BASTRTAX

Strategic Tax Management

1TAY2122

Local Taxation

Fundamental
Principles
 LOCAL GOVERNMENT TAXATION
The Constitution provides for one of the limitations of the power of taxation: each LGU shall exercise the power to create its
own sources of revenue and shall have a just share in the national taxes. This is further put into law in Section 129, Book II of
the Local Government Code as it states that each local government unit shall exercise its power to create its own sources of
revenue and to levy taxes, fees, and charges subject to the related provisions, consistent with the basic policy of local autonomy.
Such taxes, fees, and charges shall accrue exclusively to the local government units.

"Fee" means a charge fixed by law or ordinance for the regulation or inspection of a business or activity. "Charges" refer to
pecuniary liability, as rents or fees against persons or property.

LIMITATIONS
Local government units may exercise the power to levy taxes, fees or charges on any base or subject not otherwise specifically
enumerated in the Local Government Code or taxed under the provisions of the National Internal Revenue Code, as amended,
or other applicable laws: Provided, that

a. the taxes, fees, or charges shall not be unjust, excessive, oppressive, confiscatory or contrary to declared national policy
b. the ordinance levying such taxes, fees or charges shall not be enacted without any prior public hearing conducted for the
purpose.

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 In Ongsuco, et. al. v. Hon. Malones, GR No. 182065, since no public hearing had been duly conducted prior to the enactment
of an ordinance imposing “goodwill fees” upon stall holders at a public market, said ordinance was declared void.

Common Limitations
Section 133 of the Local Government Code provides for the common limitations of the local government’s taxing power. 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 in LGC;
d. Customs duties, registration fees vessels 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, fee 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 (4) four years, respectively from the date of registration;

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 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 in LGC;
j. Taxes on the gross receipts of transaction 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 LGC;
k. Taxes on premium paid by way or reinsurance or retrocession;
l. Taxes, fees or charges for the registration of motor vehicle and for the issuance of all kinds of licenses or permits for
the driving thereof, except tricycles;
m. Taxes, fees or charges on Philippine products actually exported, except as otherwise provided in LGC;
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) otherwise known as the
"Cooperatives 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.

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 FUNDAMENTAL PRINCIPLES
The following fundamental principles shall govern the exercise of the taxing and other revenue-raising powers of local
government units:

1. Taxation shall be uniform in each local government unit;

2. Taxes, fees, charges and other impositions shall:
a. be equitable and based as far as practicable on the taxpayer's ability to pay;
b. be levied and collected only for public purposes;
c. not be unjust, excessive, oppressive, or confiscatory;
d. not be contrary to law, public policy, national economic policy, or in restraint of trade;
3. The collection of local taxes, fees, charges and other impositions shall in no case be let to any private person;
4. The revenue collected pursuant to the provisions of LGC shall inure solely to the benefit of, and be subject to disposition
by, the local government unit levying the tax, fee, charge or other imposition unless otherwise specifically provided in
the LGC; and
5. Each local government unit shall, as far as practicable, evolve a progressive system of taxation.

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 TAXING AUTHORITY
The power to impose a tax, fee, or charge or to generate revenue under the LGC shall be exercised by the Sanggunian of the
local government unit concerned through an appropriate ordinance.

TAX ORDINANCES AND REVENUE MEASURES

Procedure for Approval and Effectivity
The procedure for approval of local tax ordinances and revenue measures shall be in accordance with the provisions of the LGC:
Provided, that

1. public hearings shall be conducted for the purpose prior to the enactment thereof
2. any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within
thirty (30) days from the effectivity thereof to the Secretary of Justice who shall render a decision within sixty (60) days
from the date of receipt of the appeal
3. such appeal shall not have the effect of suspending the effectivity of the ordinance and the accrual and payment of the
tax, fee, or charge levied therein
4. within thirty (30) days after receipt of the decision or the lapse of the sixty-day period without the Secretary of Justice
acting upon the appeal, the aggrieved party may file appropriate proceedings with a court of competent jurisdiction.

