2. Taxing Powers of Local Government Units (LGUs)

Grant of Local Taxing Power Under The Local Government Code

Each local government unit shall have the power to:

• Create its own sources of revenues; and
• 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. (1987 Constitution, Article X, Section 5¹; LGC, Sec. 129²)

Note: This is distinguished from national taxes that do not accrue exclusively to the national government but are shared to the local governments through the National Tax Allotment (formerly the Internal Revenue Allotment). (NIRC, Title XI³)

The power to tax is primarily vested in the Congress; however, in our jurisdiction, it may be exercised by local legislative bodies, no longer merely by virtue of a valid delegation as before, but pursuant to direct authority conferred by Section 5, Article X of the Constitution⁴. Under the latter, the exercise of the power may be subject to such guidelines and limitations as the Congress may provide which, however, must be consistent with the basic policy of local autonomy. (Mactan Cebu International Airport Authority v. Marcos, G.R. No. 120082, 11 September 1996⁵)

Authority to Prescribe Penalties For Tax Violations And Limitations Thereon

GR: The sanggunian is authorized to prescribe fines or other penalties for violations of tax ordinances:

• Amount: P1,000 - P5,000;
• Imprisonment: 1 month - 6 months;
• Such fine or other penalty, or both, shall be imposed at the discretion of the court.

EXCEPTION: The sangguniang barangay may prescribe a fine of P100 - P1,000. (LGC, Sec. 516⁶)

Authority to Grant Local Tax Exemptions

LGUs may, through ordinances duly approved, grant tax exemptions, incentives or reliefs under such terms and conditions, as they may deem necessary. (LGC, Sec. 192⁷)

Tax exemptions shall be conferred through the issuance of a non-transferable Tax Exemption Certificate. (IRR of LGC, Art. 282⁸)

Withdrawal of Exemptions

Unless otherwise provided by the LGC, tax exemptions, incentives, or reliefs granted to, or presently enjoyed by all persons, whether natural or juridical, including GOCCs, are hereby withdrawn upon the effectivity of the LGC, except the following:

• Local Water districts;
• Cooperatives duly registered under RA 6938⁹ (now governed by RA 9520, the Philippine Cooperative Code of 2008); and
• Non-stock and non-profit Hospitals and Educational institutions; (LGC, Sec. 193)¹⁰
• Business enterprises certified by the Board of Investments (BOI) as:
• Pioneer – for a period of 6 years from the date of registration; or
• Non-pioneer for a period of 4 years from the date of registration;
• Business Entity, association, or cooperatives registered under R.A. 6810¹¹;
• Printer and/or publisher of books or other reading materials prescribed by DECS as school texts or references, insofar as receipts from the printing and/or publishing thereof are concerned. (IRR of LGC, Art. 283)
• See all the RPT exemptions. (LGC, Sec. 234)¹²

Note: Business and economic enterprises operating within export processing zones administered by the Export Processing Zone Authority shall continue to enjoy the tax exemption privileges and tax incentives granted in P.D. 66¹³, as amended, unless repealed by law. (IRR of LGC, Art. 283)

Updated: However, the withdrawal of tax exemptions does not apply to government instrumentalities with corporate powers, whose real properties of public dominion devoted to public use remain exempt from real property tax (Light Rail Transit Authority v. Quezon City, G.R. No. 221626, 9 October 2019).

Tax Exemptions not applicable to Regulatory Fees

The power to grant tax exemptions, tax incentives, and tax reliefs shall not apply to regulatory fees which are levied under the police power of the LGU. (IRR of LGC, Art. 282)¹⁶

Guidelines for the Granting of Tax Exemptions, Tax Incentives and Tax Reliefs (IRR of LGC, Art. 282(b))¹⁷

• Tax exemptions or tax reliefs:
• The same may be granted in cases of the following:
• natural calamities,
• civil disturbance,
• general failure of crops, or
• adverse economic conditions such as substantial decrease in prices of agricultural or agri-based products;
• Ordinance is required;
• It shall apply to all kinds business similarly situated;
• Effective only during the next calendar year for a period not exceeding 12 months as may be provided by the ordinance;
• In the case of shared revenue, the exemption or relief shall only extend to the LGU granting such exemption or relief.
• Tax incentives:
• It shall only be granted to new investments in the locality and the ordinance shall prescribe the terms and conditions;
• It shall only be for a definite period not exceeding 1 calendar year;
• It shall be granted by ordinance passed prior to the 1st day of January of any year;
• It shall apply to all kinds business similarly situated.

Scope of Taxing Power

• Provinces – except as otherwise provided in the LGC, may levy only the taxes, fees, and charges as provided in this Article. (LGC, Sec. 134)¹⁸

Provinces may levy the taxes, fees, and charges prescribed in the LGC Chapter II Article I Secs. 135¹⁹-141, except as otherwise provided in the LGC, including the residual taxing authority under Sec. 186 subject to its conditions.

• Municipalities – may levy the taxes, fees, and charges not otherwise levied by the provinces. (LGC, Sec. 142)²⁰
• Cities – may levy the taxes, fees, and charges which the provinces or municipality may impose.

However, the taxes, fees, and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of the LGC.

