LOCAL GOVERNMENT TAX P a g e |1

Local Government Code of 1991, as amended presumption of validity of a tax ordinance cannot be overcome by bare
assertions of procedural defects on its / enactment, it would seem that if
What is the nature of the taxing power of the provinces, the taxpayer had presented evidence to support the allegation that no
municipalities and cities? public hearing was conducted, the Court should have ruled that the tax
How will the local government units be able to exercise their taxing ordinance is invalid. (Belen Figuerres v. Court of Appeals, GR No.
powers? 119172, March 25,1999). (BAR 2002)

SUGGESTED ANSWER: In order to raise revenue for the repair and maintenance of the
The taxing power of the provinces, municipalities and cities is newly constructed City Hall of Makati, the City Mayor ordered the
directly conferred by the Constitution by giving them the authority collection of P1.00, called “elevator tax", every time a person rides
to create their own sources of revenue. The local government units any of the high-tech elevators in the city hall during the hours of
do not exercise the power to tax as an inherent power or by a valid 8:00 a.m. to 10:00 a.m. and 4:00 p.m. to 6:00 p.m. Is the “elevator
delegation of the power by Congress, but pursuant to a direct tax" a valid imposition? Explain.
authority conferred by the Constitution. (Mactan Cebu International
Airport Authority v. Marcos, 261 SCRA 667 [1996]; NPC v. City of SUGGESTED ANSWER:
Cabanatuan, 401 SCRA 259 [2003]). No. The imposition of a tax, fee or charge or the generation of revenue
under the Local Government Code shall be exercised by the
The local government units exercise the power to tax by levying taxes, Sanggunian of the local government unit concerned through an
fees and charges consistent with the basic policy of local autonomy, and appropriate ordinance (Section 132 of the Local Government Code). The
to assess and collect all these taxes, fees and charges which will city mayor alone could not order the collection of the tax; as such, the
exclusively accrue to them. The local government units are authorized “elevator tax” is an invalid imposition. (BAR 2003)
to pass tax ordinances (levy) and to pursue actions for the assessment
and collection of the taxes imposed in said ordinances. (Section 129, The Local Government Code took effect on January 1, 1992.
and 132, Local Government Code). (BAR 2007) PLDT’s legislative franchise was granted sometime before 1992. Its
franchise provides that PLDT will only pay 3% franchise tax in lieu
Congress, after much public hearing and consultations with of all taxes. The legislative franchises of Smart and Globe
various sectors of society, came to the conclusion that it will be Telecoms were granted in 1998. Their legislative franchises state
good for the country to have only one system of taxation by that they will pay only 5% franchise tax in lieu of all taxes.
centralizing the imposition and collection of all taxes in the national The Province of Zamboanga del Norte passed an ordinance in 1997
government. Accordingly, it is thinking of passing a law that would that imposes a local franchise tax on all telecommunication
abolish the taxing power of all local government units. In your companies operating within the province. The tax is 50% of 1% of
opinion, would such a law be valid under the present Constitution? the gross annual receipts of the preceding calendar year based on
Explain your answer. (5%) the incoming receipts, or receipts realized, within its territorial
jurisdiction.
SUGGESTED ANSWER: Is the ordinance valid? Are PLDT, Smart and Globe liable to pay
No. The law centralizing the imposition and collection of all taxes in the franchise taxes?
national government would contravene the Constitution which mandates Reason briefly.
that : . . . "Each local government unit shall have the power to create
their own sources of revenue and to levy taxes, fees, and charges SUGGESTED ANSWER:
subject to such guidelines and limitations as Congress may provide The ordinance is valid. The Local Government Code explicitly authorizes
consistent with the basic policy of local autonomy." It is clear that provincial governments, notwithstanding any law or other special law, to
Congress can only give the guidelines and limitations on the exercise by impose a tax on business enjoying a franchise at the rate of 50% of 1%
the local governments of the power to tax but what was granted by the based on the gross annual receipts during the preceding year within the
fundamental law cannot be withdrawn by province. (Section 137, LGC).
Congress. (BAR 2001) PLDT is liable to the franchise tax levied by the province of Zamboanga
del Norte. The tax exemption privileges on franchises granted before the
May the deficiency business tax be paid in installments without passage of the Local Government Code are effectively repealed by the
surcharge and interest? Explain. (3%) latter law. (PLDT v. City of Davao, 363 SCRA 522 12001J).
