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(BDB Laws Tax Law For Business appears in the opinion section of BusinessMirror every

Thursday. BDB Law is an affiliate of Punongbayan & Araullo (P&A).

Retiring from business? Knowing your local business
tax concerns

When a business retires, it faces a host of requirements which cannot be
dispensed with. At the local government level alone, securing a tax clearance
may involve processes to rule out underpayment of business taxes. However,
instead of summarily paying the amount assessed, it would not hurt to ask: is the
local government charging business taxes in excess of an amount that is legally

The imposition of the local business tax springs from the general authority of
local government units (LGUs) to create their own sources of revenue,
established under Section 5, Article X of the Constitution, as affirmed by Section
129 of the Local Government Code (LGC) of 1991. The said provision states
that [e]ach 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 and
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. The annual business tax is considered a major source of local

LGUs conduct inspections to ensure that the payment of the business tax is not
avoided by simulating the termination of the business. If it is found that the
business is merely placed under a new name or owner, or actively engages in
normal business activities, the application for retirement is disapproved and the
business continues to be liable for the payment of local taxes, fees and charges.
Otherwise, the concerned LGU proceeds to process the application upon the
submission of all required documents.

But when is a business considered retired? The Implementing Rules and
Regulations of the LGC supply the definition under Section 241 by stating that
[the] termination shall mean that business operations are stopped completely.
Any change in ownership, management and/or name of the business shall not
constitute termination as contemplated in this Article. Interestingly, the term
retirement of business limited its scope to the cessation of business in the
locality where it operated. As far as commercial activities therein are terminated,
the business shall be considered retired for all intents and purposes. The
absence of a clear definition paved the way for situations of termination of
business activity in one locality with a view to transferring the same to another,
as covered by the concept of retired businesses.

The local business tax is paid annually on or before the twentieth day of January
or of each subsequent quarter, based on the total gross sales for the preceding
year. When a business retires, a sworn declaration of its gross sales or receipts
for the current year is required to be presented to the concerned LGU. This is
then compared to the previous years gross sales. Under Section 145 of the
LGC, if the tax paid during the year be less than the tax due on the said gross
sales of the current year, the difference shall be paid before the business is
considered officially retired. In the past, the scenario of retirement due to
transfer of business operations to another city or municipality gave rise to various
opinions between the LGUs and taxpayers in determining the residual taxes, fees
and charges payable by retiring businesses.

The Bureau of Local Government Finance (BLGF) which renders opinion on
issues affecting local tax assessments admitted finding a gray area in this regard.
It opined that the local business tax must be paid on the entire gross sales of the
previous year and on the gross sales from the beginning of the calendar year up
to the date the business actually ceased operations (BLGF-DOF Opinion Re:
Pepsi Cola Products Philippines, April 25, 1995; BLGF-DOF Opinion Re: ATLAS
Cement Marketing Corporation, February 2, 1994).

The Supreme Court (SC) squarely addressed this issue by distinguishing
business tax from income tax, stating that [b]usiness taxes imposed in the
exercise of the police power of the State for regulatory purposes are paid at the
beginning of the year as a prerequisite to the conduct of businessincome tax,
on the other hand, is a tax on all yearly profits realized in one taxable year, levied
upon the right of a person or entity to receive such income and profits. While
both types are computed based on previous years sales, business tax paid in
the current year is for the privilege of engaging in business for the same year and
not for having engaged in business for the previous year (Mobil Philippines, Inc.
v. City Treasurer of Makati, G.R. 154092, July 14, 2005).

The pronouncement of the SC settled the rule that any additional payment for the
business tax based on the current years total sales should only be to the extent
that such sales exceeded the amount of taxes paid based on the previous years
sales. With this ruling, there should be no more doubt as to the amount of tax to
be paid finally by businesses applying for retirement.