TAX REVIEWER: LAW OF BASIC TAXATION IN THE PHILIPPINES BY: Benjamin B. Aban JUICY NOTES (PROF. CABANEIRO) A2011 3

LOCAL TAXATION

Local taxation as decentralization

The principles of local taxation under the 1987 Consititution simply means Decentralization. It does not mean that local governments are sovereigns within the state or imperium in imperio.

IN GENERAL

Two aspects of local taxation

1. Levy of taxes, fees, charges and other impositions2. Real property taxation

POWER TO LEVY TAXES, FEES, CHARGES AND OTHER IMPOSITIONS

POWER OF LOCAL TAXATION

Power of local taxation not inherent

Each local government unit shall have the power to create its own sources of revenues and to levy taxes fees and charges subject to such guidelines are limitations as the Congress may provide, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local governments. [Section 5, Article X, Constitution]

The power of local taxation is not inherent and is conferred on local government units by the Constitution. This is reiterated in Section 129 of the Local Government Code of 1991.

Power is not plenary and absolute as it is subject to guidelines and limitations as may be provided by Congress.

Basco v. PAGCOR; A municipal corporation has no inherent right to impose taxes. The power to tax must always yield to a legislative act which is superior for having been passed by the State itself which has the inherent power to tax. LGU cannot tax instrumentalities of the National Government, in this case, PAGCOR.

Authority to prescribe penalties for tax violations and limitations

Limited as to the amount of fine that they may impose as well as the length or period of imprisonment that they may provide.

Fees and charges

Fees means a charge fixed by law or ordinance for the regulation or inspection of a business or activity. [Section 131(i), Local Government Code]

Charges refer to pecuniary liability, as rents or fees against persons or property. [Section 131(g), Local Government Code]

Authority to grant tax exemption privileges

With the grant of the power of taxation, local government units have also been given the power to grant tax exemptions corresponding to its taxing powers.

Local government units may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary.

Guidelines of Sanggunians On the grant of tax exemptions or tax reliefs1. May be granted in cases of natural calamities, civil disturbance, general failure of crops, or adverse economic conditions such as substantial decrease in prices of agricultural or agri-based products.2. Shall be through ordinance.3. Shall take effect only during the next calendar year for a period not exceeding 12 months.4. Any exemption or relief granted to a type or kind of business shall apply to all businesses similarly situated.

On the grant of tax incentives1. Shall be granted only to new investments.2. Shall be for a definite period not exceeding one calendar year3. Shall be by ordinance passed prior to the first day of January of any year.4. Any tax incentive granted to a type or kind of business shall apply to all businesses similarly situated.

Withdrawal of tax exemption privileges

Unless otherwise provided in the Local Government 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 Republic Act No. 6938, non-stock and non-profit hospitals and educational institutions, are hereby withdrawn upon the effectivity of the Code.

Authority of LGUs to adjust rates of tax ordinances

Local government units shall have the authority to adjust the tax rates as prescribed in the Local Government Code not oftener than once every five (5) years, but in no case shall such adjustment exceed 10% of the rates fixed under the Code.

Residual Taxing Powers of Local Governments

Local Governments can also impose those taxes, fees and charges which do not fall within the scope of taxes which are enumerated under the LGC, as well as those which are levied on subject or bases which are not taxed under the NIRC or other applicable laws.

Limitations:1. Constitutional Limitation2. Common limitations on the taxing power of LGU as prescribed in Sec. 133 of the LGC.3. Fundamental principles governing the exercise of the taxing power by local governments as prescribed under Sec. 130 of LGC.4. The requirement prescribed in Sec. 186 of the LGC which direct that the ordinance levying such residual taxes shall not be enacted without any prior public hearing conducted for the purpose.5. The principle of pre-emption.

Preemption or exclusionary rule

Preemption in taxation refers to 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. (Victorias Milling Co. Vs Municipality of Victorias Negros Occidental, Sept 27, 1968) Principally rests upon the intentions of the Congress. Inapplicability of the Doctrine:1. When congress allows municipal corporation to cover fields of taxation it already occupies.2. Beyond certain level of sales or receipts for the preceding year.3. If the subjects of the taxes levied by the National and Local Governments are different from each other.