SUGGESTED ANSWER: Smart and Globe, however, are not liable to the franchise tax imposed
Yes. Local government units may, through ordinances duly approved, under the provincial ordinance. The legislative franchises of Smart and
grant reliefs to taxpayers under such terms and conditions as they may Globe were granted in 1998, long after the Local Government Code took
deem necessary. Such reliefs may take the form of condonation or effect. Congress is deemed to have been aware of the provisions of the
extension of time for payment or non-imposition of surcharge or interest. earlier law. When it granted the exemption.
(Section 192, LGC). Accordingly, the deficiency business taxes may be Accordingly, the latest will of the legislature to grant tax exemption must
paid in installment without surcharge and interest through the passage be granted. (BAR 2007)
of an ordinance for that purpose. (BAR 2008)
The City of Manila enacted Ordinance No. 55-66 which imposes a
In order to raise revenue for the repair and maintenance of the municipal occupation tax on persons practicing various
newly constructed City Hall of Makati, the City Mayor ordered the professions in the city. Among those subjected to the occupation
collection of P1.00, called “elevator tax", every time a person rides tax were lawyers. Atty. Mariano Batas, who has a law office in
any of the high-tech elevators in the city hall during the hours of Manila, pays the ordinance-imposed occupation tax under protest.
8:00 a.m. to 10:00 a.m. and 4:00 p.m. to 6:00 p.m. Is the “elevator He goes to court to assail the validity of the ordinance for being
tax" a valid imposition? Explain. discriminatory. Decide with reasons. (3%)

SUGGESTED ANSWER: SUGGESTED ANSWER:

No. The imposition of a tax, fee or charge or the generation of revenue The ordinance is valid. The tax imposed by the ordinance is in the nature
under the Local Government Code shall be exercised by the of a professional tax which is authorized by law to be imposed by cities
Sanggunian of the local government unit concerned through an (Section 151 in relation to Section 139, LGC). The ordinance is not
appropriate ordinance (Section 132 of the Local Government Code). The discriminatory because the City Council has the power to select the
city mayor alone could not order the collection of the tax; as such, the subjects of taxation and impose the same tax on those belonging to the
“elevator tax” is an invalid imposition. (BAR 2003) same class. The authority given by law to cities is to impose a
professional tax only on persons engaged in the practice of their
An Ordinance was passed by the Provincial Board of a Province in profession requiring government examination and lawyers are included
the North, increasing the rate of basic real property tax from 0.006% within that class of professionals. (BAR 2009)
to 1 % of the assessed value of the real property effective January
1, 2000. Residents of the municipalities of the said province Mr. Fermin, a resident of Quezon City, is a Certified Public
protested the Ordinance on the ground that no public hearing was Accountant- Lawyer engaged in the Practice of his two
conducted and, therefore, any increase in the rate of real property professions. He has his main office in Makati City and maintains a
tax is void. branch office in Pasig City. Mr. Fermin pays his professional tax as
Is there merit in the protest? Explain your answer. (2%) a CPA in Makati City and his professional tax as a lawyer in Pasig
City.
SUGGESTED ANSWER: May Makati City, where he has his main office, require him to pay
The protest is devoid of merit. No public hearing is required before the his professional tax as a lawyer? Explain.
enactment of a local tax ordinance levying the basic real property tax May Quezon City, where he has his residence and where he also
(Art. 324, LGC Regulations). practices his two professions, go after him for the payment of his
ALTERNATIVE ANSWER: professional tax as a CPA and a lawyer? Explain. (5%)
Yes, there is merit in the protest provided that sufficient proof could be SUGGESTED ANSWER:
introduced for the non-observance of public hearing. By implication, the No. Mr. Fermin is given the option to pay either in the city where he
Supreme Court recognized that public hearings are required to be practices his profession or where he maintains his principal office in case
conducted prior to the enactment of an ordinance imposing real property he practices his profession in several places. The professional tax paid
taxes. Although it was concluded by the highest tribunal that as a lawyer in Pasig City, a place where he practices his profession, will
 LOCAL GOVERNMENT TAX P a g e |2

entitle him to practice his profession in any part of the Philippines without Malolos which he inherited from his deceased parents and refused
being subjected to any other national or local tax, license, or fee for the to pay the aforesaid tax. He instead filed appropriate case asking
practice of such profession. (Sec. 139 in relation to 151, Local that the ordinance be declared null and void since such a tax can
