LOCAL GOVERNMENT TAXATION

Question 1

What are local taxes?

Answer 1

Local taxes are taxes that are imposed and collected by the LGUs in order to raise revenues to enable them to perform the functions for which they have been organized.

Question 2

Aspects of Local taxation

Answer 2

Aspects of local taxation:

1. Local Government Taxation (Sections 128-196, LGC)
2. Real Property Taxation (Sections 197-283, LGC)

Question 3

Differ LGU Taxation from Real Property Taxation

Answer 3

Local Government taxation is the imposition of license taxes, fees and other impositions, including community tax

Real property taxation is the system of levy on real property imposed on a country wide basis but authorizing to a limited extent and within certain parameters, local governments to vary the rates of taxation

Question 4

Fundamental Principles of Local Gove Taxation [UE-LIP] / Requisites if municipal taxation

Answer 4

1. Taxation shall be Uniform in each LGU;
2. Taxes, fees, charges and other impositions shall: [EPU] a. be equitable and based as much as possible on the taxpayer’s ability to pay; b. be levied and collected only for public purposes; c. shall not be unjust, excessive, oppressive, or confiscatory;
3. The collection of local taxes, fees, charges and other impositions shall in no case be Let to any private person;
4. The revenues collected pursuant to the provisions of the LGC shall Inure solely to the benefit of, and be subject to the disposition by, the LGU levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and
5. Each LGU shall, as far as practicable, evolve a Progressive system of taxation (Sec. 130, LGC).

Question 5

Q: The City of Makati, in order to solve the traffic problem in its business districts, decided to impose a tax, to be paid by the driver, on all private cars entering the city during peak hours from 8:00 a.m. to 9:00 a.m. from Mondays to Fridays, but exempts those cars carrying more than two occupants, excluding the driver. Is the ordinance valid? (2003 Bar)

Answer 5

A: The ordinance is in violation of the Rule of Uniformity and Equality, which requires that all subjects or objects of taxation, similarly situated must be treated in equal footing and must not classify the subjects in an arbitrary manner. In the case at bar, the ordinance exempts cars carrying more than two occupants from coverage of the ordinance. Furthermore, the ordinance only imposes the
tax tax on private cars and exempts public vehicles from the imposition of the tax, although both contribute to the traffic problem. There exists no substantial standard used in the classification by the City of Makati.

Another issue is the fact that the tax is imposed on the driver of the vehicle and not on the registered owner. The tax does not only violate the requirement of uniformity, but the same is also unjust because it places the burden on someone who has no control over the route of the vehicle. The ordinance is, therefore, invalid for violating the rule of uniformity and equality as well as for being unjust.

Question 6

Q: Which of the following statements is NOT a test of a valid ordinance?

a. It must not contravene the Constitution or any statute;
b. It must not be unfair or oppressive;
c. It must not be partial or discriminatory;
d. It may prohibit or regulate trade. (2012 Bar)

Answer 6

A: It may prohibit or regulate trade. To be valid, an ordinance must not prohibit but may regulate trade (Magtajas v. Pryce Properties Corporation, Inc., G.R. No. 111097, July 20, 1994).

Question 7

Characteristics of the taxing power of LGUs [DON2G]

Answer 7

Not inherent –May only be exercised if delegated to them by national legislature or conferred by the Constitution itself.

2. Direct grant from the Constitution – While a direct grant, the same is subject to limitations as may be set by Congress.
3. Not absolute –Subject to limitations and guidelines as may be provided by law and the Constitution such as progressivity etc.

It is a fundamental principle that municipal ordinances are inferior in status and subordinate to the laws of the state. An ordinance in conflict with a state law of general character and statewide application is universally held to be invalid. (Batangas CATV, Inc. v. Court of Appeals, 482 Phil. 544 (2004))

4. Exercised by the sanggunian of the LGU concerned through an appropriate Ordinance.
5. Its application is bounded by the Geographical limits of the LGU that imposes the tax.

