BAR REVIEW LECTURE IN

LOCAL TAXATION

By: Atty. Carmencita C. Dabu

PART I- Local Government Taxation

A. Fundamental Principles in the exercise of the taxing and revenue-raising power of

Local Government Units (LGU) (Sec. 130) Code: PIE CUP UP

P - taxes, fees, charges shall be levied and collected for public purpose
I - revenue collected shall inure to the benefit of and be subject to disposition
by the LGUs levying it
E - taxes, fees and charges shall be equitable and based on
taxpayer’s ability to pay
C - TFC shall not be contrary to law, public policy, national
economic policy or in restraint of trade;
U - taxation shall be uniform in each LGU;
P - collection shall not be let to any private person;
U - TFC shall not be unjust, excessive, oppressive or confiscatory
P - each LGU shall evolve a progressive system of taxation.

B. Nature and Basis of Taxing Power of Local Government Units:

1. The taxing power of local government units is conferred by the Constitution. The
LGC has invested the LGU with increased power to tax, thereby empowering them with
a wider authority to raise their own revenues within their respective territorial jurisdiction.
LGUs have the power to impose taxes, fees and charges.

2. The basis of taxing powers of LGU’s are Sec. 5, Art. X, 1987 Const. and Sec. 129,
RA 7160 (The Local Government Code).

3. Since the power to tax may be exercised by LGU’s no longer by valid delegation of
said power by Congress, but by direct authority conferred by Sec. 5 Art. X of the Const.,
in interpreting statutory provisions on local taxing powers, doubts will have to be
resolved in favor of the LGU. (CITY GOV’T OF SAN PABLO, LAGUNA V. REYES, GR
NO. 127708, MARCH 25, 1999)

C. Scope of the Taxing Power of LGU’s-

1. Common Limitations on Taxing Power (Sec. 133)

a. income tax,
exception: when levied on banks and financial institutions;
b. documentary stamp tax;
c. estate tax, gift/donor’s tax; legacies and other acquisition mortis causa;
exception: as otherwise provided by LGC -
d. customs duties, customs fees, charges and dues,
exception: wharves constructed and maintained by the LGU concerned;
e. taxes, fees or charges on goods carried into or out of, or passing through
the territorial jurisdictions of LGU in the guise of charges for wharfage, tolls
for bridges or otherwise, or other impositions in any form upon such goods
of merchandise;
f. taxes, fees or charges on agricultural and aquatic products
when sold by marginal farmers or fishermen;
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g. taxes on business enterprises certified to by the BOI as pioneer or

non-pioneer (for 6 and 4 years from date of registration);
h. excise taxes on articles under the NIRC and
taxes, fees or charges on petroleum products;
i. percentage or VAT on sale, barter or exchange or similar
transportation of passengers or freight by hire and common
carriers by air, land or water;
exception: as provided herein by LGC;
j. taxes on gross receipt of transportation contractors. and persons
engaged in the transportation of passengers or freight by hire
and common carriers by air, land or water;
exception: as provided in the LGC;
k taxes on premiums paid by way of reinsurance or retrocession;
l, TFC for the registration of motor vehicles and all kinds of
license or permits for the driving thereof;
exception: license or permits on tricycles;
m. TFC on Phil. products actually exported;
exception: as otherwise provided in LGC;
n. TFC on countryside and barangay business enterprises and
cooperatives duly registered under RA6810 and 6938
o. TFC on any kind on the national government, its agencies,
and instrumentalities and LGU

2. PRINCIPLE OF PREEMPTION OR EXCLUSIONARY RULE—an instance wherein

the national government elects to tax a particular area, impliedly withholding from the
local government the delegated power to tax the same field. This doctrine principally
rests upon the intention of Congress.

a. There is preemption in percentage tax. Under Sec. 116 NIRC,- any person
whose sales or receipts are exempt under Sc. 109 (x) from the payment of VAT and who
is not a VAT-registered person shall pay a tax equivalent to 3% of his gross quarterly
sales or receipts; provided that cooperatives shall be exempt.So that even w/o Sec. 133
this tax cannot be imposed by LGU

b. LGU can impose the graduated fixed tax on the privilege to engage in a particular
business,

c. Duplication of taxes: Pre-emption does not apply in the following cases:

1) Gross annual sales P6.5 M or more the imposition of the fixed tax ceases; the
graduated annual sales tax of not exceeding 37.5% of 1% is imposed. Sales or
receipts of this amount are also subject to VAT, which essentially is also a
percentage tax.