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 Publication
Within ten (10) days after their approval, certified true copies of all provincial, city, and municipal tax ordinances or revenue
shall be published in full for three (3) consecutive days in a newspaper of local circulation: provided, however, that in provinces,
cities and municipalities where there are no newspapers of local circulation, the same may be posted in at least two (2)
conspicuous and publicly accessible places.

Furnishing of Copies
Copies of all provincial, city, and municipal and Barangay tax ordinances and revenue measures shall be furnished the
respective local treasurers for public dissemination.

Attempt to Enforce Void or Suspended Tax Ordinances and Revenue Measures

The enforcement of any tax ordinance or revenue measure after due notice of the disapproval or suspension thereof shall be
sufficient ground for administrative disciplinary action against the local officials and employees responsible therefor.

Authority to Adjust Rates of Tax Ordinances

Local units shall have the authority to adjust the tax rates as prescribed herein not oftener than once every five (5) years, but
such adjustment should not exceed ten percent (10%) of the rates fixed under the LGC.

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 Authority to Grant Tax Exemption Privileges
Local government units may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms
and conditions, as they may deem necessary.

Withdrawal of Tax Exemption Privileges.

Unless otherwise provided in the LGC, tax exemptions or incentives granted to, or presently enjoyed by all persons, whether
natural or juridical, including government-owned or -controlled corporations, except local water districts, cooperatives duly
registered under R.A. No. 6938, non-stock and nonprofit hospitals and educational institutions, are hereby withdrawn upon the
effectivity of the LGC.

COLLECTION OF LOCAL TAXES

Tax Period and Manner of Payment
Unless otherwise provided in the LGC, the tax period of all local taxes, fees and charges shall be the calendar year. Such taxes,
fees and charges may be paid in quarterly installments.

Accrual of Tax
Unless otherwise provided in the LGC, all local taxes, fees, and charges shall accrue on the first (1st) day of January of each year.
However, new taxes, fees or charges, or changes in the rates thereof, shall accrue on the first (1st) day of the quarter next
following the effectivity of the ordinance imposing such new levies or rates.
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 Time of Payment
Unless otherwise provided in the LGC, all local taxes, fees, and charges shall 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 of payment of such taxes, fees, or charges without surcharges or penalties, but only for a period not exceeding six (6)
months.

Surcharges and Penalties on Unpaid Taxes, Fees, or Charges

The Sanggunian may impose a surcharge not exceeding twenty-five percent (25%) of the amount of taxes, fees or charges not
paid on time and an interest at the rate not exceeding two percent (2%) per month of the unpaid taxes, fees or charges including
surcharges, until such amount is fully paid but in no case shall the total interest on the unpaid amount or portion thereof exceed
thirty-six (36) months. The surcharge is not imposed for unpaid real property and related taxes.

Illustration 5.1 PENALTY FOR UNPAID TAXES

A taxpayer failed to pay a local tax amounting to P100,000. Compute the total amount payable under each of the following
scenarios:
Scenario Unpaid Tax Delay

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 A Real Property Tax 8 months
B Business Tax 15 months
C Real Property ax 40 months
D Business ax 50 months
The total amount to be paid is computed as follows:
A B C D
Basic Tax Due 100,000 100,000 100,000 100,000
Surcharge - 25,000 - 25,000
Interest 16,000 37,500 72,000 90,000
Total 116,000 162,500 172,000 215,000
Collection of Local Revenues by Treasurer
All local taxes, fees, and charges shall be collected by the provincial, city, municipal, or Barangay treasurer, or their duly
authorized deputies. The provincial, city or municipal treasurer may designate the Barangay treasurer as his deputy to collect
local taxes, fees, or charges. In case a bond is required for the purpose, the provincial, city or municipal government shall pay
the premiums thereon in addition to the premiums of bond that may be required under the LGC.

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 Tax Discount for Advanced Prompt Payment
If the basic real property tax and the additional taxes are paid in advance in accordance with the prescribed schedule of payment,
the Sanggunian concerned may grant a discount not exceeding twenty percent (20%) of the annual tax due.

Most local government units practice giving the maximum discount if payment is made before the taxes accrue on January 1.
Some also still provide a lower discount if payment is made on a set date prior to the deadline.

