Tax Articles

Local Business Tax: Taxpayer’s Remedies

Atty. Fulvio D. Dawilan

In the previous article in this column, my colleague, Irwin Nidea, Jr., articulated that at this time of the year when permits to do business are required to be renewed, local government units (“LGUs”) have the tendency to flex their power to collect taxes from individuals and entities doing business within their respective jurisdictions.

Indeed, in countries like ours where taxes are the main sources of revenue, the exercise of the power of taxation is necessary for the very existence of government. Without the revenue raised from taxation, the government cannot support itself and the public needs. And so, it is often said that taxes are the lifeblood of the government. This is true not only for the national government but also to the smallest unit of government. Thus, no less than the constitution grants the LGUs the power to create their own sources of revenues. That is further amplified by the Local Government Code of 1991 (“LGC”).

And one of the more significant sources of revenues for LGUs are the local business tax. These business taxes are generally based on gross sales or receipts made by the business for the preceding year. These taxes, together with other fees and charges, accrue on the first day of January of each year, and are usually required to be paid before the business permit is issued.

There are instances where disputes ensue between the LGU and the taxpayer. The issues range from the legal and factual bases of the imposition of business tax to disagreement pertaining to the correctness of the computations. But such issues could affect the timeliness in securing the business license. Often, for fear of failing to meet the deadline for the payment of the tax and the issuance of permit and thus avoid doing business without a license, taxpayers are constrained to pay the tax sought to be collected by the LGU, even for tax impositions they believe should not be due.

In situations like this, what are the remedies available to the taxpayers? Essentially, there are two remedies that taxpayers can resort to under the LGC – one is the “protest of assessment” under Section 195 and a “claim for refund or tax credit” under Section 196. A taxpayer may file a protest under Section 195 or pay the tax and, thereafter, file claim for refund under Section 196 of the LGC.

Under what circumstances are these remedies applicable? There are court decisions holding that Section 195 applies only in cases of notice of assessment. And a notice of assessment, as commonly understood, upon review or examination conducted by tax authorities after a taxpayer has paid or supposed to have paid his taxes. Based on the LGC, an LGU has a period of 5 years (or ten years in case of fraud) within which to conduct as assessment. It could be inferred from some judicial pronouncements that it is only in this situation where Section 195 applies.

A statement of account or payment order cannot be considered the notice of assessment required under Section 195 as the notice of assessment contemplates a computation based on deficiency taxes, when the local treasurer finds that the correct taxes were not paid. Accordingly, the remedy of protest does not apply to statements of accounts or orders of payment issued in connection with a taxpayer’s renewal of business permits and licenses at the beginning of the year. The only remedy is for the concerned taxpayer to pay and, if it disagrees with the tax payment, file a claim for refund of incorrectly paid or illegally collected taxes.

A closer look at many other decisions, however, would indicate that a taxpayer faced with similar situation is free to choose which remedy to enforce. And once he chooses the remedy, he must observe the procedures laid down by law for the availment of the said chosen remedy. Apparently, these two remedies call for different requirements and conditions for their application. As such, a taxpayer should be clear on the basis of its action, and follow the prescribed procedure for that action.

A taxpayer may therefore file a protest against an assessment made upon the renewal of business permit. But this option presupposes that taxes had not yet been paid. Once the contested tax had been paid, a protest will not result in getting the desired result, that is, the return of the amount allegedly incorrectly paid or illegally collected.

In essence, while a taxpayer may legally protest taxes sought to be imposed when renewing his business permit, this may delay the issuance of business permit. The only remedy available to a taxpayer faced with a situation where he is forced to pay tax to avoid the non-issuance of business permit is to pay and apply for a refund or tax credit. This is an independent remedy and the taxpayer would only need to follow the requirements of said remedy, which are: (1) the concerned taxpayer files a written claim for refund or credit with the local treasurer, and (2) the case or proceeding must be filed within two years from the date of payment of the tax, fee or charge. Judicial precedents dictate that a prior resort to protest action is not necessary.