The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than 50% except the rates of professional and amusement taxes. (LGC, Sec. 151)²¹

Note: City can tax something even if it is taxed by the province or municipality. But the province and municipality cannot tax the same thing.

• Barangays – may levy the taxes, fees, and charges, as provided in this Article (LGC Chapter II Article IV Sec. 152)²², which shall exclusively accrue to them. (LGC, Sec. 152)²³

Taxing Powers of Provinces

SCOPE: Except as otherwise provided in the LGC, the province may levy only the taxes, fees, and charges as provided in this Article. (LGC, Sec. 134)²⁴

For provinces, they are limited to what is prescribed in the LGC, as the word is “only.”

A province may impose a tax on quarry resources extracted from public lands but not on private lands. (Lepanto Consolidated Mining Company v. Ambanloc, G.R. No. 180639, 29 June 2010)³⁸

Section 186³⁹ (power to levy other taxes, fees, or charges) allows a province to levy taxes other than those specifically enumerated under the LGC, subject to the conditions specified therein. This finding, nevertheless, affords cold comfort to petitioners as they are still prohibited from imposing taxes on stones, sand, gravel, earth and other quarry resources extracted from private lands. The tax imposed by the Province of Bulacan is an excise tax, being a tax upon the performance, carrying on, or exercise of an activity. (Province of Bulacan v. Court of Appeals, G.R. No. 126232, 20 September 1999)⁴⁰

Franchise Tax

A franchise tax is a tax on the privilege of transacting business in the state and exercising corporate franchise granted by the state. The tax covers special or secondary franchises which refer to the right or privileges conferred upon an existing corporation such as the right to use the streets of a municipality to lay pipes or tracks, erect poles or string wires.

Requisites to be Covered by Franchise Tax:

• It has a “franchise” in the sense of a secondary or special franchise; and
• It is exercising its rights or privileges under this franchise within the territory of the LGU (National Power Corporation v. City of Cabanatuan, G.R. No. 149110, 9 April 2003)⁴¹

Section 137⁴² is categorical in stating that franchise tax can only be imposed on businesses enjoying a franchise. This goes without saying that without a franchise, LGU cannot impose a franchise tax. In this case, the enactment of EPIRA⁴³ separated the transmission and sub-transmission functions of the state-owned Napocor from its generation function, and transferred all its transmission assets to the TRANSCO. Power generation is no longer considered a public utility operation, and companies which shall engage in power generation and supply of electricity are no longer required to secure a national franchise. EPIRA effectively removed power generation from the ambit of local franchise taxes. Hence, as regards Napocor's business of generating electricity, the franchise taxes sought to be collected by the Provincial Government of Bataan are devoid of any statutory basis. (National Power Corporation v. Provincial Government of Bataan, G.R. No. 180654, 21 April 2014)⁴⁴

Amusement Tax

Other businesses not subject to amusement tax:

• Resorts, swimming pools, bath houses, hot springs, and tourist spots (Pelizloy Realty Corporation⁴⁵)
• Professional basketball games – they do not fall within “other places of amusement.” Also, these are already taxed under the NIRC⁴⁶. (PBA v. CA, G.R. No. 119122)⁴⁷

In summary, the provinces may impose tax on the following:

• Transfer of real property ownership;
• Business of printing and publication;
• Franchise;
• Sand, gravel and other quarry resources;
• Professional;
• Amusement; and
• Delivery truck or van.

Fees and Charges for Regulation and Licensing

• On business and occupation except professional taxes reserved for provinces; (LGC, Sec. 147)⁴⁸
• On sealing and licensing of weights and measures; (LGC, Sec. 148)⁴⁹
• Fishery rentals, fees and charges, including the exclusive authority to grant fishery privileges within municipal waters, as well as issue licenses for the operation of fishing vessels of three tons or less.

The sangguniang bayan may:(LGC, Sec. 149)⁵⁰

• Grant fishery privileges to erect fish corrals, oysters, mussels or other aquatic beds or bangus fry areas, within its municipal waters;
• Grant the privilege to gather, take or catch bangus fry, prawn fry or kawag-kawag or fry of other species and fish from the municipal waters by nets, traps or other fishing gears to marginal fishermen free of any rental, fee, charge or any other imposition whatsoever.
• Issue licenses for the operation of fishing vessels of 3 tons or less to qualified applicants.

The imposition of 5% tax on the gross receipts on rentals or lease of space in privately-owned public markets is not income tax, rather, these constitutes as valid license fees for the regulation of the business. (Progressive Development Corporation v. Quezon City, G.R. No. L-36081, 24 April 1989)⁵¹

Situs of Local Taxation (LGC, Sec. 150)⁵²; (IRR of LGC, Art. 243⁵³)

Branch/Sales Office - A fixed place in a locality which conducts operations of the business as an extension of the principal office.

All sales made in a branch/sales office shall be taxed by the city or municipality where the said branch/sales office is located.

Note: Display offices where no stocks or items are stored for sale, although orders for the products may be received there are not considered as branch office.

Warehouse - A building utilized for the storage of products for sale and from which goods or merchandise are withdrawn for delivery to customers or dealers, or by persons acting in behalf of the business.