Illustration 5.2 TAX DISCOUNT

An owner of real property taxes is subject to real property taxes of P80,000. The local government unit provides 20% discount
if paid on or before yearend of the previous year and reduced 10% discount if paid on or before January 15.
The amount to be paid is computed as follows:
December January 15
Basic Tax Due 80,000 80,000
Discount (16,000) (8,000)
Total 64,000 72,000

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 SITUS OF LOCAL BUSINESS TAX
With Sales Outlet
For purposes of collection of local business taxes, manufacturers, assemblers, repackers, brewers, distillers, rectifiers and
compounders of liquor, distilled spirits and wines, millers, producers, exporters, wholesalers, distributors, dealers, contractors,
banks and other financial institutions, and other 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. In cases where there is no such branch or sales outlet in the city or
municipality where the sale or transaction is made, the sale shall be duly recorded in the principal office and the taxes due shall
accrue and shall be paid to such city or municipality.

With Factories and/or Plantations

The following sales allocation shall apply to manufacturers, assemblers, contractors, producers, and exporters with factories,

project offices, plants, and plantations in the pursuit of their business:

a. Thirty percent (30%) of all sales recorded in the principal office shall be taxable by the city or municipality where the
principal office is located; and
b. Seventy percent (70%) of all sales recorded in the principal office shall be taxable by the city or municipality where the
factory, project office, plant, or plantation is located.

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 In case of a plantation located at a place other than the place where the factory is located, said seventy percent (70%) mentioned
above shall be divided as follows:

a. Sixty percent (60%) to the city or municipality where the factory is located; and
b. Forty percent (40%) to the city or municipality where the plantation is located.

In case where a manufacturer, assembler, producer, exporter or contractor has two (2) or more factories, project offices, plants,
or plantations located in different localities, the seventy percent (70%) above shall be prorated among the localities where the
factories, project offices, plants, and plantations are located in proportion to their respective volume or production during the
period for which the tax is due.
Illustration 5.3 SITUS
A business has its sales outlet and plantation in Municipality of Santa Filomena, whereas its principal office and factory are
both located in Municipality of Sta. Rita. The sales outlet and principal office respectively made P3,200,000 and P900,000 sales.
The total sales shall be allocated as follows:
Sales Outlet Principal Office Factory Plantation
Sales 3,200,000 900,000
Allocation (630,000) 378,000 252,000
Total 3,200,000 270,000 378,000 252,000

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 CIVIL REMEDIES
The Local Government Code provides the following remedies which may be availed of for the collection of any delinquent local
tax, fee, charge, or other revenue.

Local Government's Lien

Local taxes, fees, charges and other revenue constitute a lien, superior to all liens, charges or encumbrances in favor of any
person, enforceable by appropriate administrative or judicial action, not only upon any property or rights therein which may
be subject to the lien but also upon property used in business, occupation, practice of profession or calling, or exercise of privilege
with respect to which the lien is imposed. The lien may only be extinguished upon full payment of the delinquent local taxes
fees and charges including related surcharges and interest.

Administrative Actions
The civil remedies for the collection of local taxes, fees, and surcharges and interest resulting from delinquency shall be by
administrative action thru distraint of goods, chattels, or effects, and other personal of whatever character, including stocks and
other securities, debts, credits, bank accounts, and interest in and rights to personal property, and by levy upon real property
and interest in or rights to real property.
Distraint of Personal Property
The remedy by distraint shall proceed as follows:

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 1. Seizure - Upon failure of the person owing any local tax, fee, or charge to pay the same at the time required, the local
treasurer or his deputy may, upon written notice, seize or confiscate any personal property belonging to that person
or any personal property subject to the lien in sufficient quantity to satisfy the tax, fee, or charge in question, together
with any increment thereto incident to delinquency and the expenses of seizure.
2. Accounting of Distrained Goods - The officer executing the distraint shall make or cause to be made an account of the
goods, chattels or effects distrained.
3. Publication - The officer shall forthwith cause a notification to be exhibited in not less than (3) public and conspicuous
places in the territory of the local government unit where the distraint is made, specifying the time and place of sale,
and the articles distrained. The time of sale shall not be less than twenty (20) days after notice to the owner or possessor
of the property as above specified and the publication or posting of the notice.
4. Release of Distrained Property upon Payment prior to Sale - If at any time prior to the sale, all the proper charges are
paid to the officer conducting the sale, the goods or effects distrained shall be restored to the owner.
5. Procedure of Sale - At the time and place fixed in the notice, the officer conducting the sale sell the goods or effects so
distrained at public auction to the highest bidder for cash. Within five (5) days after the sale, the local treasurer shall
make a report of the proceedings in writing to the local chief executive concerned. Should the property distrained be
not disposed of within one hundred and twenty (120) days from the date of distraint, the same shall be considered as
sold to the local government unit concerned for the amount of the assessment made and to the extent of the same
amount, the tax delinquencies shall be cancelled.

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 6. Disposition of Proceeds - The proceeds of the sale shall be applied to satisfy the tax, including the surcharges, interest,
and other penalties incident to delinquency, and the expenses of the distraint and sale. The balance over and above
what is required to pay the entire claim shall be returned to the owner of the property sold. Where the proceeds of the
sale are insufficient to satisfy the claim, other property may, in like manner, be distrained until the full amount due,
including all expenses, collected.
Levy on Real Property
After the expiration of the time required to pay the tax, fee, or charge, real property may be levied on before, simultaneously, or
after the distraint of personal property belonging to the delinquent taxpayer.
Further Distraint or Levy
The remedies by distraint and levy may be repeated, if necessary, until the full amount due, including all expenses, is collected.
Personal Property Exempt from Distraint or Levy
The following property shall be exempt from distraint and the levy, attachment or execution thereof for delinquency in the
payment of any local tax, fee or charge, including the related surcharge and interest:
(a) Tools and the implements necessarily used by the delinquent taxpayer in his trade or employment;
(b) One (1) horse, cow, carabao, or other beast of burden, such as the delinquent taxpayer may select, and necessarily
used by him in his ordinary occupation;

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 (c) His necessary clothing, and that of all his family;
(d) Household furniture and utensils necessary for housekeeping and used for that purpose by the delinquent taxpayer,
such as he may select, of a value not exceeding Ten thousand pesos (Php 10,000.00);
(e) Provisions, including crops, actually provided for individual or family use sufficient for four (4) months;
(f) The professional libraries of doctors, engineers, lawyers and judges;
(g) One fishing boat and net, not exceeding the total value of Ten thousand pesos (Php10,000.00), by the lawful use of
which a fisherman earns his livelihood; and
(h) Any material or article forming part of a house or improvement of any real property.

Judicial Action
The LGU concerned may enforce collection by civil action in any court of competent jurisdiction. The case shall be filed by the
local treasurer.

Either of these remedies or all may be pursued concurrently or simultaneously at the discretion of the LGU concerned.

TAXPAYER REMEDIES
The taxpayer has the following remedies for local taxes.

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 Periods of Assessment and Collection
The prescriptive period for the assessment and collection of local taxes is as follows.
Action After Effectivity of LGC Before Effectivity of LGC
Assessment 5 years from date the local tax became due 3 years from date the local tax became due
5 years from the date of assessment by 3 years from the date of assessment
Collection
administrative or judicial action

No action for the assessment and collection of such taxes, fees, or charges, whether administrative or judicial, shall be instituted
after the expiration of such period.

In case of fraud or intent to evade the payment of taxes, fees, or charges, the same may be assessed within ten (10) years from
discovery of the fraud or intent to evade payment.

Suspension of Prescription Period

The running of the periods of prescription provided in the preceding paragraphs shall be for the time during which:

1. The treasurer is legally prevented from making the assessment or collection;

2. The taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which
to assess or collect; and
3. The taxpayer is out of the country or otherwise cannot be located.
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 Protest of Assessment
Assessments made by the local treasurer can be protested by the taxpayer by
following the process illustrated on the right.

Notes
1. There is no requirement that the local tax be paid before the taxpayer can file
a protest to contest the assessment.
2. Administrative remedies must first be exhausted before the taxpayers can
seek redress in the Regional Trial Court.
3. The prescriptive period included in the illustration must be followed,
otherwise the protest will become ineffective.

