Bureau of Local Government Finance Opinion

June 23, 2014 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Ms. Sharon R. Pervera Treasurer MULTIPLEX BUILDERS, INC. (MBI) Engineers Contractors Fabricators U718 Cityland 10 Tower 2 154 H. V. Dela Costa Street Makati City Madam : This refers to your letter dated April 8, 2014, requesting opinion in connection with the Notice of Assessment of the City of Makati for supposedly deficiency local business tax amounting to P568,254.19, including surcharges and interest, for the period covering 2008-2009 computed based on gross receipts. MULTIPLEX BUILDERS, INC. is a construction contractor with principal office in Makati City. MBI paid its business taxes pursuant to the provisions of Art. 243 (a) (1) (b) (3) of the Implementing Rules and Regulations (IRR), Section 150 (b) (1) of the Local Government Code (LGC) of 1991 and Local Finance Circular No. 3-95 dated May 22, 1995. In the said letter, this Bureau understood that the basis of Makati City in the assessment of deficiency taxes amounting to P568,254.19, including surcharges and interest, is for CYs 2008 to 2009. On the other hand, it appears that the period of examination is 2008-2012. MBI is of the view that the period of examination should not be beyond what is stipulated under Article 259 (c) of the IRR, implementing Section 171 of the LGC, which provides as follows: "Article 259. Examination of Books of Accounts and Pertinent Records of Businessmen by Local Treasurer . (a) For purposes of implementing this Article, only the treasurer, or his duly authorized representative, of LGU imposing the tax, fee or charge, may examine the books of accounts and pertinent records of business in order to ascertain, assess and collect the correct amount of the tax, fee and charge. "(b) The provincial, city or municipal or barangay treasurer may, by himself or through any of his deputies duly authorized in writing, conduct the examination of the books, accounts and other pertinent records of any person, partnership, corporation or association subject to local taxes, fees and charges. "(c) Such examination shall be made during regular business hours not oftener than once a year for every tax period, which shall be the year immediately preceding the examination , and shall be certified by the examining official. Such certification shall be made of record in the books of accounts of the taxpayer examined. ( Boldfacing for emphasis ) "(d) In case the examination is made by a duly authorized deputy of the local treasurer, the written authority of the deputy concerned shall specifically state the name, address, and business of the taxpayer whose books, accounts and pertinent records are to be examined, the date and place of such examination, and the procedure to be followed in conducting the same ." ( Emphasis ours ) Hence, said letter was referred to the City Treasurer of Makati for comment and appropriate action under a 1st Indorsement dated May 5, 2014, copy furnished that Office expressing the view that pursuant to the aforequoted provision, it is clear that such examination is limited to the year immediately preceding the examination. Such limitation signifies the intent of the law which is to remind, if not to direct, local treasurers to examine every year the books of accounts of businesses operating within their respective localities in order to ascertain, assess and collect the correct amount of taxes, fees and charges paid during the current year. Under a letter dated June 17, 2014, the City Treasurer of Makati submitted its comments likewise citing Section 171 (c) of the LGC and Article 259 (c) of the IRR. In addition, the City Treasurer cited the provisions of Section 194 of the same Code, quoted as follows: "Section 194. Periods of Assessment and Collection . (a) Local taxes, fees, or charges shall be assessed within five (5) years from the date they became due. No action for the collection of such taxes, fees, or charges, whether administrative or judicial, shall be instituted after the expiration of such period: Provided, That, taxes, fees or charges which have accrued before the effectivity of the Code may be assessed within a period of three (3) years from the date they became due. "(b) In case of fraud or intent to evade the payment of taxes, fees, or charges, the same may be assessed within ten (10) years from discovery of the fraud or intent to evade payment. "(c) Local taxes, fees, or charges may be collected within five (5) years from the date of assessment by administrative or judicial action. No such action shall be instituted after the expiration of said period: Provided, however, That taxes, fees or charges assessed before the effectivity of this Code may be collected within a period of three (3) years from the date of assessment. "(d) The running of the periods of prescription provided in the preceding paragraphs shall be suspended for the time during which: "(1) The treasurer is legally prevented from making the assessment of the collection; "(2) The taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess or collect; and "(3) The taxpayer is out of the country or otherwise cannot be located." Further, the City Treasurer cited the provisions of the Makati Revenue Code, otherwise known as City Ordinance No. 2004-A-025, Sec. 7A.07 of which provides: "Examination of Books of Accounts and Pertinent Records of Business Establishments by the City Treasurer- Only the City Treasurer may, by himself or through any of his deputies duly authorized in writing, examine the books of accounts, and other pertinent records of any person, partnership, corporation, or association subject to city taxes, fees and charges in order to ascertain, assess, and collect the correct amount of the taxes, fees and charges. Such examination shall be made during regular business hours, within a period of five (5) years pursuant to Section 194 of the Local Government Code of 1991. The City Treasurer may examine the books of accounts and other records pertinent to the previous unexamined years, and shall be certified by the City Treasurer. Such certificate shall make of record in the books of accounts of the taxpayers examined." The City Treasurer contends that in view of the above provisions, it is the mandate of the local treasurer and/or his duly designated representative, to subject under examination and audit, the books of accounts and other pertinent financial records of a taxpayer under its jurisdiction. Provided, however, that the procedure and manner of examination shall be in accordance with what has been provided for in the LGC and IRR, as stated above. It is further contended that the tax period covered by the Letter of Authority (LOA) issued to MULTIPLEX BUILDERS, INC. comprised of five (5) taxable years which falls into accord with the number of years the local treasurer may be able to examine its books of accounts. The tax period for examination fall within the time frame provided for in Section 171 of the LGC which is the year immediately preceding the examination, which if analyze, the LOA was issued in 2013, the taxable years under examination are 2008, 2009, 2010, 2011, & 2012, which is "the year immediately preceding the examination." In this connection, this Bureau would like to reiterate its view embodied in the 1st Indorsement dated May 5, 2014 which states: "It is clear that such examination is limited to the year immediately preceding the examination. Such limitation signifies the intent of the law which is to remind, it not to direct, local treasurers to examine every year the books of accounts of businesses operating within their respective localities in order to ascertain, assess and collect the correct amount paid during the current year." However, this Bureau in its previous action taken on similar cases, has consistently expressed that a local government unit (LGU) may review previous assessments made for the purpose of collecting the correct taxes due from a taxpayer within a period of five (5) years if the taxing authority deems that there was underdeclaration committed and ten (10) years in case of fraud or intent to evade the payment of correct taxes as provided for in Section 194 quoted above. In addition, it must be pointed out that such review does not estop the taxing authority from assessing the taxpayer of additional taxes to cover any deficiency discovered. Moreover, it is worth mentioning that the City of Makati has enacted the Makati Revenue Code, otherwise known as City Ordinance No. 2004-A-025 which has been the basis for the examination of books of accounts of MBI. Hence, unless declared by competent authority that the said Revenue Code is illegal or unconstitutional, the City Treasurer of Makati has no other option but to examine the books of accounts of MBI within a period of five years, otherwise, she can be charged of remission and/or dereliction of duty for not implementing what appears to be a valid ordinance, employing the principle of "presumption of regularity" of the same. On the part of MBI, it may either agree to pay the deficiency local business tax including surcharges and interest fees levied or file its protest which should be resolved pursuant to the provisions of the LGC. The Company may also avail of another forum in resolving the issue, which is the court of competent jurisdiction. We hope that this will help clarify matters. Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director