Tax Articles

Local Business Tax Obligations of Administrative Offices

By: Atty. Jomel N. Manaig

Among the powers granted to local government units is the power to create their own sources of revenues. This is provided in no less than the Constitution. The prevailing law in local taxation is included the Local Government Code of 1991 (“LGC”).

Unlike the national internal revenue taxes where there is only one implementing agency, the power of local taxation is devolved in each local government unit (“LGU”). And that local taxation is implemented through local tax ordinances enacted by LGUs, which shall govern the taxation of their respective subjects.

As a basic principle, local tax ordinances should conform to the limitations provided in the LGC. Thus, the basic reference in the crafting of local tax ordinances should still be the LGC. Yet there are a number of instances where the local tax ordinances deviate from the guidelines provided in the LGC. These often lead to disputes between the LGU and its constituents – the taxpayers. And sometimes, even if there is no difference between the LGC and the ordinance, the manner of implementation or the interpretation leads to controversies. If that happens, the basic guidelines in the LGC should prevail.

Indeed, a review of some court decisions would show several instances where taxpayers differed with their provincial, city or municipal treasurers. These disputes include the timing on the collection of taxes, tax base on the imposition of local business taxes, double leverage on the same subject, challenges on the authority of the LGU to impose tax on certain taxpayers and transactions, articles or types of revenues, and many others. And the same issues arise every now and then.

It is not unusual for businesses to have their plants, branches, warehouses, extension offices, administrative offices, sales offices and other business activities located in multiple local government jurisdictions. And it is the tendency of LGUs to impose local business taxes on business presence located within their respective jurisdictions, without regard to the functions that they do within those premises. But are all of these locations liable for local business taxes?

Since the local tax season is a few weeks from now, let me discuss a new case decided by the Court of Tax Appeals. I am referring to the taxation of business offices without sales functions. In CTA AC No. 218, October 12, 2021, the liability of administrative offices for local business tax was put into test.

That case involves a taxpayer with a principal place of business located in one of the municipalities just outside Metro Manila. However, it maintains an administrative office in one of the cities in the Metropolies. That city sought to impose local business tax on the administrative office. The case was elevated to the Courts on the issue of whether or not the administrative office is liable to local business tax.

And the verdict is clear. To be subject to local business tax, one must regularly engage in trade or commercial activity as a means of livelihood or with a view to profit. A mere administrative office that does not conduct business operations or any commercial activity that separately generates revenue in a locality is not liable to business tax in that locality.

In addition, the type or classification of business registration for which an entity is registered with the LGU should not matter. Neither is the fact that an office may possibly engage in business activities in that office does not affect the taxation of that office. In that case, the office was registered as “service establishment – other independent contractor”. But again, the Courts ruled that the determining factor is the actual conduct of business. The classification of registration is not controlling. Also, the capability or possibility of engaging in business is not sufficient for the imposition of local business tax. This can only be imposed if there are actual sales or receipts generated, not on the possibility of generating sales/receipts.

LGUs have all the reasons to whine. Indeed, the presence in any jurisdiction contributes to the worries of that LGU. For instance, I’ve heard one city treasurer complain that the presence of these offices, regardless of the nature of activities conducted in those offices, somehow contribute to the traffic woes in that area. And when emergency happens, the city does not discriminate against establishment which are not paying local taxes.

I fully understand the concerns of LGUs. Afterall, every function of an entity, even if not directly related to the generation of revenues, contributes to the overall success of a business. And for that matter, an entity will not establish an office in a locality if not needed for its business. Why should an LGU then be deprived of charging contributions for all businesses present within its jurisdiction, regardless of the nature of activities?

But that is not how the existing laws are crafted. As emphasized by the Courts, local business taxes can only be imposed on separate or distinct establishment or place only where business is conducted, or only where there is a trade or commercial activity regularly engaged in by the taxpayer, as a means of livelihood or with a view to profit. In fact, a branch or sales office may only be treated as such when there is trade or commercial activity regularly engaged in by the taxpayer, as a means of livelihood or with a view to profit, in such establishment or place. Otherwise, there is no authority to impose tax. If LGUs need these to be changed, the remedy is through legislation, and not through denial of business permits or imposition of assessments. Meanwhile, LGUs should refrain from imposing local business taxes on administrative offices and other types of business presence if the office is not involved in the generation of profits for the enterprise.