Double taxation

Double taxation is not prohibited, except those between:

1. Provinces and municipalities;2. Barangay and Cities, municipalities or provinces.

SCOPES AND EXERCISE OF LOCAL TAXING POWER

Local authority that shall exercise taxing power

The power shall be exercised by the appropriate sanggunian or the sangguniang panlalawigan in the case of provinces, the sangguniang panglungsod in the case of cities, the sangguniang bayan in the case of municipalities or the sangguniang barangay in the case of barangays, through an appropriate ordinance. [Section 132, Local Government Code] The exercise of the power to tax by the local legislative assembly is subject to the veto power of the local chief executive.

1. Ultra Vires2. Prejudicial to the public welfare

However, the sanguniang may override the veto by a 2/3 vote of all its members.

Procedure for approval and effectivity of tax ordinances and revenue measures

1. Enactment and approval by sanggunian.

The procedure for approval of local tax ordinances and revenue measures shall be in accordance with the provisions of the Local Government Code. [Section 187, Local Government Code]

2. Mandatory public hearings

Public hearings shall be conducted for the purpose prior to the enactment thereof. [Section 187, Local Government Code]

3. Publication requirements

Within ten (10) days after their approval, certified true copies of all provincial, city and municipal tax ordinances or revenue measures shall be published in full for three (3) consecutive days in a newspaper of local publication or, in the absence of newspapers of local publication, posted in at least two (2) conspicuous and publicly accessible places. [Section 188, Local Government Code]

4. Furnishing of copies to local treasurer

Copies of all provincial, city and municipal tax ordinances or revenue measures shall be furnished to the respective local treasurers for public dissemination. [Section 189, Local Government Code]

Procedure for protest of tax ordinances

Any question on the constitutionality of tax ordinances or revenue measures may be raised on appeal within 30 days from the effectivity thereof to the Sec. of Justice. [Sec. 187, Local Government Code].

After the lapse of 30 days and declaratory relief before assessment; before payment

Note: Appeal from where? The provision is not really clear but presumably after going through the same process of appealing legality of ordinances, i.e. from municipal to provincial sanggunian before going to the Secretary of Justice. Otherwise, direct appeal to the Secretary may be made.

The Secretary of Justice shall render a decision within sixty (60) days from the date of receipt of appeal. [Section 187, Local Government Code]

Such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax, fee, or charge levied therein. [Section 187, Local Government Code]

Within thirty (30) days after receipt of the decision or the lapse of the 60-day period without the Secretary of Justice acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction. [Section 187, Local Government Code]Prescription for filing of review

Barangay ordinance file petition for review to municipal/city sangunian within 10 days from enactment.

Municipal or Component city ordinance file with Provincial sanggunian within 3 days from approval.

Chartered City/Provincial sanggunian file with Sec. of Justice within 30 days from effectivity.

Review powers, of local treasurers and the Sec. of Finance, on the validity of revenue ordianances have been abrogated by the Local Government Code.

No power of control by Secretary of Justice over LGUs

Section 187 of the Local Government Code, which authorizes the Secretary of Justice to review the constitutionally or legality of a tax ordinance and, if warranted, to revoke it on either or both grounds is valid, and does not confer the power of control over local government units in the Secretary of Justice; as even if the latter can set aside a tax ordinance he cannot substitute his own judgment for that of the local government units. [Drillon v. Lim, 253 SCRA 135]

Fundamental principles governing local taxation

1. Taxation shall be uniform in each local government unit.

2. Taxes, fees, charges and other impositions shall be equitable and based as much as possible on the taxpayers ability to pay.

3. They shall be levied and collected only for public purposes.

4. They shall not be unjust, excessive, oppressive or confiscatory.

5. They shall not be contrary to law, public policy, national economic policy, or in restraint of trade.

6. The collection of local taxes, fees, charges, and other impositions shall, in no case, be let to any person. Note: This overrules the Bagatsing ruling [Bagatsing v. Ramirez 7 SCRA 306]

Asiatic v. Alikpala The mere collection of market stall fees may be let to a private entity, the same not being taxes.

This is a doubtful decision since Sec. 130 of the LGC covers not only the collection of taxes but likewise all other impositions under the LGC.

7. The revenue collected under the local Government Code shall inure solely to the benefit of, and subject to disposition by, the local government unit levying the tax, fee, charge or other imposition unless specifically provided therein.

