FINAL REPORT ON THE SITUS OF TAX AND OTHER RELATED TAX ISSUES

I. During the 2nd Mindanao Economic Development Council (MEDCo) Executive Committee (MEDCo-ExeCom) Meeting held last 28 November 2005 in Misamis Occidental, committee members petitioned for an equitable distribution of the national wealth and the prompt return of income extracted from the resources of Mindanao. One of the areas identified where disparity in allocation occurs is the tax remittances of big corporations in Mindanao to their Head Offices, most of which are located in the National Capital Region. In this manner, the committee members argued, Mindanaoans are once again deprived of benefiting from what is rightfully theirs. In view of the above and as instructed by the ExeCom during the said meeting, the MEDCo Secretariat (MS) conducted an initial research on the subject, and unearthed several related issues, as follows. II. 1. Vague definition of Situs of Tax in the LGC Normally, as provided by the Local Government Code, all income realized from the operation in the city/municipality by any establishment granted a franchise shall be taxable by the city/municipality at the rate provided by the Local Government Code (LGC) regardless of where it is recorded. However, some LGUs cannot enjoy the tax allocation because some businessmen are able to evade tax collection due to the limitations of this law. Section 150 of the Local Government Code provides: SEC. 150. Situs of the Tax. - (a) For purposes of collection of the taxes under Section 143 of this Code, manufacturers, assemblers, repackers, brewers, distillers, rectifiers and compounders of liquor, distilled spirits and wines, millers, producers, exporters, wholesalers, distributors, dealers, contractors, banks and other financial institutions, and other 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 thereon shall accrue and shall be paid to the municipality where such branch or sales outlet is located. In cases where there is no such branch or sales outlet in the city or municipality where the sale or transaction is made, the sale shall be duly recorded in the principal office and the taxes due shall accrue and shall be paid to such city or municipality. Some businessmen use residential places and service centers as faades for their business transactions to circumvent the legal definition of branch or sales

office1. In the case of General Santos City, City Treasurer Rodilon Lacap said that some businessmen violate the provisions stated in Section 150. According to him, some businessmen construe the meaning of situs of tax by directly referring to Paragraph b of Section 150:

Section 150 b. The following sales allocation shall apply to manufacturers, assemblers, contractors, producers, and exporters with factories, project offices, plants, and plantations in the pursuit of their business: 1. Thirty percent (30%) of all sales recorded in the principal office shall be taxable by the city or municipality where the principal office is located; and 2. Seventy percent (70%) of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant, or plantation is located. According to Treasurer Lacap, in construing and interpreting the provision, elements of paragraph a must be tested first before resorting to paragraph b. In paragraph a, the LGU can get 100% from the branches or sales outlet. Sample Case 1: Oriental Tin Corporation, General Santos City Oriental Tin Factory in General Santos City is engaged in producing tin cans. Tin cans are assembled in General Santos City. The corporation declared that they have a processing office in Novaliches where tin cans are shipped after these are assembled. The corporation also declared that their marketing arm is in Novaliches and sales are made thereat. With the thorough investigation undertaken by the City Treasurers Office of General Santos, they found out that upon production, tin cans are directly delivered in local companies in the city. It was also found out that the function of the office in Novaliches is purely invoicing and recording; no sale or transaction is consummated in the locality. Sample Case 2: Seatrade Canning Corporation, General Santos City Seatrade Canning Corporation (Seatrade for brevity) has branch offices in Tambler, General Santos City and Cebu City.
1

Example: LG Collin in Davao City. Per interview with Mr. Anastacio Jardin, Jr., Assistant City Treasurer of Davao City, LG Electronics is using their service center in conducting business transactions with different department stores. They are allegedly distributing products/appliances to different malls and department stores in Davao City. Since it is registered as service center (and not as a sales center), no taxes are collected from them.