2) Estate and donor’s tax (Sec. 84 and 98, NIRC)– LGU may also impose a tax
of 50% of 1% of selling price, fair market or zonal value, whichever is higher, on
transfers of real property ownership (Sec. 135 and 151, LGC)

3) If the subject of the tax levied by the national and local govt are different.

3. May LGU’s impose other taxes not specifically provided under the LGC? (Sec. 186)

4. The local taxing powers of LGU’s include:

a. Authority to prescribe penalties for violations. (Sec. 516)

b. Power to adjust local tax rates, but within the ceiling provided by LGC and not
oftener that once every 5 years. (Sec. 191).
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c) Authority to grant tax exemptions and tax incentives (Sec. 192).

1) While Sanggunians may grant tax exemptions, tax incentives or reliefs,

such grant shall not apply to regulatory fees which are levied under the
police power of the LGU.

2) Tax exemptions shall be conferred through the issuance of tax exemption

certificate which shall not be transferable.

3) Tax exemption prior to the effectivity of LGC. (Sec. 193 and Sec. 234)

D. LOCAL TAX ORDINANCES:

1. The procedure on local government ordinances also apply to tax ordinances; (187)
(quorum, submission to local chief executive for approval; matter of veto and
overriding the same, publication and effectivity –Sec. 54, 55 and 59
2. public hearing are required before any local tax ordinance can be enacted. The
public hearing shall be conducted as provided under Section 277 of the
Implementing Rules and Regulations of the LGC. (Ongsuco et al., vs.
Malones, G.R. No. 182605, Oct. 27, 2009)
3. publication - within 10 days after their approval, certified copie of local ordinances or
revenue measures are published in full for 3 consecutive days in a news paper of
local circulation; (if no newspaper – posted in at least 2 conspicuous and public
accessible places (Sec.188)
4. copies of which shall be furnished the respective local treasurers for public
dissemination. (Sec. 189)

E. Specific taxing powers of LGU’s:

1. Transfer of real property ownership – sale, donation barter or other modes:

--not more than 50% of 1% of selling price, or FMV whichever is higher; 135

2. Province may impose franchise tax (50% of 1% of gross annual receipts)

New franchise -1/20 of 1% of capital investment.

a) Sec. 119, NIRC imposes 2% franchise tax on electric, gas and water utilities.

b) Franchise on telephone,telegraph, radio and television broadcasting –are

Subject to 12% VAT

3. tax on sand, gravel and other quarry resources – 10% of FMV per cubic meter those
extracted from public lands, sea beds, lakes, rivers, streams, creeks and other public
waters (Sec. 138)

4. There is pre-emption in local setting – taxes w/c provinces can levy cannot be levied
by municipalities (142); cities may levy taxes levied by provinces (151)

MUN. OF SAN FERNANDO, LA UNION V. STA. ROMANA, L-30159, 3/31/87

Inasmuch as the sand and gravel tax is a tax levied by provinces, a municipality cannot
make the payment of the tax by another municipality as a condition for granting to the
latter the right to extract sand and gravel from its territory, but it may require that such
tax be paid to the province before the desired extraction may be made.
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MUNICIPALITIES:

a) business tax –--graduated annual fixed tax

If gross annual sales for the preceding calendar year is P6.5M the tax imposed is
a percentage tax of 37.5% of 1%’

b) wholesales, distributors or dealers of any article of commerce- graduated annual

fixed tax bases on gross sale[
if gross sale is P2M –percentage tax at 50% of 1%.

c) Incidental activities relative to the business are not taxable.