Government Code). only be collected by the national government, as in fact he has paid
No. The professional tax shall be paid only once for every taxable year BIR the required capital gains tax. The Municipality countered that
and the payment shall be made either in the city where he practices his under the Constitution, each local government is vested with the
profession or where he maintains his principal office. The city of power to create its own sources of revenue and to levy taxes, and
residence cannot require him to pay his professional taxes. (Sec. 139 in it imposed the subject tax in the exercise of said constitutional
relation to Sec. 151, Local Government Code). (BAR 2005) authority. Resolve the controversy. (BAR 1991)

Ferremaro, Inc., a manufacturer of handcrafted shoes, maintains ANSWER:

its principal office in Cubao, Quezon City. It has branches/sales The ordinance passed by the Municipality of Malolos imposing a tax on
offices in Cebu and Davao. Its factory is located in Marikina City the sale or transfer of real property is void. The Local Tax Code only
where most of its workers live. Its principal office in Quezon City is allows provinces and cities to impose a tax on the transfer of ownership
also a sales office. of real property (Sec. 7 and Sec. 23, Local Tax Code). Municipalities are
Sales of finished products for calendar year 2009 in the amount of prohibited from imposing said tax that provinces are specifically
P10 million were made at the following locations: authorized to levy. (Sec. 22, Local Tax Code)
1) Cebu branch 25% While it is true that the Constitution has given broad powers of taxation
2) Davao branch 15% to local government units, this delegation, however, is subject to such
3) Quezon City branch 60% limitations as may be provided by law (Sec. 5, Art X, 1987 Constitution).
Total 100%
Where should the applicable local taxes on the shoes be paid? How are retiring businesses taxed under the Local Government
Explain. (2010 Bar Question) Code? (2%)
SUGGESTED ANWER: SUGGESTED ANSWER:
Under the LGC, the manufacturers maintaining a branch or sales outlet Retiring business under the LGC are taxed on their gross sales or gross
shall record the sale in the branch or sales outlet making the sale and receipts in the current year and not on the preceding year. If the tax paid
pay the tax in the city or municipality where the branch or sales outlet is in the current year is less than the tax due on gross sales or receipts of
located. Since Ferremaro, Inc., maintains one factory, the sales the current year, the difference shall be paid before the business is
recorded in the principal office shall be allocated and 30% of said sales considered officially retired (Sec. 145, LGC).
are taxable in the place where the principal office is located while the
70% is taxable in the place where the factory is located. What is the basis for the computation of business tax on
Hence, 25% of total sales or Php 2.5M shall be taxed in Cebu and 15% contractors under the local government code? (2%)
of total sales or Php 1.5M shall be taxed in Davao. For the remaining
60% sales amounting to Php 6.0M which is recorded in the principal SUGGESTED ANSWER:
office, 30% thereof or Php 1.8M is taxable in Quezon City where the The business tax on contractors is a graduated annual fixed tax based
principal office is located and 70% or Php 4.2M is taxable in Marikina on the gross receipts for the preceding calendar year. However, when
City where the factory is located. the gross receipts amount to P2 million or more, the business tax on
contractors is imposed as a percentage tax at the rate of 50% of 1%
XYZ Shipping Corporation is a branch of an international shipping (Sec. 143(e), LGC).
line with voyages between Manila and the West Coast of the U.S.
The company’s vessels load and unload cargoes at the Port of The Sangguniang Bayan of the Municipality of Sampaloc, Quezon,
Manila, albeit it does not have a branch or sales office in Manila. All passed an ordinance imposing a storage fee of ten centavos (PO.
the bills of lading and invoices are issued by the branch office in 10) for every 100 kilos of copra deposited in any bodega within the
Makati which is also the company’s principal office. Municipality’s jurisdiction. The Metropolitan Manufacturing
The City of Manila enacted an ordinance levying a 2% tax on gross Corporation (MMC), with principal office in Makati, is engaged in
receipts of shipping lines using the Port of Manila. the manufacture of soap, edible oil, margarine, and other coconut
Can the City Government of Manila legally impose said levy on the oil based products. It has a warehouse in Sampaloc, Quezon, used
corporation? Explain. (2010 Bar Question) as storage space for the copra purchased in Sampaloc and nearby
towns before the same is shipped to Makati. MMC goes to court to
SUGGESTED ANSWER: challenge the validity of the ordinance, demanding the refund of
No, Manila cannot legally levy the 2% Gross Receipts Tax on thi the storage fees it paid under protest.