Seatrade declared that their Head Office is in Bangkal, Makati City and Books of Account are kept in the said office. The City Treasurers Office of General Santos City visited the alleged head office and found out there were only two chairs, one table and two persons in the said office. It was also found out that Books of Account are kept in their branch office in General Santos City. In the cases above, the Local Government of General Santos gets the share of 70% as stated in paragraph b of Section 150. However, looking at the sample cases, it can be interpreted (based on paragraph a) that General Santos could have collected 100% of the taxable income from the sales in the branch office of Oriental Tin Corporation and Seatrade because sales or transactions are consummated in the city. Moreover, the experience of Davao City is quite the same with General Santos City, the City Treasurers Office of Davao City go thru the lengths of visiting Manila to examine books of accounts of suspicious companies. Before, the city had a problem with San Miguel Corporation, as they found out that the company is giving higher share to an LGU in Luzon. Because of that suspicion, the local treasurer of Davao City went to the principal office and examined the book of accounts of the corporation. The city found out that the corporation is underremitting taxes to the Local Treasurers Office of Davao City. The office took its necessary action, thus, was able to get its share of tax from the company. In the case of PLDT2, Globe, Smart and LG Electronics, City of Davao has to go through a long process of trial to get justice; with only one case (PLDT vs. Davao) being decided (Case with Globe, Smart and LG Collin are still pending). But for poor municipality which doesnt have enough resources to go through the tedious process of claiming its due share, it would be impractical to pursue such cases. Thus, there is a need to revise Section 150 of the Local Government Code, specifically the definition of branches. According to Treasurer Lacap, there must be a detailed definition of companies or business entities functioning in ordinary operations and companies undertaking major operations. Mr. Sebastian also suggested that that the Situs of Tax be explained clearly specifically the type of tax it covers (local tax). In this connection, there is a need to identify the appropriate agency to undertake investigations to help the poor LGUs in claiming their share. Establishment of a strong LGU-BIR coordination and cooperation would be a better solution to this problem.

See Annex A. PLDT vs. City of Davao (G.R. No. 143867. July 9, 2002)

2.

Companies consolidate their reportorial deliverables and remittances to their Head Offices and directly pay their taxes to BIR Offices where these Head Offices are located According to the Tax Reform Act of 1997, private companies are mandated to pay their taxes to the place where they hold offices. Since most of the private corporations hold their principal offices in the urban centers like Metro Manila, this deprives the host LGUs of the first crack of their share in the revenues. LGUs in the provinces cant raise enough from business taxes because income of the branches of big businesses operating in their localities is usually consolidated and reported at their head office. In an interview with Mr. Catalino V. Bolo, Acting Chief of Business Tax and License Division, City Treasurers Office, Davao City, he said that gross sales of businesses/companies are lumped into one item in the BIR Form. The name of the office/outlet wherein these gross sales are consummated is not identified in this form. The problem arises when this accumulated income are remitted to principal office located outside Mindanao. Since there were no names of outlet offices in the form, the principal office will definitely pay taxes (for total gross income) only to the place where the office is located. Another problem is the remittances of Large Tax Payers (LTP) in Region X to the BIR Central Office as reported by Assistant Revenue District Officer (RDO) Bernadette Honculada of BIR X in Cagayan de Oro City. It is stipulated in the National Internal Revenue Code (NIRC), that Large Tax Payers must remit their taxes directly to the BIR Large Taxpayers Office in Makati. This system or service is made for the convenience of both BIR and the companies which, on the other hand, causes a big reduction in the tax collected by the locality as this includes VAT, which, if increased, will add a share of incremental revenue to the locality where the company is situated. According to National Statistical Coordination Board (NSCB) 3, tax collection in Region X dropped by 8.23 percent in 2003. One of the reasons in the decrease of tax collection in the region was because some big companies like BUSCO, Pryce Gases, Pueblo de Oro, Petronas and Asia Brewery were remitting their taxes to their head offices in Metro Manila. Moreover in General Santos City, Mr. Noel Gonzales, Revenue District Officer of General Santos City informed MEDCo that there are tuna canning factories in the city that do not remit their taxes directly to the BIR local district office, depriving the local government in millions of its share of incremental revenues from VAT. Among the firms that reportedly directly remit tax revenues to other cities were Ocean Canning Corp., Gensan Tuna Corp., and the Alliance Tuna International

See Annex B. Factsheet. ( 2004). URL: http://wwnscb.gov.ph/ru10/factsht.factshtf.htm.