CITIES - those which the province may levy

BARANGAYS – Exclusive taxing power - on retailer when the gross sales does n0t
exceed P50,000.00 (in cities) and P30,000 ( in municipalities) – rate is 1% of
gross sales;

F. SITUS OF LOCAL TAXATION: (Sec. 150)

1. manufacturers, assemblers, repackers distillers, manufacturers brewers, rectifiers

and compounders of liquor, wines and distilled spirits, millers, producers, exporters,
wholesalers, distributors, dealers, contractors, banks and other financial institutions and
other businesses

a) with branch or sales office- shall record the sale in the branch office making the
sale or transactions; and the tax shall accrue and be paid at place where said
branch/sales office is located/

b) no branch or sales outlet where the sale is made- recorded in the principal office
and tax due shall accrue to the said city or municipality where principal office is located;

2. In the following sales allocation shall be applied to manufacturers, assemblers,

contractors, producers, and exporters irrespective of whether or not sales are made
therein:

a) 100% of sales –recorded at principal office

i) 30% taxable at city of municipality where principal office is located;
ii) 70% taxable at the city or municipality where factory, project office,
plant or plantation is located
iii) if plantation is located other than where factory is located
---70% divided according to the ff:
60% -where factory is located
40% -where plantation is located.

iv) 2 or more factories, plant, project office or plantation

located in different city or municipality—70% pro-rated in proportion to
their volume of production during the period for which the tax is due.

G. Community Tax - cities and municipalities authorized to levy

1. Who are exempt:

a. diplomatic and consular representatives
b. transient visitors when their stay in the Phils. does not exceed 3 months

Place of payment –residence of individual or principal place of business of corp.

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H. COLLECTION OF LOCAL TAXES:

1. Tax Period – CALENDAR YEAR.

2. Manner of Payment – quarterly installment
3. Accrual – first day of January ; new taxes – 1 st day of the Quarter following the
effectivity of the ordinance imposing it;
4. Time of Payment – within the 1st 20 days of January;
or subsequent quarter (if installment)
Sanggunian may extend payment up to 6 months only.
5. Surcharges and penalties on unpaid taxes, fees, chargeds— not exceeding 25% of
the amount of TFC.
6. Interest on unpaid revenues – not exceeding 2% per month but not more than 36
months.
7. Who is authorized to collect – local treasurer or their deputies

I. Constitutionality of Sec. 187, LGC - The authority of the Sec. of Justice to pass
upon the constitutionality or validity of a tax ordinance under Sec. 187 of the LGC was
upheld in the case of Drilon v. Lim GR NO. 112497, August 4, 1994)

J. Claim for Refund/Tax Credit –

1. Prior written claim for refund/tax credit of erroneously collected or over paid taxes
filed with the local treasurer is a pre requisite for the filing of a case in court/tribunal.

2. Reckoning period – from dated of payment or from the dated that the taxpayer
became entitled to the refund or tax credit.

K. Levy on Real Property-

1. In case there is no bidder, or if the highest bidder bid is for an amount insufficient to
pay the real property tax and other costs, the real property shall be forfeited in favor of
the government and the title shall be transferred in the name of the LGU.

2, The taxpayer has one (1) year from date of sale to redeem his property. Redemption
amount includes the deficiency tax, penalties and interests, expenses for auction sale,

L. Compromise - The Sanggunian may authorize the local treasurer through an

ordinance to compromise local taxes, fees and charges and a criminal offense not
involving fraud before a case is filed in court upon the payment of a compromise penalty

M. Injunction –

May an injunction lie against the LGU for the collection and enforcement of local
taxes, fees and charge?

Unlike the NIRC, the LGC does not contain any specific provision prohibiting
courts from issuing injunction; but the petition must comply with the requirements under
Rule 58 of the Rules of Court.
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PART II – REAL PROPERTY TAXATION

A. Nature and Concept of Real Property – (Art. 415, New Civil Code)
1. lands, buildings
2. improvement
3. machinery –.

B. Fundamental principles on real property taxation

1. Concept and nature of real property tax
a. What is a real property tax?

b. What is the basis of realty tax?

c. Characteristics of real property tax

C. Fundamental principles governing real property taxation (Sec. 198)

M 1) RP shall be appraised at its current and fair market value;

A 2) shall be classified for assessment purposes on the
basis of its actual use;
U 3) assessed on the basis of a uniform classification within
Each LGU
L 4) appraisal, assessment, levy and collection shall not be
Left to any private person;
E 5) appraisal and assessment shall be equitable.