Injunction
Injunction (with the RTC) against the collection of local taxes is available but only
when the following conditions concur:

a. Such a suit is not forbidden by law;

b. The ground for issuing an injunction is to prevent the collection of
wrongful taxes by a municipality; and

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 c. There is no other adequate remedy to redress the injury to property which would be inflicted by enforcing the payment
of the tax.

Claim for Refund or Tax Credit

Taxes, fees or charges already paid may be claimed as tax refund or tax credit
subject to the process illustrated below.
Notes
1. All taxpayers entitled to a refund or tax credit shall file with the local
treasurer a claim in writing duly supported by evidence of payment.
2. Exhaustion of administrative remedies is required.
3. No case or proceeding shall be entertained in any court after the
expiration of two (2) years from the date of the payment of such tax, fee,
or charge, or from the date the taxpayer is entitled to a refund or credit.

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 Protest and Assessment Appeals for Real Property Taxes
A more stringent process for real property taxes is illustrated on the right.

Notes
1. Within the same 30 days from the time of the receipt of the adverse decision
from LBAA, the taxpayer may also file a Motion for Reconsideration with the
LBAA.
2. A taxpayer must first exhaust his administrative remedies.
3. Appeal take to the CTA shall not suspend the payment, levy, distraint, and/or
sale of any property of the taxpayer for the satisfaction of his tax liability.

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 Self-Check!
Basing on your readings, answer the following questions.
1. Explain the source of the local government’s power to tax.
2. Differentiate taxes, fees and charges.
3. Explain the different rules applicable to tax ordinances and revenue measures.
4. Explain the different rules applicable to the collection of local taxes.
5. What are the remedies available to the local government? to the taxpayer?

Exercise 5.1 IDENTIFICATION

Identify the terminologies best described by the following statements.
1. The source of the local taxing power
2. The one vested to exercise the power of taxation in the provincial level
3. These refer to pecuniary liability, as rents or fees against persons or property
4. This means a charge fixed by law or ordinance for the regulation or inspection of a business or activity
5. This refers to the tax laws in the local level
6. Any person who, either for himself or on commission, travels from place to place and sells his goods or offers to sell and
deliver the same

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 Exercise 5.2 MULTIPLE CHOICE
Choose the best answer from the choices provided.
1. What is the maximum imposable surcharge penalty for unpaid local taxes?
a. 10%
b. 15%
c. 20%
d. 25%
2. What is the maximum imposable total interest penalty for unpaid local taxes?
a. 2%
b. 18%
c. 36%
d. 72%
3. When do local taxes normally accrue?
a. January 1
b. January 20
c. June 30
d. December 31

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 4. Which of the following properties is not exempt from levy or distraint?
a. Clothing of the taxpayer
b. Professional library of a lawyer
c. Household furniture amounting to P15,000
d. A carabao used by a farmer
5. Which of the following is not a civil remedy available to the LGU?
a. Lien
b. Protest
c. Levy
d. Distraint

Exercise 1.3 PRESCRIPTION PERIODS

Write the prescription periods, including the reckoning date, of the following events:
1. Filing for claim for tax refund of credit
2. Filing for protest for assessment
3. Assessment of local tax before effectivity of LGC
4. Collection of local tax after effectivity of LGC

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 5. Judicial action for a claim for tax refund/credit
6. Appeal to the Court of Tax Appeals
7. Appeal to CBAA for real property taxes
8. Filing a Petition for Review with the CTA regarding real property taxes

Problem 5.1 PENALTY FOR UNPAID TAXES

A local tax was due for P218,000.
Compute for the total amount due assuming under each of the following scenarios:
Due for 1.5 years Due for 4 years
Business Tax
Real Property Tax

Problem 5.2 SITUS OF LOCAL BUSINESS TAX

A business entity has its principal office in the Municipality of San Nicolas where it made P2,500,000 worth of sales. It has a
sales outlet in Laoag City which made P6,500,000 worth of sales. It also has its factory located in the Municipality of Sarrat and
a plantation located in the Municipality of Vintar.

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