Note: If a warehouse does any of the following, it shall be considered as a branch/sales office:

• accepts orders; or
• issues sales invoices.

Principal Office - The head or main office of the business.

If the sale is made in a place where there is no branch/sales office, it shall be recorded and taxed by the city or municipality where the principal office is located.

All sales recorded in the principal office where the business has factories, project office, plant, and plantations in different places, the following sales allocation shall be followed:

• 30% shall be taxed by the city or municipality where the principal office is located; and
• 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.
• Where the plantation and the factory have different location, this 70% shall be divided as follows:
• 60% to the city or municipality where the factory is located; and
• 40% to the city or municipality where the plantation is located.
• Where 2 or more factories, project offices, plants, or plantations have different locations, this 70% shall be prorated among the localities where the factories, project offices, plants, and plantations are located in proportion to their respective volumes of production.

GR: If there is a branch/sales office, the sale shall be taxed in that locality.

EXCEPTION: If there is no branch/sales office, the sale shall be taxed in the locality where the principal office is located, subject to the rule on allocation, if applicable.

Plantation - A tract of agricultural land planted to trees or seedlings whether fruit bearing or not, uniformly spaced or seeded by broadcast methods or normally arranged to allow highest production, including inland fishing ground.

Experimental Farms - An agricultural land utilized by a business or corporation to conduct studies, tests, researches or experiments involving agricultural, agribusiness, marine, or aquatic, livestock, poultry, dairy and other similar products for the purpose of improving the quality and quantity of goods or products.

LGUs where only experimental farms are located shall not be entitled to the sales allocation.

For manufacturers or producers which engage the services of an independent contractor to produce or manufacture some of their products, same rules shall apply except that the factory or plant and warehouse of the contractor utilized for the production and storage of the manufacturers’ products shall be considered as the factory or plant and warehouse of the manufacturer.

Taxing powers of Cities

SCOPE: Except as otherwise provided in the LGC, the city may levy the taxes, fees, and charges which the province or municipality may impose. (LGC, Sec. 151)⁵⁴

The city may:

• Levy and collect any of the taxes, fees, charges, and other impositions that the province and municipality may impose.

Note: The tax rates that the city may levy may exceed the maximum rates allowed for the province or municipality by not more than 50% except the rates of professional and amusement taxes.

• Professional tax – not exceeding P300
• Amusement tax – Not more than 30% of the gross receipts from admission fees.

Note: These 2 taxes are uniform for the city and the province.

• Levy and collect a percentage tax on a business not otherwise specified in the preceding paragraphs of LGC Section 143, under Section 143(h)⁵⁵, at rates not exceeding 3% of the gross sales or receipts of the preceding calendar year. (IRR of LGC, Art. 237)⁵⁶

However, the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of the LGC. (LGC, Sec. 151)

The proceeds of the tax on sand, gravel, and other quarry resources in highly-urbanized cities shall be distributed follows:

• Highly urbanized city – 60%
• Barangay where extracted – 40% (IRR of LGC, Art. 239)⁵⁷

Taxing Powers of Barangays

SCOPE: The barangays may levy the following taxes and charges, which shall exclusively accrue to them:

• Taxes - On stores or retailers with fixed business establishments with gross sales of receipts of the preceding calendar year of P50,000 or less for cities and P30,000 or less, in the case of municipalities, rate = not exceeding 1% on gross sales or receipts.
• Service Fees or Charges for services rendered in connection with the regulations or the use of barangay-owned properties or service facilities such as palay, copra, or tobacco dryers.
• Barangay Clearance. - No city or municipality may issue any license or permit for any business or activity unless a clearance is first obtained from the barangay where such business or activity is located or conducted.

Note: The application for clearance shall be acted upon within 7 working days from its filing. If not issued within 7 days, the city or municipality may issue the said license or permit.

• Other fees and Charges. - The barangay may levy reasonable fees and charges:
• On commercial breeding of fighting Cocks

Note: Commercial breeding – with annual sale of more than 5 fighting cocks of a duly registered breeder.

• Cockfights and cockpits;
• On places of Recreation which charge admission fees; and
• On Billboards, signboards, neon signs, and outdoor ads. (LGC, Sec. 152⁶⁰; IRR of LGC, Art. 240⁶¹)

COMMON REVENUE-RAISING POWERS OF LGUS

• Service Fees and Charges for services rendered. (LGC, Sec. 153⁶²)
• Public Utility Charges for the operation of public utilities owned, operated and maintained by LGUs within their jurisdiction. (LGC, Sec. 154⁶³)
• Toll Fees or Charges for the use of any public road, pier, or wharf, waterway, bridge, ferry or telecommunication system funded and constructed by the LGU concerned. (LGC, Sec. 155⁶⁴)

Exceptions to Collection of Toll Fees or Charges:

• Officers and enlisted men of the AFP and PNP on mission,
• Post office personnel delivering mail,
• Physically handicapped,
• Disabled citizens who are sixty-five (65) years or older. (LGC, Sec. 155)

Note: When public safety and welfare so requires, the sanggunian may discontinue the collection of the tolls, and thereafter the said facility shall be free and open for public use. (LGC, Sec. 155)

