Tax Articles

Transacting Business Not Sole Basis
for Imposing Local Business Tax

By Atty. Fulvio D. Dawilan

Local governments units (LGUs) are granted the power to create their own sources of revenues by no less than the constitution. That power is further defined under the Local Government Code of 1991 (“LGC”). And provided that there is a valid tax ordinance enacted by the respective local legislative body or the sanggunian, that power can be imposed on properties and business activities located or conducted within the jurisdiction of the concerned LGU.

Like the national tax agency, LGUs had become so aggressive in their assessment and collection efforts. In fact, in many cases, two or more LGUs are trying to impose taxes on the same subject. This is not surprising, especially in the case of local business taxes, where the earning process may involve a series of activities conducted in different localities. The premise is – where there is business activity, there should be tax.

Indeed, the rule is that local taxes are payable for every separate or distinct establishment or place where business subject to the tax is conducted. Hence, it is not unusual for a locality where part of the activities are transacted to claim its share of the business tax or even to impose tax on the whole revenue, on the pretext that the income earner is doing business within its jurisdiction. But local taxation is not as simple as that. Transacting business in a locality, even if that activity constitutes doing business, is not necessarily covered by the taxing power of the concerned LGU. There are parameters defined in the LGC that provides when and where local taxes can be imposed.

Without dwelling on specific cases, let me discuss in general the extent of the power of LGUs to impose local taxes, especially when a taxpayer conducts business in different LGUs or when transactions cover more than one LGUs. The rule on situs of local taxation is very clear. Businesses, maintaining or operating branch or sales outlet elsewhere, shall record the sale in the branch or sales outlet making the sale or transaction, and the tax accrues and should be paid to the LGU where such branch or sales outlet is located. If there is no branch or sales outlet in the locality where the sale or transaction is made, the sale shall be duly recorded in the principal office and the taxes accrue and shall be paid to that city or municipality. Specific allocation rule is provided when the business has factories, project offices, plants, and plantations in different localities. And this applies irrespective of whether or not sales are made in the locality where the factory, project office, plant, or plantation is located.

Local taxes are therefore imposable only by the LGUs where the principal offices, branches/sales outlet/warehouse, factories, project offices, plants and plantations are located.

Cleary, in so far as local taxation is concerned, doing business or having part of the business transacted in an LGU does not make the business liable for taxes in that city/municipality. To be covered or not by the taxation power by the locality outside one’s principal place of business, it is not only the doing or not doing of business in the said locality that is considered. The presence or absence of a branch or the factories, project offices, plant or plantation matters.

The rules undoubtedly made clear that sales made in a locality where there is no branch shall be recorded in the principal office and the taxes due shall accrue to the city or municipality where the principal office is located. A branch is a fixed place in a locality which conducts operations of the business as an extension of the principal office. An office where orders may be received is not a branch or sales office.

Perhaps, it is unfair for LGUs where businesses are partly transacted not to have its share of the tax revenues, when its community is disturbed with the presence of business activities in its area. Indeed, there should be more equitable distribution of local taxes. As one city treasurer puts it, regardless of the extent of business conducted in its area, the presence contributes to the woes of the city. Nonetheless, the present local tax rules do not include these reasons as bases for imposing local taxes.

The present local tax system often leads to misunderstanding among LGUs and their taxpayers, as to which LGU has the authority to impose tax. The quarrel as to which LGU has the jurisdiction to impose tax often comes at the expense of the businesses. Perhaps, local taxation should be included in the tax reform program by next administration, to spare both the LGUs and the taxpayers from the confusions and establish fairer local tax system.