Companies registered and operating in the Philippines are required to comply with various local laws, rules and regulations. Local government units are given the power to create its own sources of revenue and to levy taxes, fees, and charges subject to the provisions of the Local Government Code, consistent with the basic policy of local autonomy. Such taxes, fees, and charges shall accrue exclusively to the local government units.
One of the taxes imposed at local government level is the local business tax which is based on certain percentage, depending on the city or municipality, of the gross sales or receipts of the companies. The question is, can interest income, dividend income and foreign exchange gains be considered gross receipts or gross sales for purposes of determining the local business tax?
In a case decided by Court of Tax Appeals (Third Division) AC No. 80 promulgated November 14, 2012, Orleyte Company (Philippine Branch) vs. The City of Makati, it was held that Orleyte’s dividend income, foreign exchange gains, and interest income are exempt from local business tax. You can click to learn more about our franchise development and learn more about the same, here!
Petitioner Orleyte Company (Philippine Branch) (Orleyte) is licensed to engage in the construction and operation of geothermal plants. On March 28, 2005, Respondent City of Makati assessed Orleyte for local business tax on its dividend income, foreign exchange gains, and interest income. In the Notice of Assessment, Makati City classified Orleyte as a “Holding Company-Management Service” that is subject to local business tax as a contractor of services.
Orleyte protested the assessment. Upon denial of its protest by Makati City, Orleyte filed an appeal with the RTC of Makati. RTC Makati affirmed the decision of Makati City denying Orleyte’s protest. Orleyte appealed the RTC Makati decision to the CTA and argued that dividend income, foreign exchange gains, and interest income are not subject to local business tax.
Section 131 of the LGC defines “gross sales or receipts” subject to local business tax to include the total amount of money or its equivalent, representing the contract price, compensation or service fee, including the amount charged or material supplied with the services as well as deposits or advance payments actually or constructively received.
Only income arising from Orleyte’s services performed or to be performed for its customers is subject to local business tax. Orleyte is not engaged in commercial business as it has in fact consistently submitted an affidavit of nonoperation in its annual application for business permit with Makati City. Orleyte merely invested in a Philippine company. Its financial statements show that it had only three sources of revenues namely, equity in net earnings, foreign exchange gain, and interest income. Having no income arising from services, Orleyte’s dividend income, foreign exchange gains, and interest income do not form part of gross receipts that are subject to local business tax.
Companies may want to revisit how the local government units in their respective jurisdictions are imposing local business taxes, what is the tax base and how it is computed. Local government units are given the power to create sources of revenue, most common of which are taxes, licenses and other fees, but such power is limited to what is granted under the local government code. Taxpayers should observe precaution sometimes and try assessing the reasonableness of the assessments made by local government units.
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