Tax Articles

Tax Base: Local Business Taxes

By Fulvio D. Dawilan

It is often said that taxes are the lifeblood of the government. This is true and it applies both to the national government as well as to the local governments. Thus, local governments units (LGUs) are also granted the power to create their own sources of revenues by no less than the constitution. The Local Government Code of 1991 (“LGC”) further defined that power.

Pursuant to this power, LGUs have enacted their respective tax ordinances aimed at imposing taxes on properties and business activities located or conducted within their respective jurisdictions. There are a number of activities and properties which are the subject of local taxes, and the more significant sources of revenues of LGUs are the local business taxes. These business taxes are computed as certain percentages of gross sales or receipts made by a 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. It is this time of the year when some LGUs flex their power to collect the taxes due, not only for the present year, but also for the local business tax assessments for previous years. The imposition of local taxes often lead to disputes between the local tax authorities and taxpayers in their jurisdictions. Disagreements notwithstanding, businesses are often forced to pay for fear of not getting the permit and risk having the business closed.

And what are the usual reasons resulting in the disputes between the tax authorities and their taxpayers? There are lots of them. One is the proper tax base for the local business tax. To ensure collections of taxes higher than that of the previous year, some LGUs would require businesses to pay local taxes based on sales or receipts more than that of the previous year. And in some cases, the basis is not actual financial data but assumptions. And even this period of renewal, some LGUs are continuing that practice as if they are not aware of the unusual conditions businesses faced in the previous year.

This needs a revisit of the proper tax base for the computation of local business taxes. The LGC specifically provides the bases for the imposition of local business tax to be the gross revenue or gross receipts for the preceding calendar year. So as a rule, the local business tax due for the year should either be computed as a percentage of gross revenue or gross receipts for the preceding calendar year. And these two are not the same. The difference is significant because while generally the tax may be computed on the gross receipts or gross revenue, there are specific types of business, such as the service providers, where the tax base is the “gross receipts”.

As early as 2007, in G.R. No. 176667, the Supreme Court made a distinction between gross revenue and gross receipts as basis for local business taxes. In that case, the LGU assessed the taxpayer based on the gross revenue as reported in the taxpayer’s financial statements for the previous year. The LGU proceeded on the assessment, taking the position that the “gross receipts” is synonymous with gross earnings/revenue. Ruling against the LGU’s position, the Court noted that “gross receipts” is different from “gross revenue”. Gross receipts include money or its equivalent actually or constructively received in consideration of services rendered or articles sold, exchanged or leased, whether actual or constructive. In contrast and taking cue from the accounting rules, the Court stated that “gross revenue” covers money or its equivalent actually or constructively received, including the value of services rendered or articles sold, exchanged or leased, the payment of which is yet to be received. With specific reference to services, revenue is recognized when the services have been rendered. In other words, revenue is recognized when the earning process is complete, whether or not the selling price is collected.

This decision of the Supreme Court was echoed by the Court of Tax Appeals in subsequent cases. In C.T.A. AC No. 217, July 13, 2020, the Court invalidated a local tax deficiency assessment computed based on kilometrage, which is in turn based on income. The taxpayer, being a contractor/service provider should be taxed based on gross receipts. Similarly, in a recent case (CTA EB No. 2157, January 07, 2021), the Court declared the assessment void, the deficiency tax assessment having been computed on a tax base (gross value of the taxpayer’s shipments) that is not in accordance with the mandates of the law. As in the other cases, the rules require the businesses in which the taxpayer belongs to pay tax based on gross receipts.

Since the taxpayers involved in these cases were specifically subject to local tax based on their gross receipts in accordance with the rules applicable to them, the Court concluded that the tax base should be the gross receipts of the preceding year and not gross revenue of the preceding year. It was error on the part of the LGU to have computed the business taxes due on the gross revenue. To do so may result in double taxation, where a revenue is taxed at the time when the revenue is accrued and again when the selling price is collected.

While the issue on those cases revolved around the differentiation of the gross revenue and gross receipts as the tax base, it emphasizes the rule that local business taxes cannot be imposed on a tax base that is not provided in the law. LGUs could not compute the tax on any other bases, either at the time of the renewal of business licenses or in subsequent examinations, other than those provided in the rules.

While taxes are indeed the lifeblood of the government, the same should not be used as tool to destroy. As justice Holmes said, the power to tax is not the power to destroy while the Court sits. Tax administrators should therefore implement the tax rules for the benefit of both the taxpayers and the government. That is a duty. They should not wait for the Court to mediate for a tax law to be properly implemented.