COMMUNITY TAX

Only cities or municipalities may levy a community tax. (LGC, Sec. 156⁶⁵)

A Community Tax Certificate (CTC) shall be issued to every person or corporation upon payment of the community tax. (LGC, Sec. 162⁶⁶)

A CTC may also be issued to any person or corporation not subject to the community tax upon payment of P1. (LGC, Sec. 162)

Individuals

Requisites:

• Resident of the Philippines
• Eighteen (18) years of age or over
• Either:
• regularly employed on a wage or salary basis for at least 30 consecutive working days during any calendar year, or
• engaged in business or occupation, or
• owner of real property with an aggregate assessed value of P1,000 or more, or
• required by law to file an income tax return. (LGC, Sec. 157⁶⁷)

Amount to Pay for Individuals

• P5 - Basic annual community tax; and
• P1 - Annual additional tax - for every P1,000 of income regardless of whether from business, exercise of profession or from property;
• Limit: up to P5,000 only;
• In the case of husband and wife, the additional tax shall be based upon the total property owned by them and the total gross receipts or earnings derived by them. (LGC, Sec. 157)

Juridical Persons

Requisites:

• Corporation (domestic or resident foreign);
• Engaged in or doing business in the Philippines. (LGC, Sec. 158⁶⁸)

Amount to Pay for Juridical Persons

• P500 - Annual community tax; and
• Annual additional tax:
• P2 - for every P5,000 worth of real property in the Philippines owned by it during the preceding year based on the valuation used for the payment of real property tax under existing laws, found in the assessment rolls of the city or municipality where the real property is situated; and
• P2 - for every P5,000 of gross receipts or earnings derived by it from its business in the Philippines during the preceding year.
• Limit: up to P10,000 only.
• The dividends received by a corporation from another corporation however shall, for the purpose of the additional tax, be considered as part of the gross receipts or earnings of said corporation. (LGC, Sec. 158)

Exemptions

• Diplomatic and consular representatives; and
• Transient visitors when their stay in the Philippines does not exceed 3 months. (LGC, Sec. 159⁶⁹)

Place of Payment

• Individual - place of residence
• Juridical person - location of principal office
• In case of branch, sales office or warehouse where sales are made and recorded, corresponding community tax shall be paid to the LGU where such branch, sales office or warehouse is located. (IRR of LGC, Art. 246⁷⁰)

It shall be unlawful for any city or municipal treasurer to collect community tax outside the territorial jurisdiction of the city or the municipality. Any person, natural or juridical, who pays community tax to a city or municipality other than the city or municipality where his residence, or principal office in the case of juridical persons, is located shall remain liable to pay such tax to the city or municipality concerned. (IRR of LGC, Art. 246)

Time for Payment

Individuals - Accrue on January 1 of each year

GR: Payment shall not be later than the last day of February of each year.

EXCEPTIONS:

• If a person reaches the age of 18 years or loses the benefit of exemption on or before March 31, he shall have 20 days to pay the community tax without becoming delinquent.
• If a person reaches the age of 18 years, or loses the benefit of exemption after March 31 but on or before June 30, he shall be liable for the community tax for that year. (LGC, Sec. 161)
• If a person comes to reside in the Philippines, or reaches the age of 18 years, or loses the benefit of exemption on or after July 1, he shall not be subject to the community tax for that year.

Juridical persons - If established and organized on or before June 30, it shall be liable for the community tax for that year. Conversely, if it is established and organized July 1, it shall not be subject to the community tax for that year.

If established and organized on or before March 31, it shall have 20 days to pay.

If the community tax is not paid on time, the taxpayer is liable for interest at 24% per annum on the unpaid amount from the due date until payment. (LGC, Sec. 161⁷¹)

When Presentation of CTC is Required

When an individual subject to the community tax:

• acknowledges any document before a notary public;
• takes the oath of office upon election or appointment to any position in the government service;
• receives any license, certificate, or permit from any public authority;
• pays any tax or fee;
• receives any money from any public fund;
• transacts other official business; or
• receives any salary or wage from any person or corporation with whom such transaction is made or business done or from whom any salary or wage is received to require such individual to exhibit the community tax certificate.

However, the presentation of CTC shall not be required in connection with the registration of a voter.

When, through its authorized officers, any corporation subject to the community tax:

• receives any license, certificate, or permit from any public authority,
• pays any tax or fee,
• receives money from public funds, or
• transacts other official business.

When the CTC is required, it shall be the one issued for the current year, except for the period from January until April 15, in which case, the CTC issued for the preceding year shall suffice. (LGC, Sec. 163)

Distribution of Proceeds

The proceeds of the tax shall accrue to the general funds of the cities, municipalities and barangays except a portion thereof which shall accrue to the general fund of the national government to cover the actual cost of printing and distribution of the forms and other related expenses.

The city or municipal treasurer shall deputize the barangay treasurer to collect the community tax in their respective jurisdictions, provided that said barangay treasurer shall be bonded in accordance with existing laws.

