Bureau of Local Government Finance Opinion

August 29, 2008 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty. Victoria T. Tomelden, CPA Legal Counsel Holcim Philippines, Inc. L3 PHINMA Plaza 39 Plaza Drive, Rockwell Center Makati City 1211 Madam : This refers to your letter dated August 2, 2008, requesting a ruling on the correct interpretation of Section 150 (Situs of the Tax) of R.A. 7160 known as the Local Government Code (LGC) of 1991, particularly the relationship of sub-paragraphs (a) and (b) of said Section. Representations are made that Holcim Philippines, Inc. (HPI) is a domestic corporation primarily engaged in the manufacture, production and merchandising of cement, cement products and by-products. Its principal office is located in Makati City. It has four (4) manufacturing plants, two (2) of which are located in Luzon while the remaining two (2) are located in Mindanao. It is submitted that unlike the two (2) manufacturing plants in Luzon, the two (2) plants in Mindanao also serve as sales office for its Mindanao customers. In Luzon, HPI maintains several branch offices to cater to the needs of its Luzon customers thus, recording of sales and collection is done not at the plant but at the branch office. The principal office also acts as sales office for Metro Manila and nearby provinces like Cavite, Laguna and Bulacan customers. Further, it is submitted that for purposes of computing the business tax under Section 143 of the LGC, all sales recorded in the two (2) manufacturing plants in Mindanao are subject to 100% business tax in the areas where the plants are located. On the other hand, all Luzon sales, except for those recorded in Baguio City, Cagayan and Isabela Provinces, are being taxed based on the 30%-70% allocation as provided for in Article 243 (b) (3) of the IRR, implementing Section 150 of the LGC. Thirty percent (30%) of the sales recorded in the branch office are taxed in the locality where such branch is located while the remaining seventy percent (70%) are taxed in the locality where the plant is located, that is where the goods are produced and withdrawn . Recently, HPI's branch office in San Fernando City (Pampanga) received an assessment from the City Treasurer's Office claiming that "all sales recorded in HPI Pampanga branch should be taxed thereat 100%." It argued that for a manufacturer like HPI, the 70%-30% allocation shall be used only in cases " where there is no branch or sales outlet in the area where the sales transaction is made ." In view hereof, the following queries were posed: 1. Is San Fernando City correct in its position that the 70%-30% allocation shall be used only in cases where there is no branch or sales outlet in the area where the sales transaction is made ? 2. Corollary to this, can the Company ask for a refund for business tax erroneously paid to the concerned municipalities? 3. With respect to municipalities where HPI made short payments, can the Company request from the LGUs concerned for exemption from imposition of surcharges, penalties and interests considering that the underpayments were due to erroneous interpretation of the law and that there was no intent to evade payment? In view of the foregoing, the pertinent provisions of law on the matter are those provided for under Section 150 of RA 7160 otherwise known as the Local Government Code (LGC) of 1991, as implemented by Article 243 (b) of the Implementing Rules and Regulations (IRR) of the Code, quoted hereunder. " ART. 243. Situs of the Tax . "(a) x x x "(b) Sales Allocation (1) All sales made 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) 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 sales made by said principal office and the tax shall accrue to the city or municipality where said principal office is located. "(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. x x x." "xxx xxx xxx "(5) In cases where there are two (2) or more factories, project offices, plants or plantations located in different localities, the seventy percent (70%) sales allocation shall be prorated among the localities where such factories, project offices, plants and plantations are located in proportion to their respective volumes of production during the period for which the tax is due. x x x. "(6) The foregoing sales allocation under par. (3) hereof shall be applied irrespective of whether or not sales are made in the locality where the factory, project office, plant or plantation is located. In the case of sales made by the factory, project office, plant or plantation, the sale shall be covered by paragraph (1) or (2) above ." (Underscoring supplied) Accordingly, 100% of the tax shall accrue to the LGUs where the two (2) manufacturing plants that also serve as sales office are located. However, for Luzon sales, and based on the abovequoted provisions of law, HPI's Luzon sales shall be taxed as follows: 1) Luzon Plants a) Norzagaray Plant 70% of all sales made from goods produced and withdrawn thereat and 30% for sales recorded at the Sales Office; b) Bacnotan Plant 70% of all sales made from goods produced and withdrawn thereat and 30% for sales recorded at the Sales Office. 