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Situs rule on local business tax

Situs rule on local business tax by: Senen M. Quizon

One of the most contentious issues in local taxation is the taxing jurisdiction of other local governments over businesses. This issue arises because most business operations span multiple jurisdictions as evidenced by the presence of a branch, factory, warehouse, or plantation in different localities resulting in a conflict among competing local government units (LGUs) as to the exercise of taxing power.

To avoid this conflict, Section 150 of the Local Government Code (LGC) of 1991 provides for rules on the situs of local business tax (LBT) — particularly, the allocation of sales which applies to manufacturers, assemblers, contractors, producers, and exporters with factories, project offices, plants, and plantations located in different LGUs. These rules are implemented by Article 243 of the Implementing Rules and Regulations (IRR) of the LGC. The Department of Finance has also prepared specific guidelines on the situs of LBT for certain industries like banks and other financial institutions, insurance companies, exporters, and very recently, mining companies taking into account their peculiarities.

The basic rule in determining the situs of LBT is that “all sales made in a locality where there is a branch or sales office or warehouse should be recorded in said branch or sales office or warehouse and the LBT due should be paid to the city or municipality where the same is located.”  The foregoing rule appears to be straightforward but a closer look at the definition of a branch, sales office, and warehouse under Article 243 (a)(2) and (3) of the IRR of the LGC provides us a better understanding on how this specific situs rule is implemented.
Under Section 243(a)(1) and (2) of the IRR of the LGC, the term  “branch or sales office” is defined as “a fixed place in a locality which conducts operations of the business as an extension of the principal office.” As further defined by the IRR, branches or sales offices used only as display areas of the products where no stocks or items are stored for sale, although orders for the products may be received, are not considered branches or sales offices.  On the other hand, the term “warehouse” is defined as “a building utilized for the storage of products for sale and from which goods or merchandise are withdrawn for delivery to customers or dealers, or by persons acting in behalf of the business. A warehouse that does not accept orders and/or issues sales invoices as aforementioned shall not be considered a branch or sales office.”

Following the above definition, mere presence of a branch, sales office or warehouse in a locality does not automatically give rise to LBT liability to the host LGU.  The IRR requires that the sales should be recorded in the branch, sales office or warehouse before it can be considered as such, and for the LGU to be able to collect LBT on such establishment within its territorial boundary.  Otherwise, the host LGU may only collect Mayor’s permit fee and other regulatory fees provided for under the existing local ordinance of the said LGU.  This view has been consistently expressed by the Bureau of Local Government Finance (BLGF) in the various opinions it has issued on the matter.

There are also specific rules if a factory, project office, plant or plantation is maintained by the taxpayer and 100 percent of the sales are recorded in its principal office.  The LGU where the principal office is located cannot tax 100 percent of its sales. Instead, a sales allocation is required to be applied.  In this regard, Article 243(b)(3) of the IRR of LGC provides that only 30 percent of all sales recorded in the principal office shall be taxable in the LGU where it is located while the 70 percent shall be taxable in the LGU where the factory, project office, plant or plantation is located. 

In certain cases, even the plantation maintained by a taxpayer and the factory may be situated in s eparate localities. In this particular case, the 70 percent sales allocation shall be further allocated between the LGUs where the factory and plantation are located — i.e., 60 percent should accrue to the city of municipality where the factory is located while 40 percent shall be taxable to the city or municipality where the plantation is located. It is also possible that two or more factories, project offices, plants or plantations are located in different localities. In that case, the 70 percent sales allocation shall be prorated among the localities in proportion to the volumes of production generated in each locality during the period for which the tax is due.           

Despite these rules, many LGUs still believe that they are not getting their proportionate share of taxes from business establishments which maintain their physical presence in their locality. Hence, they try to exert their taxing authority by imposing LBT on all the facilities in their jurisdiction, regardless of the situs rules. In some cases, they impose LBT on 100 percent of the recorded sales in the principal instead of applying the mandated sales allocation.

When this happens, a taxpayer should not feel helpless.  He can file a protest against the LBT assessment issued by the local treasurer. Under the rules, the protest to the assessment should be filed within 60 days from the receipt of notice of the LBT assessment; otherwise, the assessment shall become final.  The protest letter shall be persuasive enough, citing the facts of the case, the legal basis to dispute the assessment and any other documentary support or issuances.

It is also helpful to secure an opinion from the BLGF on the correct interpretation of the codal provisions in the situation at hand. The taxpayer can use this opinion to support its position against the LBT assessment, or persuade the concerned LGU to reconsider its assessment.

This article is not intended to be a substitute for professional advice.  For comments and inquiries, you may e-mail the author at  For other tax concerns, please check out our other tax services.