Bureau of Local Government Finance Opinion

August 12, 2015 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Rosa Michele C. Bagtas Atty. Maria Paula G. Romero CRUZ MARCELO & TENEFRANCIA Law Office 6th, 7th, 8th & 10th Floors CVCLAW Center 11th Avenue corner 39th Street Bonifacio Triangle Bonifacio Global City 1634 Metro Manila Mesdames : This refers to your letter dated June 17, 2015, requesting in behalf of your client, Unilever Philippines, Inc. (Unilever), confirmation of your opinion that Unilever is not liable to secure business permit and pay local business tax in Cagayan de Oro City where its warehouse is located, in view of the following information submitted hereunder. Unilever, a corporation duly organized and existing under the Philippines laws, with principal office in the City of Manila, is engaged in the manufacture of consumer goods. Unilever intends to engage the services of a third party contractor which operates a warehouse in Cagayan de Oro City for the storage of its goods therein. The goods shall be dispatched from such warehouse to independent third party distributors of Unilever for sale and distribution to customers in the Mindanao area. While this is the case, the warehouse operator in Cagayan de Oro City will not itself issue any sales invoice or accept any product orders on behalf of Unilever. However, in some instances, the warehouse operator is requested to print a copy of the sales invoice which is generated from Unilever's head office in Manila. Further, Unilever does not intend to open and maintain any type of office in Cagayan de Oro City, whether a branch office, a sales office or an administrative office. All sales of Unilever products which will be stored and passed through said warehouse in Cagayan de Oro City will be recorded and invoiced in Manila where the Company maintains its principal place of business. Although Unilever's products can be found in a warehouse in Cagayan de Oro City, it is your view that the said warehouse cannot be considered as doing business in Cagayan de Oro City for purposes of regulation and taxation since it is owned and operated by a third party contractor and does not accept nor process any orders or sales invoice of Unilever's products. CAIHTE In this connection, the law applicable is Article 243 (a) (2) and (3), and (b) (1) of the Implementing Rules and Regulations (IRR) implementing Section 150 of the LGC quoted hereunder: " Article 243. Situs of the Tax . (a) For purposes of collection of the taxes under Article 232 of this Rule, the following definition of terms and guidelines shall be strictly observed: "xxx xxx xxx "(2) Branch or Sales Office a fixed place in a locality which conducts operations of the business as an extension of the principal office. However, offices used only as display areas of the products where no stocks or items are stored for sale, although orders for the products may be received thereat, are not branch or sales offices as herein contemplated. A warehouse which accepts orders and/or issues sales invoices independent of a branch with sales office shall be considered as a sales office . "(3) Warehouse a building utilized for the storage of products fox sale and from which goods or merchandise are withdrawn for delivery to customers or dealers, or by persons acting in behalf of the business. A warehouse that does not accept orders and/or issue sales invoices as aforementioned, shall not be considered a branch or sales office . "xxx xxx xxx "(b) Sales Allocation (1) . . . . (2) In cases where there is no such branch, sales office or warehouse in the locality where the sale is made, the sale shall be recorded in the principal office along with the sale made by said principal office and the tax shall accrue to the city or municipality where said principal office is located. "xxx xxx xxx." (Underlining supplied) Taking into consideration the above definition of branch or sales office, it may be stated that a warehouse may be considered as sales office under the following scenarios: (1) if the warehouse accepts orders but does not issue sales invoices; (2) if the warehouse does not accept orders but issues sales invoices; or (3) if the warehouse accepts orders and issues sales invoices. In view of the foregoing, the warehouse in Cagayan de Oro City cannot be considered as a sales office since it does not accept orders or issue sales invoices. Another thing to consider is that said warehouse used for storage of goods of Unilever is owned by a third party who is not authorized to accept orders in behalf of Unilever. Even if goods are dispatched from the warehouse it does not necessarily mean that it is engaged in business activity in Cagayan de Oro City. This Bureau therefore, concurs with your stand that Unilever is not liable to pay business tax in Cagayan de Oro City. This view is anchored on the fact that basically, business tax is based on " gross sales or receipts ", 1 which is not in attendance in the herein case of Unilever. DETACa As submitted, products stored in the warehouse owned by a third party and withdrawn for delivery to independent third party distributors who sell these products to their customers in the Mindanao area. Such transactions are, however, considered executed in the principal office in Manila and where, as mentioned, corresponding invoices and receipts are prepared and issued in Manila for transactions conducted in Mindanao area. In strict sense, there are no " gross sales or receipts " to speak of as far as the warehouse in Cagayan de Oro City is concerned as there is no transaction being carried out thereat, not even the issuance of invoices or official receipts which would constitute a consummated sales transactions. The only act being conducted in Cagayan de Oro City is to dispatch goods to independent third party distributors of Unilever. With regard to business permit, it is viewed that both the owner of the warehouse (as real estate lessor) and Unilever are liable pursuant to Section 147 of the LGC, which provides: 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. In view of the foregoing, and as much as the warehouse in Cagayan de Oro City may not be considered either as a branch or sales office, Article 243 (b) (2), supra , and Unilever shall be liable to pay 100% business tax to the City of Manila where the principal office is located. The City of Manila can also collect Mayor's permit fee and other regulatory fees as provided under its existing Local Revenue Code. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director Footnotes 1. Section 143, LGC of 1991.