Bureau of Local Government Finance Opinion

March 9, 2001 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Atty: Priscilla G. Valer Romulo, Mabanta, Buenaventura Sayoc & delos Angeles 30th Floor, Citibank Tower Citibank Plaza 8741 Paseo de Roxas Makati City Madam : This refers to your letter dated February 15, 2001 requesting on behalf of your client Honda Cars Philippines, Inc. (Honda Cars for brevity) confirmation of your opinion that in computing local business tax liability of Honda Cars under Section 143 of the Local Government Code (LGC) of 1991, the excise tax paid on the importation and manufacture of its products shall be excluded from taxable gross sales in accordance with Section 131 (n) of the said Code. In addition, an opinion is being requested on the situs of the local business tax payable by Honda Cars under Section 143 of the LGC. Representations are made that Honda Cars is a corporation engaged in the business of importing, assembling and manufacturing automobiles and automobile products. Its principal office and manufacturing plant are located in Sta. Rosa, Laguna. As a manufacturer, assembler and importer of automobiles, Honda Cars pay the excise tax, which is an ad valorem tax on automobiles imposed under Section 149 of the National Internal Revenue Code at rates ranging from 15% to 100% of the selling price, depending on the engine displacement of the automobiles. The excise tax is recorded as part of sale because it forms part of the selling price invoiced to the dealers. EDaHAT Honda Cars sells the automobiles and automobile products only through authorized Honda Car dealers nationwide, which have pre-existing Dealership Agreement with Honda Cars. All selling activities such as, processing of sales orders of the authorized dealers, invoicing and recording of sale, delivery of automobiles and automobile products, collection of receivables and issuance of the corresponding official receipts to the dealers are done at the principal office. Further, in accordance with the Dealership Agreement with the dealers, title over the products sold passes from Honda Cars to the dealers at the office/plant in Sta. Rosa, Laguna. Thus, all sales are effected in Santa Rosa. No sales whatsoever is made in any locality outside Sta. Rosa. Honda Cars also rents an office in Makati City. No sales are made by the Makati Office. Neither are deliveries effected in Makati since, as mentioned, the dealers take title over the products at the office/plant in Sta. Rosa. The Makati Office is maintained as a liaison office and serves only as a message and coordination center. It houses personnel that evaluates customer's feedback and oversees the dealer's compliance with the terms and conditions of the Dealership Agreement. Said office also serves as the operation base for the personnel that conduct market research and studies, formulates advertising and promotion strategies, coordinates with advertising agencies and the media with respect to marketing, advertising and promotion campaign. However, the City of Makati requires Honda Cars to pay 30% of its gross sales and pay the local tax due thereon as a condition for the issuance of the Mayor's Permit and business license. DHSEcI ISSUE NO. 1 To support its claim, Honda Cars cited the provisions of Section 131 (n) of the LGC, quoted as follows: "Section 131. Definition of Terms. When used in this Title, the term: "(a) . . . "(n) Gross Sales or Receipts include the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person excluding discounts if determinable at the time of sales, sales return, excise tax, and value-added tax (VAT); "xxx xxx xxx." Honda Cars contends that the excise tax, like the value-added tax, is excluded from gross sales or receipts because although it is received by Honda Cars from the dealers as part of the selling price, it is paid to the Bureau of Internal Revenue and does not redound to the benefit of Honda Cars. Honda Cars contends further that it is a well settled principle in taxation that amounts earmarked by law or regulation for payment of third parties do not form part of taxable sales or receipts. Honda Cars cited the case of Commissioner of Internal Revenue vs. Manila Jockey Club, Inc. , 108 Phil. 821 (1960), wherein the Supreme Court held that the gross receipts of the Manila Jockey Club should not include the 1/2% which the Club is directed to turn over to the Board of Races, the 5% which it is directed to give to winning horses and jockeys, and the P10.00 contributed to a common fund by horse owners for each horse participating in the special novato race, because all these moneys, although delivered to the Club, have been especially earmarked by law or regulations for other persons. caEIDA As can be gleaned in the aforequoted Section, the Code speaks of the tax base as the gross sales/receipts. No qualifications of any kind so as to make a deduction of any amount from gross sales can be allowed except of course the discounts if determined at the time of sale, sales returns, excise tax and value-added tax. In view thereof, this Bureau concurs in your stand that for purposes of computing its local business tax liability, Honda Cars can exclude the excise tax from the tax base by deducting the amount of excise tax paid to the Bureau of Internal Revenue from the amount of Net Sales. In addition, this Bureau finds no merits in disturbing the judicial interpretation made by competent authority on issues similarly situated as the above. ISSUE NO. 2: This Bureau has consistently expressed the view on previous similar cases that if no sales are made and recorded in the Liaison Office, a corporation should pay its business taxes in full to the local government units where the sales are made and recorded. Stated otherwise, the local government unit where only a liaison office is maintained shall not share in the business tax paid by a taxpayer, considering that said office is not included among those mentioned in the law and the Implementing Rules and Regulations (IRR) as entitled to share of the tax. In this connection and on the basis of the representations made by Honda Cars, the Makati Office is not a branch or sales offices in the real sense of the word but merely a monitoring base of orders placed by dealers. Said orders are not yet sale. They are mere offers to buy and are not perfected sale until such offers are accepted by Honda Cars. Accordingly, Honda Cars may only be required to pay regulatory fees for maintaining said office in Makati City. The 30%-70% rule shall not apply as the principal office and plant are both located in Sta. Rosa, Laguna, thus, 100% of sales shall become fully taxable by said municipality. It is hope that this will help clarify matters. cADTSH Very truly yours, (SGD.) BENJAMIN A. GERONIMO Executive Director <www.blgf.gov.ph/downloads/opinion/localtax/2001/a2001-0221.pdf>last visited January 16, 2014.