D. Types of real property tax

a) basic
b) special levies on real property
1. concept and kinds
a. special education fund –(Sec. 235)1% of assessed value;
b. additional ad valorem tax on idle lands (Sec. 237)
c. special levy for public works- (Sec. 239)
e. special levies imposed by other laws

E. Nature of the taxing power on real property—delegated power (Sec. 232)

1. Only provinces, and cities and municipalities within the Metro Manila Area are
authorized to tax real property.

2 Extent of taxing power –provinces, cities and municipalities in Metro Manila area do
not only have the power to levy real estate taxes, but they may also fix real estate tax
rates. It includes the imposition of the basic tax and special levies.

3. Barangays are bereft of taxing power as regards realty tax and special assessment;

a. Rate – Provinces - rate not exceeding 1% of the assessed value

City or municipality within MMA, not exceeding 2% of the assessed value.

b. Municipalities outside MMA and barangay have no power to fix rates of realty tax.

c. NO public hearing shall be required before the enactment of a local tax

ordinance levying the basic real property tax (Art, 324 RR)

d. Power to prescribe penalties for tax violations- (Sec. 516)-applies to PCM (MMA) not
to municipalities outside MMA and barangays
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4. Exemption from RPT –(Sec. 234)

a. Beneficial use principle - Real properties owned by the government are exempt from
real estate taxes. However, if the beneficial use thereof is granted to a taxable person
for consideration or otherwise, the exemption does not apply. The beneficial user shall
be liable for the realty taxes. (GSIS vs. City Treasurer of the City of Manila, G.R. No.
18624. December 23, 2009)

a. Real properties exempt from RPT –

1) owned by the government and its political subdivisions and government

instrumentalities; Exception: beneficial use principle
2) All lands, buildings, improvements actually, directly and exclusively used for
religious, charitable or educational purposes
3) All machineries & equipments used by local water utilities and GOCCs engaged
in water supply and distribution of water and/or generation & transmission of
electric power
4) All real property owned by cooperatives under RA 6938
5) Machinery & Equipment used for pollution control and environment protection

5. Real property tax administration and collection

a. Procedure for administration of real property

D a. Declaration of real property

A b. Listing of real property in the assessment roll
V c. Appraisal and Valuation
A d. Determination of assessed value
P e Payment and collection of tax

b. Classification of real property—basis : actual use

C – commercial
A _ agricultural
M _ mineral
R _ residential
I _ industrial
T _ timberland
S _ special

c. schedule of fair market value is prepared based on the classification

of real property

d. publication of Schedule of FMV – newspaper of general circulation,

or in the absence thereof, posted in the provincial capitol city or
municipal hall and in 2 conspicuous public places therein.

e. revision of schedule of FMV

1) Cases where previous valuation and assessment is disregarded – Sec. 220
i. when declared and listed for tax purposes for the first time
ii. there is an ongoing general revision of property
property classification and assessment;
iii. request is made by the person in whose name the
property is declared

Note: Assessment may be increased not oftener than once every 3 years
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In case of new improvements which substantially increase the value of said property or
of any change in its actual use.

Machinery - a) brand new – FMV is the acquisition cost;

b) in other cases –
remaining eco. Life replacement cost or
FMV= estimated eco. Life X reproduction cost

Effectivity of assessment or reassessment –

1) made Jan. 1 – 1st of Jan.
Except: within 90 days from the occurrence of such case –take effect ist day of
the quarter following the reassessment.

Notification of new or revised assessment -30 days

7. Assessment of property with back taxes – 10 years back taxes

lnterest – a) no interest =if paid on or before the end of the quarter
following the date of notice of assessmentwas received

b) other cases – 2% per month from the date

of assessment;
8. Payment and Collection of RPT-

A. Date of accrual of RPT – 1st day of January ; constitute a lien on

The property
B. Payment of the Tax –

1. time of payment –
basic and SEF- 4 quarterly installments
Special levy – ordinance
Other tax- as prescribed by the Sanggunian

2. application of payment – 1st- prior years, interests and

Penalties
nd
2 – current years
3. advance payment – not exceed 20% of the tax due

4. prompt payment – discount not exceed 10%

5. interest on unpaid tax- 2% per month; not exceed 36 months.

9. Remedies for the collection of Real Property Tax

a. The General rule on requiring the taxpayer to pay the assessment first prior to
entertaining any protest relevant thereto does not apply when the matter being raised is
not as to the amount of the assessment but on the authority
itself of the local government unit to impose the same.

REMEDIES OF THE GOVERNMENT:

A. Civil remedies:
1. LG lien – superior to all lien (173)
2. administrative:
a. distraint of personal property
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b. levy on real property- before, simultaneous of after distraint

3. compromise- The Sanggunian may authorize the local treasurer to compromise

an offense not involving fraud before a case is filed in court upon the payment
of a compromise penalty of not less than P200/ (148)

B. Judicial remedies:
1. court action –civil or criminal
2. declaratory relief
3. injunction

- - - - - - - - - ----------------------------------------------------------- - - - - - - - -

CASES IN LOCAL TAXATION:

CAGAYAN ELECTRIC POWER & LIGHT CO., INC. (CEPALCO)

v. CITY OF CAGAYAN DE ORO, GR 191761, Nov. 14, 2012

Facts:

On September 30, 2005,CEPALCO filed a petition for declaratory relief assailing

the validity of Ordinance No. 9503-2005 before the Regional Trial Court of Cagayan de
Oro City, Branch 18, on the ground that the tax imposed by said ordinance is in reality a
tax on income which the City of Cagayan de Oro may not impose under Section 133(a)
of the Local Governmdnet Code (RA 7160). Even assuming that the City Council can
enact the assailed ordinance, CEPALCO is exempt from the imposition by virtue of its
franchise (R.A. 9284).

The City contended that the ordinance is valid and that CEPALCO is no longer
exempt because of the express withdrawal of the exemption provided by Section 193 of
the LGC and its failure to exhaust administrative remedies under the LGC;

The RTC and CA upheld the validity of the ordinance and held that CEPALCO is
no longer exempt in view of Sec. 193 of the LGC which withdrew all exemptions
granted prior to the LGC. CEPALCO went to the SC.

Issues: 1. Whether or not CEPALCO’s action has prescribed for failure to

exhaust administrative remedies under Sec. 187 of LGC.

2. Whether or not the Ordinance imposes an income tax which the City
cannot impose under Sec. 193 of the LGC

3. Whether or not CEPALCO is exempt from the tax imposed by said

ordinance.

Ruling:

1. The Sangguniang Panlungsod of Cagayan de Oro approved the subject

ordinance on 10 January 2005 and took effect on 19 February 2005. CEPALCO filed a
petition for declaratory relief before the RTC on 30 September 2005, but did not file
anything before the Secretary of Justice.

The subject ordinance is a local revenue measure, therefore the provisions of the
LGC applies. Sec. 187 of the LGC provides that a taxpayer who questions the validity
or legality of a tax ordinance must file his appeal to the Secretary of Justice, within 30
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days from effectivity thereof. The Secretary has 60 days from receipt of the
protest/complaint within which to decision. His’ decision is appealable to the RTC
within a period also of 30 days from receipt thereof. If the Secretary does not act
thereon, after the lapse of 60 days, a party could already proceed to seek relief in court.
These three separate periods are clearly given for compliance as a prerequisite before
seeking redress in a competent court amd therefore mandatory. Hence, petitioners’
failure to appeal to the Secretary of Justice within 30 days as required by Sec. 187 of
R.A. 7160 is fatal to their cause.

2. CEPALCO insists that subject ordinance imposes an income tax which is

prohibited by Section 133(a) of the LGC. Unfortunately for CEPALCO, we agree with
the ruling of the trial and appellate courts that said ordinance imposes a tax on
business. CEPALCO’s act of leasing for a consideration the use of its posts, poles or
towers to other pole users falls under the Local Government Code’s definition of
business. Business is defined by Section 131(d) of theLocal Government Code as
“trade or commercial activity regularly engaged in as a means of livelihood or with a
view to profit.” In relation to Section 131(d), Section 143(h) of the LGC, provides that
the city may impose taxes, fees, and charges on any business which is not specified in
Section 143(a) to (g) and which the Sanggunian concerned may deem proper to tax.

