CHAPTER 1

INTRODUCTION TO LAWS ON MUNICIPAL TAXES

Local Government Units (LGUs) play an important role in the governance of the country in general. The Local Government Code of 1991(Local Government Code) vested on LGUs certain duties and responsibilities, which included the duty and responsibility to provide the basic services previously provided to the public by the National Government. To support their operation and implement the State policies of decentralization and local fiscal autonomy, LGUs are empowered to raise revenue and impose “municipal taxes.”

McQuillin defines “municipal taxes” as those imposed by a municipality under constitutional or statutory authority delegated to it, on persons or property within the corporate limits, to support the local government and pay its debts and liabilities. They are usually its principal source of revenue. 1

This Chapter, by way of introduction to laws on “municipal taxes,” provides a brief discussion on the source of LGUs’ power to create revenue and impose taxes, the different forms of levy under the Local Government Code, the principles, guidelines and limitations set for the exercise of such power and the procedure for enactment of revenue ordinances. A detailed discussion on the various limitations will be provided in the succeeding Chapters.

This Chapter will likewise discuss the role of the Department of Finance (DOF) and its Bureau of Local Government Finance (BLGF) as government agencies tasked to advise LGUs on tax issues.

§1.1 Source of authority

The power of taxation, while inherent in the State in view of its sovereign prerogatives, is not inherent in LGUs, being mere creations of the State. LGUs may exercise a power of taxation if delegated to them, in the cases specifically provided for by law. 2

Prior to the 1973 Constitution, LGUs imposed and collected taxes under a limited statutory authority. In the absence of an enabling law, LGUs were without authority to impose and collect taxes within their respective territorial jurisdictions.3

Starting with the 1973 Constitution, LGUs acquired the authority to create revenue and impose taxes, not anymore simply by virtue of statutes but, by virtue of the Constitution. 4 Thus, Article X, Section 5 of the 1987 Constitution provides:

“SECTION 5. Each 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.”

This has changed the rules in the interpretation on the LGUs’ authority to create revenue and impose taxes, viz:

1 McQuillin, Eugene, “The Law of Municipal Corporations,” 3rd Ed (1972 revised volume), p. 44.02.2 Paras, Edgardo, “Taxation Fundamentals,” 1966 ed., p. 246. See Icard vs. The City Council Of

Baguio, G.R. No. L-1281, May 31, 1949.3 City of Davao, et.al., v. RTC and GSIS, G.R. No. 127383, Aug. 18, 2005.4 City Government of Quezon City, et. al. v. Bayan Telecommunications, Inc., G.R. No.

162015, Mar. 6, 2006.

a. Prior to such constitutional delegation, if there is doubt as to the existence of such power, the doubt shall be resolved against the LGUs. Presently with the above constitutional delegation, the doubt shall be resolved in favor of LGUs.5

b. Congress cannot effectively reduce or diminish the LGUs’ authority to create revenue and impose taxes. It can only provide guidelines and limitations, which must be consistent with the State policy of local autonomy.6 Local autonomy includes not only administrative but also fiscal autonomy.7

§1.2 Implementing statutes

Prior to the Local Government Code, various measures have been enacted primarily to empower each LGU and promote local fiscal autonomy. These included the Barrio Charter of 1959, the Local Autonomy Act of 1959, the Decentralization Act of 1967 and the Local Government Code of 1983. Such laws were not sufficient to make each LGU independent from the national government. This was mainly due, among others, to the LGUs’: (a) inadequate tax base; (b) lack of fiscal control over external sources of income; (c) limited authority to prioritize and approve development projects; and (d) heavy dependence on external sources.8

Pursuant to Article X, Section 3 of the Constitution,9 Congress enacted the Local Government Code.10 It provided the guidelines and limitations in the exercise of (including the exemptions from) the LGUs’ authority to create revenue and impose taxes.

The Supreme Court noted that with the enactment of the Local Government Code, LGUs may now effectively deal with fiscal constraints which they constantly encounter. The Local Government Code has widened their tax base, which now includes taxes which were prohibited by previous laws, such as the imposition of taxes on forest products, forest concessionaires, mineral products, mining operations, and the like. The Local Government Code has likewise provided enough flexibility to LGUs for

5 Ibid.6 The following provisions of the Constitution provide the State policy regarding local

autonomy of LGUs:

“Article II. Declaration of Principles and State Policiesxxx xxx xxxSec. 25. The State shall ensure the autonomy of local governments.”

“Article X. Local Governmentxxx xxx xxxSec. 2. The territorial and political subdivisions shall enjoy local autonomy.xxx xxx xxx”

7 Province of Batangas v. Romulo, G.R. No. 152774, May 27, 2004.8 National Power Corporation v. City of Cabanatuan, G.R. No. 149110, April 9, 2003.9 Article X, Section 3 of the Constitution provides:

"Section 3 - The Congress shall enact a local government code which shall provide for a more responsive and accountable local government structure instituted through a system of decentralization with effective mechanisms of recall, initiative, and referendum, allocate among the different local government units their powers, responsibilities, and resources, and provide for the qualifications, election, appointment and removal, term, salaries, powers and functions and duties of local officials, and all other matters relating to the organization and operation of the local units." (underscoring supplied)

10 RA 7160, dated October 10, 1991.

them to impose tax rates in accordance with their needs and capabilities. It does not prescribe graduated fixed rates but merely specifies the minimum and maximum tax rates and leaves the determination of the actual rates to the LGUs’ legislative council.11

§1.2.1 Necessity for an implementing revenue code

The Local Government Code is merely a general law that delegates to LGUs the power to impose local taxes. It does not by itself impose local taxes. It needs an enabling revenue ordinance.12 Section 132 of the Local Government Code provides:

“SECTION 132. Local Taxing Authority. - The power to impose a tax, fee, or charge or to generate revenue under this Code shall be exercised by the sanggunian of the local government unit concerned through an appropriate ordinance.”

While the Local Government Code enumerates specific examples of local taxes, LGUs may choose not to impose the same even if they are authorized to do so.13

Hence, before any tax, fee or charge may be collected from the public, the same must first be levied under a duly-enacted revenue ordinance of the concerned LGU.14 The same is true even prior to the Local Government Code. In Marinduque Iron Mines, Inc. v. Municipal Council of the Municipality of Hinabangan, Samar,15 the Supreme Court held the ordinance in question failed to levy any tax as the main section of the ordinance was merely declaratory of the LGU’s authority to impose a tax. It should have expressly required the taxpayer to pay a tax.

§1.2.2 Function of DOF local finance circulars

The DOF periodically issues local finance circulars to prescribe guidelines in the LGUs’ levy and administration of local taxes, fees and charges. Among others, such circulars serve as guides to:

(a) local elective officials in the enactment of revenue ordinances;(b) local treasury offices in collecting taxes and other local impositions, as

well as in determining or computing tax discounts or penalties and surcharges; and

(c) tax-paying public as to the proper interpretation and application of the laws and rules governing local taxation.16

They cannot, and are not meant to, amend the provisions of the Local Government Code and be the basis for LGUs to collect taxes, fees or charges.17

§1.3 Forms of levy

LGUs levy amounts from the public in various forms. They may be in the form of taxes, fees and charges.

Taxes pertain to impositions which are primarily intended to raise revenue. There are two aspects of municipal taxation, to wit:

11 National Power Corporation.12 See Lepanto Consolidated Mining Co. v. Ambanloc, G.R. No. 180639, June 29, 2010;

LGC, Sec. 132.13 Yamane v. BA Lepanto Condominium Corporation, G.R. No. 154993, Oct. 25, 2005.14 BLGF letter dated July 11, 1996.15 G.R. No. L-18924, June 30, 1964.16 BLGF letter dated April 24, 1995.17 Ibid. See also BLGF letter dated February 20, 1996.

a. the power of LGUs to levy local taxes (which is governed by Book II, Title 1 of the Local Government Code);

b. the power of provinces, cities and municipalities within Metro Manila to levy realty taxes (which is governed by Book II, Title 2 of the Local Government Code).

The commonly known local taxes are the business tax, community tax, local transfer tax and franchise tax. On the other hand, the commonly known realty taxes are the real property tax, the levies for the Special Education Fund and idle lands.

Fees pertain to impositions which are incidental to the exercise by the LGUs of their power to regulate. These include business and/or occupation permit fees, inspection fees, fees for the sealing and licensing of weights and measures and other related fees.

Charges pertain to payments in exchange for the services rendered or the privileges provided by LGUs. These include the amount levied for the use of public utilities owned, operated and maintained by LGUs and the rentals, fees or charges on the grant of fishery privileges.

Other sources of revenue -

Apart from the above-described levies, LGUs receive the following amounts from the National Government as other major source of revenue:

a. Internal revenue allotment (IRA) -

This represents each LGU’s share in the national internal revenue taxes.18 It is equivalent to 40% of the total amount of national internal revenue taxes collected in the third year preceding the current year. Such amount is divided among the various LGUs in accordance with the formula provided in Sections 284 to 285 of the Local Government Code.

As basic feature of local fiscal autonomy, the Local Government Code mandates its automatic release within five (5) days after the end of each quarter and declares that it shall be free from any lien or holdback.19 In Pimentel v. Aguirre, et.al.,20 the Supreme Court (in declaring as invalid an administrative order withholding a portion of the LGUs’ IRA) discussed the concept of local fiscal autonomy in the following manner:

“Under existing law, local government units, in addition to having administrative autonomy in the exercise of their functions, enjoy fiscal autonomy as well. Fiscal autonomy means that local governments have the power to create their own sources of revenue in addition to their equitable share in the national taxes released by the national government, as well as the power to allocate their resources in accordance with their own priorities. It extends to the preparation of their budgets, and local officials in turn have to work within the constraints thereof. They are not formulated at the national level and imposed on local governments, whether they are relevant to local needs and resources or not. Hence, the necessity of a balancing of viewpoints and the harmonization of proposals from both local and national officials, who in any case are partners in the attainment of national goals.

Local fiscal autonomy does not however rule out any manner of national government intervention by way of supervision, in order to ensure that local programs, fiscal and otherwise, are consistent with national goals. Significantly,

18 LGC, Sec.284.19 Ibid., Sec.286.20 G.R. No. 132988, July 19, 2000.

the President, by constitutional fiat, is the head of the economic and planning agency of the government, primarily responsible for formulating and implementing continuing, coordinated and integrated social and economic policies, plans and programs for the entire country. However, under the Constitution, the formulation and the implementation of such policies and programs are subject to ‘consultations with the appropriate public agencies, various private sectors, and local government units.’ The President cannot do so unilaterally.”

b. Share in the National Wealth -

Each LGU has a share in the proceeds derived from the utilization and development of the national wealth within its area. Such share may be in the form of cash or direct benefits to its constituents. 21

The share of each LGU is equivalent to 40% of the National Government’s gross collection from the applicable mining taxes, royalties, forestry and fishery charges, among others. 22 Similar to the IRA, the share of each LGU must be automatically released to the LGU’s treasurer within five (5) days after the end of each quarter, without any lien or holdback that may be imposed by the National Government for whatever purpose. 23

§1.4 Principles, guidelines and limitations

LGUs have no unbridled authority to impose taxes. They are similarly governed by the basic principles, guidelines and limitations on the exercise by the State of its taxing power. Moreover, the exercise of their delegated authority must be consistent with the national development framework of the National Government. As noted by the Supreme Court, “while the constitutional objective is to ensure that LGUs are strengthened and made more autonomous, Congress must still see to it that: (a) the taxpayer will not be over-burdened or saddled with multiple and unreasonable impositions; (b) each LGU will have its fair share of available resources; (c) the resources of the national government will not be unduly disturbed; and (d) local taxation will be fair, uniform, and just.”24 Thus, the Local Government Code provides the following in relation to the exercise by each LGU’s authority to create revenue and impose taxes:

a. Fundamental principles of local taxation;b. Common limitations and allocation of taxes among LGUs;c. Procedure for the enactment of revenue ordinances.