2) Principal Office All sales made by the Principal Office for its Metro Manila and nearby provinces like Cavite, Laguna and Bulacan customers, and recorded at the Principal Office shall be taxable 100% where said Principal Office is located. It is clarified however, that the allocation procedures applicable to the Luzon plants are based on the definition of the phrase "Branch or sales office" under Article 243 of the IRR, implementing Section 150 of the LGC, quoted as follows: "Art. 243. Situs of the Tax . "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. x x x" (Underscoring supplied) Query No. 1 In resolving the herein issue, Section 150 (b) aforecited is quoted hereunder: "SECTION 150. Situs of the Tax . x x x "(b) The following sales allocation shall apply to manufacturers , assemblers, contractors, producers, and exporters with factories, project offices, plants , and plantations in the pursuit of their business: "(1) 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 "(2) 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." On the other hand, Section 150 (a) of the LGC provides as follows: "SECTION 150. Situs of the Tax . "(a) For purposes of collection of the taxes under Section 143 of this Code, manufacturers , assemblers, repackers, brewers, distillers, rectifiers and compounders of liquor-distilled spirits and wines, millers, producers, exporters, wholesalers, distributors, dealers, contractors, banks and other financial institutions, and other businesses, maintaining or operating branch or sales outlet elsewhere shall record the sale in the branch or sales outlet making the sale or transaction, and the tax thereon shall accrue and shall be paid to the municipality where such branch or sales outlet is located. In cases where there is no branch or sales outlet in the city or municipality where the sale or transaction is made, the sale shall be duly recorded at the principal office and the taxes due shall accrue and shall be paid to such city of municipality. " (Underlining supplied) From the aforequoted provisions of Section 150 (b) and 150 (a), it may be deduced that the LGU where the plant is located shall have the authority to tax seventy percent (70%) of all sales recorded in the principal office and the LGU where the principal office is located shall tax the remaining thirty percent (30%) of said sales. However, it is also clear that all sales or receipts made in a branch or sales outlet shall be recorded in such branch or sales outlet and shall be taxable by the LGU where said branch or sales outlet is located. Clearly, therefore, the LGU where the factory is situated shall not have a share in the sales or receipts made in a branch or sales outlet for so long as the sales made are recorded in said branch or sales outlet. In the case at hand, HPI sales made at San Fernando City (Pampanga) shall be recorded at its Pampanga branch, in which case, Section 150, abovequoted will apply. Needless to say, whether the products sold in San Fernando City were produced or withdrawn from HPI's plant elsewhere, for so long as the sale is recorded in the Pampanga branch, 100% of the tax due from such sales shall be taxable by said city and to the exclusion of the locality where the manufacturing plant is located. Accordingly, the CTO as such made a correct assessment that 100% of HPI's sales shall be taxable by said city. Likewise, this Bureau upholds the CTO's view that the 70%-30% allocation shall be used only in cases, where there are no branches or sales outlets in the area where the sale transactions are made. Query No. 2 With regard to the issue on whether HPI can ask for a refund for business tax erroneously paid to the concerned municipalities, the applicable provision of law is Section 196 of the Local Government Code (LGC) of 1991, which provides as follows: " SEC. 196. Claim for Refund of Tax Credit . No case or proceeding shall be maintained in any court for the recovery of any tax, fee, or charge erroneously or illegally collected until a written claim for refund or credit has been filed with the local treasurer . No case or proceeding shall be entertained in any court after the expiration of two (2) years from the date of the payment of such tax, fee, or charge, or from the date the taxpayer is entitled to a refund or credit." (Underscoring ours) Section 196 abovequoted provides the requirements before any case or proceeding for the recovery of any tax, fee or charge erroneously or illegally collected may be filed in any court. To carry out the provisions of Section 196, the details in claiming tax refund or credit were filled in by Article 286 of the IRR which was promulgated well within the limits of the authority granted. "ART. 286. Claim for Refund or Tax Credit . All taxpayers entitled to a refund or tax credit under this Rule shall file with the Local treasurer a claim in writing duly supported