Get Adobe Reader

In order to view PDF files, you need to install Adobe Reader. Please click here to download a free copy of Adobe Reader.

Local business taxes not based on presumptive income

Local business taxes not based on presumptive income by: Pamela P. Palad

It is already the month of February and most businesses may have already renewed their business registrations with their respective local government units (LGUs) to secure their business permits for 2011.  

However, it may be noteworthy to look into your billing assessments and check whether a proper computation for your local business taxes (LBT) has been made.

The right of LGUs to create its own sources of revenue and levy taxes is upheld, consistent with the State policy to guarantee the autonomy of local governments and the objective of the Local Government Code of 1991 (LGC).  

That law, Republic Act No. 7160, provides that LGUs enjoy genuine and meaningful local autonomy to help them achieve their  development as self-reliant communities and make them effective partners in the attainment of national goals.  Thus, LGUs are granted the power to tax, including the right to impose LBT on all businesses operating within its jurisdiction.

LBT is imposed on the amount of gross sales or receipts of a business establishment for the preceding year using the rates of taxes provided under Section 143 of the LGC, or a specific ordinance issued by the LGU, for each type of business.  

In order to provide asis for computation, business establishments are required by LGUs to submit a Declaration/ Certification of Gross Sales/Receipts for the preceding year; and the latest Income Tax Returns and Financial Statements for purposes of verifying the accuracy of the declarations that have been made for the previous year.  Any underdeclaration found shall be added to the LBT due for 2011, before the business permit may be issued.

Nevertheless, the widespread practice in most LGUs is that, instead of using the declared gross sales or receipts as tax base, the said LGUs assessed taxpayers using a higher income using the Presumptive Income Level Assessment Approach (PILAA), thereby resulting in the overassessment and overpayment of business taxes.  

In one case decided by the Court of Tax Appeals (CTA) En Banc last December 2010, the gross sales have been increased from P2.3 million to P5 million, or more than 100% of the actual sales declared.  Much worse, based on actual experience, an LGU can impose an add-on income of as much as P20 million as basis for computing LBT.

Some taxpayers may not be knowledgeable of how LBT should be computed and thus, they take the assessments at face value, not noticing the erroneous income level used.  However, for those taxpayers whose actual income level has been significantly increased without legal justification, they are forced to pay the bloated amount under protest in order to obtain the necessary Mayor’s Permit to legally operate their businesses.

The LGUs justify their use of the PILAA by explaining that it is commonly practiced in most LGUs throughout the country as a tool for the efficient and effective collection of taxes.  It is used at the height of the renewal of business permits when an LGU has very limited time to verify the amount of gross sales declared by those applying for business permits.
The PILAA is indeed a tax collection tool which enables the LGUs to set a certain income level standard for various business entities based on industry factors.  

However, the PILAA does not give LGUs a carte blanche authority to increase the gross sales/receipts of the taxpayers within its jurisdiction and on that basis, assess the local business tax.
In one case, the CTA ruled that the PILAA may be used by an LGU in computing the local business tax only if the taxpayer is unable to provide proof of its income.
 
With the taxpayer’s submission of its sworn declaration of gross income together with its audited financial statements, the LGU could have sufficiently computed the LBT due without resorting to the PILAA.  There is no need for the LGU to use a “presumptive income level” sin ce the taxpayer has already provided its actual gross income for the corresponding taxable year.

If the LGU believed that a taxpayer underdeclared its gross income, the remedy should have been to compute the LBT on the taxpayer’s declared income and then subsequently issue a Letter of Authority for the examination and audit of the taxpayer’s books of accounts and other records.  If a taxpayer fails to present its books of accounts and other records, or if the taxpayer has no such records to validate its declared income, then the LGU may use the presumptive income level for the assessment of deficiency taxes.

Furthermore, the use of the PILAA should be properly provided for in the specific local revenue code of the LGU.  Otherwise, this may be subject to abuse by local officials.  While the LGC grants LGUs the power to create its own sources of revenue, the same is subject to the limitation that the tax be imposed through an appropriate ordinance.  

Hence, if the LGU intends to use the PILAA, then it should be subject to the procedures provided in the LGC regarding public hearings and publication.  This is to ensure that the taxpayers are properly informed of the factors used in determining the presumptive income and for the taxpayers to agree to such level of presumptive income applicable to their industry.

Absent such ordinance authorizing the use of the PILAA and embodying the presumptive income levels to be used by the City Treasurer, the collection of additional LBT based on such PILAA is illegal, and a taxpayer may properly claim the refund of the excess business taxes collected.

As mentioned, the remedy is to file a written claim for refund or credit with the local treasurer premised on the illegal and erroneous collection of the additional business tax computed upon the unilateral application of the presumptive income level.  However, the claim must be made within two (2) years from the date of payment of the tax, fee or charge, or the date the taxpayer is entitled to a refund or credit.

While the Constitution seeks to safeguard the viability and self-sufficiency of LGUs by directly granting them general taxing powers, it also ensures that such taxing powers are properly rationalized and limited by law so that taxpayers will not be over-burdened or saddled with multiple and unreasonable impositions.  The bottom line is, despite the local autonomy granted by the Constitution, local taxation must always be fair, uniform and just.