Setting boundaries: Situs of local business tax

The payment of local business tax (LBT) to local government units (LGUs) is usually regarded as a lot less complicated than paying internal revenue taxes to the Bureau of Internal Revenue (BIR). However, failure to comply and pay the correct LBT may result in a more adverse and immediate effect on the issuance of the mandatory business permit that an ongoing enterprise needs to operate.

Given that a business may operate in various cities or municipalities in separate jurisdictions, it is important to understand situs, or the place of taxation relating to the payment of LBT. It is worth noting that for LGUs to each get a fair share of local business taxes from taxpayers whose businesses operate in more than one city or municipality, laws were enacted for the proper allocation of those taxes.

Under the Local Government Code of 1991, if the taxpayer has a branch or sales office and sales are made and recorded there, LBT is payable to the LGU where such branch or sales office is located. On the other hand, if the taxpayer has no branch or sales office in the locality where sales are made, the sale shall be recorded in the principal office. The corresponding LBT shall then accrue to the LGU where said principal office is located.

In other words, it is important to consider not only where the business activity is conducted but also where the sales are actually recorded. Hence, the LBT of a branch that records its sales in that branch shall be imposed by the city or municipality where said branch is located.

Since an LGU can only exercise its taxing powers within the boundaries of its territory, it cannot compel a taxpayer outside its jurisdiction to record sales made outside its territory for the sole purpose of imposing local taxes.

Meanwhile, a different rule applies for manufacturers, assemblers, contractors, producers, and exporters that operate a factory, project office, plant, or plantation in the pursuit of business, in which case, the sales shall be allocated in the following manner:

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• 30 percent of all sales recorded in the principal office shall be taxable by the city or municipality where the principal office is located; and

• 70 percent of all sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant, or plantation is located.

To illustrate, for a plantation company whose principal office is located in Taguig City but maintains a plantation field in Cotabato, 70 percent of all sales recorded in its principal office must be taxable in the city of Cotabato and the other 30 percent must be taxable in the city of Taguig.

As to the situs of business tax on a construction contractor that has a condominium project in Pasig, for example, with a principal office located in Marikina, 30 percent of all transactions recorded in the principal office shall be taxable by the city of Marikina and the other 70 percent shall be taxable by the city of Pasig, where the construction project is located. Both LGUs may, however, collect mayor’s permit and other regulatory fees in their respective localities.

For banks and other banking institutions, the law provides that the gross receipts derived from all transactions filed with or negotiated in the branch office shall be recorded in the said branch while the gross receipts from transactions made by the head office, except gross receipts recorded in the branches, shall be taxable by the city or municipality where the said head office is located.

Allocation rules on the payment of LBT also apply to enterprises whose principal place of business, branch, plantation, factory, or sales office are located within the boundaries of at least two different LGUs. Note that this rule similarly applies to entities registered with the Philippine Economic Zone Authority that are under the five percent special corporate income tax. In this case, they are required to allocate the corresponding two percent of the five percent tax to the respective LGUs.

It is important to know where to properly recognize gross receipts and to maintain complete and accurate supporting documents as to the payment of local business taxes in different LGUs. To avoid interruption of operations or even mandatory closure, a business enterprise must consistently comply with these rules governing the payment of local business tax to the proper LGU having jurisdiction over its head office, branches, and places where it conducts its business. It may be a simple exercise but it can turn into a big headache when obligations are not fulfilled.

Francesca Isabel P. Montenegro

The author is a senior associate with the tax and corporate services division of Deloitte Philippines (Landicho Abela & Co.), a member of the Deloitte Asia Pacific Network. For comments or questions, email [email protected]

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