shipping line because taxes on the gross receipts of transportation Is the ordinance valid? Explain your answer. (4%)
contractors and persons engaged in the transportation of passengers or SUGGESTED ANSWER:
freight by hire and common carriers by air, and or water is beyond the Yes. The municipality is authorized to impose reasonable fees and
taxing powers of the local government units. charges as a regulatory measure in an amount commensurate with the
cost of regulation, inspection and licensing (Section 147, LGC). In the
ABC Corporation is registered as a holding company and has an case at bar, the storage of copra in any warehouse within the
office in the City of Makati. It has no actual business operations. It municipality can be the proper subject of regulation pursuant to the
invested in another company and its earnings are limited to police power granted to municipalities under the Revised Administrative
dividends from this investment, interests on its bank deposits, and Code or the “general welfare clause”. A warehouse used for keeping or
foreign exchange gains from its foreign currency account. storing copra is an establishment likely to endanger the public safety or
The City of Makati assessed ABC Corporation as a contractor or likely to give rise to conflagration because the oil content of the copra,
one that sells services for a fee. Is the City of Makati correct? (2013) when ignited, is difficult to put under control by water and the use of
chemicals is necessary to put out the fire. It is, thus, reasonable that the
SUGGESTED ANSWER: Municipality impose storage fees for its own surveillance and lookout
The City of Makati is wrong in assessing ABC Corp. as a contractor. (Procter & Gamble Philippine Manufacturing Corporation v. Municipality
First, ABC Corp. is not a contractor as defined in Section 131(h) of of Jagna, Province of Bohol, 94 SCRA 894 [1979]). (BAR 2009)
Republic Act No. 7160 or the Local Government Code (LGC). This
provision defines a contractor as a person, natural or juridical, not The City of Manila enacted an ordinance, imposing a 5% tax on
subject to professional tax under the LGC, but whose activity consists gross receipts on rentals of space in privately- owned public
essentially of the sale of all kinds of services for a fee, regardless of markets. BAT Corporation questioned the validity of the ordinance,
whether or not the performance of the service calls for the exercise or stating that the tax is an income tax, which cannot be imposed by
use of the physical or mental faculties of such contractor or his the city government. Do you agree with the position of BAT
employees. Corporation? Explain. (5%)
In the given problem, ABC Corp. is merely a holding company whose SUGGESTED ANSWER:
earnings are limited to dividends, interests on bank deposits and foreign No. The tax imposed is not an income tax but a license tax or fee for the
exchange gains from foreign currency account. Evidently, ABC Corp. is regulation of the business in which the taxpayers are engaged, that is
not engaged in the sale of services for a fee. the leasing of spaces in privately-owned public markets. (Progressive
Second, Section 186 of LGC provides that local government units Development Corporation v. Quezon City, 172 SCRA 629 [1989]). The
cannot levy taxes, fees or charges on any base or subject tax under the income tax imposed under the National Internal Revenue Code which
provisions of the NIRC. preempts the imposition by the City is one which is imposed on the
In the given problem, ABC Corp.’s dividends, interest income and privilege enjoyed by a taxpayer in earning income and not a tax on
foreign exchange gains from foreign currency account are already business. (BAR 2008)
subject to final income tax under the NIRC, specifically, Sections
27(D)(4), 27(D)(1), 32(A), respectively. Consequently, the City of Makati In accordance with the Local Government Code (LGC), the
cannot levy from ABC Corp. taxes on these incomes. Sangguniang Panglungsod (SP) of Baguio City enacted Tax
Ordinance No. 19, Series of 2014, imposing a P50.00 tax on all the
The Municipality of Malolos passed an ordinance imposing a tax on tourists and travellers going to Baguio City. In imposing the local
any sale or transfer of real property located within the municipality tax, the SP reasoned that the tax collected will be used to maintain
at a rate of one-fourth (1/4) of one percentum (1%) of the total the cleanliness of Baguio City and for the beautification of its
consideration of such transaction. X sold a parcel of land in tourist attractions. Claiming the tax to be unjust, Baguio Travellers
 LOCAL GOVERNMENT TAX P a g e |3

Association (BTA), an association of travel agencies in Baguio remained unacted upon by the Secretary of Finance, the
City, filed a petition for declaratory relief before the Regional Trial municipality started collecting the tax in question. The members of
Court (RTC) because BTA was apprehensive that tourists might the Philippine Bar in the municipality questioned the legality of the
cancel their bookings with BTA’s member agencies. BTA also ordinance and sought the suspension of the collection of the tax
prayed for the issuance of a Temporary Restraining Order (TRO) to but the municipality argued that since the Secretary has not taken
enjoin Baguio City from enforcing the local tax on their customers any action on the ordinance for more than one hundred twenty
and on all tourists going to Baguio City. days after his receipt thereof, the legality of the ordinance can no
The RTC issued a TRO enjoining Baguio City from imposing the longer be questioned and insisted on the collection of the tax.