§1.4.1 Fundamental principles

It may be recalled that the inherent taxing power of the State is subject to both inherent and constitutional limitations. Being mere creations of the State, LGUs are subject to similar limitations, as summarized in Section 130 of the Local Government Code, which provides:

“SECTION 130. Fundamental Principles. - The following fundamental principles shall govern the exercise of the taxing and other revenue-raising powers of local government units:

(a) Taxation shall be uniform in each local government unit; (b) Taxes, fees, charges and other impositions shall:

21 Id., Sec.289.22 Id., Secs.290-291.23 Id., Sec.293.24 Manila Electric Company v. Province of Laguna, et.al., G.R. No. 131359, May 5, 1999.

(1) be equitable and based as far as practicable on the taxpayer's ability to pay;

(2) be levied and collected only for public purposes; (3) not be unjust, excessive, oppressive, or confiscatory; (4) not be contrary to law, public policy, national economic policy, or

in the restraint of trade;

(c) The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person;

(d) The revenue collected pursuant to the provisions of this Code shall inure solely to the benefit of, and be subject to the disposition by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided herein; and,

(e) Each local government unit shall, as far as practicable, evolve a progressive system of taxation.”

Sub-paragraphs (a), (b)(1),(b)(3), (d) and (e) reflect relevant constitutional limitations.25 Sub-paragraph (b)(2) mirrors the inherent limitation of the State’s taxing power that taxes must be raised for public purpose. Sub-paragraph (c) forbids an LGU from constituting a taxpayer to become its withholding agent with respect to the local taxes due on such payments to another taxpayer. Otherwise, the first taxpayer will be made responsible for the collection of local taxes that are imposed on the other taxpayer.26 This may also lead to graft and corruption. 27

Sub-paragraph (b)(4) emphasizes that the actions of LGUs must be consistent with the national development framework of the National Government.

Section 130, nevertheless, does not exclude the application of the other general principles of taxation and limitations on the exercise of the State’s taxing power, as may be relevant to each particular case.

Unjust, excessive, oppressive or confiscatory tax

Ordinarily, the exercise by the State (and LGUs) of the power of taxation constitutes a deprivation of property under the due process clause of the Constitution.

25 In particular, sub-paragraphs (a), (b)(1) and (e) reflect Article VI, Section 28 of the Constitution, which provides in part:

“SECTION 28. (1) The rule of taxation shall be uniform and equitable. The Congress shall evolve a progressive system of taxation.

(2) xxx”

Sub-paragraph (b)(3) reflects the requirement of substantive due process that the means employed should not be unduly oppressive and must be reasonably necessary to accomplish the objective for the exercise of State power.

Sub-paragraph (d) reflects the last paragraph of Article X, Section 5 which provides:

“SECTION 5. Each 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.”

26 Treasurer of the City of Manila v. Unilever Philippines, Inc., C.T.A. AC No. 43, Feb. 18, 2009.

27 Paras, p. 248. .

The injunction against the State’s (and LGUs’) deprivation of private property may only be justified when the taking of the property is in the lawful exercise of the taxing power, as when (1) the tax is for a public purpose; (2) the rule on uniformity of taxation is observed; (3) either the person or property taxed is within the jurisdiction of the government levying the tax; and (4) in the assessment and collection of certain kinds of taxes, notice and opportunity for hearing are provided. Hence, the taxpayer's right to due process is violated when arbitrary or oppressive methods are used in assessing and collecting taxes. 28

It should be noted that the Local Government Code does not define the terms “unjust,” “excessive,” “oppressive,” “confiscatory,” which were defined in Section 3 of the Local Autonomy Act, as follows:

“SECTION 3. Definitions. — When used in this Code —- xxx -

(j) Confiscatory is that which amounts to undue seizure or forfeiture of private property in favor of the public treasury.

- xxx -(m) Excessive means that which is characterized by whatever is notably

greater than what is moderate, reasonable, proper, usual, necessary and just.

- xxx -(a-1) Oppressive means unreasonably burdensome, unjustly severe, or harsh.

- xxx -(n-1) Unjust means deficient in justice and fairness.

- xxx -”

Congress may have intentionally omitted the definition of these terms in the Local Government Code because such terms were, in the first place, broadly defined in the Local Autonomy Act. Moreover, in determining whether a tax is unjust, excessive, oppressive or confiscatory, the municipal conditions as a whole and the nature of the business made subject to imposition should be considered.29 The determination of these matters should be properly left to the courts.

The case of Matalin Coconut, Inc. v. The Municipal Council of Malabang, Lanao Del Sur, et.al.30 provides an illustration of what constitutes an unjust and unreasonable exercise by the LGU of its taxing power. In this case, petitioner questioned an ordinance imposing a police inspection fee equivalent to a “fixed tax of P.30 per bag of cassava starch or flour shipped out of the municipality.” The Supreme Court adopted the lower court’s finding that such imposition was unjust and unreasonable, to wit:

". . . It has been proven that the only service rendered by the Municipality of Malabang, by way of inspection, is for the policeman to verify from the driver of the trucks of the petitioner passing by at the police checkpoint the number of bags loaded per trip which are to be shipped out of the municipality based on the trip tickets for the purpose of computing the total amount of tax to be collected and for no other purpose. The pretention of respondents that the police, aside from counting the number of bags shipped out, is also inspecting the cassava flour starch contained in the bags to find out if the said cassava flour starch is fit for human consumption could not be given credence by the Court because, aside from the fact that said purpose is not so stated in the ordinance in question, the policemen of said municipality are not competent to determine if the cassava flour starch are fit for human consumption. The further pretention of respondents that the trucks of the petitioner hauling the bags of cassava flour starch from the mill to the bodega at the beach of Malabang are escorted by a policeman from

28 Yamane v. BA Lepanto Condominium Corporation, G.R. No. 154993, Oct. 25, 2005, citing Pepsi-Cola Bottling Company v. Municipality of Tanauan, G.R. No. L-31156, Feb. 27, 1976.

29 Victorias Milling Co., Inc. v. Municipality of Victorias, G.R. No. L-21183, Sept. 27, 1968.30 G.R. No. L-28138, Aug. 13, 1986.

the police checkpoint to the beach for the purpose of protecting the truck and its cargoes from molestation by undesirable elements could not also be given credence by the Court because it has been shown, beyond doubt, that the petitioner has not asked for the said police protection because there has been no occasion where its trucks have been molested, even for once, by bad elements from the police checkpoint to the bodega at the beach, it is solely for the purpose of verifying the correct number of bags of cassava flour starch loaded on the trucks of the petitioner as stated in the trip tickets, when unloaded at its bodega at the beach. The imposition, therefore, of a police inspection fee of P.30 per bag, imposed by said ordinance is unjust and unreasonable.

The Court finally finds the inspection fee of P0.30 per bag, imposed by the ordinance in question to be excessive and confiscatory. It has been shown by the petitioner, Matalin Coconut Company, Inc., that it is merely realizing a marginal average profit of P0.40, per bag, of cassava flour starch shipped out from the Municipality of Malabang because the average production is P15.60 per bag, including transportation costs, while the prevailing market price is P16.00 per bag. The further imposition, therefore, of the tax of P0.30 per bag, by the ordinance in question would force the petitioner to close or stop its cassava flour starch milling business considering that it is maintaining a big labor force in its operation, including a force of security guards to guard its properties. The ordinance, therefore, has an adverse effect on the economic growth of the Municipality of Malabang, in particular, and of the nation, in general, and is contrary to the economic policy of the government."

A revenue ordinance is not oppressive simply because it carries a penal clause for non-payment of local tax.31

§1.4.2 Common limitations/Allocation of taxes among LGUs

Double taxation is likely to happen in the field of local taxation, i.e., an LGU may impose a tax that is already imposed by the National Government or by another LGU that has territorial jurisdiction over such LGU. To avoid “local double taxation,” Congress prevented LGUs from imposing taxes which are already imposed by the National Government “unless otherwise provided in the Local Government Code.” This limitation is common to all LGUs. Hence, Section 133 of the Local Government Code appropriately uses the term “common limitations.”

Congress likewise identified and apportioned in Sections 134 to 16432 the taxes, fees and charges that each LGU may impose to the exclusion of all other LGUs. Consequently, municipalities may not impose the taxes, fees, and charges levied under Sections 135 to 141 which are allocated by Congress to provinces (and, by virtue of Section 151, to cities). Hence, Section 142 of the Local Government Code provides: “xxx municipalities may levy taxes, fees, and charges not otherwise levied by provinces.” Conversely, provinces may not impose taxes, fees and charges levied under Sections 143, 147 to 149 which are allocated by Congress to municipalities (and, by virtue of Section 151, to cities). Hence, Section 134 of the Local Government Code similarly provides: “xxx the province may levy only the taxes, fees and charges as provided in this Article (i.e., Article One – Provinces).”

The succeeding Chapters will further discuss the aforementioned common limitations and allocation of taxes among LGUs. The succeeding Chapters will likewise discuss the review process under the Local Government Code, where an LGU’s revenue ordinance (e.g., municipal ordinance) will be reviewed by the legislative council of the LGU which has territorial jurisdiction over the LGU passing the revenue ordinance (i.e., legislative council of the province which has territorial jurisdiction over the

31 Villanueva v. City of Iloilo, G.R. No. L-26521, Dec. 28, 1968.32 Under Section 151, cities may impose the taxes which may be imposed by provinces and

municipalities.

municipality enacting the ordinance). If the reviewing legislative council finds that the revenue ordinance under review is in violation of the aforementioned common limitations and allocation of taxes, it may declare such revenue ordinance invalid. Furthermore, the persons who may be adversely affected by such invalid revenue ordinance may question the same with the Secretary of Justice, who may likewise declare such revenue ordinance invalid.

§1.4.3 Procedure for enactment of a revenue ordinance

LGUs impose revenue ordinances through their respective legislative council. The ordinary procedure under the Local Government Code for the enactment of ordinances, including the review by the legislative council of the LGU where the LGU enacting the ordinance belongs, applies. In addition, the Local Government Code requires a prior public hearing and publication of the revenue ordinance. They ensure that the taxpayers are properly notified so they may be able to voice out their views or objections during the public hearing, or later on through a petition with the Secretary of Justice questioning the constitutionality or legality of the revenue ordinance pursuant to Section 187 of the Local Government Code.

Conduct of public hearings -

Public hearings are conducted by legislative bodies to allow interested parties to ventilate their views on a proposed revenue ordinance. In Hagonoy Market Vendor Association v. Municipality of Hagonoy, Bulacan, 33 the Supreme Court pointed out that such views are not binding on the legislative body. The latter is not compelled by law to adopt the same. Sanggunian members are elected by the people to make laws that will promote the general interest of their constituents. They are mandated to use their discretion and best judgment in serving the people. Parties who participate in public hearings to give their opinions on a proposed revenue ordinance should not expect that their views would be patronized by their lawmakers.

Nevertheless, public hearing is not necessary when the tax or fee is imposed on a tax base or subject specifically enumerated in the Local Government Code. It is only necessary when the tax base or subject: (a) is similar to those authorized, but which may not have been specifically enumerated, in the Local Government Code, or (b) is not similar or comparable to any tax base or subject specifically mentioned or otherwise provided for in the Local Government Code. In Berdin, et.al. v. Mascarinas, 34 the Supreme Court explained when a tax base or subject is already specifically enumerated in the law (then the Local Tax Code and now the Local Government Code), the existence of the power to tax is beyond question as the same is expressly granted. Even in the determination of the rates of the tax, a public hearing, even if ideal, is not necessary because the law itself provides for a ceiling on such rates. The same does not obtain in a situation where what is about to be taxed is not specifically enumerated in the law because in such a situation, the issues of whether to tax or not and at what rate a tax is to be imposed are crucial. Consequently, a public hearing in such situation is necessary and vital.

