Mobil Phils. v.

Treasurer of Makati

Business taxes are imposed in the exercise of police power and are paid for the
privilege of carrying on a business in the year the tax was paid. It is paid at the
beginning of the year as a fee to allow the business to operate for the rest of the
year. Income tax, on the other hand, is a tax on income realized in one taxable year
and is due following the close of the taxable year. It is an excise tax levied upon the
right of a person or entity to receive income or profits.

On the year an establishment retires or terminates its business within the LGU, it
would be required to pay the difference in the amount if the business tax collected,
based on the previous years gross sales or receipts, is less than the actual tax due,
based on the current years gross sales or receipts.

The case of Mobil Phil v Makati is instructive.

Local business tax is paid for the privilege of carrying a business during the year it is paid, and
not for the previous year.
In that case, the City of Makati would use the gross receipts of the previous year as the basis
for the local business tax of the current year. The gross receipts were, of course, mere
estimates, such that if the estimate is more than the actual receipts of the current year,
the company would be entitled to the difference.
For example, in 2009, Mobils gross receipts were P1m. The business tax rate is 5%. On
January 1, 2010, Mobil paid their business tax of P50,000, which was based on their gross
receipts of 2009. However, in August, 2010, Mobil decided to close down their operations
and move to Mindanao. At the end of August, 2010, their gross receipts were P700,000.
What happens?
Mobil will be entitled to a refund of P15,000. Since the previous years gross receipts
are used as the basis for the current years business tax (and is only a mere
estimate thereof), if the business closes down within the year, and its gross
receipts are lower than that of the previous year, they are entitled to a credit.
At the time they closed down, their gross receipts were P700,000. Hence, the tax was
only P35,000.
At the start of the year, they paid P50,000 for the privilege for carrying their business
for the entire year. Since the P50,000 tax paid is more than the amount computed
based on Mobils actual gross receipts for 2010, they are entitled to a refund.

Business taxes are paid at the beginning of the year to allow operations for the rest of the year
(even if, as in this case, calculated based on previous years figures).

Income taxes,

meanwhile, are paid on 15th day of 4th month, and are for previous years operations. (Mobil
Phils. v. Treasurer of Makati)