If the proceeds are collected by the city or municipal treasurer, it shall accrue entirely to the general fund of the city or municipality concerned. However, if it is collected through the barangay treasurers, it shall be apportioned as 50-50 to the general fund of the city or municipality and to the barangay where the tax is collected, respectively. (LGC, Sec. 164)

COMMON LIMITATIONS ON THE TAXING POWERS OF LGUS

LGUs cannot levy

• Income tax, except on banks and other financial institutions;

Section 131(e) defines “banks and other financial institutions,” which excludes holding companies. Section 3.A.02(h) of the Revised Makati Revenue Code imposes an LBT on the dividend income of banks and other financial institutions. Section 3.A.02(p), however, makes holding companies, such as MHI, liable for the same business tax. Section 3.A.02(p) of the Revised Makati Revenue Code violates the limit set by Section 133(a) of the LGC, which prohibits the imposition of income tax except when levied on banks and other financial institutions. The said provision is therefore an ultra vires exercise of local taxing power that cannot be given effect without violating the principle that an ordinance must conform with and can neither amend nor repeal a statute. (Michigan Holdings, Inc. v City Treasurer of Makati, CTA Case No. 1093, 2015)

• Documentary stamp tax;
• Estate Tax, Inheritance, gifts, legacies and other acquisitions mortis causa, except as otherwise provided;
• 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;
• 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;
• Taxes, fees or charges on Agricultural and aquatic products when sold by marginal farmers or fishermen;
• Taxes on business enterprises certified to by the Board of Investments as:
• pioneer – 6 years from registration or
• non-pioneer – 4 years from registration;
• Excise taxes on articles enumerated under the NIRC, as amended and taxes, fees, and charges on Petroleum products;

The language of Section 133(h) makes plain that the prohibition with respect to petroleum products extends not only to excise taxes thereon, but all "taxes, fees and charges." While local government units are authorized to burden all such other class of goods with "taxes, fees and charges", excepting excise taxes, a specific prohibition is imposed barring the levying of any other type of taxes with respect to petroleum products. (Petron Corporation v. Tiangco, 2008, J. Tinga)

• Percentage or VAT on sales, barters or exchanges or similar transactions on goods or services except as otherwise provided;

A tax that bears a direct relation to the volume of sales (or when there is a set ratio on the volume of sales and the amount of tax) may not be imposed by the local government since these amounts to percentage tax on sales. (Serafica v. Treasurer of Ormoc City, G.R. No. L24813, 1969, C.J. Concepcion)

• 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 the LGC;

Section 133 of the LGC prohibits LGUs from imposing taxes on the gross receipts of transportation contractors, persons engaged in the transportation of passengers or freight by hire, and common carriers by air, land, or water. This is an exception to the grant of taxing power given to municipalities and cities per Section 143(h) of the LGC. (City of Manila v. Colet, G.R. No. 120051, 2014)

• 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;
• Taxes, fees, or other charges on Philippine products actually Exported, except as otherwise provided;
• Taxes, fee, or charges, on Countryside and Barangay Business Enterprises under R.A. 6810 and cooperatives duly registered under R.A. 9520 (Philippine Cooperative Code of 2008), which repealed R.A. 6938 (the former Cooperative Code cited in the LGC); and
• Taxes, fees or charges of any kind on the National Government, its agencies and instrumentalities, and local government units. (LGC, Sec. 133)

REQUIREMENTS OF A VALID TAX ORDINANCE

Authority to Issue Local Tax Ordinance

The power to impose a tax, fee or charge or to generate revenue is exercised by the sanggunian of the LGU concerned through an appropriate ordinance. (LGC, Sec. 132)

Sangguniang Panlalawigan – for provinces

Sangguniang Panglungsod – for cities

Sangguniang Bayan – for municipalities

Sangguniang barangay – for barangays (LGC, Secs. 132 and 391(a)(2))

Procedure for Approval and Effectivity of Local Tax Ordinances

The procedure applicable to local government ordinances in general should be observed.

General Requirements for an Ordinance

• Necessity of quorum; (LGC, Sec. 53)
• Submission for approval by the local chief executive; (LGC, Sec. 54)
• The matter of veto and overriding the same; (LGC, Sec. 55)
• The publication and effectivity; (LGC, Sec. 59)

Specific Requirements for Tax Ordinance

• Public hearings are required before any local tax ordinance is enacted. (IRR of LGC, Art. 276)
• Within 10 days after their approval, publication in full for 3 consecutive days in a newspaper of general circulation. In the absence of such newspaper in the province, city or municipality, the ordinance may be posted in at least two conspicuous and publicly accessible places. (LGC, Sec. 188)
• Copies of all provincial, city, and municipal and Barangay tax ordinances and revenue measures shall be furnished the respective local treasurers for public dissemination. (LGC, Sec. 189)