Accrual and period of payment -

The liability to pay local taxes, fees and charges generally arises on the first (1st) day of January of each year, “unless otherwise provided in this (Local Government) Code.”35 New taxes, fees or charges, or changes in the rates, shall accrue on the first (1st) day of the quarter next following the effectivity of the revenue ordinance imposing

33 G.R. No. 137621, Feb. 6, 2002.34 G.R. No. 135928, July 6, 2007.35 LGC, Sec. 166.

such new levies or rates.36 This gives the taxpayer a reasonable opportunity to prepare for the payment of such taxes, fees or charges.37

On the other hand, such taxes, fees and charges must generally be paid within the first twenty (20) days of January or of each subsequent quarter, as the case may be. The sanggunian concerned may, for a justifiable reason or cause, extend the time for payment of such taxes, fees, or charges without surcharges or penalties, but only for a period not exceeding six (6) months. 38 The following are the exceptions:

a. Local transfer tax -

Local transfer tax accrues from the effective date of transfer of ownership or title over a real property (e.g., from the date of execution and notarization of the deed of sale or from the date of the decedent's death), and not on the date of registration of the corresponding deed of conveyance.39

Section 135 of the Local Government Code allows a period of 60 days from the accrual of the tax for the transferor to pay the same.

b. Amusement tax -

The sangguniang panlalawigan may prescribe the time, manner, terms and conditions for the payment of tax. 40

c. Community tax -

While a community tax accrues every January 1, the tax must be paid not later than the last day of February of each year,41 subject to the following rules:

1. If a person reaches the age of eighteen (18) years or loses the benefit of exemption on or before the last day of June, he is liable to the community tax on the day he reaches such age or upon the day the exemption ends. However, if a person reaches the age of eighteen (18) years or loses the benefit of exemption on or before the last day of March, he has twenty (20) days to pay the community tax without becoming delinquent.42

2. A person who comes to reside in the Philippines or reaches the age of eighteen (18) years on or after July 1, or who ceases to belong to an exempt class on or after the same date, is not subject to the community tax for that year. 43

3. A corporation established and organized on or before June 30 is liable for the community tax for that year. Conversely, a corporation established and organized on or after July 1 is not subject to the community tax for that year. 44

4. A corporation established and organized on or before March 31 has twenty (20) days within which to pay the community tax without becoming

36 Supra.37 Paras, p. 262, citing Opinion of the Secretary of Justice No. 55, s. 1941. 38 LGC, Sec. 167.39 See also BLGF letter dated August 27, 1996.40 LGC, Sec. 140; LGC-IRR, Art. 229(d).41 Id., Sec. 161.42 Id.43 Id.44 Id.

delinquent.45

If the tax is not paid within the prescribed period, the delinquent taxpayer is liable to an interest of twenty-four percent (24%) per annum from the due date until it is paid. 46

§1.5 Role of DOF and Bureau of Local Government Finance

The President exercises administrative supervision over LGUs. 47 In the field of local taxation, the President exercises this authority through the Secretary of Finance by virtue of PD 477, otherwise known as the decree on local fiscal administration.48

While PD 477 was amended by the Local Government Code, the DOF continuously cites its authority under Article 287 of the Local Government Code’s implementing rules and regulations (IRR), which provides:

“ARTICLE 287. Authority of the Secretary of Finance. — The Secretary of Finance shall, in consultation with the leagues of LGUs, formulate and prescribe, from time to time, procedures and guidelines as may be necessary for the proper, efficient, and effective implementation of this Rule.”

Lack of authority to review revenue ordinances -

The DOF no longer reviews the revenue ordinances of provinces and cities. Although the DOF extends technical assistance to LGUs in the interpretation or clarification of the conflicting provisions of the Local Government Code pertaining to local taxation, it cannot render a ruling on the legality or constitutionality of a revenue ordinance. This matter is now exclusively under the jurisdiction of the Secretary of Justice or the court of competent jurisdiction, as the case may be, pursuant to Section 187 of the Local Government Code.49

Authority to appoint local treasurers -45 Id.46 Id.47 Constitution, Article X, Section 4 provides: “The President of the Philippines shall

exercise general supervision over local governments. xxx” This provision has been interpreted to exclude the power of control. In Taule v. Santos, (G.R. No. 90336, Aug. 12, 1991) the Supreme Court explained the President wielded no more authority than that of checking whether local governments or their officials were performing their duties as provided by the fundamental law and by statutes. He cannot interfere with local governments, so long as they act within the scope of their authority.

48 Section 3 of PD 477 provides the following:

“SECTION 3. Supervisory authority of the Department of Finance. — The Department of Finance shall exercise general supervision over the financial affairs of the local governments and, except as otherwise specifically provided by law, over all funds the investment of which is authorized by law. For the purpose, and along with the powers, duties and functions vested upon it by law, it shall be the responsibility of the Department to:

(a) Formulate and execute fiscal policies that will promote the financial stability and growth of the local governments;

(b) Provide the local governments with policy guidelines in the preparation and adoption of sound financial plans and review the local budgets in order to enhance the maximum utilization of local funds and resources;

(c) Adopt and enforce the necessary measures that will improve local treasury operations and foster effective financial management at the local levels; and

(d) Ensure the proper use, custody and safekeeping of public funds in the local governments.

In order to attain the foregoing objectives, the Secretary of Finance shall exercise direct executive supervision over all treasury officials and personnel in the local governments.”

49 BLGF letters dated May 26, 1993; May 14, 1993; May 3, 1993.

Under the Local Government Code, the DOF, through the Secretary of Finance, appoints the treasurer and assistant treasurer. The Secretary of Finance shall choose from a list of at least three (3) ranking eligible recommendees of the governor or mayor, as the case may be, subject to civil service law, rules and regulations. Upon their appointment, they shall be under the administrative supervision of the governor or mayor, as the case may be, to whom they shall report regularly on the tax collection efforts in the LGU. 50

Role of the Bureau of Local Government Finance -

The BLGF is an agency attached to the DOF. It was established to provide, among others, consultative services and technical assistance to LGUs and the general public on local taxation, real property assessment and other related matter.51

The findings of the BLGF are not conclusive on the courts. Unlike the findings of the Commissioner of Internal Revenue pursuant to the exercise of his authority under Section 4 of the NIRC,52 the BLGF is not an administrative agency whose findings on questions of fact are given weight and deference in the courts.53

§1.6 Summary

As discussed, LGUs have no inherent taxing power. The source of their taxing power is the Constitution, no longer a mere statute. The Local Government Code provides guidelines and limitations, which must not in any way defeat the State policy of local fiscal autonomy. In case of doubt whether an LGU has authority to levy a particular tax, fee or charge, the doubt must be resolved in favor of the LGU.

In the exercise of its taxing power, the LGU, through its legislative council, must enact an implementing revenue ordinance which must follow the various guidelines, limitations and procedural requirements prescribed by the Local Government Code. Such guidelines generally reflect the various inherent and constitutional limitations of the State’s taxing power. The provisions on limitations, on the other hand, implement the allocation of taxing power between the National Government and the LGUs, and among the LGUs. The DOF, through the BLGF, periodically provides guidelines and advice to LGUs.

50 LGC, Secs. 470-471.51 Administrative Code of 1987.52 “SEC. 4. Power of the Commissioner to Interpret Tax Laws and to Decide Tax Cases. -

The power to interpret the provisions of this Code and other tax laws shall be under the exclusive and original jurisdiction of the Commissioner, subject to review by the Secretary of Finance. xxx”

53 Smart Communications, Inc. v. The City Of Davao, G.R. No. 155491, Sept. 16, 2008; PLDT v. City of Davao, G.R. No. 143867, Aug. 22, 2001.

CHAPTER 2

COMMON LIMITATIONS

Congress has reserved certain taxes, fees and charges which cannot be covered by the taxing power of each LGU. This is an instance where the National Government elects to tax a particular area, impliedly withholding from each LGU the power to tax the same field. This “doctrine of pre-emption” primarily rests upon the intention of Congress. Should Congress allow LGUs to cover fields of taxation which the National Government already occupies, then the doctrine of preemption will not apply.54

Section 133 of the Local Government Code (entitled “Common Limitations on the Taxing Powers of Local Government Units”) illustrates the doctrine of pre-emption. It enumerates the taxes, fees and charges which may not be imposed by each LGU. It also provides the exceptions, in addition to the other provisions of the Local Government Code, to the doctrine of pre-emption, viz:

“SECTION 133. Common Limitations on the Taxing Powers of Local Government Units. - Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following:

(a) Income tax, except when levied on banks and other financial institutions; (b) Documentary stamp tax; (c) Taxes on estates, inheritance, gifts, legacies and other acquisitions mortis

causa, except as otherwise provided herein; (d) Customs duties, registration fees of vessel and wharfage on wharves,

tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned;

(e) Taxes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise;

(f) Taxes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen;

(g) Taxes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from the date of registration;

(h) Excise taxes on articles enumerated under the National Internal Revenue Code, as amended, and taxes, fees or charges on petroleum products;

(i) Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein;

(j) Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code;

(k) Taxes on premiums paid by way of reinsurance or retrocession; (l) Taxes, fees or charges for the registration of motor vehicles and for the

issuance of all kinds of licenses or permits for the driving thereof, except tricycles;

(m) Taxes, fees, or other charges on Philippine products actually exported, except as otherwise provided herein;

(n) Taxes, fees, or charges, on Countryside and Barangay Business Enterprises and cooperatives duly registered under R.A. No. 6810 and Republic Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938)

54 Victorias Milling, Co.,Inc., v. The Municipality of Victorias, Province of Negros Occidental, G.R. No. L-21183, Sept. 27, 1968.

otherwise known as the ‘Cooperative Code of the Philippines,’ respectively; and

(o) Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units.”

In Mactan Cebu International Airport v. Marcos,55 the Supreme Court noted an inaccuracy in the opening paragraph of Section 133 vis-à-vis its main provisions. It pointed out that Section 133 itself enumerated what were beyond the taxing powers of LGUs and, where exceptions were intended, the exceptions were explicitly indicated in the relevant sub-paragraph. Thus, the phrase “Unless otherwise provided in this Code” should be used instead of “Unless otherwise provided herein.” The Supreme Court explained:

“Note, too, that the aforementioned clause in Section 133 seems to be inaccurately worded. Instead of the clause ‘unless otherwise provided herein,’ with the ‘herein’ to mean, of course, the section, it should have used the clause ‘unless otherwise provided in this Code.’

The former results in absurdity since the section itself enumerates what are beyond the taxing powers of local government units and, where exceptions were intended, the exceptions are explicitly indicated in the next. For instance, in item (a) which excepts income taxes ‘when levied on banks and other financial institutions’; item (d) which excepts ‘wharfage on wharves constructed and maintained by the local government unit concerned’; and item (l) which excepts taxes, fees and charges for the registration and issuance of licenses or permits for the driving of ‘tricycles.’

It may also be observed that within the body itself of the section, there are exceptions which can be found only in other parts of the Local Government Code, but the section interchangeably uses therein the clause, ‘except as otherwise provided herein’ as in items (c) and (i), or the clause ‘except as provided in this Code’ in item (j). These clauses would be obviously unnecessary or mere surplusages if the opening clause of the section were ‘Unless otherwise provided in this Code’ instead of ‘Unless otherwise provided herein.’ In any event, even if the latter is used, since under Section 232 local government units have the power to levy real property tax, except those exempted therefrom under Section 234, then Section 232 must be deemed to qualify Section 133.”56

Broad classifications of the common limitations -

For purposes of discussion, Aban has broadly classified the taxes, fees and charges enumerated in Section 133 into the following:

a. Taxes, fees and charges similar to the national internal revenue taxes imposed under the National Internal Revenue Code (NIRC);

b. Taxes, fees and charges similar to the customs duties and other levies imposed under the Tariff and Customs Code of the Philippines (TCCP);

c. Taxes, fees and charges on certain activities and transactions which are governed by special laws;

d. Taxes, fees and charges on certain persons or entities, transactions or activities, where the levy of such taxes, fees and charges will be in restraint of trade or will violate principles of

55 G.R. No. 120082, Sept.11, 1996.56 Mactan Cebu International Airport.

taxation.57

This Chapter will follow the same format and discuss under each broad classification: (i) the various taxes, fees and charges covered by the doctrine of pre-emption; and (ii) the corresponding exceptions, which are clearly provided either in Section 133 or in other provisions of the Local Government Code.