8. Each local government unit shall, as far as practicable, evolve a progressive system of taxation. [Section 130, Local Government Code]

9. The interpretation of laws on the grant of taxing power to LGUs shall be liberally interpreted in favor of the LGU, But, doubts on the liability of the taxpayer under a valid tax ordinance is construed strictly against the LGU, except as regards to tax exemptions, incentives or reliefs.

10. The National Government cannot deprive LGUs of their taxing power as this power is expressly granted and mandated by the Constitution. The laws may provide limitations, but they cannot totally abrogate the taxing power of the LGUs

11. Congress cannot enact local tax law, only guidelines and limitations.

Common limitations on the taxing powers of LGUs

Unless otherwise provided therein, the exercise of the taxing powers of provinces, citites, municipalities, and barangays shall not extend to the levy of the following:

1. Income tax, except when levied on banks and other financial institutions;

A 5% tax on gross receipts of rentals or lease of spaces in a privately owned public market constitutes a valid license tax or fee for the regulation of the business rather than as Income tax.

2. documentary stamp tax;

3. taxes or estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein;

4. Customs duties, registration fees of vessels and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and due, except wharfage on wharves constructed and maintained by the LGU concerned;

5. Taxes, fees and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of LGUs in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees or charges in any form whatsoever upon such goods or merchandise;

6. Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen;

7. Taxes or 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;

8. Excise taxes on articles enumerated in the NIRC, as amended, and taxes, fees or charges on petroleum products;

9. Percentage or value-added tax on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein;

10. Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers of freight by hire and common carriers by air, land or water, except as provided in this Code;

11. Taxes on premiums paid by way of reinsurance or retrocession;

12. Taxes, fees or charges for the registration of motor vehicles and for the issuance of all kinds of licenses or permits for the driving thereof, except tricycles;

13. Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided herein;

14. Taxes, fees or charges on Countryside and Barangay Business Enterprises and cooperatives duly registered under Republic Act No. 6810 and Republic Act No. 6938, otherwise known as the Cooperative Code of the Philippines;

15. Taxes, fees or charges of any kind of the National Government, its agencies and instrumentalities, and local government units. [Section 133, Local Government Code]

Common limitations may be classified into the following categories

1. Taxes which are levied by the NIRC2. Taxes, fees and charges which are imposed under the Tariff and Customs Code and other custom laws3. Taxes, fees and charges the imposition of which contravenes existing governmental policies or which are violative of the fundamental principles of taxation4. Taxes, fees and charges imposed under special laws

Scope of taxing power of provinces

1. Tax on the transfer of real property ownership or 1% within 60 days2. Tax on the business of printing and publication3. Franchise tax

A local franchise tax may only be imposed on companies with legislative franchises that do not have the In lieu of all taxes proviso.

4. Tax on sand, gravel and other quarry resources5. Professional tax P300

Professional exclusively employed in the government shall be exempt from the payment of tax.

6. Amusement tax 30% of gross receipts7. Annual fixed tax per delivery truck or van of manufacturers or producers and wholesalers of, or dealers in certain products. [Section 134-141, Local Government Code]

Scope of taxing power of municipalities

1. Taxes, fees and charges not otherwise levied by provinces2. Fees and charges on business and occupation and practice of any profession or calling3. Fees for sealing and licensing of weights and measures4. Fishery rentals, fees and charges [Section 142-149, Local government Code]

Business

Business means trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit.

A manufacturer or producer which sells its products through a broker, is subject to excise tax (business tax) in the city or municipality where the broker conducts its business.

A broker is an agent of the company, a dealer is not.

A city can validly tax the sales to customers outside the city as long as the orders were booked and paid for in the companys branch office in the city.

Scope of taxing power of cities

1. The city may levy the taxes, fees and charges which the province or municipality may impose. [Section 151, Local Government Code]

Note: The rates of taxes that the city may levy may exceed the maximum rates allowed for the province of municipality by not more than fifty percent (50%) except the rates of professional and amusement taxes.

Scope of taxing power of barangays

1. Taxes on stores or retailers are fixed business establishments with gross sales or receipts of the preceding calendar year of P50,000 or less for barangays in the cities and P30,000 of less for barangays in municipalities2. Service fees or charges for services rendered or use of barangay-owned properties or service facilities3. Barangay clearance4. Other fees and charges [Section 152, Local Government Code]

Other fees and charges by barangays

The barangay may levy reasonable fees and charges:

1. On commercial breeding of fighting cocks, cockfights and cockpits;2. On places of recreation which charge admission fees; and3. On billboards, signboards, neon signs, and outdoor advertisements.