local tax. On May 15, 2009, La Manga Trading Corporation received a
Aggrieved, Baguio City filed a petition for certiorari before the deficiency business tax assessment of PI,500,000.00 from the
Supreme Court (SC) seeking to set aside the TRO issued by the Pasay City Treasurer. On June 30, 2009, the corporation contested
RTC on the ground that collection of taxes cannot be enjoined. Will the assessment by filing a written protest with the City Treasurer.
the petition prosper? (2014 Bar Question) On October 10, 2009, the corporation received a collection letter
SUGGESTED ANSWER : from the City Treasurer, drawing it to file on October 25, 2009 an
No, the petition for certiorari filed by Baguio City will not prosper. As appeal against the assessment before the Pasay Regional Trial
stated in Valley Trading Co., Inc. v. CFI of Isabela (G.R. No. L-49529, Court (RTC).
March 31, 1989) and Angeles City v. Angeles City Electric Corporation A. Was the protest of the corporation filed on time? Explain. (3%)
(G.R. No. 166134, June 29, 2010), the prohibition on the issuance of an SUGGESTED ANSWER:
order or writ enjoining the collection of taxes applies only to national The protest was filed on time. The taxpayer has the right to protest an
internal revenue taxes, and not to local taxes. Unlike the NIRC, there is assessment within 60 days from receipt thereof (Sec. 195, LGC).
no express provision in the Local Government Code which prohibits
courts from enjoining the collection of such taxes. Therefore, the RTC B. Was the appeal with the Pasay RTC filed on time? Explain. (3%)
was properly vested with authority to issue the assailed TRO enjoining SUGGESTED ANSWER:
Baguio City from imposing the local tax. The appeal was not filed on time. When an assessment is protested, the
treasurer has 60 days within which to The taxpayer has 30 days from
In 2014, M City approved an ordinance levying customs duties and receipt of the denial of the protest or from the lapse of the 60-day period
fees on goods coming into the territorial jurisdiction of the city. decide, whichever comes first, otherwise the assessment becomes
Said city ordinance was duly published on February 15, 2014 with conclusive and unappeallable. Since no decision on the protest was
effectivity date on March 1, 2014. made, the taxpayer should have appealed to the RTC within 30 days
a. Is there a ground for opposing said ordinance? from the lapse of the period to decide the protest (Sec. 195, LGC).
b. What is the proper procedural remedy and applicable time
periods for challenging the ordinance? (2015 Bar Question) Give the remedies available to local government units to enforce
the collection of taxes, fees, and charges?
SUGGESTED ANSWER: ANSWER:
a. Yes, on the ground that the ordinance is ultra-vires. The taxing powers The remedies available to the local government units to enforce
of local government units, such as M City, cannot extend to the levy of collection of taxes, fees, and charges are:
taxes, fees and charges already imposed by the national government, A. Administrative remedies of distraint of personal property of whatever
and this include, among others, the levy of customs duties under the kind whether tangible or intangible, and levy of real property and interest
Tariff and Customs Code. therein; and
b. Any question on the constitutionality or legality of tax ordinances may B. Judicial remedy by institution of an ordinary civil action for collection
be raised on appeal within thirty (30) days from the effectivity to the with the regular courts of proper jurisdiction. (BAR 1997)
Secretary of Justice. The Secretary of Justice shall render a decision
within sixty (60) days from the date of receipt of the appeal. Thereafter,
within thirty (30) days after receipt of the decision or the lapse of the The City of Maharlika passed an ordinance imposing a tax on any sale
sixty-day period without the Secretary of Justice acting upon the appeal, or transfer of real property located within the city at a rate of fifty percent
the aggrieved party may file the appropriate proceedings with the (50%) of one percent (1%) of the total consideration of the transaction,
Regional Trial Court. Jose sold a parcel of land in the city, which he inherited from his
deceased parents, and refused to pay the aforesaid tax. He instead filed
a case asking that the ordinance be declared null and void since the tax
MNO Corporation was organized on July 1, 2006, to engage in
it imposed can only be collected by the national government, as in fact
trading of school supplies, with principal place of business in
he has paid the Bureau of Internal Revenue (BIR) the required capital
Cubao, Quezon City. Its books of accounts and income statement
showing gross sales as follows: gains tax. If you were the City Legal Officer of Maharlika, what defenses
July 1, 2006 to December 31, 2006 P 5,000,000 would you raise to sustain the validity of the ordinance? (5%) (2016)
January 1, 2007 to June 30, 2007 P10,000,000
JULY 1, 2007 TO DECEMBER 31, 2007 PI 5,000,000 SUGGESTED ANSWER

I would argue that the City is allowed to levy a tax on transfer of real
Since MNO Corporation adopted fiscal year ending June 30 as its
taxable year for income tax purposes, it paid its 2% business tax property ownership (Sec. 135, LGC).