§2.1 Taxes, fees and charges similar to the national internal revenue taxes imposed under the NIRC

The NIRC provides the following national internal revenue taxes which are presently levied by the National Government:

a. Income tax;b. Transfer taxes (such as estate tax and donor’s tax);c. Business taxes (such as valued added tax and percentage tax);d. Excise taxes;e. Documentary stamp taxes.

Sub-paragraphs (a),(b),(c),(h),(i),(j) and (k) of Section 133 generally forbid (subject to certain exceptions) LGUs from imposing the above taxes. These sub-paragraphs will be discussed below immediately under the heading of the relevant national internal revenue tax.

§2.1.1 Income taxes

Section 133(a) limits the authority of LGUs to impose “(i)ncome tax, except when levied on banks and other financial institutions.”

An income tax is a tax on a person’s flow of wealth other than a mere return of capital.58 It is a tax on all yearly profits arising from property, professions, trades or offices, or as a tax on a person's income, emoluments, profits and the like. It is tax on income, whether net or gross, realized in one taxable year. 59

Normally, income tax is computed based on a person’s “net income,” i.e., the excess of a person’s wealth inflow over his costs of earning or producing such wealth. In some cases, it is computed based on a person’s “gross income” but the tax rate is low enough as to equalize the computed tax with the resulting amount if the tax base were to be a net amount applying the regular rate of tax.

Sub-paragraph (a) as presently-worded implies that a city or municipality may impose income tax, in addition to a business tax which a city or municipality may levy on banks and other financial institutions.60 The implementing rules and regulations of the Local Government Code (IRR) provide the following clarification:

“(f) On banks and other financial institutions, at a rate not exceeding fifty percent (50%) of one percent (1%) on the gross receipts of the preceding calendar year derived from interest, commissions and discounts from lending activities, income from financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium.

57 Aban, Benjamin, “Law of Basic Taxation in the Philippines,” Rev. Ed., p. 402.

58 In Madrigal,et.al. v. Rafferty (G.R. No. 12287, Aug. 7, 1918), the Supreme Court defined “income” as a “flow of services rendered by a (person’s) capital by the payment of money from it or any other benefit rendered by a fund of capital in relation to such fund through a period of time.”

59 Mobil Philippines, Inc. v. City Treasurer of Makati, G.R. No. 154092, July 14, 2005.60 See Sections 143(f) and 151 of the LGC.

All other income and receipts of banks and financial institutions not otherwise enumerated above shall be excluded from the taxing authority of the LGU concerned.”61

This underscored provision of the IRR is added in order to avoid the implication brought about by sub-paragraph (a) that cities or municipalities may levy an income tax on banks and other financial institutions.

§2.1.2 Transfer taxes

A transfer tax may be broadly defined as a tax on the transfer of a property, whether real or personal, from one person to another. Presently, estate tax and donor’s tax are the transfer taxes imposed under the NIRC.

Based on the wordings of Section 133(c), the Local Government Code does not forbid LGUs from imposing donor’s tax or tax on transfers inter-vivos. Section 133(c) appears to be limited to transfers mortis causa or which take effect upon the death of the transferor, i.e., “(t)axes on estates, inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided herein.”

The exception pertains to the local transfer tax on transfer inter-vivos under Section 135, which may be imposed by provinces and cities on all transfers of real properties, in particular by way of “sale , donation, barter, or on any other mode of transferring ownership or title of real property.” Transfers through testate and intestate succession (which are generally subject to estate tax under the NIRC) are included as taxable transfers under Section 135.

§2.1.3 Business taxes

A business tax is a tax on the privilege of engaging in business in a particular taxing jurisdiction. It is paid at the beginning of the year as a fee to allow the business to operate for the rest of the year and is deemed a prerequisite to the conduct of business.62 It is different from income tax in the sense that a business tax is payable regardless whether a person earns income from his business. Hence, the tax rate is based on a person’s gross receipts or earnings.

The business taxes imposed under the NIRC are the value-added tax (VAT) and the various percentage taxes imposed on specific taxpayers, such as persons exempt from VAT,63 domestic carriers and keepers of garages,64 international carriers,65 certain franchise holders,66persons making overseas dispatch,67 banks and non-bank financial intermediaries,68 finance companies,69 life insurance companies,70 agents of foreign insurance companies,71 proprietors, lessees or operators of certain amusement places,72 race horse winners73 and sellers of listed shares of stock.74

61 LGC-IRR, Art. 232(f); underscoring supplied.62 Mobil Philippines, Inc. v. City Treasurer of Makati, G.R. No. 154092, July 14, 2005.63 NIRC, Sec. 116.64 Ibid., Sec. 117.65 Id., Sec. 118.66 Id., Sec. 119.67 Id., Sec. 120.68 Id., Sec. 121.69 Id., Sec. 122.70 Id., Sec. 123.71 Id., Sec. 124.72 Id., Sec. 125.73 Id., Sec. 126.74 Id., Sec. 127.

By virtue of sub-paragraphs (i),(j) and (k) of Section 133, LGUs may not impose a tax similar to VAT or percentage tax levied under the NIRC, unless specifically provided in the Local Government Code. Each of the above sub-paragraph (and the corresponding exception/s) will be briefly discussed below.

Sub-par. (i) - “Percentage or value-added tax (VAT) on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided herein”

A percentage tax is one when there is a set ratio between the amount of tax and the volume of sales,75 or which is based on the amount of the proceeds realized out of the sale of the articles sold. 76

The exceptions referred to in sub-paragraph “i” pertain to the following:

a. Franchise tax, which may be imposed by provinces and cities under Sections 137 and 151, respectively;

b. Professional tax, which may be imposed by provinces and cities under Sections 139 and 151, respectively;

c. Amusement tax on proprietors, lessees or operators of boxing stadia, which may be imposed by provinces and cities under Sections 140 and 151, respectively;

d. Business taxes (under certain circumstances), which may be imposed by municipalities and cities under Sections 143 and 151, respectively.

Franchise Tax -

Under the NIRC, franchise holders may either be subject to VAT under Section 108 (VAT on sale of services and use or lease of properties) or Section 119 (percentage tax on franchises). In addition, the Local Government Code grants provinces and cities the power to impose a franchise tax on businesses enjoying a franchise.

Professional Tax -

Under the NIRC, professionals are subject to either VAT under Section 108 (VAT on sale of services and use or lease properties) or Section 116 (percentage tax on persons exempt from VAT) depending on whether his annual gross receipts exceed P1,500,000.00.77 In addition, the Local Government Code authorizes provinces and cities to impose an annual professional tax on each person engaged in the exercise or practice of his profession.

Amusement Tax -

In addition to the amusement tax levied under Section 125 of the NIRC, the Local Government Code authorizes provinces and cities to impose an amusement tax on “proprietors, lessees, or operators of theaters, cinemas, concert halls, circuses, boxing stadia, and other places of amusement.” 78

Business tax -

75 San Miguel Corporation v. Municipality of Mandaue, G.R. No. L-30761, Jul. 11, 1973.76 Shell Company of P. I. LTD. v. E. E. Vaño, G.R. No. L-6093, Feb. 24, 1954.77 RA 9337. 78 LGC, Sec. 140.

As will be discussed in the succeeding Chapters, cities and municipalities may impose a business tax, which in most cases is expressed as a percentage of the taxpayer’s gross sales or receipts.79

Section 143(a), (b), (d) and (e) of the Local Government Code authorize the levy

of a specific amount of tax. Up to a certain amount, cities and municipalities may levy a graduated tax, which is fixed and not calculated as a percentage of the taxpayer’s annual gross sales or receipts. Beyond that amount, cities and municipalities may levy a percentage tax, where there is a set ratio between the amount of tax and the amount of the taxpayer’s gross sales or receipts. This is one of the exceptions on the limitation prescribed in Section 133(i). Thus, the nullified revenue ordinances in the following cases are now allowed:

1. In San Miguel Corporation v. Municipality of Mandaue,80 where the questioned revenue ordinance provided that if the "gross value in money or actual market value of the beer removed from the factory exceeds P37,500.00 per quarter, the taxpayer is required to pay a quarterly license tax of P160.00 plus P0.30 for every P1,000.00 or fraction of the excess;”

2. In Marinduque Iron Mines, Inc. v. Municipal Council of the Municipality of Hinabangan, Samar,81 where the questioned revenue ordinance effectively prescribed a tax based on sales. In this case, the Supreme Court noted that while the questioned revenue ordinance purported to base the tax on either "gross output or sales," the only standard provided for measuring the gross output was its peso value, as determined from "true copies of receipts and/or invoices" that the taxpayer was required to submit to the municipal treasurer. Directly or indirectly, the amount of tax payable under this revenue ordinance was determined by the gross sales of the taxpayer, and violated the explicit prohibition under the Local Autonomy Act that the municipality must not levy, or impose, "taxes in any form based on sales."

Sub-par. (j) - “Taxes on the gross receipts of transportation contractors and persons engaged in the transportation of passengers or freight by hire and common carriers by air, land or water, except as provided in this Code”

Section 133(j) reiterates the prohibition under Section 117 of the NIRC that “(t)he gross receipts of common carriers derived from their incoming and outgoing freight shall not be subjected to the local taxes.”

An oil pipelines operator is included in the term “common carrier,” whose gross receipts are not subject to local tax. In First Philippine Industrial Corporation v. CA, et.al.,82 the Supreme Court explained that a "common carrier" (following its definition under Article 1732 of the Civil Code83) may be defined, broadly, as one who holds himself out to the public as engaged in the business of transporting persons or properties from place to place, for compensation, offering his services to the public generally. It laid down the following tests for determining whether a party is a common carrier of goods:

79 Ibid., Sec. 143.80 G.R. No. L-30761, July 11, 1973.81 G.R. No. L-18924, June 30, 1964.82 G.R. No. 125948, Dec. 29, 1998.83 Article 1732 of the Civil Code defines a "common carrier" as "any person, corporation,

firm or association engaged in the business of carrying or transporting passengers or goods or both, by land, water, or air, for compensation, offering their services to the public."

1. Whether he is engaged in the business of carrying goods for others as a public employment, and whether he holds himself out as ready to engage in the transportation of goods for others generally as a business and not as a casual occupation;

2. Whether he undertakes to carry goods of the kind to which his business is confined;

3. Whether he undertakes to carry by the method by which his business is conducted and over his established roads; and

4. Whether the transportation is for hire.

Thus, an operator of oil pipelines is a common carrier. It is engaged in the business of transporting or carrying goods, i.e., petroleum products, for hire as a public employment. It undertakes to carry for all persons indifferently, that is, to all persons who choose to employ its services and transports the goods by land and for compensation. The fact that such operator has a limited clientele does not exclude it from the definition of a common carrier. The definition of "common carrier" in the Civil Code makes no distinction as to the means of transporting, as long as it is by land, water or air. It does not provide that the transportation of the passengers or goods should be by motor vehicle. 84

Exception under sub-paragraph (j) -

The exception in sub-paragraph “j” pertains to the taxes and fees on the operation and franchising of tricycles. Article 221(j) of the IRR specifically recognizes the authority of cities and municipalities to levy taxes on the operation and franchising of tricycles, pursuant to Sections 151 and 147, respectively, of the Local Government Code.

Sub-par. (k) - “Taxes on premiums paid by way of reinsurance or retrocession”

There is reinsurance or retrocession when an insurer procures a third person to insure him against loss or liability by reason of the original insurance.85 Section 133(k) complements Section 123 of the NIRC,86 which excludes as part of the taxable premium such amounts refunded on account of rejection risk (i.e., retrocession) and reinsurance paid by the company that has already paid the tax.