Public hearing is Required

• Within 10 days from filing of any proposed tax ordinance or revenue measure, the same shall first be published for 3 consecutive days in a newspaper of local circulation or shall be posted simultaneously in at least 4 conspicuous public places within the territorial jurisdiction of the LGU concerned.
• In addition to the requirement for publication or posting, the sanggunian concerned shall cause the sending of written notices of the proposed ordinance, enclosing a copy thereof, to the interested or affected parties operating or doing business within the territorial jurisdiction of the LGU concerned.
• The notice shall specify the date or dates and venue of the public hearing. The initial public hearing shall be held not earlier than 10 days from the sending out of notice, or the last day of publication, or date of posting thereof, whichever is later.
• At the public hearing, all interested parties shall be accorded an opportunity to appear and present or express their views, comments and recommendations, and such public hearing shall continue until all issues have been presented and fully deliberated upon and/or consensus is obtained, whether for or against the enactment of the proposed tax ordinance or revenue measure.
• The secretary of the sanggunian shall prepare the minutes of such public hearing and shall attach to the minutes the position papers, memoranda, and other documents submitted by those who participated.
• No tax ordinance or revenue measure shall be enacted or approved in the absence of a public hearing duly conducted. (IRR of LGC, Art. 276; Figuerres v. CA, G.R. No. 119172, March 25, 1999)

In case the effectivity of any tax ordinance or revenue measure falls on any date other than the beginning of the quarter, the same shall be considered as falling at the beginning of the next ensuing quarter and the taxes, fees, or charges due shall begin to accrue therefrom. (IRR of LGC, Art. 276)

A municipal tax ordinance which prescribes a set ratio between the amount of the tax and the volume of sales of the taxpayer imposes a sales tax and is null and void for being beyond the power of a municipality to enact. (Arabay, Inc. V. CFI of Zamboanga, G.R. No. L-37684, 1975, J. Castro)

TAXPAYER’S REMEDIES

Protest of Assessment

• The Local Treasurer or his duly authorized representative shall issue a notice of assessment stating the nature of the tax, fee, or charge, the amount of deficiency, surcharges, interests and penalties if he finds that correct taxes, fees, or charges have not been paid.
• Within 60 days from the receipt of the notice of assessment, the taxpayer may file a written protest with the Local Treasurer contesting the assessment, otherwise the assessment shall become final and executory.
• The Local Treasurer shall decide the protest within 60 days from the time of filing of the written protest.
• If the protest is found to be meritorious, he shall issue a notice cancelling wholly or partially the assessment
• If the assessment is found to be wholly or partly correct, the Local Treasurer shall deny the protest wholly or partly with notice to the taxpayer.
• The taxpayer has 30 days from the receipt of the denial of the protest or from the lapse of the 60-day period within which to appeal with the court of competent jurisdiction, otherwise the assessment becomes conclusive and unappealable. (LGC, Sec. 195).

Note: Unlike a disputed real property tax assessment where payment under protest is generally required, a protest against a disputed Notice of Assessment for deficiency local tax need not be preceded or accompanied by payment under protest.

Where no payment is made, the taxpayer's procedural remedy is governed strictly by Section 195. That is, in case of whole or partial denial of the protest, or inaction by the local treasurer, the taxpayer's only recourse is to appeal the assessment with the court of competent jurisdiction. The appeal before the court does not seek a refund but only questions the validity or correctness of the assessment.

Where payment was made, the taxpayer may maintain a court action protesting the assessment (LGC, Sec. 195) and at the same time seeking a refund of the taxes (LGC, Sec. 196) (City of Manila v. Cosmos Bottling Corporation, G.R. No. 196681, June 27, 2018, J. Martires)

Jurisdiction of Courts Over Local Taxation Cases

With the amendment brought by RA No. 9282, the Court of Tax Appeals now has appellate jurisdiction over local taxation cases decided by the RTC in the exercise of its appellate or original jurisdiction.

The case which arose from the dispute between Napocor and the Provincial Government of Bataan over the purported franchise tax delinquency of Napocor is a local tax case that is within the exclusive appellate jurisdiction of the CTA, not the CA. Although the complaint filed with the trial court is a Petition for declaration of nullity of foreclosure sale with prayer for preliminary mandatory injunction, a reading of the petition shows that it essentially assails the correctness of the local franchise tax assessments. In order for the trial court to resolve the complaint, the issues regarding the correctness of the tax assessment and collection must also necessarily be dealt with. Hence, the CA correctly dismissed the appeal for lack of jurisdiction. (NAPOCOR v. Provincial Government of Bataan, G.R. No. 180654, J. Leonen)

Regular judicial courts are not prohibited from enjoining the collection of local taxes, subject to Rule 58 (preliminary injunction) of the Rules of Court.

Injunction – if irreparable damage would be caused to the taxpayer and no adequate remedy is available.

Unlike the NIRC, the Local Tax Code does not contain any specific provision prohibiting courts from enjoining the collection of local taxes. Such statutory lapse or intent may have allowed preliminary injunction where local taxes are involved. But it cannot negate the procedural rules and requirements under Rule 58 of the Rules of Court (Valley Trading Co. v. CFI of Isabela, 171 SCRA 501, 1989, J. Regalado)

Claim for Refund or Tax Credit for Erroneously or Illegally Collected Tax, Fee or Charge

A written claim for refund or credit must be filed with the Local Treasurer for the recovery of any tax, fee, or charge erroneously or illegally collected.

