The basis of local business taxes

KPMG CORNER By Mr. Manuel P. Salvador III | Updated February 2,
2010 - 12:00am
The 20th day of January marks an important day in Philippine
history. On this day in the year 2001 our current and, in a few
months, soon to be ex-president, was sworn in as the 14th President
of the Republic of the Philippines following the fall of former
President Joseph Estrada and less than four years later subsequently
elected to a full six-year presidential term. Thus how one would view
the significance of the 20th of January may depend on what side of
the political fence one is on. As an African proverb states, “Until
lions have their historians, tales of the hunt shall always glorify the
hunters. “
From a tax perspective, the 20th of January may also be considered
an important date as it is the date when local taxes for the New Year
fall due. Local taxes are those that are imposed by local government
units such as Provinces, cities, municipalities and barangays in
contrast to national internal revenue taxes that are those imposed
by the National Government through the Bureau of Internal Revenue
and the Bureau of Customs. Each local government unit shall
exercise its power to create its own sources of revenue and to levy
taxes, fees, and charges consistent with the basic policy of local
Under Section 167 of the Local Government Code (LGC) all local
taxes, fees, and charges shall be paid within the first 20 days of
January or, if paid quarterly, on or before the 20th of each month
beginning each subsequent quarter. By the time you read this article
you may have already renewed or are already in the process of
renewing your business permit. It may be helpful to understand
some basic concepts of local taxation.
Firstly, local taxation is governed by a number of fundamental
principles. One of these basic principles is that taxation has to be
uniform in each local government unit. What this basically means is
that local taxes have to be equitable and based as far as practicable
on the taxpayer’s ability to pay. Further local taxes can only be

Finally. On the other hand. a tax on business on manufacturers. evolve a progressive system of taxation. While cynics among us may view these fundamental principles as nothing more than lofty ideals. The kind of taxes that a local government unit can impose would depend on the local government unit. each local government unit shall. barters or exchanges or similar transactions on goods or services except as otherwise provided in the LGC. Also. In addition to the principle on the uniformity of taxation. Some common examples of taxes which provinces. Gravel and Other Quarry Resources as well as a Professional Tax and Amusement tax. these principles do in fact ensure that a local government unit is able to self sufficient and rely less on the National Government for its financial requirements. the tax must not be unjust. For example. It is in fact a power that is delegated to it by law which in this case is the LGC. among others. cities.. Consequently. the territorial jurisdictions of local government units. another precept is that the collection of local taxes. the local government unit levying the tax. a municipality may impose. and barangays are not allowed to impose are income taxes. national economic policy. charges and other impositions shall in no case be delegated to any private person. municipalities. or in restraint of trade. excessive. there are certain kinds of taxes that a local government unit is not allowed to impose and a limited number which it may. taxes. the revenue collected shall inure solely to the benefit of. except when levied on banks and other financial institutions. customs duties. fees. or passing through. a Tax on Business of Printing and Publication.collected and used for public purposes. Another fundamental concept is that the power to tax is not a power that is inherent to a local government unit. a province may impose a tax on Transfer of Real Property Ownership. fees and charges and other impositions upon goods carried into or out of. a Tax on Sand. . public policy. as far as practicable. oppressive. In addition. excise taxes on articles enumerated under the National Internal Revenue Code. as well as percentage or value-added taxes (VAT) on sales. documentary stamp taxes. and be subject to disposition by. wholesalers. a Franchise Tax. or confiscatory as well as not contrary to law.

it may in fact impose a business tax on any business. For example. The LGC provides that the local business tax payable would depend on the amount of gross sales or gross receipts of the previous taxable year which a business has to declare. the Supreme Court held that gross receipts include money or its equivalent actually or constructively received in consideration of services rendered or articles sold. It concluded that the local government unit erred when it assessed the taxpayer’s local business tax based on gross revenue as declared in its audited financial statements. whether actual or constructive. The local government unit argued that gross receipts are synonymous with gross earnings/revenue. includes uncollected earnings. In this case. the question arises as to whether the revenues as declared in the audited financial statements represents an accurate basis for declaring gross sales or receipts for local business tax. which included accrued revenues or revenues that were not actually or constructively received since the LGC provides that the tax should be computed based on gross receipts. The Supreme Court disagreed with the position taken by the local government unit. retailers. if the local legislative body chooses. As local governments may rely on the audited financial statements of a business to determine the local business tax payable. In fact. exchanged or leased. . One of the tax issues surrounding the imposition of the local business tax is the proper tax base. which. not otherwise specified in the LGC which the local legislative body may deem proper to tax. contractors banks and financial institutions as well as peddlers engaged in the sale of merchandise. This issue appears to have been settled by the Philippine Supreme Court. In its decision. a local government unit assessed a taxpayer for deficiency local business based on its gross revenue as reported in its financial statements. the local business tax that is payable for the year 2010 would be based on the gross sales or gross receipts in the year 2009. in turn.distributors. Note that the business tax that may be imposed by the municipality may be imposed by a city as well although the LGC allows the city to impose a higher rate of business tax.

this time from Haiti. ““Dèyè Mon Gin Mon…Behind the mountains are more mountains. Salvador III is a Tax Director of Manabat Sanagustin & Co. (Manual P. For comments or inquiries. I hope this article has provided information that will enable you to overcome local business tax . a member firm of KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). please emailmsalvadoriii@kpmg. CPAs.” In order to hurdle the challenges that taxation issues throw our way.Let me end this article with another ancient proverb. one must manage to overcome so many obstacles. a Swiss entity The views and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG in the Philippines.