84 First Philippine Industrial Corporation v. CA, et.al., G.R. No. 125948, Dec. 29, 1998.85 Insurance Code, Sec. 95.86 “SEC. 123. Tax on Life Insurance Premiums. - There shall be collected from every

person, company or corporation (except purely cooperative companies or associations) doing life insurance business of any sort in the Philippines a tax of five percent (5%) of the total premium collected, whether such premiums are paid in money, notes, credits or any substitute for money; but premiums refunded within six (6) months after payment on account of rejection of risk or returned for other reason to a person insured shall not be included in the taxable receipts; nor shall any tax be paid upon reinsurance by a company that has already paid the tax; nor upon doing business outside the Philippines on account of any life insurance of the insured who is a nonresident, if any tax on such premium is imposed by the foreign country where the branch is established nor upon premiums collected or received on account of any reinsurance , if the insured, in case of personal insurance, resides outside the Philippines, if any tax on such premiums is imposed by the foreign country where the original insurance has been issued or perfected; nor upon that portion of the premiums collected or received by the insurance companies on variable contracts (as defined in section 232(2) of Presidential Decree No. 612), in excess of the amounts necessary to insure the lives of the variable contract workers. Cooperative companies or associations are such as are conducted by the members thereof with the money collected from among themselves and solely for their own protection and not for profit.” (underscoring supplied)

§2.1.4 Excise taxes

An excise tax has been broadly defined to be a tax upon the performance, carrying on, or the exercise of an activity.87 This general definition of excise tax, however, is not contemplated in Section 133(h). The latter forbids LGUs from imposing two broad categories of excise taxes, to wit:

a. the excise taxes enumerated under the NIRC (such as excise taxes on certain “sin products” and other non-essential goods, in particular: alcohol products,88 tobacco products,89 petroleum products, 90

automobiles,91 jewelry, goods made of precious metals, perfumes, yachts and other vessels intended for pleasure or sport, 92 and mineral products93); and

b. taxes, fees or charges specifically on petroleum products.

In Petron Corporation v. Tiangco, et.al.,94 the Supreme Court explained while taxes on petroleum products are also considered as excise taxes under Section 148 of the NIRC, they are given special treatment under the Local Government Code. If sub-paragraph “h” were to be interpreted to have adopted the above general definition of excise tax, it would mean that LGUs are barred from imposing business taxes on persons engaged in businesses dealing with any of the articles subject to excise taxes under the NIRC.

Exceptions to the prohibition under sub-paragraph (h) -

Sub-paragraph “h” demonstrates the inaccuracy in the language of Section 133 as noted in Mactan Cebu International Airport. This is one instance where the opening clause “unless otherwise provided herein” should have been “unless otherwise provided in this Code.” Notwithstanding the silence of sub-paragraph “h”:

a. Provinces and cities may impose an excise tax on the extraction of quarry resources from public lands

Section 151 of the NIRC imposes a tax on all quarry resources, regardless of origin, whether extracted from public or private land. On the other hand, the Local Government Code expressly grants provinces and cities the power to impose an excise tax on quarry resources extracted from public lands.95

With regard to the quarry resources extracted from private lands, LGUs are forbidden by Section 133(h) from imposing an excise tax on such activity notwithstanding their general taxing power under Section 186 of the Local Government Code. In Province of Bulacan, et.al. v. CA, et.al,96 the Supreme Court explained an LGU cannot impose tax on quarry resources extracted from private lands pursuant to Section 186. The tax imposed by the petitioner was an excise tax, which was covered by the doctrine of pre-emption pursuant to Section 133(h) of the Local Government Code, in relation to Section 151 of the NIRC. The only exception under this prohibition 87 Allied Thread Co. Inc. v. City Mayor of Manila, G.R. No. L-40296, Nov. 21, 1984; Iloilo

Bottlers, Inc. v. City of Iloilo, G.R. No. 52019, Aug. 19, 1988.88 NIRC, Secs. 141 to 143.89 Ibid., Secs. 144 to 145.90 Id., Sec. 148.91 Id., Sec. 149.92 Id., Sec. 150.93 Id., Sec. 151.94 G.R. No. 158881, April 16, 2008.95 Ibid., Secs. 138 and 151.96 G.R. No. 126232, Nov. 27, 1998.

was the power granted under Section 138 of the Local Government Code, i.e., the power of a province (and a city) to impose tax on quarry resources extracted from public lands.

b. Cities and municipalities may generally impose a business tax on businesses dealing with articles subject to excise tax

Section 133(h) only prohibits the imposition of an excise tax on the products which are already subject to excise tax under the NIRC. It does not prohibit the imposition of business taxes. A tax on business is distinct from a tax on the article itself.97 Thus, cities and municipalities may generally impose business taxes on persons engaged in businesses dealing with articles subject to excise taxes under the NIRC.98

As an exception, the second part of Section 133(h) does not only cover the prohibition against the imposition of an excise tax on petroleum products, but also the prohibition against the imposition of business tax on the person dealing with petroleum products.

While a business tax is distinct from an excise tax, such distinction is immaterial insofar as the latter part of Section 133 (h) is concerned. As explained in Petron Corporation, the phrase "taxes, fees or charges on petroleum products" does not qualify the kind of taxes, fees or charges that is not covered by the absolute prohibition. The earlier reference in paragraph (h) to excise taxes comprehends a wider range of subjects of taxation while the later reference to "taxes, fees and charges" pertains only to one class of articles of the many subjects of excise taxes, specifically, "petroleum products." If the later reference pertains to excise tax (i.e., direct or excise tax on petroleum products), it would be redundant since the former already prohibits the imposition of excise taxes on articles already subject to such taxes under the NIRC, such as petroleum products. There would be no sense on the part of Congress to twice emphasize in the same sentence that excise taxes on petroleum products are beyond the pale of local government taxation. 99

Furthermore, Article 232(h) of the IRR has clarified that municipalities (and cities) may not impose any local tax on the production, manufacture, refining, distribution or sale of oil, gasoline and other petroleum products, to wit:

“(h) On any business, not otherwise specified in the preceding paragraphs which the sanggunian concerned may deem proper to tax provided that on any business subject to the exercise tax, VAT, or percentage tax under the NIRC, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year and provided further, that in line with existing national policy, any business engaged in the production, manufacture, refining, distribution or sale of oil, gasoline, and other petroleum products shall not be subject to any local tax imposed in this Article.”100

The reason why the Local Government Code gives special concern over petroleum products is because they remain to be an area of public concern. If municipalities, cities and provinces were authorized to impose business taxes on manufacturers and retailers of petroleum products, the resulting losses to these enterprises would be passed on to the consumers, triggering the chain of increases that normally accompany the increase in oil prices. No similarly massive trigger effect would ensue upon the imposition of business taxes on other commodities, including those

97 Philippine Petroleum Corporation v. Municipality of Pililia, Rizal, G.R. No. 90776, June 3, 1991.

98 LGC, Secs. 143(h) and 151.99 Petron Corporation.100 Underscoring supplied.

already subject to excise taxation under the NIRC. 101

§2.1.5 Documentary stamp taxes

A documentary stamp tax is a tax on the exercise by persons of certain privileges conferred by law for the creation, revision or termination of specific legal relationships through the execution of specific instruments.102

The NIRC imposes a documentary stamp tax upon certain transactions and documents when the obligation or right arises from Philippine sources or the property is situated in the Philippines.103 These transactions and documents pertain to original issue of shares of stock,104 sales, agreements to sell, memoranda of sales, deliveries or transfer of shares or certificates of stock,105 bonds, debentures, certificate of stock or indebtedness issued in foreign countries,106 certificates of profits or interest in property or accumulations,107 bank checks, drafts, certificates of deposit not bearing interest, and other instruments,108 debt instruments,109 bills of exchange or drafts,110 acceptance of bills of exchange and others,111 foreign bills of exchange and letters of credit,112 life insurance policies,113 policies of insurance upon property,114 fidelity bonds and other insurance policies,115 policies of annuities and pre-need plans,116 indemnity bonds,117

certificates,118 warehouse receipts,119 jai-alai, horse racing tickets, lotto or other authorized numbers games,120 bills of lading or receipts,121 proxies,122 powers of attorney,123 leases and other hiring agreements,124 mortgages, pledges and deeds of trust,125 deeds of sale and conveyances of real property,126 charter parties and similar instruments,127 and assignments or transfer of any mortgage, lease or policy of insurance, renewal or continuance of any agreement, contract, charter, or any evidence of obligation or indebtedness.128

Section 133(b) does not admit of any exception under the Local Government Code.

§2.2 Taxes, fees and charges similar to the customs duties and other levies imposed under the TCCP

101 Petron Corporation.102 Philippine Home Assurance Corporation, et.al., v.CA, G.R. No. 119446, Jan. 21, 1999.103 NIRC, Sec. 173.104 Ibid., Sec. 174.105 Id., Sec. 175.106 Id., Sec. 176.107 Id., Sec. 177.108 Id., Sec. 178.109 Id., Sec. 179.110 Id., Sec. 180.111 Id., Sec. 181.112 Id., Sec. 182.113 Id., Sec. 183.114 Id., Sec. 184.115 Id., Sec. 185.116 Id., Sec. 186.117 Id., Sec. 187.118 Id., Sec. 188.119 Id., Sec. 189.120 Id., Sec. 190.121 Id., Sec. 191.122 Id., Sec. 192.123 Id., Sec. 193.124 Id., Sec. 194.125 Id., Sec. 195.126 Id., Sec. 196.127 Id., Sec. 197.128 Id., Sec. 198.

The TCCP levies various duties, fees and charges, which include: (a) import duties; (b) export duties; (c) vessel registration fees; (d) wharfage dues; (e) tonnage dues; (f) harbor fees; (g) berthing charges; (h) storage charges; and (i) arrastre charges. As will be discussed below, LGUs may not generally levy these duties, fees and charges.

§2.2.1 Import duties, fees and charges

Under Section 133(d), LGUs may not levy “(c)ustoms duties, registration fees of vessel and wharfage on wharves, tonnage dues, and all other kinds of customs fees, charges and dues except wharfage on wharves constructed and maintained by the local government unit concerned.”

The limitation pertains to the levy of the following:

a. Customs dutiesb. Vessel registration feesc. Wharfage duesd. Tonnage duese. Other dues, such as harbor fees, berthing charges, storage charges and

arrastre charges.

The Bureau of Customs is tasked to collect customs duties, while the Philippine Ports Authority is tasked to collect the other port charges. 129

Customs duties -

Customs duties are the taxes on the importation and exportation of commodities, the tariff or tax assessed upon merchandise imported from, or exported to, a foreign country. They are assessed at the prescribed tariff rates and are very much like taxes which are frequently imposed for both revenue-raising and for regulatory purposes.130

Wharfage dues -

Wharfage dues are the amounts assessed against the cargoes of a vessel engaged in the foreign trade, based on the quantity, weight or measure received and/or discharged by such vessel.131

Tonnage dues -

129 "Section 39. Bureau of Customs. — The Tariff and Customs Code is hereby modified or amended to the extent that all the powers, duties and jurisdiction of the Bureau of Customs concerning the following matters shall be transferred to and be vested in the Authority:

a) All dues, fees and rates collectible on vessels and cargoes under Title VII but excluding Part VII of the Code, as amended by P.D. 34, regardless of the port or place of call of the vessel, whether on government or private port (As amended by Executive Order No. 513);

b) The general supervision, control and regulation of all matters and affairs that pertain to the operation of and the issuance of permits or license to construct ports, port facilities, warehouses, and other facilities, within port districts;

c) All such other powers, duties and jurisdictions vested in the Bureau of Customs, pertaining to every matter concerning port facilities, port, operations or port works.”

