“The power of the local purse” by Allenierey Allan V. Exclamador (May 14, 2012)

SUITS THE C-SUITE By Allenierey Allan V. Exclamador
Business World (05/14/2012)

Over the last few years, local government units (LGUs) have been constantly improving their tax administration machinery to enhance collection efficiency.

For example, tax ordinances have been revised to adopt the maximum tax rates provided under the Local Government Code (LGC).

Local treasurers and assessors work with the Bureau of Internal Revenue (BIR) to, among others, update the valuation of real properties for real property tax purposes.

Retiring businesses are judiciously audited for deficiency taxes before they are cleared for closure.

More recently, Congress proposed, through House Bill (HB) No. 4053, to require businesses within the economic zones to pay service fees to their host cities and municipalities which, if passed, will effectively dilute their exemption under the Special Economic Zone Act of 1995.

Indeed, LGUs have come a long way since the LGC took effect in 1992. Although some LGUs have yet to improve their revenue-generating capacity and are still dependent on their Internal Revenue Allotment (IRA), a number of highly urbanized cities, however, have begun to aggressively implement and enforce the local business tax (LBT) within their jurisdictions.

Under the LGC, any person or entity doing business in a city or municipality must secure an annual business license or permit in order to operate within the city or municipality. Local business tax (LBT) must be paid before the business license is issued.

Being a tax on the privilege of carrying on a business within the LGU, it is computed based on a certain percentage of the taxpayer’s gross sales or receipts for the preceding calendar year, depending on the type of business, and accrues starting January 1 of each year. Payment of the LBT shall be made within the first 20 days of January or of each subsequent quarter as the case may be. Taxes not paid on time are subject to applicable penalties.

Under the LGC, the LBT is imposed on eight business type clusters namely: Manufacturers, Wholesalers and Distributors, Exporters/Dealers of Essential Commodities, Retailers, Contractors, Banks and Other Financial Institutions, Peddlers, and the catch-all, “Others.” The LBT rates for these business clusters differ among cities and municipalities, but the tax may not be imposed without a duly enacted Ordinance.


Gross sales or receipts as basis for the LBT 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 returns, excise tax, and value-added tax (VAT).

For purposes of computing LBT, gross sales or receipts should not include passive income such as interest from savings and time deposits, dividends, and other income derived from foreign currency variances. The Department of Finance has also clarified in a 2005 opinion that monies collected by taxpayers which do not redound to their benefit are excluded from the computation.

Gross sales or receipts should be based on the Audited Financial Statements of the preceding year. Since the Audited FS will not be available until March or April, the LBT will be based on the taxpayer’s certification of its gross sales or receipts for the preceding calendar year.

However, the amount declared should be based on the taxpayer’s books and other pertinent records. Under Sections 171 and 194 of the LGC, the treasurer may ascertain the correctness of the gross sales or receipts declared by the taxpayer by examining the taxpayer’s books and other supporting records, including income tax and VAT returns.

Should there be any discrepancy, the local treasurer will inform the taxpayer. While this is the informal and initial stage of the assessment, it is prudent for the taxpayer who disagrees with the findings to immediately respond to the local treasurer in writing, and submit a reconciliation schedule and other supporting documents.

If the local treasurer finds the justification baseless, a Notice of Assessment may be issued stating the nature of the tax, the amount of deficiency, surcharge and interest.

Pursuant to Section 195 of the LGC, the taxpayer may file a protest within 60 days from receipt of Notice of Assessment and the local treasurer has 60 days to decide on the merits of the protest.

If the local treasurer denies the protest or fails to act within the same period, the taxpayer may appeal the case to a Regional Trial Court or Municipal Trial Court, as the case may be, within 30 days from receipt of denial or the lapse of the 60-day period.

The local treasurer may issue an assessment within five years from the date the tax becomes due, except in case of fraud or intent to evade the payment of taxes. In this case, the taxpayer may be assessed within 10 years from the discovery of the fraud or intent to evade payment.

Assessments may still be issued after five years if the treasurer is legally prevented from making the assessment or collection; the taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess; or the taxpayer is out of the country or otherwise cannot be located.

While the power of local governments to create their own sources of revenue is guaranteed by the Constitution, said power must also be exercised within legal bounds. In a February 17, 2012 decision, the Court of Tax Appeals ruled that an LGU cannot encroach upon the prerogatives of another LGU by imposing a tax on sales recorded by branch offices located in other LGUs.

While certainly some taxpayers may find it impractical to go through the tedious process of protesting an assessment given the amount of the assessments and issues involved, it is crucial to know the legal remedies and sound legal arguments that may be forwarded to avoid payment of erroneous or excessive tax assessments.

The power of the local purse must at all times be recognized, but not at the expense of the taxpayers’ right against unreasonable and baseless assessments.

Allenierey Allan V. Exclamador is a Tax Senior Director of SGV &Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.