Gross receipts realized by a specialty contractor from its overseas construction projects are not subject to tax (BLGF Opinion, May 16, 2017).

Question 8

Legal foundations of LGU’s powers

Answer 8

1. CONSTITUTION.
   Art. X, Sec. 5 of the 1987 Constitution - “Each LGU shall have the power to create their 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.”
2. LOCAL GOVERNMENT CODE
   Sec. 129 of the Local Government Code (LGC) - “Each LGU 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 autonomy. Such taxes, fees, and charges shall accrue exclusively to the LGUs.”
3. Charter of Cities – additional taxing authority exclusively granted to cities include the power to impose percentage tax and taxes on articles subject to specific tax.

Question 9

Limitations upon Congress when it provides guidelines and limitations on the LGUs power of taxation:

Answer 9

The Congress shall ensure that: 1. The taxpayers will not be overburdened or saddled with multiple and unreasonable impositions; 2. Each LGU will have its fair share of available resources; 3. The resources of national government will not be unduly disturbed; and 4. Local taxation will be fair, uniform and just.

Question 10

Q: Does the ARMM and CAR have the same source of power as the LGUs?

Answer 10

A: NO. The LGUs derive their power to tax from Sec. 5, Article X of the 1987 Constitution. The constitutional provision is self-executing. This is applicable only to LGUs outside the Autonomous Region namely the Muslim Mindanao and the Cordilleras since the authority to tax the LGUs within their region is delegated by the Organic Act creating them.

Sec. 20, Article X of the 1987 Constitution authorizes the Congress to pass the Organic Act which shall provide for legislative powers over creation of sources of revenues. This provision is not self-executing unlike Sec. 5, Article X of the Constitution.

NOTE: The LGU’s power to tax is subject to such guidelines and limitations as Congress may provide while the Autonomous Region’s power to tax is based on the Organic Act which the Constitution authorizes Congress to pass.

Question 11

“Paradigm shift in local government taxation”

Answer 11

Paradigm shift in local government taxation means the power to tax is no longer vested exclusively on Congress. Local legislative bodies are now given direct authority to levy taxes, fees and other charges pursuant to Art. X, Sec. 5 of the Constitution (NAPOCOR v. City of Cabanatuan, G.R. No. 149110, April 9, 2003). The reason of the shift results from the realization that genuine development can be achieved only by strengthening local autonomy and promoting decentralization of governance (Ibid.).

Question 12

Where the nature of the taxing power of LGUs come from

Answer 12

The nature of the taxing power of the provinces, municipalities and cities is directly conferred by the Constitution by giving them the authority to create their own sources of revenue. The LGUs do not exercise the power to tax as an inherent power or by a valid delegation of the power by Congress, but pursuant to a direct authority conferred by the Constitution. (2007 Bar)

Question 13

Can the Congress abolish the power to tax of local governments?

Answer 13

The Congress, under the 1987 Constitution, cannot abolish the power to tax of local governments; it is expressly granted by the fundamental law. The only authority conferred to Congress is to provide the guidelines and limitations on the local government’s exercise of the power to tax (Sec. 5, Art. X, 1987 Constitution). (2003 Bar)

Question 14

Limitations of the Authority of LGUs to Prescribe Penalties for Tax Violations

Answer 14

1. Limited as to the amount of imposable fine as well as the length or period of imprisonment;
2. The Sanggunianis authorized to prescribe fines or other penalties for violations of tax ordinances a. in no case shall fines be less than P1,000 nor more than P5,000 b. nor shall the imprisonment be less than one (1) month nor more than six (6) months;
3. Such fine or other penalty shall be imposed at the discretion of the court;
4. The Sangguniang Barangay may prescribe a fine of not less than P100 nor more than P1,000 (Sec. 516, LGC).

Question 15

Do LGUS have the Authority to Grant Local Tax Exemptions?