130 Garcia v. The Executive Secretary, et. al., G.R. No. 101273, July 3, 1992.131 LGC, Sec. 131(y); TCCP, Sec. 2801.

Tonnage dues are the amounts paid by the owner, agent, operator or master of a vessel engaged in foreign trade coming to the Philippines from a foreign port or going to a foreign port from the Philippines based on the net tonnage of the vessel or weight of the articles discharged or laden.132

Harbor fees -

A harbor fees are the amounts which the owner, agent, operator or master of a vessel has to pay for each entrance into or departure from a port of entry in the Philippines.133

Berthing charges -

Berthing charges are the amounts assessed against a vessel for mooring or berthing at a pier, wharf, bulkhead-wharf, river channel, marginal wharf at any port in the Philippines; or for mooring or making fast to a vessel so berthed; or for berthing or mooring within any slip, channel, basin river or canal under the jurisdiction of any port of the Philippines. The owner, agent, operator or master of the vessel is liable for these charges.134

Storage Charges -

Storage charges are the amounts assessed on articles for storage in customs premises, cargo shed and warehouses of the government. The owner or consignee of the articles is liable for these charges.135

Arrastre Charges -

Arrastre charges are the amounts which the owner or consignee of the article or baggage has to pay for the handling, receiving and custody of the imported or exported article or the baggage of the passengers.136

LGUs are also prohibited from imposing berthing fees, which under the doctrine of ejusdem generis fall under the general terms "all other kinds of customs fees, charges, and dues."137

Exception under sub-paragraph (d) -

By way of exception, Section 155 of the Local Government Code authorizes LGUs to impose toll fees or charges for the use of any public road, pier, wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the concerned LGU.

§2.2.2 Export duties and levies

Section 133(m) prohibits LGUs from imposing “(t)axes, fees, or other charges on Philippine products actually exported, except as otherwise provided herein.”

132 Ibid., Sec. 3201.133 Id., Sec. 2701.134 Id., Sec. 2901.135 Id., Sec. 3001.136 Id., Section 3101.137 Everett Steamship Corporation v. Municipality of Medina, et.al., G.R. No. L-21191, April

30, 1966.

The prohibition against the imposition of local tax on Philippine exported products was first introduced by RA 4497,138 when it amended the Local Autonomy Act on June 19, 1965. RA 4497 expressly prohibited LGUs from imposing a local tax “on exports of Philippine finished, manufactured or processed products and products of Philippine cottage industries.”139

Exception under sub-paragraph (m) -

The exception refers to the authority of cities and municipalities to impose a tax on the privilege to engage in an export business, pursuant to Section 143(c).140 It should be noted that Section 133(m) refers to the exported products, while Section 143(c) refers to the business of exporting itself. Hence, strictly speaking, the provisions of Section 143(c) do not fall within the ambit of and not in conflict with the prohibition enunciated under Section 133(m).141

§2.3 Taxes, fees and charges on activities and transactions governed by special laws

The Local Government Code complements certain special laws which provide incentives to taxpayers on account of their activities or transactions. These laws include: (a) the Omnibus Investments Code;142 (b) the Magna Carta for Countryside and Barangay Business Enterprises; 143 (c) the Cooperative Code of the Philippines;144 and (d) the laws establishing economic zones.

§2.3.1 Omnibus Investments Code

Section 133(g) supplements the incentives provided under Article 39 of the Omnibus Investments Code, which grants tax and non-tax incentives to various entities, including pioneer and non-pioneer registered enterprises and regional headquarters.

Pioneer and non-pioneer registered enterprises

While the incentives under Article 39 do not include the exemption from the payment of local taxes, Section 133(g) of the Local Government Code supplements the BOI-registered enterprises’ tax exemptions by forbidding LGUs from imposing “(t)axes on business enterprises certified to by the Board of Investments as pioneer or non-pioneer for a period of six (6) and four (4) years, respectively from the date of

138 “An Act Amending Section Two Of Republic Act Twenty-Two Hundred Sixty-Four, Otherwise Known As The Autonomy Act Of Nineteen Fifty-Nine.”

139 See Ormoc Sugarcane Planters Association, Inc. v. The Municipal Board of Ormoc City, G.R. No. L-23793, Feb. 23, 1968.

140 Section 143(c) authorizes municipalities and cities to impose a business tax on the exporters of the following essential commodities:

(1) Rice and corn; (2) Wheat or cassava flour, meat, dairy products, locally manufactured, processed or

preserved food, sugar, salt and other agricultural, marine, and fresh water products, whether in their original state or not;

(3) Cooking oil and cooking gas; (4) Laundry soap, detergents, and medicine; (5) Agricultural implements, equipment and post-harvest facilities, fertilizers, pesticides,

insecticides, herbicides and other farm inputs; (6) Poultry feeds and other animal feeds; (7) School supplies; and (8) Cement.

141 BLGF letter dated March 10, 1994.142 E.O. No. 226, dated July 16, 1987.143 R.A. No. 6810, dated December 14, 1989.144 R.A. No. 6938, dated March 10, 1990.

registration.” In the case of registered expanding firms, the gross sales or receipts directly arising from such expansion shall be exempt from local business taxes for a similar period. 145 The local tax exemption granted to pioneer and non-pioneer enterprises shall only apply upon presentation of the corresponding BOI-certification.146

The local tax exemption only covers the payment of the local business tax.147 The registered enterprise is still liable to pay the Mayor's permit and other fees and charges for services rendered by the LGU, such as garbage fees, sanitary inspection fees, electrical inspection fees, which the LGU may have imposed under a duly-enacted revenue ordinance.148

Reckoning date of the period of exemption -

While the Omnibus Investments Code fixes the reckoning date (of the 6-year or 4-year period of entitlement) for incentives from the registered enterprise’s “commercial operation,” Section 133(g) fixes the reckoning date of the period of exemption from the registered enterprise’s “date of registration,” i.e., the date indicated in the certificate of registration issued by the BOI.149

In Batangas Power Corporation v. Batangas City,150 petitioner argued that its 6-year tax holiday should commence on the date of its actual commercial operations as certified to by the BOI, not on the date of its BOI registration. In rejecting this argument, the Supreme Court held that petitioner’s reliance on Article 39 of the Omnibus Investments Code was misplaced. The tax holiday provided in Article 39 pertained to income taxes imposed by the national government on BOI-registered enterprises. The provisions of the Local Government Code (which proscribes LGUs from levying taxes, fees or charges on BOI-registered enterprises within the prescribed period reckoned from the date of BOI registration) should apply to Batangas City’s tax claim against the petitioner.

Procedure for availment of local tax exemption -

Local Finance Circular 05-93 prescribes the limitations, manner and procedures for the levy of local business tax on BOI-registered enterprises, to wit:

"Sec. 4. Availment of the Exemption. (a) Within sixty (60) days —

(i) from receipt of the Certificate of Registration from the BOI, or(ii) from the effectivity of the tax ordinance or revenue measure imposing a

tax on business, or(iii) from the effectivity of these guidelines, whichever comes later, the

President or any duly authorized representative of the registered enterprise, shall submit a certified true copy of said Certificate of Registration to the local treasurer concerned together with a request for a Certificate of Exemption for the appropriate period, as indicated in Sec. 3 above.

- xxx - xxx - xxx"-

The 60-day period is only directory and not mandatory. The failure of any business to observe the same will not render taxable what the law has expressly exempted from local taxation.151

145 Local Finance Circular 05-93, Sec. 3.146 BLGF letter dated November 12, 1998.147 Local Finance Circular 05-93.148 BLGF letters dated March 6, 1997; March 5, 1996; February 20, 1996.149 Local Finance Circular 05-93, Sec. 3.150 G.R. No. 152675, April 28, 2004.151 BLGF letter dated April 24, 1995.

Local business tax on business enterprises registered with the BOI not covered or no longer exempt from tax -

Business enterprises registered with the BOI not covered or no longer exempt from local business tax are subject to local business tax as follows:

(a) the gross sales or receipts on goods or products sold domestically are subject to the business tax at rates prescribed under paragraphs (a), (b) and (d) of Section 143 of the Local Government Code;

(b) the amount of export sales is subject to local business tax at rates not exceeding one-half (1/2) of the rates stated in paragraph (a).

The amount of export sales must be excluded and declared separately from the total sales in order for the same to be subject to the rates prescribed in paragraph (b) above. The failure of a business enterprise to make this separate declaration of export sales shall subject its total sales to the rates prescribed in paragraph (a).152

Upon expiration of its period of exemption, the situs of the tax of a BOI-registered enterprise shall be determined in accordance with Section 150 of the Local Government Code and Article 243 of the IRR. In case a manufacturer engages the services of an independent contractor to manufacture some of its products, the rules on situs of taxation shall apply. However, the factory or plant and warehouse of the contractor utilized for the manufacture and storage of the manufacturer's products shall be considered as the factory or plant and warehouse of the manufacturer. The independent contractor shall not be taxed on the basis of the gross sales of his production of the manufacturer's products. He shall only be taxed on the basis of his gross receipts as independent contractor under Section 143(e) of the Local Government Code.153

Regional Headquarters

Republic Act No. 8756154 has amended the Omnibus Investments Code by providing incentives to multinational companies establishing regional or area headquarters (RHQ) and regional operating headquarters (ROHQ) in the Philippines. These incentives aim to attract foreign investors into the country.

An RHQ is an office whose purpose is to act as an administrative branch of a multinational company engaged in international trade. It principally serves as a supervision, communications and coordination center for its subsidiaries, branches or affiliates in the Asia-Pacific Region and other foreign markets. It does not earn or derive income in the Philippines.155

An ROHQ is a foreign business entity which is allowed to derive income in the Philippines by performing qualifying services to its affiliates, subsidiaries or branches in the Philippines, in the Asia-Pacific Region and in other foreign markets. 156

152 Local Finance Circular 05-93, Sec. 5.153 Ibid.154 “An Act Providing for the Terms, Conditions and Licensing Requirements of Regional or

Area Headquarters, Regional Operating Headquarters, and Regional Warehouses of Multinational Companies, Amending for the Purpose Certain Provisions of Executive Order No. 226, otherwise known as the Omnibus Investments Code of 1987.”

155 R.A. 8756, Sec. 2(2).156 Ibid, Sec. 2(3).

Among others, RA 8756 provides that RHQ and ROHQ “shall be exempt from all kinds of local taxes, fees, or charges imposed by a local government unit except real property tax on land improvements and equipment.” 157

§2.3.2 Magna Carta for Countryside and Barangay Business Enterprises

The first part of Section 133(n) forbids LGUs from imposing “(t)axes, fees, or charges on Countryside and Barangay Business Enterprises xxx duly registered under R.A. No. 6810,” otherwise known as the “Magna Carta for Countryside and Barangay Business Enterprises.” This complements the 5-year local tax exemption of a registered countryside and barangay business enterprise (CBBE) under Section 9 of RA 6810. 158

The CBBE’s local tax exemption includes the exemption from the payment of the corporate community tax. Nevertheless, it may be issued a community tax certificate upon payment of One Peso (P1.00) pursuant to Article 247 of the IRR, viz:

"Art. 247. Community Tax Certificate. — A community tax certificate shall be issued to every person or corporation upon payment of the community tax. A community tax certificate may also be issued to any person or corporation not subject to the community tax upon payment of One Peso (P1.00).”

A CBBE is liable to pay charges or fees for services rendered by an LGU, such as garbage fees, sanitary inspection fees, electrical inspection fees, rentals or toll fees for use of public utilities owned and operated by the LGU.159

§2.3.3 Cooperative Code of the Philippines

The second part of Section 133(n) complements the tax exemption privileges of cooperatives duly registered with the Cooperative Development Authority (CDA), pursuant to the Cooperative Code of the Philippines. Their local tax exemption privileges may be summarized as follows:

a. Duly-registered cooperatives (regardless of capitalization) with regard to their transactions with members are not subject to local taxes;

b. Duly-registered cooperatives with minimal capital (i.e., accumulated reserves and undivided net savings of not more than Ten Million pesos) with regard to their transactions with non-members are similarly not subject local taxes;

c. Duly-registered cooperatives with substantial capital (i.e, accumulated reserves and undivided net savings of more than Ten Million pesos) with regard to their transactions with non-members are subject local taxes.160

157 Id., Sec. 5, amending Article 66 of the Omnibus Investments Code.158 See also Section 17 of DTI Department Administrative Order No. 2, series of 1990.159 BLGF letter dated March 17, 1995.160 “Article 62. Tax and Other Exemptions. — Cooperatives transacting with both

members and non-members shall not be subject to tax on their transactions to members. Notwithstanding the provisions of any law or regulation to the contrary, such cooperatives dealing with non-members shall enjoy the following tax exemptions:

(1) Cooperatives with accumulated reserves and undivided net savings of not more than Ten Million pesos (P10,000,000.00) shall be exempt from all national, city, provincial, municipal or barangay taxes of whatever name and nature. Such cooperatives shall be exempt from customs duties, advance sales or compensating taxes on their importation of machineries, equipment and spare parts used by them and which are not available locally as certified by the Department of Trade and Industry. . . .'" (underscoring supplied)

Duly registered cooperatives transacting business with both members and non-members are still required to obtain or secure a Mayor's permit and pay the commensurate costs of regulation, inspection and surveillance of their businesses but not exceeding One Thousand Pesos (P1,000.00). Moreover, they must secure a Community Tax Certificate and pay the corresponding tax.161

Moreover, they are still liable to pay service charges or rentals for the use of the LGUs’ properties, equipment or public utilities, such as charges for actual water consumption, electric power, toll fees for the use of public roads and bridges and the like. 162

§2.3.4 Special laws establishing economic zones

Following the enactment of the Local Government Code, Congress passed various laws163 that provided qualified enterprises with a 5% special tax regime, in lieu of all taxes except realty tax on land owned by developers.

