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Situs: Local Taxation

IN countries like ours where taxes are the main sources of revenue, the exercise of the
power of taxation is necessary for the very existence of government. Without the revenue
raised from taxation, the government cannot support itself and the public needs. And so, it is
often said that taxes are the lifeblood of the government.
This is true not only for the national government but also for its smallest unit. Thus, no less
than the Constitution grants the local government units (LGUs) the power to create their own
sources of revenues. That is further amplified by the Local Government Code of 1991 (LGC).
It is not, therefore, unusual for taxes to be levied on the same subject by two taxing
authorities, i.e., the national government and the LGUs. The prohibition against double
taxation is not violated since the tax is imposed by different tax authorities. But for a local
government unit to be able to exercise such power, it needs to enact an ordinance for that
purpose.
Local taxation, however, is subject to certain limitations. The exercise of the taxing power by
LGUs cannot extend to certain types of taxes as so enumerated in the LGC. Also, in local
business taxation, LGUs are governed by the situs of the tax rule. Some equate this rule to
the territorial principle of taxation. To a certain extent, this may be correct, but not entirely.
The territorial system of taxation follows the rule that a taxing jurisdiction may impose tax on
revenues that have arisen or have been earned within its geographical boundaries. This
does not necessarily mirror the situs of the tax rule. The latter specifies the rule in the
determination of the place of taxation or which jurisdiction has the authority to impose the tax
on the revenue/receipts or allocated revenue/receipts. This is especially significant if the
person/entity has presenceprincipal place of business, branch, sales outlet, warehouse,
factories, project offices, plants or plantationsin more than one city and/or municipality.
And it does not limit the extent of the taxing power to the revenues derived within its
boundaries.

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And because of this, while the situs rule in local business taxation had been existing for
years, there are still inconsistencies in its implementation by LGUs. Many LGUs have
varying interpretations of this rule. Thus we regularly encounter cities or municipalities
imposing or attempting to impose taxes on revenues/receipts already taxed by other
localities. Similarly, there are some taxpayers who fail to follow the rule on situs. The result
payment of tax within the wrong city or municipality.
In short, there is confusion on the application of the situs rule in local business taxation, both
on the part of the LGUs and taxpayers. It may be because the rules are not clear. Or even if
the rule is clear, some simply choose to ignore if it is not beneficial to their cause.
Whatever the cause of the differences in the implementation of the situs rule, the cases
decided by the courts should provide the best guide for its application. For instance, the LGC
clearly provides that businesses maintaining or operating branch or sales outlet elsewhere
shall record the sale in the branch or sales outlet making the sale or transaction, and the tax
thereon shall accrue and shall be paid to the municipality where such branch or sales outlet
is located. Despite its clarity, this is often the cause of dispute between the taxpayer and the
LGU.
A case in point is CTA AC Case 76 recently decided by the Court of Tax Appeals. In this
case, the treasurer of the city where the head office of the taxpayer is located sought to
impose local business tax on the revenue derived by the taxpayer from the operation of its
branches in other cities. It argued that it has the authority to assess business taxes on
revenues not properly taxed by the other cities. The Court ruled that this is impermissible,
because to do so would be sanctioning or encroaching upon the prerogatives of another coequal and autonomous local government.
Indeed, taxes are the lifeblood of the government. Everybody is called to contribute his
rightful share for the support of the government. But the assessment and collection of taxes
should not be enforced arbitrarily to the detriment of the taxpaying public. The situs of the
tax rule in local taxation is provided precisely to guide both the tax authority and taxpayers
for the proper allocation and distribution of taxes to the affected localities where the taxpayer
does his business or part of his business.
* * * *
The author is the senior partner of Du-Baladad and Associates Law Offices (BDB Law), a
member-firm of World Tax Services (WTS) Alliance.
The article is for general information only and is not intended, nor should be construed as a
substitute for tax, legal or financial advice on any specific matter. Applicability of this article
to any actual or particular tax or legal issue should be supported therefore by a professional
study or advice. If you have any comments or questions concerning the article, you may email the author at fulvio.dawilan@bdblaw.com.ph or call 403-2001 local 310.

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