Answer 15

LGUs may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions as they may deem necessary (Sec. 192, LGC).

The power to grant tax exemptions, tax incentives and tax reliefs shall not apply to regulatory fees which are levied under the police power of the LGU.

Question 16

What are the guidelines in granting Tax exemptions and reliefs?

Answer 16

Tax Exemptions and Reliefs

a. May be granted in cases of natural calamities, civil disturbance, general failure of crops or adverse economic conditions such as substantial decrease in prices of agricultural or agri-based products;
b. The grant shall be through an ordinance;
c. Any exemption or relief granted to a type or kind of business shall apply to all businesses similarly situated;
d. The same may take effect only during the calendar year not exceeding 12 months as may be provided in the ordinance; and e. In case of shared revenues, the relief or exemption shall only extend to the LGU granting such.

Question 17

What are the guidelines in granting tax incentives?

Answer 17

Tax incentives:
a. Shall be granted only to new investments in the locality and the ordinance shall prescribe the terms and conditions therefore;

b. The grant shall be for a definite period not exceeding 1 calendar year;
c. The grant shall be through an ordinance passed prior to the 1st day of January of any year; and
d. Tax incentive granted to a type or kind of business shall apply to all businesses similarly situated.

Question 18

Q: The LGC took effect on January 1, 1992. PLDT’s legislative franchise was granted sometime before 1992. Its franchise provides that PLDT will pay only 3% franchise tax in lieu of all taxes.

The legislative franchise of Smart and Globe Telecoms were granted in 1998. Their legislative franchises state that they will pay only 5% franchise tax in lieu of all taxes.

The Province of Zamboanga del Norte passed an ordinance in 1997 that imposes a local franchise tax on all telecommunications companies operating within the province. The tax is 50% of 1% of the gross annual receipts of the preceding calendar year based on the incoming receipts, or receipts realized, within its territorial jurisdiction.

Is the ordinance valid? Are PLDT, Smart and Globe liable to pay franchise taxes? Reason briefly (2007 Bar).

Answer 18

A: The ordinance is valid as it was passed pursuant to the powers of provinces and cities to impose taxes on businesses with franchises under the Local Government Code (LGC). The LGC, which took effect on January 1, 1992, withdrew tax exemptions or incentives previously enjoyed by all persons, except certain entities (Sec. 193, LGC).

PLDT is liable to pay the local franchise taxes because its legislative franchise was granted by Congress prior to the passage of the LGC. Thus, the provision of the LGC withdrawing tax exemptions or incentives applies to PLDT. Smart and Globe are exempt from the local franchise taxes imposed by the province since their respective legislative franchises were granted in 1998, or after the enactment of the LGC.
Therefore, with respect to Smart and Globe, the withdrawal of tax exemptions or incentives under the LGC was superseded by the legislative franchise requiring payment of the 5% franchise tax “in lieu of all taxes” (PLDT v. City of Davao, G.R. No. 143867, August 22, 2001 and March 25, 2003).

Question 19

Q: Is Smart Communications, Inc. (SMART) exempt from local taxation?

Answer 19

A: Under its franchise, SMART is not exempt from local business and franchise taxes. Moreover, Section 23 of the Public Telecommunications Act does not provide legal basis for Smart’s exemption from local business and franchises taxes. The term “exemption” in Section 23 of the Public Telecommunications Act does not mean tax exemption; rather, it refers to exemption from certain regulatory or reporting requirements imposed by government agencies such as the National Telecommunications Commission. (The City of Iloilo v. Smart Communications Inc., G.R. No. 167260, February 27, 2009).

