Authority of the Municipality of Buhi, Camarines Sur to Impose Business Tax upon People's Energy Services, Inc.

April 8, 2008 DILG LEGAL OPINION NO. 016-08 Atty. Ramon I. Constancio President/CEO People's Energy Services, Inc. (PESI) Sta. Justina, Buhi Camarines Sur Dear Atty. Constancio : This has reference to your earlier letter asking our legal opinion on whether the Municipality of Buhi, that Province, has the authority to impose business tax upon People's Energy Services, Inc. (PESI) when no express authority was given to it in that Municipality's Revenue Code. As stated in your letter, PESI owns and operates the Lake Buhi-Barit River Hydro Electric Power Plant after its privatization in 2004 through a bidding conducted by Power Assets and Liabilities Management Corporation (PSALM). Since its operation in 2005, PESI had been paying business tax amounting to eighty thousand pesos (Php80,000) to the Municipality of Buhi. You are aware that the Municipality of Buhi is authorized to impose business tax under Section 143 (h) of the Local Government Code of 1991 (R.A. 7160). However, when the Municipality tried to implement this provision via its Municipal Revenue Code, it did not specifically provide for the imposition of business tax to a power generation company, a group to which the PESI belongs. What was provided in the Municipal Revenue Code is a tax on general engineering contractors or installers of heat or power. To your mind, power generation is definitely different from general engineering contractors or installers of heat or power. Such being the case, you are of the view that the Municipality of Buhi cannot impose business tax on PESI. Hence, your query. At the outset, may we invite your attention to Section 143 (h) of the Local Government Code of 1991 (R.A. 7160), which provides and we quote: ESTAIH "SEC. 143. Tax on Business. The municipality may impose taxes on the following businesses: xxx xxx xxx (h) On any business, not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, That on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year. . . ." Based on the foregoing, municipalities, like the Municipality of Buhi, may impose tax on business which the Sangguniang Bayan may deem proper subject to the limitation that on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed 2% of gross sales or receipts of the preceding calendar year. It must be emphasized however that before the Municipality of Buhi may impose and collect such taxes, fees or charges on any business operating thereat, necessarily, the same must first be levied under a duly enacted tax ordinance. Coming now to your query, since the Municipal Revenue Code of the Municipality of Buhi did not specifically provide for the imposition of business tax to a power generation company like PESI, we are of the view that the imposition and collection of business tax on PESI is legally infirmed as there is yet no ordinance duly enacted for such purpose. With regard to your claim that PESI is covered under the Mini-Hydroelectric Power Incentives Act (R.A. 7156) providing a Special Privilege Tax on mini-hydro power plant developers by requiring them to remit only two percent (2%) of the gross receipts derived from the sale of electric power to the Bureau of Internal Revenue, considering that the same is within the technical expertise of the Department of Finance-Bureau of Local Government Finance (DOF-BLGF), we deem it proper that you instead refer the matter to said agency. We hope that we have addressed your concern accordingly. IEHScT Very truly yours, (SGD.) AUSTERE A. PANADERO Undersecretary ATTACHMENT PEOPLE'S ENERGY SERVICES, INC. Sta. Justina, Buhi, Camarines Sur April 12, 2007 HON. RONALDO PUNO Secretary Department of Interior and Local Government San Francisco Condominium, EDSA, Quezon City Thru: The Legal Department Dear Secretary Puno: People's Energy Services, Inc. (PESI) owns and operates the Lake Buhi-Barit River Hydro Electric Power Plant after its privatization in 2004 through a bidding conducted by Power Assets and Liabilities Management Corporation (PSALM). Just like any other legitimate business, PESI would like to comply with all statutory, business and revenue requirements. Since its operation in 2005, PESI had been paying business tax of Php80,000.00 to the Municipality of Buhi. We perfectly understand that under the Local Government Code it is expressly stated that: Section 143. Tax on Business. The municipality may impose taxes on: xxx xxx xxx (h) On any business, not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, That on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year. The sanggunian concerned may prescribe a schedule of graduated tax rates but in no case to exceed the rates prescribed herein. EScaIT xxx xxx xxx The foregoing provision is implemented by the Municipality of Buhi through its Municipal Revenue Code or Ordinance No. ______ (unnumbered). Thereby the Municipality of Buhi imposed upon PESI as a power generation entity, a business tax which is .05% or 50% of 1% of the gross income of the company anchoring the same on the specific provision of the municipal code, to wit: xxx xxx xxx General engineering contractors, general building contractors, and specialty contractors, filling, demolition and salvage work contractors and proprietors or operators of bulldozers and other heavy equipment made available to others for considerations; persons engaged in the installation of water system and gas or electric light, heat or power, proprietors or operators of engraving and plating establishments; xxx xxx xxx The above-cited provision of the Municipal Revenue Code did not specifically provide for the business tax to a power generation company. Power generation is definitely different from general engineering contractors or installers of heat or power. It is at this juncture that we would like to inquire from your office whether the Municipality of Buhi has the authority to impose the abovementioned business tax upon PESI when no express authority was given to them based on the Municipal Revenue Code. Although in the provision of the Local Government Code it is stated that the LGU can tax " on any business ,not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax ," the Sangguniang Bayan of Buhi through its Municipal Revenue Code did not specify that power generation business is among those businesses they deem proper to tax. Absent the specific provision stating that the power generation business is taxable, the Local Government Unit cannot impose the tax in question upon PESI which is engaged in the power generation. Further, we believe that we are covered under the Mini-Hydroelectric Power Incentives Act or Republic Act 7156 which provides a Special Privilege Tax to mini-hydro power plant developers by requiring them to remit only 2% of the gross receipts derived from the sale of electric power to BIR. We also believe that we will be doubly taxed if the Sanggunian will impose another tax in the same company revenue and business. aHCSTD We would like to solicit your valuable legal opinion on the matter. Thank you. Yours truly, (SGD.) ATTY. RAMON I. CONSTANCIO President/CEO