Nature and coverage of the 5% special tax regime

The nature and coverage of the 5% special tax regime enjoyed by qualified enterprises may be briefly summarized as follows:

1. The 5% preferential tax is income tax in nature and a national internal revenue law in character, and not a local tax imposable by LGUs;

2. Registered enterprises (including real property developers) are exempt from national and local taxes;

3. The buildings, machineries and improvements of the registered enterprises (other than real property developers) are exempt from realty taxes; and

4. The land of real property developers, even if they are registered enterprises, is not exempt from realty taxes. 164

Business permits or license fees (which are charges imposed to cover the costs of regulation) are not covered by the above exemption.165 Moreover, the 5% special tax regime does not apply to the following:

1. Registered enterprises’ operations outside of the economic zones;166

161 BLGF Memorandum Circular No. 031-09, October 7, 2009.162 Ibid.163 To name a few: Republic Act No. 7227, otherwise known as "Bases Conversion and

Development Act of 1992," Republic Act No. 7916 as amended by Republic Act No. 8748, otherwise known as "Special Economic Zone Act of 1995," Republic Act No. 7903, otherwise known as "Zamboanga City Special Economic Zone Act of 1995" and Republic Act No. 7922 otherwise known as "Cagayan Special Economic Zone Act of 1995."

164 RR 1-00, Sec. 4; BLGF letters dated April 3, 2003 and April 8, 2003.165 BLGF letter dated August 25, 1999.166 R.A. No. 7916, Sec. 4 (a) defines ecozones as "are selected areas with highly developed

or which have the potential to be developed into agro-industrial, industrial, tourist/recreational, commercial, banking, investment and financial centers. An ECOZONE may contain any or all of the following: industrial estates (IEs), export processing zones (EPZs), free trade zones, and tourist/recreational centers."

2. Persons and service enterprises rendering their services within the economic zones,167 except duly-registered service enterprises which export their services or are rendering their services abroad through the use of information technologies, provided such services are paid in foreign currency inwardly remitted through the Bangko Sentral ng Pilipinas;168

3. Fees and service charges for rental or use of public utilities.

Allocation of the 5% tax

While LGUs are not authorized to impose local taxes on duly-registered enterprises, they nevertheless have a share in the 5% tax. Out of the five percent (5%) tax, three percent (3%) shall be remitted to the National Government while the remaining two percent (2%) shall be remitted to the municipalities or cities where the enterprises are located.169 Although provinces have no share in the 2% tax, they retain the right to collect realty taxes on lands owned by developers within the economic zones.

§2.4 Taxes, fees and charges in restraint of trade or in violation of principles of taxation

Under Section 133, LGUs are prohibited from imposing taxes, fees and charges that will be in restraint of trade or in violation of principles of taxation, specifically: (a) export and import taxes; (b) taxes, fees or charges on certain agricultural and aquatic products; (c) taxes, fees and charges for the registration of motor vehicles; (d) taxes, fees and charges for the issuance of a license or permit to drive motor vehicles; and (e) taxes, fees and charges on the Government.

§2.4.1 Export and import taxes

Section 133(e) covers the so-called export and import taxes, i.e., “(t)axes, fees, and charges and other impositions upon goods carried into or out of, or passing through, the territorial jurisdictions of local government units in the guise of charges for wharfage, tolls for bridges or otherwise, or other taxes, fees, or charges in any form whatsoever upon such goods or merchandise.” The purpose of this prohibition is to prevent restraint of trade and ensure free flow of goods between cities and municipalities.170

Sub-paragraph (e) does not prevent a province or city from imposing an annual fixed tax on delivery trucks of certain articles.171 It also does not prevent a municipality or city from imposing an annual fixed tax on peddlers. 172

Background of the prohibition

The prohibition against the levy of export and import taxes was initially provided in the Revised Administrative Code. However, the Local Autonomy Act failed to mention this limitation as among the expressly enumerated limitations on its general

167 R.A. No. 8748, Sec. 5. 168 RR 2-05, Sec. 6.169 Supra, Sec. 24.170 Paras, Edgardo, “Taxation Fundamentals,” 1966 ed., p. 248, citing Panaligan v. City of

Tacloban, L-9319, Sept. 27, 1957 and Zamboanga Copra Procurement Corporation v. City of Zamboanga, G.R. No. L-14806, July 30, 1960.

171 LGC, Section 141.172 Ibid., Section 143(g).

grant of taxing power to LGUs. Consequently, the Supreme Court in a number of cases173 declared that the above limitation on the imposition of import and export taxes was repealed by the Local Autonomy Act. While the Supreme Court acknowledged the transcendental effects that the tax on movement of goods might have upon the national economy, the language of the Local Automony Act, however, precluded the Supreme Court from invalidating the various revenue ordinances imposing the same.

Several taxpayers later on attempted to invoke the amendatory provision of RA 4497,174 which had amended the Local Autonomy Act. The Supreme Court nevertheless clarified that RA 4497 prohibited LGUs from imposing a local tax “on exports of Philippine finished, manufactured or processed products and products of Philippine cottage industries,” i.e., on the export of Philippine products to any foreign country.175 RA 4497 did not restore the prohibition against the imposition of import and export taxes that was initially provided in the Revised Administrative Code but was subsequently omitted in the Local Autonomy Act.

Considering this background, Congress restored the prohibition against the levy of export and import taxes in Section 133(e) of the Local Government Code.

Illustrative cases

Based on the Revised Administrative Code prior to its implied repeal by the Local Autonomy Act, the Supreme Court has declared the following revenue ordinances to have imposed fees in the nature of export and import taxes:

a. An ordinance imposing upon copra dealers a tax on copra exported abroad; 176

b. An ordinance imposing fees, which based on their amounts were in reality taxes, on all animals, fish and fruits taken out of the LGU;177

c. An ordinance imposing a license fee on the business of buying and/or selling of copra, ramie and/or hemp in the LGU;178

173 Nin Bay Mining Co. v. Mun. of Roxas, G.R. No. L-20125, July 20, 1965; Ormoc Sugar Company, Inc.v. The Treasurer of Ormoc City, et. al., G.R. No. L-23794, Feb. 17, 1968; Laoag Producers' Cooperative Marketing Association, Inc. v. The Municipality of Laoag, Ilocos Norte, G.R. No. L-27498, Feb. 24, 1971.

174 Section 2 of the Local Autonomy Act was amended on June 19, 1965 by R.A. No. 4497, as follows:

"SECTION 1. Section two of Republic Act Numbered Twenty-two hundred sixty-four is amended to read as follows:

‘SECTION 2. Taxation. — xxx Provided, however, That no city, municipality or municipal district may levy or impose any of the following:‘xxx xxx xxx‘(1) Taxes, fees or levies, of any kind, which in effect impose a burden on exports of

Philippine finished, manufactured or processed products and products of Philippine cottage industries."

175 See Ormoc Sugarcane Planters Association, Inc. v. The Municipal Board of Ormoc City, G.R. No. L-23793, Feb. 23, 1968; Procter & Gamble Trading Company v. The Municipality of Medina, Misamis Oriental, G.R. No. L-29125, Jan. 31, 1972; Procter & Gamble Philippine Manufacturing Corporation v. The Municipality of Jagna, Province of Bohol, G.R. No. L-24265, Dec. 28, 1979.

176 Zamboanga Copra Procurement Corporation v. City of Zamboanga, G.R. No. L-14806, July 30, 1960.

177 Serafin Saldaña v. City of Iloilo, G.R. No. L-10470, June 26, 1958.178 East Asiatic Co., Ltd. v. City Of Davao, and Victor Clapano, G.R. No. L-16253, Aug. 21,

1962.

d. An ordinance imposing a tax based and computed from the cargo manifest or bill of lading showing the number of cases received (not sold) by any agent and/or consignee of any person or corporation engaged in selling softdrinks or carbonated drinks, and not on merchants engaged in their sale (unless such merchants were agents and/or consignees of another dealer).179

Moreover, the BLGF opined the following to be in violation of the above provision:

a. A terminal fee on all outbound passengers of any vessel, ferry or craft docked at an LGU port to any point of destination and a permit fee to transport heavy and light equipment, including motor vehicles on any outgoing or incoming vessel, ferry or craft at the said port;180

b. A quarantine/sanitation, inspection and safety fees on ships anchoring and leaving the ports.181

On the other hand, the BLGF opined that a Business Permit Fee of P500.00 per annum on any person hauling boulders, sand and gravel within the jurisdiction of the LGU does not violate the above prohibition.182

In Palma Development Corporation v. Municipality of Malangas, Zamboanga Del Sur, 183 petitioner questioned a revenue ordinance imposing service fees for police surveillance on goods. It argued that while the respondent had the authority to levy fees on vehicles using its roads, the respondent had no authority to levy fees on goods that were being transported by vehicles. In upholding this argument, the Supreme Court noted the questioned revenue ordinance imposed two types of service fees: (a) for the use of the municipal roads; and (b) for police surveillance on all goods and equipment sheltered in the premises of the wharf. The amount of service fees, however, was based on the type of vehicles that passed through the road and the type of goods that were being transported. The service fees for police surveillance on goods harbored on the wharf were in the guise of a wharfage, a prohibited imposition under Section 133(e). The Supreme Court explained:

“By express language of Sections 153 and 155 of RA No. 7160, local government units, through their Sanggunian, may prescribe the terms and conditions for the imposition of toll fees or charges for the use of any public road, pier or wharf funded and constructed by them. A service fee imposed on vehicles using municipal roads leading to the wharf is thus valid. However, Section 133(e) of RA No. 7160 prohibits the imposition, in the guise of wharfage, of fees — as well as all other taxes or charges in any form whatsoever — on goods or merchandise. It is therefore irrelevant if the fees imposed are actually for police surveillance on the goods, because any other form of imposition on goods passing through the territorial jurisdiction of the municipality is clearly prohibited by Section 133(e).

Under Section 131(y) of RA No. 7160, wharfage is defined as ‘a fee assessed against the cargo of a vessel engaged in foreign or domestic trade based on quantity, weight, or measure received and/or discharged by vessel.’ It is apparent that a wharfage does not lose its basic character by being labeled as a service fee ‘for police surveillance on all goods.’ xxx

179 Pepsi-Cola Bottling Co. of the Philippines, Inc. v. City of Butuan, G.R. No. L-22814, Aug. 28, 1968.

180 BLGF letter dated October 21, 1996.181 BLGF letter dated June 26, 1997.182 BLGF letter dated August 6, 1996.183 G.R. No. 152492, Oct. 16, 2003.

Section 133(e) of RA No. 7160 expressly prohibits the imposition of all other taxes, fees or charges in any form whatsoever upon the merchandise or goods that pass through the territorial jurisdiction of local government units. It is therefore immaterial to the instant case whether the service fee on the goods is for police surveillance or not, since the subject provision of the revenue ordinance is invalid.”