for fiscal year ending June 30,
City Treasurer assessed the corporation for deficiency business The capital gains tax which is an income tax collected by the national
tax for 2007 based on gross sales of P25 million alleging that local government is entirely different from the tax on sale or transfer imposed
business taxes shall be computed based on calendar year. by the ordinance.
Is the position of the city treasurer tenable? Explain. (3%)
The tax imposed by the ordinance not being in the nature of an income
SUGGESTED ANSWER: tax, the imposition of the income tax by the national government will not
Yes. The tax period for local taxes is generally the calendar year. pre-empt the tax sought to be imposed by the ordinance.
(Section 165, LGC). (BAR 2008)
I would further argue that the imposition by the national government of
a tax will pre-empt Local Government Units (LGU) only if there is no
X, a taxpayer who believes that an ordinance passed by the City specific provision under the Local Government Code giving said power
Council of Pasay is unconstitutional for being discriminatory (Bulacan v. CA, G.R. No. 126232, November 1998, 299 SCRA 442),
against him, want to know from you, his tax lawyer, whether or not
he can file an appeal. In the affirmative, he asks you where such IKM Corporation, doing business in the City of Kalookan, has been a
appeal should be made: the Secretary of Finance, or the Secretary distributor and retailer of clothing and household materials. It has been
of Justice, or the Court of Tax Appeals, or the regular courts. What paying the City of Kalookan local taxes based on Sections 15 (Tax on
would your advice be to your client, X? Wholesalers, Distributors or Dealers) and 17 (Tax on Retailers) of the
Revenue Code of Kalookan City (Code).
SUGGESTED ANSWER: Subsequently, the Sangguniang Panlungsod enacted an ordinance
The appeal should be made with the Secretary of Justice. Any question amending the Code by inserting Section 21 which imposes a tax on
on the constitutionality or legality of a tax ordinance may be raised on "Businesses Subject to Excise, Value-Added and Percentage Taxes
appeal with the Secretary of Justice within 30 days from the effectivity under the National Internal Revenue Code (NIRC)," at the rate of 50%
thereof. (Sec. 187, LGC; Hagonoy Market Vendor Association v. of 1 % per annum on the gross sales and receipts on persons "who sell
Municipality of Hagonoy, 376 SCRA 376 [ 2002]). (BAR 2003) goods and services in the course of trade or business." KM Corporation
paid the taxes due under Section 21 under protest, claiming that (a) local
The Municipality of Argao, Province of Cebu passed a tax government units could not impose a tax on businesses already taxed
ordinance requiring all professionals practicing in the municipality under the NIRC and (b) this would amount to double taxation, since its
to pay a tax equivalent to two (2%) percent of their gross income. business was already taxed under Sections 15 and 17 of the Code.
A certified true copy of the ordinance was sent to the Secretary of (a) May local government units impose a tax on businesses already
Finance for review on 1 March 1989 and was received by him on subjected to tax under the NIRC? (2.5%)
the same day. On 15 August 1989, even as the tax ordinance (b) Does this amount to double taxation? (2.5%) (2018)
 LOCAL GOVERNMENT TAX P a g e |4

SUGGESTED ANSWER: A: YES. CASURECO III is liable for franchise tax on gross receipts within
Iriga City and Rinconada area. It should be stressed that what the
a. Yes, local government units may impose a tax on businesses already petitioner seeks to collect from CASURECO III is a franchise tax, which as
subjected to tax under the NIRC. defined, is a tax on the exercise of a privilege. As Section 137 of the LGC
provides, franchise tax shall be based on gross receipts precisely because
“Each local government unit shall have the power to create its own it is a tax on business, rather than on persons or property. Since it
sources of revenues and to levy taxes, fees and charges subject to such partakes of the nature of an excise tax, the situs of taxation is the place
guidelines and limitations as the Congress may provide, consistent with where the privilege is exercised, in this case in the City of Iriga, where
the basic policy of local autonomy. Such taxes, fees, and charges shall CASURECO III has its principal office and from where it operates,
accrue exclusively to the local governments.” (Article 10, Section 5 of regardless of the place where its services or products are delivered.
the 1987 Constitution). Hence, franchise tax covers all gross receipts from Iriga City and the
Rinconada area.
