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Local business taxes and its basis

It is almost the end of the year and this is appropriate time to remind business and property owners of their local tax obligations for the ensuing calendar year. Among the taxes imposed by local government units, usually the cities and municipalities, are the local business taxes. These accrue on January first of each year. But who are liable for local business tax and what is its basis? As the nature of the tax suggests, local business tax is imposed only against persons engaged in business. The Local Government Code (LGC) defines the word business as trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit. As ruled by the Supreme Court in one case (G.R. No. 154993, October 25, 2005), it is imperative that in order that the taxpayer may be subjected to business taxes, its activities must fall within this definition. If none of the activities are geared towards maintaining a livelihood or obtaining profit, the taxpayer is not required to pay local business tax. The activity must also fall within the classes of business enumerated in the respective tax ordinance. The LGC specifically enumerates several types of business on which municipalities and cities may impose taxes. But reference to the local tax ordinance is vital, for the power of the local government units to impose local taxes is exercised through the appropriate ordinance enacted by its sanggunian. The local sanggunian is also authorized to impose taxes on any other businesses not otherwise specified under the LGC which the sanggunian concerned may deem proper to tax. The local tax ordinance is usually quite exhaustive in enumerating the class of businesses it deems appropriate to tax. If the taxpayer does not fall within the enumerated classes of taxable businesses under the local tax ordinance, the taxpayer is likewise not required to pay local business tax.

In terms of rates and amounts, reference to the LGC and the respective local tax ordinance is again necessary. Local tax codes normally group taxpayers into different classifications, each classification with its own basis and applicable tax rate. But one thing is uniform the local business tax is computed based on the gross sales or receipts for the preceding calendar year. The reference to the preceding calendar year as basis of the computation of local business tax is specifically provided in no less than the Local Government Code. There is no basis of the practice of some local treasurers in requiring taxpayers to pay their local taxes based on amounts reported in the financial statements of the year prior to the immediately preceding year. Besides, the revenue as declared in the financial statements may not necessarily be the correct basis of the local business tax. For some classes of taxpayers, mostly those engaged in providing services, the reference is the gross receipts of the preceding calendar year, and not the revenue. From an accounting standpoint, revenue and gross receipts are two different things and may not be used interchangeably. For taxpayers using the accrual method of accounting, the financial statements reflect income or revenue which accrued to it during the period, which includes income earned but not necessarily received or paid. If the basis of the tax under the ordinance is the gross receipts, then only the portion of the revenues which were actually and constructively received should be considered in determining the tax base. Otherwise, as the Supreme Court said in another case (G.R. No. 176667, November 22, 2007), this may result in the constitutionally proscribed double taxation inasmuch as same item of income may be taxed in the period it is reported as revenue and again in the year of its receipt. The reference to the previous years figure brings another issue - whether the local business taxes that accrues in January first of each year pertains to the previous year or the current year. Business taxes are paid for the privilege of carrying on a business in the year the tax was paid. Notwithstanding that the tax is computed based on prior years figure, the business taxes paid in the year is for the privilege of engaging in business for the same year, and not for having engaged in business for the previous year. The use of the previous calendar years gross sales or receipts is merely the basis for the amount of business taxes due for the privilege of carrying on a business in the year when the tax was paid. This is specifically significant for retiring businesses because if the taxes had already been paid for the year it is retiring based on previous years figure, the taxpayer shall be required to pay only the difference in the amount if the tax collected, based on the previous years gross sales or receipts, is less than the actual tax due based on the current years gross sales or receipts. Delay in the payment of local business taxes attracts surcharges and interests. Thus, taxpayers are enjoined to declare correctly and pay their taxes on time. On the part of the local tax authorities, while they have the authority to create their own sources of revenue and to levy taxes, the same should be pursued within the guidelines provided in the LGC and their own respective tax ordinances.