The claim must be filed within 2 years from:

• date of the payment of such tax, fee, or charge, or
• date the taxpayer is entitled to a refund or credit. (LGC, Sec. 196). Thus, a tax paid pursuant to an ordinance that was judicially declared invalid may still be recovered within two years from finality of the judgment. (ICTSI v. City of Manila, CTA AC No. 11, Mar. 10, 2021)

Note: Actual payment is required under Sec. 196, unlike in Sec. 195 that can be resorted to even without payment.

Note: Notice of Assessment is required in Sec. 195 but not in Sec. 196.

What determines the appropriate remedy between Sec. 195 and Sec. 196 is the local government's basis for the collection of the tax. It is explicitly stated in Sec. 195 that it is a remedy against a notice of assessment issued by the local treasurer, upon a finding that the correct taxes, fees, or charges have not been paid. Here, no notice of assessment for deficiency taxes was issued by the City Treasurer. While the receipts state the amount and nature of the tax assessed, they do not contain any amount of deficiency, surcharges, interests, and penalties due from Corp A. They cannot be considered the "notice of assessment" required under Sec. 195. Consequently, Section 196 applies. (International Container Terminal Services v. City of Manila, G.R. No. 185622, October 17, 2018, J. Leonen)

Corp A sent letters of claims for refund for the first three quarters it paid taxes due to alleged double taxation, but the City Treasurer failed to act upon the same. Corp A no longer sent letters for the subsequent quarters because it would essentially just reiterate the same arguments it made in the former letters. Due to the City Treasurer’s inaction, it filed a Petition for Certiorari and Prohibition with prayer for TRO before the RTC. Is Corp A entitled to refund it paid subsequent to third quarter?

Answer: Yes. To be entitled to a refund under Sec. 196, the taxpayer must comply with the following procedural requirements:

• File a written claim for refund or credit with the local treasurer; and
• File a judicial case for refund within 2 years from the payment of the tax, fee, or charge, or from the date when the taxpayer is entitled to a refund or credit.

In this case, while the corporation admittedly failed to file claims for refund for the taxes subsequent to the third quarter, this failure was warranted under the circumstances. First, the filing of the subsequent written claims would have yielded the same result every time. Second, the issue of the Corp A’s claim for refund is a question of law (double taxation). When the issue raised by the taxpayer is purely legal and there is no question concerning the reasonableness of the amount assessed, then there is no need to exhaust administrative remedies. (International Container Terminal Services v. City of Manila, G.R. No. 185622, October 17, 2018, J. Leonen)

Tax Credit

It shall only be applied to future tax obligations of the same taxpayer for the same business and not refundable in cash.

If a taxpayer has no other tax obligation payable to the LGU during the year, his tax credits shall be applied in full during the first quarter of the next calendar year for the same business.

Any unapplied balance of the tax credit shall be refunded in cash in the event that he terminates operation of the business involved within the locality. (IRR of LGC, Art. 286)

In the event that the protest is finally decided in favor of the taxpayer, the amount or portion of the tax protested shall be refunded to the taxpayer, or applied as tax credit against his existing or future tax liability. It is not necessary for petitioner to move for the issuance of the writ of execution because the remedy has already been provided by law. (Coca-Cola Bottlers Philippines, Inc. v. City of Manila, 721 SCRA 1, 2014, J. Peralta)

Difference between Sec. 195 (Protest) and Sec. 196 (Refund/Tax Credit)

(City of Manila v. Cosmos Bottling Corporation, G.R. No. 196681, June 27, 2018, J. Martires; International Container Terminal Services v. City of Manila, G.R. No. 185622, October 17, 2018, J. Leonen)

Action Before The Secretary Of Justice

Protest Against a Newly Enacted Ordinance

Any question on the constitutionality or legality of tax ordinances or revenue measures may be raised on appeal within 30 days from the effectivity thereof to the Secretary of Justice.

The SOJ shall render a decision within 60 days from the date of receipt of the appeal. (LGC, Sec. 187)

Effect of Appeal

The appeal will not suspend the effectivity of the ordinance and the accrual and payment of the tax, fee, or charge levied therein.

The aggrieved party may file appropriate proceedings with a court of competent jurisdiction (RTC):

• within 30 days after receipt of the decision; or
• after the lapse of the 60-day period without the SOJ acting upon it. (LGC, Sec. 187)

The SOJ can declare an ordinance void for not having followed the requirements of the law but he cannot replace it with his own law or he cannot say that is unwise. When the SOJ alters or modifies or sets aside a tax ordinance, he is not allowed to substitute his own judgment for the judgment of the LGU that enacted the measure since he only exercises supervision and not control. (Drilon v. Lim, G.R. No. 112497, 1994, J. Cruz)

SOJ dismissed an appeal assailing the constitutionality of the tax ordinances of the Municipality of San Juan on the ground that it was filed out of time. The failure of the petitioners in the case to appeal to the Secretary within 30 days from the date of effectivity is fatal to their cause. (Reyes v. CA, G.R. No. 118233, December 10, 1999, J. Quisumbing)

While the appeal to the DOJ is mandatory and fatal to the taxpayer if not availed of, if the issue is on pure questions of law, the appeal to the DOJ is not mandatory and the case can be brought straight to the RTC. (Alta Vista Golf and Country Club v. Cebu, G.R. No. 180235, 2016, J. Leonardo-De Castro)

Under Section 187 of the Local Government Code of 1991, aggrieved taxpayers who question the validity or legality of a tax ordinance are required to file an appeal before the Secretary of Justice before they seek intervention from the regular courts.\|\|\| (Aala v. Uy, G.R. No. 202781, 2017, J. Leonen)

If the 30-day period lapses without any direct action being filed with the SOJ to question the constitutionality or legality of the tax ordinance or revenue measure, it does not preclude the taxpayer from questioning the constitutionality or legality of the tax ordinance or revenue measure in an indirect or collateral attack as an affirmative defense in a protest under Sec. 195 or as a ground for a claim for refund under Sec. 196.