Sec 133 of the LGC – Common limitations on the taxing power of LGC
Relate with Sec 143 (h) of the LGC – “Tax on Businesses: (h) On any Q: CASURECO III maintains that it is exempt from payment of franchise tax
business, not otherwise specified in the preceding paragraphs, which because of its nature as a non-profit cooperative, as contemplated in PD 269,
the sanggunian concerned may deem proper to tax:
and insists that only entities engaged in business, and not non-profit entities
like itself, are subject to the said franchise tax. Is this correct?
Provided, That on any business subject to the excise, value-added or
percentage tax under the National Internal Revenue Code, as amended,
the rate of tax shall not exceed two percent (2%) of gross sales or A: NO. In National Power Corporation v. City of Cabanatuan, the Court
receipts of the preceding calendar year. The sanggunian concerned may declared that "a franchise tax is a tax on the privilege of transacting business
prescribe a schedule of graduated tax rates but in no case to exceed the in the state and exercising corporate franchises granted by the State." It is not
rates prescribed herein.” levied on the corporation simply for existing as a corporation, upon its
property or its income, but on its exercise of the rights or privileges granted to
b. Yes, it will amount to indirect double taxation. it by the government." It is within this context that the phrase “tax on
businesses enjoying a franchise‟ in Section 137 of the LGC should be
Under the law, direct double taxation exists if the following requisites interpreted and understood."
exist:
Both taxes are imposed on the same property or subject matter; Q: Mr. Fermin, a resident of Quezon City, is a Certified Public
For the same purpose; Accountant-Lawyer engaged in the practice of his two professions. He
Imposed by the same taxing authority; has his main office in Makati City and maintains a branch office in
Within the same jurisdiction; Pasig City. Mr. Fermin pays his professional tax as a CPA in Makati City
During the same taxing period; and his professional tax as a lawyer in Pasig City.
Covering the same kind or character of tax. a. May Makati City, where he has his main office, require
him to pay his professional tax as a lawyer? Explain.
If there is an element lacking, only indirect double taxation exists. The
Constitution only prohibits direct double taxation b. May Quezon City, where he has his residence and where he also
practices his two professions, go after him for the payment of his
GN professional tax as a CPA and a lawyer? Explain. (2005 Bar)
A:
Q: BATAS Law is a general professional partnership operating in the a. NO. Makati City where Mr. Fermin has his main office may not require
City of Valenzuela. It regularly pays value-added tax on its services. him to pay his professional tax as a lawyer. Mr. Fermin has the option of
All its lawyers have individually paid the required professional tax paying his professional tax as a lawyer in Pasig City where he practices law
for the year 2017. However, as a condition for the renewal of its or in Makati City where he maintains his principal office (Sec. 139[b], LGC).
business permit for the year 2017, the City Treasurer of Valenzuela b. NO, the situs of the professional tax is the city where the
assessed BATAS Law for the payment of percentage business tax on professional practices his profession or where he maintains his principal
its gross receipts for the year 2016 in accordance with the Revenue office in case he practices his profession in several places. The local
Tax Code of Valenzuela. Is BATAS Law liable to pay the assessed government of Quezon City has no right to collect the professional tax from
percentage business tax? Explain your answer. Mr. Fermin as the place of residence of the taxpayer is not the proper situs
in the collection of the professional tax.
A: NO. Section 133 (i) of the LGC provides that the exercise of the taxing
powers of local government units such as the City of Valenzuela shall not Q: Cagayan Electric Power and Light Company, Inc. (CEPALCO), who is
extend to the levy of “percentage or value-added tax (VAT) on sales, barters leasing for a consideration the use of its posts, poles or towers to
or exchanges or similar transactions on goods or services” except as otherwise other pole users, assails the validity of Ordinance No. 9503-2005
provided in the LGC. passed by the Sangguniang Panlungsod of Cagayan de Oro, which
Therefore, BATAS Law may not be assessed with and required to pay imposed a tax on the lease or rental of electric and/or
percentage business tax. (Bar 2017) telecommunication posts, poles or towers by pole owners to other
pole users at the rate of 10% of the annual rental income derived
Q: Victoria Milling is a sugar miller. Its gross receipts as a sugar therefrom. CEPALCO contends that if it is a city which imposes it, it
central or sugar refinery is subject to percentage tax by the NIRC. The can only impose up to 1/2 of what the province or municipality may
Municipality of Victorias imposed a tax on sugar millers depending impose, and since under Section 137, a province may impose 50% of
upon the annual output capacity of the miller. Does the principle of 1%, a city may therefore only impose 25% of 1%. Is this correct?
preemption apply?