§2.4.2Taxes, fees or charges on certain agricultural and aquatic products

Under Section 133(f), LGUs are prohibited from imposing “(t)axes, fees or charges on agricultural and aquatic products when sold by marginal farmers or fishermen.”

Meaning of “agricultural product”

An agricultural product includes “the yield of the soil, such as corn, rice, wheat, rye, hay, coconuts, sugarcane, tobacco, root crops, vegetables, fruits, flowers, and their by-products; ordinary salt; all kinds of fish; poultry; and livestock and animal products, whether in their original form or not.”184 The phrase “whether in their original form or not” refers to the transformation of said products by the farmer, fisherman, producer or owner through the application of processes to preserve or otherwise to prepare said products for the market.185 Such transformation must have been undertaken by the farmer, fisherman, producer or owner. 186

An agricultural product as defined likewise includes those that have undergone not only simple but even sophisticated processes employing advanced technological means in packaging, like dressed chicken or ground coffee in plastic bags or styropor or other packaging materials intended to process and prepare the products for the market. 187

The term by-products shall mean those materials which in the cultivation or processing of an article remain over, and which are still of value and marketable, like copra cake from copra or molasses from sugar cane. 188

Meaning of “marginal farmer or fisherman”

A marginal farmer or fisherman refers to an individual engaged in subsistence farming or fishing, which shall be limited to the sale, barter or exchange of agricultural or marine products produced by himself and his immediate family, and whose annual net income from such farming or fishing does not exceed Fifty Thousand Pesos (P50,000.00) or the poverty line established by NEDA for the particular region or locality, whichever is higher.189

In City of Cebu, et.al. v. Intermediate Appellate Court,190 the City of Cebu imposed a fish inspection fee. It argued that the same was not against the fishermen but rather against the traders and fish vendors. Moreover, the rate of imposition was very minimal. The Supreme Court invalidated the questioned revenue ordinance and held that the Local Tax Code prohibited LGUs from imposing an inspection fee on agricultural products. Under the questioned revenue ordinance, a fisherman selling his fish within the city had to pay the inspection fee for every kilo of fish sold. This would

184 LGC-IRR, Art. 220(a).185 Ibid.186 Id.187 Id.188 Id.189 Id., Article 220(p).190 G.R. No. 70684, October 10, 1986.

restrict the free flow of fresh fish to Cebu City because the price of fish would necessarily increase.

§2.4.3 Taxes, fees and charges for the registration of motor vehicles

The first part of Section 133(l) forbids LGUs from imposing “(t)axes, fees or charges for the registration of motor vehicles xxx.”

The National Government, through the Land Transportation Office (LTO), imposes substantial fees for the registration of motor vehicles. Without Section 133(l), an LGU may impose additional fees. There will be a substantial burden on the part of vehicle owners to secure registration for their motor vehicles.191

As used in Section 133(l), the term "motor vehicle" refers to “any vehicle propelled by any power other than muscular power using the public roads, but excluding road rollers, trolley cars, street-sweepers, sprinklers, lawn mowers, bulldozers, graders, fork-lifts, amphibian trucks, and cranes if not used on public roads, vehicles which run only on rails or tracks, and tractors, trailers, and traction engines of all kinds used exclusively for agricultural purposes.”192 Vehicles not falling under this definition, such as traction engines used exclusively for agricultural purposes, may be subject to fees for the registration and issuance of permits or licenses for the use of the same within the LGU. Such imposition may be justified by the extraordinary wear and tear caused on roads and streets by such vehicles and for reasons of public safety.193

§2.4.4 Taxes, fees and charges for the issuance of a license or permit to drive motor vehicles

The second part of Section 133(l) forbids LGUs from imposing “(t)axes, fees or charges xxx for the issuance of all kinds of licenses or permits for the driving (of motor vehicles), except tricycles.”

An LGU has no authority to impose conditions for the use of motor vehicles within its jurisdiction. While it may regulate "any business or occupation," the use of a street, road or highway by a motor vehicle is neither a business nor an occupation.194

Nevertheless, LGUs have the power to regulate the operation of tricycles-for-hire and to grant franchises for their operation. The power of the LTO to register and issue licenses for the driving of tricycles, however, was not devolved to LGUs under the provisions of the Local Government Code.

In Land Transportation Office v. City of Butuan, 195 the Supreme Court clarified that the delegated powers to LGUs under Section 458 of the Local Government Code196

pertained to the franchising and regulatory powers exercised by the Land 191 BLGF letter dated June 19, 1995.192 LGC, Section 131(q).193 Supra.194 Fulgencio Vega, et. al. v. Municipal Board of The City Of Iloilo, et. al., G.R. No. L-6765,

May 12, 1954.195 G.R. No. 131512, Jan. 20, 2000.196 "SEC. 458. Powers, Duties, Functions and Compensation. —

xxx xxx xxx(3) Subject to the provisions of Book II of this Code, enact ordinances granting franchises and authorizing the issuance of permits or licenses, upon such conditions and for such purposes intended to promote the general welfare of the inhabitants of the city and pursuant to this legislative authority shall:xxx xxx xxx.(VI) Subject to the guidelines prescribed by the Department of Transportation and Communications, regulate the operation of tricycles and grant franchises for the operation thereof within the territorial jurisdiction of the city."

Transportation Franchising and Regulatory Board. They did not include LTO’s functions relative to the registration of, and issuance of licenses to drive, motor vehicles. The Local Government Code did not affect the powers of LTO under the Land Transportation and Traffic Code (RA 4136) requiring the registration of all kinds of motor vehicles "used or operated on or upon any public highway" in the country. The exclusionary clause contained in the tax provisions of Section 133(l) did not have the effect of withdrawing the express power of LTO to cause the registration of all motor vehicles and the issuance of licenses to drive them.

§2.4.5 Taxes, fees or charges on the Government

Section 133(o) forbids LGUs from imposing “(t)axes, fees and charges of any kind on the National Government, its agencies and instrumentalities, and local government units.”

Sub-paragraph “o” recognizes the basic principle that LGUs cannot tax the National Government. Such principle emanates from the "supremacy" of the National Government over LGUs. It also recognizes an inherent limitation on the taxing power of the State that a government shall generally not be subject to tax. Thus, when LGUs invoke the power to tax on the National Government, its agencies and instrumentalities, such power shall be construed strictly against the LGUs invoking the same. Its practical effect is to reduce the amount of money that has to be handled by government in the course of its operations. Moreover, there is no point in National Government and LGUs taxing each other, unless a sound and compelling policy requires such transfer of public funds from one government pocket to another.197

Thus, LGUs have no power to tax the National Government, its agencies and instrumentalities, except as otherwise provided in the Local Government Code pursuant to the saving clause in Section 133 stating "[u]nless otherwise provided in this Code." This exception refers to Section 234(a), which pertains to the exemption of the Republic from realty taxes imposed by LGUs. It provides the real property owned by the Republic, whether titled in the name of the National Government, its agencies or instrumentalities, is subject to realty taxes if the beneficial use of such property is given to a taxable entity. 198

§2.5 Summary

The various taxes, fees and charges which LGUs may not impose pursuant to the doctrine of pre-emption and the various exceptions provided in the Local Government Code are summarized below.

Broad classification of common limitations

Doctrine of Pre-emption (relevant sub-paragraphs of Section 133)

Exceptions(relevant provisions of the Local Government Code/IRR)

Taxes, fees and charges similar to NIRC taxes

Income tax (sub-paragraph “a”)

Limited liability of banks and financial institutions (pursuant to Art. 232”f”)

Transfer tax on transfer mortis-causa, such as estate tax (sub-paragraph “c”)

Authority of provinces and cities to impose a local transfer tax on the transfer inter-vivos and mortis-causa of real

197 Manila International Airport Authority v. CA, et.al., G.R. No. 155650, July 20, 2006.198 Supra.

properties (pursuant to Section 135)

VAT and Percentage Tax (sub-paragraph “i”)

Authority of provinces and cities to impose a local franchise tax (pursuant to Section 137)Authority of provinces and cities to impose a professional tax (pursuant to Section 139)Authority of provinces and cities to impose a local amusement tax on certain activities (pursuant to Section 140)Authority of cities and municipalities to impose a local business tax on persons engaged in business, including banks and other financial institutions, insurance companies, financing companies (pursuant toSection 143)

Common carrier’s tax (sub- paragraph “j”)

Authority of cities and municipalities to levy taxes on the operation and franchising of tricycles (pursuant to Section 147)

Exemption from premium tax on reinsurance or retrocession (sub -paragraph “k”)

-

Excise taxes levied on certain “sin products” and other non-essential goods (first part of sub -paragraph “h”)

Authority of provinces and cities to impose a tax on quarry resources extracted from public lands (as opposed to quarry resources extracted from private lands) (pursuant to Section 138) Authority of cities and municipalities to impose a local business tax on businesses dealing with articles subject to excise tax (pursuant toSection 143 )

Excise tax levied on petroleum products (second part of sub -paragraph “h”)

-

Documentary stamp tax(sub- paragraph “b”)

-

Taxes, fees and charges similar to TCCP duties, fees and charges

Import duties, fees and charges (sub- paragraph “d”)

Authority of LGUs to impose toll fees or charges for the use of any public road, pier, wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the concerned LGU (pursuant to Section 155)

Export duties and levies (sub- paragraph “m”)

Authority of cities and municipalities to impose a business tax on exporters (pursuant to Section 143)

Taxes, fees and charges on activities and transactions governed by special laws

Exemption under the Omnibus Investments Code (sub- paragraph “g”)

Authority of cities and municipalities to require payment of fees for the issuance ofMayor's permit (pursuant to Section 147)

Authority of LGUs to imposefees and charges for services rendered, such as garbage fees, sanitary inspection fees, electrical inspection fees (pursuant to Sections 153 and 154)Authority of cities and municipalities to require payment of Community Tax (pursuant to Section 158)

Exemption under the Magna Carta for Countryside and Barangay Business Enterprises (sub- paragraph “n”)

Authority of LGUs to imposefees and charges for services rendered, such as garbage fees, sanitary inspection fees, electrical inspection fees (pursuant to Sections 153 and 154)Authority of cities and municipalities to require payment of Community

Tax (pursuant to Section 158)

Exemption under the Cooperative Code of the Philippines (sub- paragraph “n”)

Authority of cities and municipalities to require payment of fees for the issuance ofMayor's permit (pursuant to Section 147)Authority of LGUs to imposefees and charges for services rendered, such as garbage fees, sanitary inspection fees, electrical inspection fees (pursuant to Sections 153 and 154)Authority of cities and municipalities to require payment of Community Tax (pursuant to Section 158)

Special laws establishing economic zones

Authority of cities and municipalities to require payment of fees for the issuance ofMayor's permit (pursuant to Section 147)Authority of LGUs to imposefees and charges for services rendered, such as garbage fees, sanitary inspection fees, electrical inspection fees (pursuant to Sections 153 and 154)Authority of cities and municipalities to require payment of Community Tax (pursuant to Section 158)Authority of the relevant LGUs to collect realty taxes on lands owned by developers within the economic zones (pursuant to Section 232)

Taxes, fees and charges in restraint of trade or violation principles of taxation

Export and import taxes (sub- paragraph “e”)

Authority of provinces and cities to impose an annual fixed tax on delivery trucks of certain articles (pursuant to Section 141)Authority of cities and municipalities to impose

an annual fixed tax on peddlers (pursuant to Section 143)

Taxes, fees or charges on certain agricultural and aquatic products (sub- paragraph “f”)

Authority of cities and municipalities to require payment of Community Tax (pursuant to Section 157)

Taxes, fees and charges for the registration of motor vehicles and the issuance of licenses or permits to drive motor vehicles (sub- paragraph “l”)

Authority of cities and municipalities to regulate the operation of tricycles-for-hire and to grant franchises for their operation (pursuant to Section 147)

Taxes, fees or charges on the government (sub- paragraph “o”)

Authority of relevant LGUs to collect realty taxes on real properties owned by the government when their beneficial use is given to a taxable entity (pursuant to Section 234”a”)