Summary of Remedies

ASSESSMENT AND COLLECTION OF LOCAL TAXES

Tax Period

The tax period shall be the calendar year, unless otherwise provided in the LGC. (LGC, Sec. 165)

Manner of Payment

It may be paid in quarterly installments. (LGC, Sec. 165

Accrual of Tax

GR: It shall accrue on the January 1 of each year, unless otherwise provided in the LGC.

EXCEPTION: New taxes, fees or charges, or changes in the rates thereof, shall accrue on the 1st day of the quarter next following the effectivity of the ordinance imposing such new levies or rates. (LGC, Sec. 166)

Time of Payment

It charges shall be paid within 20 days of January or of each subsequent quarter, as the case may be, unless otherwise provided in the LGC. The sanggunian may, for a justifiable cause, extend the time for payment of such taxes without surcharges or penalty for a period not exceeding 6 months. (LGC, Sec. 167)

Surcharges and Penalties on Unpaid Taxes, Fees, or Charges

The sanggunian may impose the following:

• Surcharge - not exceeding 25% of the unpaid taxes, fees or charges not paid on time.
• Interest - not exceeding 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 exceed 36 months. (LGC, Sec. 168)
• On any other source of revenue, LGUs are authorized to impose an interest of a maximum of 2% per month, maximum of 36 months, on the amount unpaid. (LGC, Sec. 169)

Authority of the Local 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 or 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 premiums in addition to the premiums of the bond that may be required under LGC. (LGC, Sec. 170)

City Treasurer cannot be compelled by mandamus to accept payment of taxes, if in his reasoning and assessment, the payment is incorrect or deficient. (San Juan v. Castro, 541 SCRA 526, 2007, J. Carpio-Morales)

• He may examine the books of accounts and pertinent records of businessmen in order to ascertain, assess, and collect the correct amount of taxes, fees, and charges.

The examination shall be made during regular business hours not oftener than once a year for every tax period, which shall be the year immediately preceding the examination, and shall be certified by the examining official. Such certification shall be made of record in the books of accounts of the taxpayer examined.

In case the examination is made by a duly authorized deputy of the local treasurer, the written authority of the deputy shall specifically state the name, address, and business of the taxpayer whose books, accounts, and pertinent records are to be examined, the date and place of such examination, and the procedure to be followed in conducting the same. (LGC, Sec. 171)

Penalty on Local Treasurer

The local treasurer shall be automatically dismissed from the service after due notice and hearing, without prejudice to criminal prosecution if he does any of the following;

• Fails to issue or execute the warrant of distraint or levy after the expiration of the time prescribed; or
• Is found guilty of abusing the exercise thereof, by competent authority. (LGC, Sec. 177)

Remedies of The Local Government Units

Local Government's Lien

Local taxes, fees, charges and other revenues constitute a lien, superior to all liens, charges or encumbrances in favor of any person, enforceable by appropriate administrative or judicial action, upon:

• Any property or rights therein which may be subject to the lien; and
• 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. (LGC, Sec. 173)

Civil Remedies:

• By administrative action:
• Distraint of personal property; and
• Levy upon real property;
• Judicial action.

Note: Either of these remedies or all may be pursued concurrently or simultaneously at the discretion of the LGU concerned. (LGC, Sec. 174)

Prescriptive Period

Prescriptive Period for Assessment

GR: Local taxes, fees, or charges shall be assessed 5 years from the date they became due. No action for the collection of such taxes, fees, or charges, whether administrative or judicial, shall be instituted after the expiration of such period.

EXCEPTIONS:

But those which have accrued before the effectivity of the LGC may be assessed within a period of 3 years from the date they became due.

In case of fraud or intent to evade the payment of taxes, fees, or charges, the same may be assessed within 10 years from discovery of the fraud or intent to evade payment. (LGC, Sec. 194)

Prescriptive Period for Collection

GR: Local taxes, fees, or charges may be collected within 5 years from the date of assessment by administrative or judicial action. No such action shall be instituted after the expiration of said period.

EXCEPTIONS: But those which have assessed before the effectivity of the LGC may be collected within a period of 3 years from the date of assessment. (LGC, Sec. 194)

Suspension of Prescriptive Periods

• When the treasurer is legally prevented from making the assessment or collection;
• When the taxpayer requests for a reinvestigation and executes a waiver in writing before expiration of the period within which to assess or collect; and
• When the taxpayer is out of the country or otherwise cannot be located. (LGC, Sec. 194)