The taxing power of local government units is primarily based on Section 5,

Article X of the 1987 Constitution. The Local Government Code supplements the
Constitution with Sections 151 (Scope of Taxing Powers) and 186 (Power to Levy other
Taxes, fees and charges): The rates of taxes that the city may levy may exceed the
maximum rates allowed for the province or municipality by not more than fifty percent
(50%) except the rates of professional and amusement taxes. A province may impose a
franchise tax at a rate "not exceeding 50% of 1% of the gross annual receipts."
Following Section 151, a city may impose a franchise tax of up to 0.0075 (or 0.75%) of a
business’ gross annual receipts for the preceding calendar year based on the incoming
receipt, or realized, within its territorial jurisdiction. A municipality may impose a
business tax at a rate not exceeding "two percent of gross sales or receipts."

3. CEPALCO’s claim of tax exemption of the income from its poles relies on
a strained interpretation of its franchise. Section 1 of R.A. No. 9284 added Section 9 to
R.A. No. 3247, CEPALCO’s franchise:

SEC. 9. Tax Provisions. ‒ The grantee, its successors or

assigns, shall be subject to the payment of all taxes, duties, fees
or charges and other impositions applicable to private electric
utilities under the National Internal Revenue Code (NIRC) of
1997, as amended, the Local Government Code and other
applicable laws: Provided, That nothing herein shall be construed
as repealing any specific tax exemptions, incentives, or
privileges granted under any relevant law: Provided, further, That
all rights, privileges, benefits and exemptions accorded to
existing and future private electric utilities by their respective
franchises shall likewise be extended to the grantee.

The Local Government Code withdrew tax exemption privileges previously given
to natural or juridical persons, and granted local government units the power to impose
franchise tax,24.:

SEC. 137. Franchise Tax. – Notwithstanding any exemption

granted by any law or other special law, the province may
impose a tax on businesses enjoying a franchise, at a rate not
exceeding fifty percent (50%) of one percent (1%) of the gross
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annual receipts for the preceding calendar year based on the

incoming receipt, or realized, within its territorial jurisdiction.

xxxx

SEC. 193. Withdrawal of Tax Exemption Privileges. –

Unless otherwise provided in this Code, tax exemptions or
incentives granted to, or presently enjoyed by all persons,
whether natural or juridical, including government-owned or
controlled corporations, except local water districts, cooperatives
duly registered under R.A. No. 6938, non-stock and non-profit
hospitals and educational institutions, are hereby withdrawn
upon the effectivity of this Code.

SEC. 534. Repealing Clause. – x x x.

(f) All general and special laws, acts, city charters, decrees,
executive orders, proclamations and administrative regulations,
or part or parts thereof which are inconsistent with any of the
provisions of this Code are hereby repealed or modified
accordingly.

It is hornbook doctrine that tax exemptions are strictly construed against the
claimant. For this reason, tax exemptions must be based on clear legal provisions. The
separate opinion in PLDT v. City of Davao25 is applicable to the present case, thus:

Tax exemptions must be clear and unequivocal. A taxpayer claiming a tax

exemption must point to a specific provision of law conferring on the taxpayer, in clear
and plain terms, exemption from a common burden. Any doubt whether a tax exemption
exists is resolved against the taxpayer. Tax exemptions cannot arise by mere
implication, much less by an implied re-enactment of a repealed tax exemption clause.

CEPALCO’s claim of exemption under the "in lieu of all taxes" clause must fail in
light of Section 193 of the Local Government Code as well as Section 9 of its own
franchise.

Finally, in view of the lack of a separability clause, we declare void the entirety of
Ordinance No. 9503-2005. Any payment made by reason of the tax imposed by
Ordinance No. 9503-2005 should, therefore, be refunded to CEPALCO. Our ruling,
however, is made without prejudice to the enactment by the City of Cagayan de Oro of a
tax ordinance that complies with the limits set by the Local Government Code.
PETITION GRANTED
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