Bureau of Local Government Finance Opinion

May 21, 2014 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Mr. Edward L. Roguel Partner, Tax Advisory & Compliance Punongbayan & Araullo 19th and 20th Floors, Tower I The Enterprise Center 6766 Ayala Avenue 1200 Makati City Philippines Sir : This refers to your letter dated March 25, 2014 requesting in behalf of your client, Bank of Makati, Inc., (the "Bank") confirmation of your opinion on the following issues: 1. The Bank is liable for the payment of local business tax (LBT) to the LGU where the Head Office is located and in the LGUs where the Bank has a branch, on the transactions recorded in the Head Office and the Branch, respectively. 2. The Bank is not required to register in the LGU where it does not have a branch and shall not be liable for the payment of LBT in LGUs where it does not have a branch. 3. Employees of the Bank who are deployed in the Dealer's branches (clients) where the Bank does not maintain a branch are not be required to secure and pay occupational permit fee. Background The Bank is a rural bank duly organized and existing by virtue of Philippine laws. The Bank's head office is located at 44 Sen. Gil Puyat Avenue, Makati City, while its branches and loan centers are located in various parts of the country. The Bank offers a variety of loans such as personal, salary, consumer and motorcycle loans for the purpose of meeting the credit needs of its borrowers. As part of its retail loan strategy, the Bank forged a partnership with its affiliate motorcycle dealers, namely: Motortrade Nationwide Corporation, Motorjoy and Honda Prestige (collectively known as "Dealers"), to extend credit to those who want to take out motorcycle loans. To expedite processing of loans applications as well as facilitate collection of loans receivables particularly in areas where the Bank has no branches, the Bank assigns some of its employees in the different branches of the Dealers. These employees who are assigned in the areas where the Dealer's branch are located are not required to report daily in the Dealer's branches, as they can conduct their work outside of the Dealer's branch as the circumstance may require. The Bank and the Dealers also maintain an outsourcing arrangement in order to facilitate the processing and collection of the loans. The Bank employees stationed in the areas where various branches of the Dealers are located have the following responsibilities: a) Loan Coordinator responsible for the processing and documentation of the loans or financing application of buyers or motorcycles. b) Credit Investigator is responsible for conducting background checking on the applicant. c) Credit Collector acts as representative of the Bank in collecting loan payments from delinquent loan receivables. The procedures followed for receipting installment loan payments varies depending on to whom the loan payments are made by the customers: 1. In cases that the monthly loan payments of customer-borrowers are coursed through the Dealers, an acknowledgement receipt is issued by the latter as proof of loan payments/instalments; 2. The Dealer shall then forward the loan payment to the Loan Coordinator who, in turn, shall encode the payment using the computers in the Dealer's premises. Only the Loan Coordinator has access to the Bank's system and therefore, the Loan Coordinator is responsible for entering the customer's payment into the computer system; 3. Once payment is encoded in the system and credited to the account of the Bank, the Bank shall issue the official receipts and sent it to the concerned Dealers for pick up by the customers; 4. However, if payment is made directly to the Bank's branch office, the concerned branch shall issue the corresponding official receipt for the loan amortization payments made by the customer; 5. In case an account becomes delinquent, the Credit Collector takes over the collection of overdue payments. And if payment is made to the Credit Collector, a provisional receipt shall be issued. The official receipt shall be sent to the Dealer upon encoding by the Loan Coordinator of the payment in the Bank's system. Due to the presence of bank employees in the branches of the Dealers, some LGUs require the Bank's employees to secure occupational permit , notwithstanding the fact that the Bank does not maintain any physical presence and these Bank personnel are not employees of the Dealers. Some LGUs also insist that like the Dealers, the Bank should also register and pay LBT although it does not have a branch in the concerned LGUs. In an attempt to collect occupational permit fee and LBT from the Bank, some LGUs withheld the issuance of the Mayor's permit of Dealers pending registration of the Bank and securing of Occupation Permit by its employees together with corresponding payments to the concerned LGUs. Discussion Under Section 143 in relation to Section 146 of the Local Government Code (LGC), a municipality/city may impose tax "on banks or financial institutions at the rate of 50% of one percent (1%) on the gross receipts of the preceding calendar year derived from interest, commissions and discounts from lending activities , income from financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium". On the other hand, Section 150 of the same Code provides that "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 outlets is located . In cases where there is no such branch or sales outlet in the city or municipality where the sale or transaction is made, the sale shall be duly recorded in the principal office and the taxes due shall accrue and shall be paid to such city or municipality." ( Underscoring for emphasis ) In this connection, Section 5 of Local Finance Circular (LFC) No. 1-93 