Common revenue-raising powers of LGUs

1. Service fees and charges2. Public utility charges3. Toll fees or charges [Section 153-155, Local Government Code]

SITUS OF LOCAL TAXATION

Situs according to the cases Excise or privilege tax is not dependent on the domicile of the taxpayer, but on the place in which the act is performed or the occupation is engaged in; not upon the location of the office, but the place where the sale is perfected. (Allied Thread Co vs City Mayor of Manila, November 21, 1984). It is the place of consummation of the sale, associated with the delivery of the things which are the subject matter of the contract that determines the situs of the contract for purposes of taxation, and not merely the place of perfection of the contract. (Shell Co. V Municipality of Sipocot Camarines Sur, 105 Phil 1263) The city of Cebu can validly tax the sale of matches and paid for the companys branch office in the city. The matches can be regarded as sold in the city because the matches were delivered to the carrier in Cebu City (Phil. Match Co. Vs City Of Cebu, January 18, 1978)

Situs according to the LGC, Sec. 150 For manufacturers, assemblers, packers, brewers, distillers, rectifiers, and compounders of liquor, distilled spirit 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.

General Rule: Tax shall accrue and shall be paid to the municipality where such branch or sales outlet is located.

Exception: To the municipality of the principal office if there is no such branch or sales outlet in the city or municipality where the transaction was made.

For manufacturers, assemblers, contractors, producers, and exporters with factories, project offices, palnts and plantations in pursuit of their business.

Sales Allocation

Prorated among the municipalities when factories or plantation be more than one

70% for the city where the factory or plantation is located30% for the city where the principal office is located.

40 % to the city where the plantation is located when location of factory is diferrent60% to the city where the factory is located when location of plantation is diferrent

Sales allocation shall be applied irrespective whether or not sales are made in the locality where the factory, project office, plant or plantation is located.

COMMUNITY TAX

Community tax

The community tax, which replaced the residence tax is essentially a poll or capitation tax. It is of a fixed amount imposed upon certain inhabitants of the Philippines without regard to their property or the occupation in which they may be engaged.

It is imposed both on individuals and juridical persons.

Individuals liable to community tax Every inhabitant of the Philippines, 18 years of age or over:

1. who has been regularly employed on a wage or salary basis for at least 30 consecutive working days during any calendar year; or

2. who is engaged in any business or occupation; or

3. who owns real property with an aggregate assessed value of P1,000 or more; or

4. who is required by law to file an income tax return.

Annual community tax for individuals is P5.00 and an annual additional tax of P1.00 for every P1,000 of income or from property wichi in no case shall exceed P5,000. [Section 157, Local Government Code]

Inhabitant

Means any person, irrespective of his or her citizenship or nationality, who dwells or resides in the Philippines for a period exceeding three (3) months.

Juridical persons liable to community tax

Every corporation, no matter how created or organized, whether domestic or resident foreign, engaged in or doing business in the Philippines, shall pay an annual community tax of P500.

An annual additional ax of P2.00 shall be imposed for every P5,000 worth of real property in the Philippines owned by it or for every P5,000 of gross receipts or earnings received by it form its business in the Philippines in the preceding year, but total amount must not exceed P10,000. [Section 158, Local Government Code]

Who are exempt from community tax?

1. Diplomatic and consular representatives

2. Transient visitors when their stay in the Philippines does not exceed three (3) months. [Section 159, Local Government Code]

Accrual and payment of community tax Community tax shall accrue on the first day of January which shall be paid not later than the last day of February each year.

TAX REMEDIES AND ADMINISTRATIVE MATTERS IN LOCAL TAXATION

Accrual of taxes

Unless otherwise provided in the Code, all local taxes, fees and charges shall accrue on the first day of January of each year.

New taxes, fees or charges, or charges in the rates thereof, shall accrue on the first day of the quarter of the next following the effectivity of the ordinance imposing such new levies or rates. [Section 166, Local Government Code]

Tax period and time of payment

Calendar year unless otherwise provided

Taxes shall be paid within the first twenty (20) days of January or of each subsequent quarter, as the case may be.

