The basis of local business taxes

KPMG CORNER By Mr. Manuel P. Salvador III | Updated February 2,

2010 - 12:00am
The 20th day of January marks an important day in Philippine
history. On this day in the year 2001 our current and, in a few
months, soon to be ex-president, was sworn in as the 14th President
of the Republic of the Philippines following the fall of former
President Joseph Estrada and less than four years later subsequently
elected to a full six-year presidential term. Thus how one would view
the significance of the 20th of January may depend on what side of
the political fence one is on. As an African proverb states, Until
lions have their historians, tales of the hunt shall always glorify the
hunters.
From a tax perspective, the 20th of January may also be considered
an important date as it is the date when local taxes for the New Year
fall due. Local taxes are those that are imposed by local government
units such as Provinces, cities, municipalities and barangays in
contrast to national internal revenue taxes that are those imposed
by the National Government through the Bureau of Internal Revenue
and the Bureau of Customs. Each local government unit shall
exercise its power to create its own sources of revenue and to levy
taxes, fees, and charges consistent with the basic policy of local
autonomy.
Under Section 167 of the Local Government Code (LGC) all local
taxes, fees, and charges shall be paid within the first 20 days of
January or, if paid quarterly, on or before the 20th of each month
beginning each subsequent quarter. By the time you read this article
you may have already renewed or are already in the process of
renewing your business permit. It may be helpful to understand
some basic concepts of local taxation.
Firstly, local taxation is governed by a number of fundamental
principles. One of these basic principles is that taxation has to be
uniform in each local government unit. What this basically means is
that local taxes have to be equitable and based as far as practicable
on the taxpayers ability to pay. Further local taxes can only be

collected and used for public purposes. In addition, the tax must not
be unjust, excessive, oppressive, or confiscatory as well as not
contrary to law, public policy, national economic policy, or in
restraint of trade.
In addition to the principle on the uniformity of taxation, another
precept is that the collection of local taxes, fees, charges and other
impositions shall in no case be delegated to any private person.
Also, the revenue collected shall inure solely to the benefit of, and
be subject to disposition by, the local government unit levying the
tax,. Finally, each local government unit shall, as far as practicable,
evolve a progressive system of taxation. While cynics among us may
view these fundamental principles as nothing more than lofty ideals,
these principles do in fact ensure that a local government unit is
able to self sufficient and rely less on the National Government for
its financial requirements.
Another fundamental concept is that the power to tax is not a power
that is inherent to a local government unit. It is in fact a power that
is delegated to it by law which in this case is the LGC. Consequently,
there are certain kinds of taxes that a local government unit is not
allowed to impose and a limited number which it may.
Some common examples of taxes which provinces, cities,
municipalities, and barangays are not allowed to impose are income
taxes, except when levied on banks and other financial institutions,
documentary stamp taxes, customs duties, taxes, fees and charges
and other impositions upon goods carried into or out of, or passing
through, the territorial jurisdictions of local government units, excise
taxes on articles enumerated under the National Internal Revenue
Code, as well as percentage or value-added taxes (VAT) on sales,
barters or exchanges or similar transactions on goods or services
except as otherwise provided in the LGC.
The kind of taxes that a local government unit can impose would
depend on the local government unit. For example, a province may
impose a tax on Transfer of Real Property Ownership, a Tax on
Business of Printing and Publication, a Franchise Tax, a Tax on Sand,
Gravel and Other Quarry Resources as well as a Professional Tax and
Amusement tax, among others. On the other hand, a municipality
may impose. a tax on business on manufacturers, wholesalers,

distributors, retailers, contractors banks and financial institutions as

well as peddlers engaged in the sale of merchandise. In fact, if the
local legislative body chooses, it may in fact impose a business tax
on any business, not otherwise specified in the LGC which the local
legislative body may deem proper to tax. Note that the business tax
that may be imposed by the municipality may be imposed by a city
as well although the LGC allows the city to impose a higher rate of
business tax.
One of the tax issues surrounding the imposition of the local
business tax is the proper tax base. The LGC provides that the local
business tax payable would depend on the amount of gross sales or
gross receipts of the previous taxable year which a business has to
declare. For example, the local business tax that is payable for the
year 2010 would be based on the gross sales or gross receipts in the
year 2009. As local governments may rely on the audited financial
statements of a business to determine the local business tax
payable, the question arises as to whether the revenues as declared
in the audited financial statements represents an accurate basis for
declaring gross sales or receipts for local business tax.
This issue appears to have been settled by the Philippine Supreme
Court. In this case, a local government unit assessed a taxpayer for
deficiency local business based on its gross revenue as reported in
its financial statements. The local government unit argued that
gross receipts are synonymous with gross earnings/revenue, which,
in turn, includes uncollected earnings.
The Supreme Court disagreed with the position taken by the local
government unit. In its decision, the Supreme Court held that 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. It concluded
that the local government unit erred when it assessed the
taxpayers local business tax based on gross revenue as declared in
its audited financial statements, which included accrued revenues or
revenues that were not actually or constructively received since the
LGC provides that the tax should be computed based on gross
receipts.

Let me end this article with another ancient proverb, this time from
Haiti. Dy Mon Gin MonBehind the mountains are more
mountains. In order to hurdle the challenges that taxation issues
throw our way, one must manage to overcome so many obstacles. I
hope this article has provided information that will enable you to
overcome local business tax issues.
(Manual P. Salvador III is a Tax Director of Manabat Sanagustin &
Co., CPAs, a member firm of KPMG network of independent member
firms affiliated with KPMG International Cooperative (KPMG
International), a Swiss entity
The views and opinions expressed herein are those of the author
and do not necessarily represent the views and opinions of KPMG in
the Philippines. For comments or inquiries, please
emailmsalvadoriii@kpmg.com)