issued by the Department of Finance provides for the rules on the situs of LBT on the allocations of gross receipts of banks and other financial institutions. For the purpose of LBT, transactions filed and negotiated with the branch shall be recorded in the said branch and it shall include transactions filed and negotiated in the branch but was forwarded to the Head Office for the final approval. Similarly, gross receipts by the head office shall be taxable in the city where the head office is located. As submitted, the Bank maintains a number of branches all over the country but there are areas where the Bank has no branches and in these cases, it is the nearest branch of the Bank which accepts and processes the loan application. Thus, each branch has its assigned coverage area where installment financing applications for motorcycles from the Dealers are processed and approved. But, in cases where there is no branch present or capable of servicing loan applications, such applications are forwarded to the Head Office for processing and approval. As regards the presence of Bank's employees in the premises of the branches of Dealers to facilitate the processing of the financing agreements, it is viewed that the same does not create a business presence of the bank in the said localities but are considered as necessary or incidental to the nature of business transaction extended by the Bank to both its clients (Dealers and loan applicants). As such and in the case that the Bank does not have a branch in said locality where the branch of the Dealer is located, employees of the Bank stationed in said Dealer's branch to facilitate loan applications and collection of loans receivable should not be required to secure and pay the required occupational permit fee imposed by the LGUs since their employer (Bank) is not registered in said LGU and therefore beyond the taxing powers and regulation of LGUs concerned. In view of the above, the LGUs where the sales office or branch of the dealers are located cannot impose tax on the Bank if the Bank does not have a branch in said locality even if the employees of the Bank are stationed in the dealer's sales office. On Query No. 1 The Department of Finance issued Local Finance Circular No. 2-07 dated February 26, 2007, copy enclosed, amending Sections 2 & 5 of Local Finance Circular 1-93 dated June 16, 1993 prescribing the guidelines governing the power of Municipalities and Cities to impose business tax on banks and other financial institutions pursuant to Sections 143 (f), 150 and 151, respectively, of Republic Act No. 7160, otherwise known as the Local Government Code of 1991 and its Implementing Rules and Regulations (IRR). Section 5 of LFC No. 2-97 provides as follows: "Section 5. Situs of the Tax . For purposes of collection of the tax, the following shall apply (a) All transactions filed with or negotiated in the branch shall be recorded in said branch and the gross receipts derived from said transactions shall be taxable by the city or municipality where such branch is located. This rule shall be applied to: "(1) transactions negotiated with and approved by the branch manager under his own authority, or "(2) transactions filed and negotiated in the branch but being beyond the approving authority of the branch manager, are forwarded to the head Office for final approval. "(3) transaction where the stated address in the loan application of the borrower is the city or municipality where the Bank has a branch, in which case the Head Office upon approval of the loan shall credit the transaction to the Bank Branch. "xxx xxx xxx." Clearly, the immediate preceding provisions of LFC No. 2-07 shall govern the issue on LBT liability of banks and other financial institutions as in the herein case, that all transactions filed and negotiated in the branch shall be recorded in the branch and the gross receipts derived from the transactions shall be taxable in the LGU where the branch is located. On Query No. 2 Article 243 (b) (1) (2) of the IRR, implementing Section 150 of the LGC, provides as follows: "Article 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) 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." Pursuant to the abovequoted provisions of the IRR of the LGC, it can be deduced that even if there are sales or transactions made in such localities but as long as there are no branch or sales offices and the sales or transactions made thereat are recorded in the principal/head office, the tax shall accrue to the locality where the principal/head office is located. In this particular case, the Bank is not required to register and liable to pay the LBT in the LGU concerned where it (Bank) does not have or maintain a branch. On Query No. 3 This Bureau concurs with your stand that the employees of the Bank who are assigned in various branches of the Dealers in different localities to facilitate the processing of loan applications and other activities related thereto and where the Bank does not have a branch office, are not required to secure and pay the occupational permit fee for its employees considering that they are not employees of the Dealers. In summary, (1) the Bank is liable for LBT if it maintain a branch in the locality where transaction are filed or consummated; (2) However, it is not liable for LBT to any LGU where it does not have or maintain any branch; and (3) Bank employees assigned in various branches of the Dealers for specific purposes are not required to secure Occupational Permit as they are not under the employment of said Dealers or its branches and therefore beyond the authority and regulation of the LGUs concerned hosting the Dealers or its branches. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director