Updates on local tax and business requirements

Updates on local tax and business requirements

by Marietta B. Saludaga

As the deadline for the renewal of local government permits comes to an end, the focus from local taxation shifts to other areas of business compliance.

It may still be timely, though, to revisit the rules on local taxation as there are usual issues, which causes misunderstanding between the taxpayers and the local government units  (LGUs). One issue is the basis of local business tax for contractors and other service providers.

It is settled that LGUs have the power to create their own sources of revenues through local tax ordinances.

However, such local tax ordinances should be enacted within the boundaries provided in the Local Government Code (LGC). And, as so provided in the LGC, contractors and other independent contractors shall be subject to local business taxes based on the gross receipts for the preceding calendar year.

Some local government units, however, based their assessment of taxes due upon the  renewal of mayor’s permit or in case of post-audits, on the revenue as reflected in the  financial statements.

Should the local business taxes due be based on the gross revenue or gross receipts? In a recent case (G.R. No. 176667, Nov. 22, 2007), the Supreme Court ruled that the basis of local business tax for contractors should be the gross receipts. In this case, the local government unit advanced the view that the term "gross receipts" is synonymous with "gross revenue." On the other hand, the taxpayer argued that only the portion of the revenues which were actually and constructively received should be considered in determining the tax base.

In ruling in favor of taxpayer, the Court made a distinction between the term "gross receipts" and "gross revenue."

"Gross receipts" has been defined to include money or its equivalent actually or constructively received in consideration for services rendered or articles sold, exchanged or leased, whether actual or constructive. There is constructive receipt, when the consideration for the articles sold, exchanged or leased, or the services rendered has already been placed under the control of the person who sold the goods or rendered services without any restriction by the payor.

In contrast, "gross revenue" covers money or its equivalent actually or constructively received, including the value of services rendered or articles sold, exchanged or leased, the payment of which is yet to be received.
It is, therefore, clear that the basis of local business taxes for contractors shall be the gross receipts, which refer to the portion of the revenues actually or constructively received. The financial statements of taxpayers, especially those using the accrual method of accounting, reflect income or revenue which accrued during the taxable year. Since this revenue may not yet be actually or constructively received or paid, the same should not be made the basis of local business tax. Otherwise, this may result in double taxation because it could be subjected to tax again upon collection.

This decision puts to rest the correct interpretation of gross receipts as the basis of local business tax for contractors. Thus, the local government units and taxpayers alike will now be guided in determining the tax due.

Taxpayers adversely affected by such practice may rightfully request for reassessment of their local taxes and apply for refund if the payments had been excessive due to erroneous tax base.

On another development, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular No. 12-2008, dated Jan. 8, 2008, which prescribes the submission of certain BIR documents before any application for initial registration or renewal of business license can be acted upon. Initial registrants are required to submit Taxpayer Identification Number, Certificate of Registration issued by the BIR and Proof of Payment of Annual Registration Fee (BIR Form No. 0605). For renewal purpos es, the Annual Income Tax Return and Monthly/Quarterly VAT Declaration/Returns or Monthly Percentage Tax Returns shall be submitted, in addition to the required documents for initial registration.

Compliance with these documentary requirements will not be an issue if they are available at the time of filing of the application.

It is to be noted, though, that the deadline for the renewal of local business license or mayor’s permit is Jan. 20. On the other hand, the deadline for the filing of the last quarter VAT return and the annual income tax return is later than this date. Thus, it will be impossible for most taxpayers to comply with the submission of these BIR documents.

Though we applaud the concerted efforts of the BIR and local government units to improve tax collection and compliance, we also appeal that fairness be observed continuously in the pursuit of this objective.

(The author is a senior tax manager at Punongbayan & Araullo, member of Grant Thornton International. For comments and inquiries, please e-mail the author or call 886-5511.)