by evidence of payment ( e.g. , official receipts, tax clearance, and such other proof evidencing overpayment) within two (2) years from payment of the tax, fee or charge. No case or proceeding shall be entertained in any court without this claim in writing, and after the expiration of two (2) years from the date of payment of such tax, fee or charge, or from the date the taxpayer is entitled to a refund or tax credit. The tax credit granted a taxpayer shall not be refundable in cash but shall only be applied to future tax obligations of the same taxpayer for the same business. If a taxpayer has paid in full the tax due for the entire year and he shall have no other tax obligation payable to the LGU concerned during the year, his tax credits, if any, shall be applied in full during the first quarter of the next calendar year on the tax due from him for the same business of said calendar year. Any unapplied balance of the tax credit shall be refunded in cash in the event that he terminates operations of the business involved within the locality." It is clear from the aforequoted provision of law that the claim for refund or tax credit shall be filed with the local treasurer. For so long as the said claim is duly supported by evidence of payment ( e.g. , official receipts, tax clearance, and such other proof evidencing overpayment) the Treasurer's Office has no alternative but to grant such request. In view hereof, it is suggested that you, or any authorized official or representative of HPI may confer with the local treasurer concerned for the purpose of securing the refund or tax credit. However, this to emphasize that as a rule, refund of the amount of taxes erroneously paid to local government units are in the form of tax credits. It is only in case where the taxpayer concerned does not have any future tax obligation that cash refund may be allowed. Query No. 3 With regard to the issue on whether HPI can request the LGUs, where the Company has incurred underpayments, not to impose surcharges, penalties and interests considering that the underpayments were due to erroneous interpretation of the law and that there was no intent to evade payment, Article 282 (b) of the Implementing Rules and Regulations (IRR) quoted hereunder, implementing Section 192 of the LGC shall apply: "Article 282. Authority to Grant Tax Exemption Privileges . x x x "(b) Local sanggunians granting tax exemptions, tax incentives and tax reliefs may be guided by the following: "(1) On the grant of tax exemptions or tax reliefs: "(i) The exemption or relief may be granted in cases of natural calamities, civil disturbances, general failure of crops or adverse economic conditions such as substantial decrease in the prices of agricultural or agri-based products; "(ii) Any grant of exemption or relief shall be through an ordinance; "(iii) Any exemption or relief granted to a type or kind of business shall apply to all businesses similarly situated; and "(iv) Any exemption or relief granted shall take effect only during the next calendar year for a period not exceeding twelve (12) months as may be provided in the ordinance. In the case of shared revenues, the tax exemption or relief shall only extend to the LGU granting such exemption. "xxx xxx xxx." Based on the abovequoted provision of the LGC, the law specifically provides the grant for tax exemptions and reliefs under certain situations and conditions. It can be observed however, that there is no mention of condonation of the payment of business tax, penalties, or interests. The LGC, however, provides, as an exception, condonation of real property tax (Sections 276 and 277) on situations and/or conditions enumerated therein but nowhere in the Code does it provide for the condonation of local business tax penalties and interests. However, in the case submitted for resolution, this Bureau finds some acceptable and valid indicative reasons to suggest condoning the penalties and interests that the LGUs concerned may have imposed on HPI. Another reason (perhaps), aside from the erroneous interpretation of the law, is that the underpayment was made in good faith on the firm belief that it was the correct tax. No less than the Supreme Court, in the case of Quimpo v. Mendoza, G.R. No. L-33052, dated 31 August 1981 , took into consideration the apparent good faith of the petitioner in not imposing the surcharge on the deficiency realty tax under Republic Act No. 521. Another consideration is the opinion rendered by the Secretary of the Department Finance in a letter dated 10 February 1975, wherein it was held that taxpayers who paid their taxes on time and in the honest belief that the tax assessed and collected from them were correct should not be required to pay the surcharge and interest in the guise of late payment of the tax. (Philippine Law on Local Government Taxation, Annotated, 2000 Edition, A. B. Ursal, p. 199) We trust that your abovementioned concerns have been properly addressed. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director