. 243. Situs of the Tax. (a) . . . . xxx xxx xxx (b) Sales Allocation (1) All sales in a locality where there is a branch or sales office or warehouse shall be recorded in said branch or sales office or warehouse and the tax shall be payable to the city or municipality where the same is located. (2) . . . (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. . . . . xxx xxx xxx." (Emphasis ours) Accordingly, the fixed monthly rental which includes operation and maintenance charges, which GE Philippines is receiving from SHELL and SPEX for the leased ROUs are considered "gross sales/receipts". SEcADa However, it is clarified that Batangas City government may not share in the local business tax (LBT) that GE Philippines may be required to pay to Taguig City where its principal office is located, for reason that GE Philippines does not own the "plant" per se located in Batangas City. The ROUs, which GE Philippines owns and leases to Shell and SPEX is a movable thing which can be installed or removed anytime from Shell and SPEX premises (Plant), once the lease agreement expires. In this instance, GE Philippines is considered a "lessor" rather than "owner" or "operator" or a "plant" as contemplated in the above definition. In view hereof, the gross receipts received by GE Philippines from Shell and SPEX representing the monthly lease rentals for its ROUs shall be taxable by Taguig City where GE Philippines' principal office is located to the exclusion of Batangas City. It is hoped that we have clarified matters. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director