Inc., In Alabel, Sarangani Province, Southern Philippines Power Corporation (SPPC) do not remit taxes to local revenue district office. Per Mr. Gonzales, should these corporations will pay their taxes to the local BIR Office, then the collection performance of Revenue District Offices will improve. The LGU will get 20% of the 50% of the incremental revenue 4 from VAT for the last three years. It will finance the construction of school buildings, roads, bridges, hospitals, etc according to Paragraph D, subsections 1 to 4, Section 21 of the Republic Act 9337, otherwise known as the Expanded Value-Added Tax (EVAT) Act of 20055. The 20% will be earmarked for the following purposes6: Public Elementary and Secondary Education (6%), Health Insurance Premiums (4%), Environmental Conservation (6%), and Agricultural Modernization (4%). These amounts will be available to the LGUs after third fiscal year in accordance with the Local Government Code. However, it will only be enjoyed by the LGUs if companies pay their taxes to the local RDO, says Mr. Venerado Homez, Assistant RDO of RDO-Kidapawan City. Mr. Muslimen l. Maca-agir, al Hadj, RDO of Revenue District Office-Cotabato City and Mr. Maca-angcos Ampuan, Assistant RDO of Revenue District OfficeCotabato City, suggested that in order to solve this issue, it would be better to decentralize the payment of taxes or to request these big companies to transfer their head offices in the municipality (in cases of companies conducting major transactions and operations thereat). In the case of General Santos City, Revenue District Officer Eric Furia sent a letter to Mayor Narciso Grafilo, Jr. of Alabel, Sarangani last 15 June 2006 requesting the latter to persuade and get the nod of SPPC to transfer their head offices in Alabel and pay the VAT in their municipality7. Moreover, there is a need to devise a more equitable scheme of distribution of proceeds from taxes by revising the forms of BIR and modifying the manner of reporting tax collections. In the case of Large Tax Payers who remit their taxes
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See Annex C. DBM-DOF-DILG Joint Circular No. 1-02. February 6, 2006. Incremental Collection from Value-Added Tax (VAT) refers to the excess in the annual increase in actual collection of VAT in the immediately preceding year over the annual increase in the second preceding year (in toto). See annex B for sample computation.
5

From telephone interview with Ms. Edilyn Vitasa, Revenue Officer 2 of BIR-Central Office. According to her, 80% will go to the national government.
6

See

Annex

D.

Department

of

Finance

(2005).

Briefer

of

VAT

Law.

Retrieved

f rom:

www.vatreform.gov.ph/htm/aboutVat.asp
7

Per BIR Region XII Director Rodita Galano, the proposed transfer of the business address of the tuna canneries would not be easy and might take a long time since the concerned companies are registered with the Board of Investments (BOI), in which they enjoy holiday tax exemption. However, General Santos City Mayor Pedro Acharon, Jr. said that in his meeting with the Tuna Canners Association of the Philippines (TCAP), officials of the tuna companies agreed to pay their taxes in the city to help improve its revenue collections. Tuna canneries did not object to the call to transfer the business addresses of their companies since most of their operations are based in the city. (Related by Mr. Noel B. Gonzales during an interview conducted last 4 September 2006). See Annex E (Letter of RDO Eric Furia to Mayor Narciso Grafilo, Jr.)