Question 20

Government Instrumentalities Exempted from Local Taxation

Answer 20

1. Philippine Amusement and Gaming Corporation, 2. Philippine Reclamation Authority, 3. Manila International Airport Authority, 4. Mactan Cebu International Aiport Authority, 5. Philippine Economic Zone Authority, 6. Philippine Rice Research Institute, 7. Philippine Ports Authority, 8. Philippine National Railways, 9. University of the Philippines, 10. Bangko Sentral ng Pilipinas, 11. Philippine Fisheries Development Authority, 12. Cebu Port Authority, 13. Cagayan De Oro Port Authority, 14. San Fernando Port Authority and 15. Government Service Insurance System

Note: Exemption likewise applies to real property taxation.

Question 21

Privileges withdrawn upon the effectivity of the LGC:

Answer 21

GR: Tax exemptions or incentives granted to or enjoyed by all persons, whether natural or juridical, including government-owned or controlled corporations are hereby withdrawn upon the effectivity of the Local Government Code (Sec. 193, LGC).

XPNs: Those exemptions or incentives conferred to: 1. Local water districts 2. Cooperatives duly registered under R.A. 6938 3. Non-stock and non-profit hospitals 4. Educational institutions

NOTE: However, withdrawal of tax exemption is not to be construed as prohibiting future grants of tax exemptions. The grant of taxing powers to LGU’s under the LGC does not affect the power of Congress to grant exemptions to certain persons, pursuant to a declared national policy.

Question 22

Who bears the burden of proof in claiming exemption?

Answer 22

Necessity of Reenactment: The person claiming the exemption has the burden of proving its claim by clear grant of exemption after the enactment of the LGC (NAPOCOR v. City of Cabanatuan, G.R. No. 149110, April 9, 2003).
The rule that special law must prevail over the provisions of a later general law does not apply as the legislative purpose to withdraw tax privileges enjoyed under existing laws or charters is apparent from the express provisions of the LGC (City of San Pablo, Laguna v. Reyes, G.R. No. 127780, March 25, 1999

Question 23

Rationale for the withdrawal of tax exemptions:

Answer 23

The intention of the law in withdrawing the tax exemptions is to broaden the tax base of LGU to assure them of substantial sources of revenue (Philippine Rural Electric Cooperatives Association v. The Secretary of DILG, G.R. No. 143076. June 10, 2003).

Question 24

Q: Prior to the enactment of the Local Government Code, consumer’s cooperatives registered under the Cooperative Development Act enjoyed exemption from all taxes imposed by a local government. With the Local Government Code’s withdrawal of exemptions, could these cooperatives continue to enjoy such exemption? (2011 Bar)

Answer 24

A:YES. Their exemption is specifically mentioned among those not withdrawn by the Local Government Code.

Question 25

Authority to Adjust Local Tax Rates

Answer 25

LGUs have the power to adjust local tax rates provided that the adjustment of the tax rates as prescribed herein should not be oftener than once every 5 years, and in no case shall such adjustment exceed 10% of the rates fixed under the LGC (Sec. 191, LGC).

Question 26

Residual Taxing Power of Local Governments

Answer 26

“Residual Taxing Power of the LGU” means LGUs may exercise the power to levy taxes, fees or charges on any base or subject NOT otherwise specifically enumerated herein or taxed under the: 1. Local Government Code; 2. National Internal Revenue Code; or 3. Other applicable laws (Sec. 186, LGC).

Question 27

Conditions in the exercise of the residual power of taxation

Answer 27

1. The tax base or subject is not taxed under the National Internal Revenue Code or other applicable laws; 2. The taxes, fees, or charges are not unjust, excessive, confiscatory, oppressive, or contrary to the declare national economic policy of the government; 3. A public hearing has been conducted prior to the enactment of the ordinance levying taxes, fees, or charges; and
2. The procedures for the approval, effectivity, and publication of tax ordinance have been complied with. 5. The residual power is subject to the constitutional limitations on the taxing power and the common limitations on the taxing power of LGUs as prescribed in Section 133 of LGC. 6. Principle of Pre-emption or Exclusionary Rule