The sanggunian concerned may, for a justifiable reason or cause, extend the time for payment of such taxes, fees, or charges without surcharges or penalties, but only for a period not exceeding six (6) months. [Section 165 and 167, Local Government Code]

Local government lien

Local taxes, fees, charges and other revenues constitute a lien, superior to all liens, charges or encumbrances in favor of any person, enforceable by appropriate administrative or judicial action, not only upon any property or rights therein which maybe subject to the lien but also upon property used in business, occupation or calling, or exercise of privilege with respect to which the lien is imposed.

The lien is extinguished upon payment of the tax, fee or charge, including the interest and surcharges. [Section 173, Local Government Code]

Civil remedies for collection

1. By administrative action

a. Distraint of personal property

b. Levy upon real property

2. By judicial action [Section 174, Local Government Code]

Period of assessment

Local taxes, fees, or charges shall be assessed within five (5) years from the date they became due. [Section 194(a), Local Government Code]

In case of fraud or intent to evade the payment of taxes, fees, or charges, the same may be assessed within ten (10) years from discovery of the fraud or intent to evade payment. [Section 194(b), Local Government Code]

Period of collection

Local taxes, fees, or charges may be collected within five (5) years from the date of assessment of administrative or judicial action. [Section 194 , Local Government Code]

Suspension of period of assessment and collection

1. The treasurer is legally prevented from making the assessment or collection.

2. The taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess or collect.

3. The taxpayer is out of the country or otherwise cannot be located. [Section 194(d), Local Government Code]

REMEDIES OF THE TAXPAYER IN LOCAL TAXATION

1. Protest by means of appeal to the secretary of Justice.2. Protest against the assessment3. Claim for refund or tax credit

Protest against a newly enacted ordinance May be raised on appeal within 30 days from the effectivity thereof to the Secretary of Justice. Shall NOT have the effect of suspending the effectivity of the ordinance and the accrual and payment of the tax, fee or charge levied therein. Appeal from the decision of of the Sec of Justice is filed with the regular court. CTA has no jurisdiction over said appeal.

PROCEDURE FOR PROTEST OF ASSESSMENT

1. Notice of Assessment

When the local treasurer or his duly authorized representative finds that correct taxes, fees, or charges have not been paid, he shall issue a notice of assessment stating the nature of the tax, fee or charge, the amount of deficiency, the surcharge, interests and penalties. [Section 195, Local Government Code]

2. Written protest

Within sixty (60) days from the receipts of the notice of assessment, the taxpayer may file a written protest with the local treasurer contesting the assessment; otherwise, the assessment shall become final and executory. [Section 195, Local Government Code]

3. Decision

The local treasurer shall decide the protest within sixty (60) days from the time of its filing. If the treasurer finds the protest to be wholly or partly meritorious, he shall issue a notice canceling wholly or partially the assessment. However, if the local treasurer finds the assessment to be wholly or partly correct, he shall deny the protest wholly or partly with notice to the taxpayer. [Section 195, Local Government Code]

4. Appeal

The taxpayer shall have thirty (30) days from the receipt of the denial of the protest or from the lapse of the sixty-day period prescribed within which to appeal with the court of competent jurisdiction; otherwise, the assessment becomes conclusive and unappealable. [Section 195, Local Government Code]

Claim for refund or tax credit

Remedy after payment in cases where tax was erroneously or illegally collected.

No case or proceeding shall be maintained in any court for the recovery of any tax, fee, or charge erroneously or illegally collected until a written claim for refund or credit has been filed with local treasurer. [Section 196, Local Government Code]

Written claim for refund or credit must be filed with the treasurer within two (2) years form the date of payment of the tax, fee or charge or from the date the taxpayer is entitled to a refund or credit (doctrine of supervening cause therefore applies). [Section 196, Local Government Code]

Note: There is no provision governing the procedure in case the claim for refund or credit is denied or not acted upon by the local treasurer. The same procedure for protest of assessment may be followed and, as such, the taxpayer may appeal with the court of competent jurisdiction.

Injuction on the collection of local taxes

Unlike in the NIRC, the LGC does not specifically prohibit the issuance of injunctions on the collection of local taxes.

However, injunctions cannot be issued on the basis of the alleged unconstitutionality of the tax ordinance. Until the tax ordinance is declared to be unconstitutional, it is presumed to be valid and constitutional.

Chapter 10: LOCAL TAXATION. Page 3 of 10