in their main offices, it may also be required that VAT collected be specified according to the area where they are operating, and be given back to the said area to add up to the incremental revenue of the respective localities. 3. ) Relatedly, there is a need to revisit the sales allocation scheme in Section 150 of the Local Government Code. In the provision, there is no classification as to what type of factory or plantation is being mentioned. Some LGUs lamented that the sharing scheme is not fair (60% for the factory and 40% for the plantation). According to the LGUs, this sharing should not be on the basis of gross sales and volume of production but on the nature of operations (i.e. operations that are more extractive of environmental resources or those that have detrimental effects to the environment should remit larger percentage of tax to the host LGU). LGUs also complain about the inequitable sharing of proceeds form mining activities stipulated in Section 82 of Republic Act No. 79428 and Section 2929 of Local Government Code. Looking at the above provisions, provinces, municipalities, and barangays with larger land area and population will get a bigger share than the provinces, municipalities, and barangays with smaller land area and population. The problem arises when the province, municipality or barangay with smaller population and land area suffer the most from the devastating effects of environmental degradation (e.g., pollution, .soil erosion, etc.) For the case of factory and plantation share allocation, Cagayan de Oro Chamber of Commerce and Industry Regional Governor Arsenio Sebastian III said that the 50/50 sharing may be equitable for both plantation and factory. Conversely, Ernesto Balat, Iligan City Treasurer suggested that the bigger share must be given to the area or locality with bigger diminution on their natural resources. He was also agreeable that environmental institutions like Department of Environment and Natural Resources (DENR) be involved in the process of identification. With regard to mining activities, Governor Rolando Yebes 10 of the Provincial Government of Zamboanga del Norte suggested that DENR should also be included in the revenue collection as support agency. The agency shall identify companies that are extractive of natural resources in the locality and causes environmental hazards/risks to the community (extractive industries). The would-be identified companies shall pay tax higher than what is stated in the Local Government Code.
8

Unfair sales allocation of plantation versus Factory and seemingly inequitable share from the proceeds of mining activities.

See Annex F . An Act Instituting a New System of Mineral Resources Exploration, Development, Utilization, and Conservation.
9

Section 292 provides for the 70-30% sharing based on population and land area. See Annex G. Concept Paper on the Proposed Policy Reform on Enhancing Local Government Unit Access to 40% LGU Share from the Proceeds of the Development and Utilization of National Wealth.
10

Per City Treasurer Lacap, a classical provision regarding this must be added to the Local Government Code to establish this kind of policy. T here is a need to add to the terms and definitions under the Situs of Tax (IRR of LGC) the said companies/industries (extractive industries, e.g soap industry, cement industry, etc.) so as to separate them from plantation and factory that are not extractive of natural resources. 4. Unjustified limitations of the taxing powers of LGUs. Section 133 of the LGC enumerates the common limitations on the taxing powers of the LGU: SEC. 133. Common Limitations on the Taxing Powers of Local Government Units. - Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: xxx (g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from the date of registration; xxx (j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code;
x x x

According to some local treasurers, some of the limitations enumerated therein are disappointing and undue. Treasurer Lacap said that paragraphs q and j violate the fundamental principles of local taxationautonomy for LGUs11. Also, in the 1992 Edition of Annotated Local Government Code of 1991, Atty. Jose N. Nolledo opined that the long enumerated limitations in the section unduly tie the hands of LGUs. However, in the Supreme Court decision for the case of First Philippine Industrial Corporation vs. Court of Appeals, the rationales behind these limitations are due to the following:
11

See Annex H. First Philippine Industrial Corporation vs. Court of Appeals, G.R. No. 125948, December 29, 1998

1. LGUs are proscribed from levying taxes from BOI-certified pioneer

enterprises for a period of six years from the date of registration because collection from these companies would constitute double taxation. (However, once the tax exemption given by the Board of Investments lapses, the LGU and BIR could already collect taxes from the business enterprises).

2. Common carriers are excluded from the taxing power of the local government
unit the imposition of business tax to prevent a duplication of the so-called "common carrier's tax" collected by the Bureau of Internal Revenue.