Local business tax: A tool by the LGU to create its own source of revenue or a means of abuse?
The first quarter of 2017 has just finished, and by now most business entities, if not all, had renewed their business registration and paid local business tax (LBT) for 2017.
Under the Local Government Code, municipalities and cities have the power to impose LBT on all business entities within their jurisdiction consistent with the state policies of local autonomy and decentralization.
Such power is not absolute. LGU’s revenue ordinances are subject to the limitations provided under the Local Government Code.
Some LGUs have been aggressively raising taxes either by increasing the tax rate and/or tax base.
Certain unfair and abusive practices have come to the attention of the Department of Finance, in particular the Bureau of Local Government Finance (BLGF). Early this year, BLGF issued BLGF Memorandum Circular No. 01-001-2017 addressed to all local government treasurers and assistant treasurers.
BLGF MC No. 01-001-2017 reiterates the Bureau’s previous stand that newly started business entities shall not be subject to payment of initial LBT, but only to business permit and other regulatory fees and charges. Businesses engaging in printing and publication and those enjoying a franchise fall under the exception. Their LBT shall be based on capital investment.
For renewal of business permit, BLGF MC No. 01-001-2017 states LBT shall be based on gross sales or receipts. The same may be found in the business entity’s Audited Financial Statement (AFS), and in its absence on the sworn declaration of the entity’s gross sales or receipts. In addition, the Presumptive Income Level Assessment Approach (PILAA) may be used, but only if the taxpayer is unable to provide proof of its gross sales or receipts, and the use of PILAA is expressly provided for in the local tax ordinance. Otherwise, the LGU’s collection of tax is void and the taxpayer is entitled to refund of taxes paid. These directives are in accordance with the CTA en banc ruling on 10 December 2010 in First Planters Pawnshop, Inc. v. City Treasurer Of Pasay City, Memorandum Circular No. 1 Series of 2016 jointly issued by the DILG, DTI, and DICT on 30 August 2016, and CTA First Division ruling on 25 July 2013 in Provincial Government Of Cagayan v. Smart Communications, Inc.
In case of unsuspected under-declaration of gross sales or receipts, the local treasurer is empowered to examine the business entity’s books of accounts pursuant to Section 171 of the 1991 LGC, which must be done after the business renewal period.
Lastly, BLGF MC No. 01-001-2017 dissuades LGUs of automatically applying additional 10% to 15% increase on the previous year’s gross receipts without any basis.
Interestingly, almost all revenue ordinances in the National Capital Region (for example in Caloocan City, Las Piñas City, Makati City, Mandaluyong City, Manila, Quezon City, Parañaque City, Pasay City, Taguig City) impose newly started business entities to initial LBT based on capital investment. The big question now is how the government will be able to give teeth to BLGF MC No. 01-001-2017 and its provisions, an issuance which represents hope to taxpayers against undue harassment from LGUs.
The views and opinions expressed in this article are those of the author. This article is for general informational and educational purposes only and not offered as and does not constitute legal advice or legal opinion.
Joanne O. Macabagdal is an Associate of the Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW).