What is the situs rule in local taxation? How are entities with branch offices, sales offices, project offices, factories, plants and others taxed?
Local business taxes (“LBT”) are taxes imposed by local government units on the privilege of doing business within their jurisdiction.
The rules on situs of LBT under Section 150 of LGC can be summarized as follows:
- Where there is a branch or sales office, or warehouse making the sale or transaction, the tax shall accrue and be paid to the city or municipality where such branch, sales office, or warehouse making the sale or transaction is located;
- In case there is no branch, sales office, or warehouse, the sale must be recorded in the principal office and the taxes must be paid to the city or municipality where the latter is located; and
- If there is no branch but the company maintains a factory, project office, plant or plantation, the 30/70 sales allocation rule between the local government units where the principal office, plant, or plantation is located, applies. In this case, 30% of all the sales recorded in the principal office shall be taxable by the city or municipality where it is located and 70% of all the sales recorded in the principal office shall be taxable by the city or municipality where the factory, project office, plant, or plantation is located.
Below are samples of the application of the Sales Allocation Rules:
- BRL’s principal office is located at Pasig City. Also located in Pasig City is the factory/commissary that manufactures empanadas with various fillings. However, it is the branches and outlets of BRL located in different cities and municipalities where the empanadas are being sold that issue the corresponding receipts to customers for products sold. Notwithstanding the above procedure, Pasig City still requires BRL to declare seventy percent (70%) of its sales as basis for the computation of business tax for the sole reason that the principal office and factory/commissary are located within the territorial jurisdiction of that City.
The BLGF ruled that the Sales Allocation Rules shall not apply considering that the sales are recorded in the branches of BRL. The BLGF noted that for the Sales Allocation Rules to apply, the recording of sales must be made in the principal office [Bureau of Local Government Finance Opinion, (8 September 2014)]
- CCBPI has a plant situated in Brgy. Ilijan, Bago City (Negros Occidental) which produces Viva Spring Water in 330 ml, 500 ml and 5 gallon bottles. No sales are being made in Bago City. Instead, all the productions in the said plant are being shipped and delivered to CCBPI sales offices in the Visayas and Mindanao, which are all outside the territorial jurisdiction of Bago City. Sales made by these sales offices are recorded in the place where they are located.
The BLGF ruled that all sales made in the sales/branch office shall be 100% taxable by the city/municipality where the sales/branch office is located. Thus, in the case above, all sales of Spring Viva Water produced in Bago City and shipped and delivered to CCBPI sales offices shall be taxable by the local government units in Visayas and Mindanao where said sales offices are located. Considering that there is no branch office in Bago City, there are no sales transactions that may be taxed by said City. On the other hand, the 30-70 sales allocation shall not apply inasmuch as no sales are recorded in the principal office. [Bureau of Local Government Finance Opinion, (3 May 2010)]
- SRC’s principal office is located in South Cotabato. It is engaged in the following business: (a) Rent-a-car (Services) — exclusively with Dole Philippines — Polomolok 9b) Forklift (Services) — exclusively with Dole Philippines — Polomolok, and (c.) Real Estate Lessor — properties located in LGUs Polomolok, Tampakan, T’boli, Surallah and General Santos. SRC has no branch or sales offices.
The BLGF ruled that since SRC has no branches or sales offices in Polomolok, Tampakan, T’boli, Surallah and General Santos City, all sales recorded in the principal office shall be 100% taxable by Polomolok where the said principal office is located. (Bureau of Local Government Finance Opinion, [28 January 2015])
- TRADC’s principal office is located in Makati City. It maintains a factory located in Pasig City. TRADC has no sales being made in the said factory, since the doughnuts baked and produced in the said factory are being delivered to different sales outlets or branches which are outside the territorial jurisdiction of Pasig City. However, the said factory of TRADC was assessed by Pasig City for local business tax.
The BLGF ruled that the Sales Allocation Rules cannot apply on the consolidated sales of doughnut from all of its other branches, provided that said sales were recorded in the branch where it is located. Thus, only those sales recorded in the principal office shall be taxable by Pasig City. [Situs of Taxation of Krispy Kreme-Pineda Commissary, Bureau of Local Government Finance Opinion, (20 July 2017)]
- HPI is engaged in the manufacture, production and merchandising of cement, cement products and by-products. Its principal office is located in Makati City. It has four (4) manufacturing plants, two (2) of which are located in Luzon while the remaining two (2) are located in Mindanao. In Luzon, HPI maintains several branch offices to cater to the needs of its Luzon customers thus, recording of sales and collection is done not at the plant but at the branch office. Recently, HPI’s branch office in San Fernando City (Pampanga) received an assessment from the City Treasurer’s Office claiming that “all sales recorded in HPI Pampanga branch should be taxed thereat 100%.” It argued that for a manufacturer like HPI, the 70%-30% allocation shall be used only in cases “where there is no branch or sales outlet in the area where the sales transaction is made.”
The BLGF ruled that the city or municipality where the plant is located shall have the authority to tax seventy percent (70%) of all sales recorded in the principal office and the city or municipality where the principal office is located shall tax the remaining thirty percent (30%) of said sales. However, it is also clear that all sales or receipts made in a branch or sales outlet shall be recorded in such branch or sales outlet and shall be taxable by the LGU where said branch or sales outlet is located. Clearly, therefore, the LGU where the factory is situated shall not have a share in the sales or receipts made in a branch or sales outlet for so long as the sale made are recorded in said branch or sales outlet. (BLGF Opinion dated 29 August 2008)
While the foregoing may serve to guide taxpayers as to the clear application of the situs rule in local taxation, it must be noted that the interpretation of rules may differ depending on the circumstances in each case.