Question 28

Principle of Pre-emption or Exclusionary Doctrine, when applicable

Answer 28

1. Taxes levied under the NIRC. 2. Taxes imposed under the Tariff and Customs Code. 3. Taxes under special laws.

Question 29

What s PREEMPTION

Answer 29

Preemption in the matter of taxation simply refers to an instance where the national government elects to tax a particular area, impliedly withholding from the local government the delegated power to tax the same field. This doctrine primarily rests upon the intention of Congress. Conversely, should Congress allow municipal corporations to cover fields of taxation it already occupies, then the doctrine of preemption will not apply. (Victorias Milling Co., Inc. v. The Municipality of Victorias, Negros Occidental, G.R. No. L-21183, September 27, 1968)

Question 30

Classification of common limitations/excluded impositions

Answer 30

1. Taxes which are levied under the NIRC unless otherwise provided by the LGC - Items 1,2,3,8,9 & 10. 2. Taxes, fees, and charges which are imposed under the Tariffs and Customs Code - Item 4 3. Taxes, fees and charges where the imposition of which contravenes existing governmental policies or which are violative of the fundamental principles of taxation - Items 5, 6, 7, 11, 13, 14 & 15 4. Taxes, fees and charges imposed under special laws - Item 12 5. When Congress allows municipal corporations to cover fields of taxation it already occupies. 6. It does not apply beyond a certain level of sales or receipts for the preceding year. 7. If the subject of the taxes levied by the national and local governments are different from each other.

Question 31

Q: BATAS Law is a general professional partnership operating in the City of Valenzuela. It regularly pays value-added tax on its services. All its lawyers have individually paid the required professional tax for the year 2017. However, as a condition for the renewal of its business permit for the year 2017, the City Treasurer of Valenzuela assessed BATAS Law for the payment of percentage business tax on its gross receipts for the year 2016 in accordance with the Revenue Tax Code of Valenzuela. Is BATAS Law liable to pay the assessed percentage business tax? Explain your answer.

Answer 31

A: NO. Section 133 (i) of the LGC provides that the exercise of the taxing powers of local government units such as the City of Valenzuela shall not extend to the levy of “percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services” except as otherwise provided in the LGC. Therefore, BATAS Law may not be assessed with and required to pay percentage business tax. (Bar 2017)

Question 32

Q: Victoria Milling is a sugar miller. Its gross receipts as a sugar central or sugar refinery is subject to percentage tax by the NIRC. The Municipality of Victorias imposed a tax on sugar millers depending upon the annual output capacity of the miller. Does the principle of preemption apply?

Answer 32

A: NO. The NIRC imposes a percentage tax. The ordinance does not deal with percentage tax. Rather, the ordinance deals with a tax specifically for operators of sugar centrals and sugar refineries. The rates imposed are based on the maximum annual output capacity, which is not a percentage because it is not a share. Nor is it a tax based on the amount of the proceeds realized out of the sale of sugar, centrifugal or refined. (Victorias Milling Co., Inc. v. The Municipality of Victorias, Negros Occidental, G.R. No. L-21183, September 27, 1968)

Question 33

The following are the powers of taxation of the LGUs

Answer 33

1. Common Revenue-Raising Powers of LGUs; 2. Specific Powers of LGU to Impose Taxes; 3. Power to Levy Community Tax; and 4. Powers under Miscellaneous Provision

Question 34

LGUs cannot tax the National Government:

Answer 34

GR: LGUs cannot impose taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities.
XPN: When specific provisions of the LGC authorize the LGUs to impose taxes, fees or charges on the aforementioned entities (City Government of San Pablo, Laguna v. Reyes, G.R. No. 127708, March 25, 1999).

Question 35

Authority to Issue Local Tax Ordinances

Answer 35

Sanggunian levy of local taxes It shall be exercised through an appropriate ordinance. However, the local chief executive (except the punong barangay) possesses veto powers as laid down in Sec. 55 of LGC.