A: NO. Section 151 of the LGC states that, subject to certain exceptions, a
A: NO. The NIRC imposes a percentage tax. The ordinance does not deal with city may exceed by "not more than 50%" the tax rates allowed to provinces
percentage tax. Rather, the ordinance deals with a tax specifically for and municipalities. Therefore, a city may impose a franchise tax of up to
operators of sugar centrals and sugar refineries. The rates imposed are based 0.75% of a business’ gross annual receipts for the preceding calendar year
on the maximum annual output capacity, which is not a percentage because it based on the incoming receipt, or realized, within its territorial
is not a share. Nor is it a tax based on the amount of the proceeds realized out jurisdiction.
of the sale of sugar, centrifugal or refined. (Victorias Milling Co., Inc. v. The In the same manner, since a municipality may impose a business tax at a
Municipality of Victorias, Negros Occidental, G.R. No. L-21183, September 27, rate not exceeding "two percent of gross sales or receipts" under Section
1968) 143, a city may impose a business tax of up to 3% of a business’ gross sales
or receipts of the preceding calendar year (May exceed by not more than
Q: CASURECO III is an electric cooperative duly organized and existing 50% means it may impose up to 50% more than what a province or
by virtue of PD 269 and registered with the National Electrification municipality could impose).
Administration (NEA). It is engaged in the business of electric power CEPALCO also erred when it equates Section 137’s "gross annual receipts"
distribution to various end-users and consumers within the City of with Ordinance No. 9503-2005’s "annual rental income." Section 2 of the
Iriga and the municipalities of Nabua, Bato, Baao, Buhi, Bula and ordinance imposes "a tax on the lease or rental of electric and/or
Balatan of the Province of Camarines Sur, otherwise known as the telecommunication posts, poles or towers by pole owners to other pole
"Rinconada area." users at the rate of 10% of the annual rental income derived therefrom,"
Sometime in 2003, Petitioner City of Iriga required CASURECO III to and not on CEPALCO’s gross annual receipts. Thus, although the tax rate of
submit a report of its gross receipts for the period 1997-2002 to serve 10% is definitely higher than that imposable by cities as franchise or
as the basis for the computation of franchise taxes, fees and other business tax, the tax base of annual rental income of "electric and/or
charges. The latter complied and was subsequently assessed taxes. telecommunication posts, poles or towers by pole owners to other pole
CASURECO III refused to pay for the assessed taxes, asserting that the users" is definitely smaller than that used by cities in the computation of
computation of the petitioner was erroneous because it included franchise or business tax.
gross receipts from service areas beyond the latter’s territorial
jurisdiction. Is Casureco liable for the payment of the franchise tax on Q: The City of Cagayan de Oro contends that the allowable rate of
the Rinconada area? increase provided under Section 151 of the LGC applies only to those
 LOCAL GOVERNMENT TAX P a g e |5

businesses identified and enumerated under Section 143 thereof. Q: The Sangguniang Panlungsod of Cagayan de Oro (City Council)
Thus, the City of Cagayan de Oro submits that the 2% limitation passed an ordinance imposing a tax on the lease or rental of electric
prescribed under Section 143(h) applies only to the tax rates on the and/or telecommunication posts, poles or towers by pole owners to
businesses identified thereunder and does not apply to those that other pole users 10% of the annual rental income derived from such
may thereafter be deemed taxable under Section 186 of the LGC. On lease or rental.
the same vein, the City of Cagayan de Oro submits that the limitation Cagayan Electric Power and Light Company, Inc. (CEPALCO), who is
under Section 151 likewise does not apply in this particular instance; leasing for a consideration the use of its posts, poles or towers to
otherwise it will run counter to the intent and purpose of Section 186 other pole users, assails its validity on the ground that the tax
of the LGC. Is the City of Cagayan correct? imposed by the disputed ordinance is in reality a tax on income which
the City of Cagayan de Oro may not impose, the same being expressly
A: NO. The City of Cagayan de Oro’s imposition of a tax on the lease of poles prohibited by Section 133(a) of LGC. Is the ordinance valid?
falls under Section 143(h) which speaks of any business, not otherwise A: YES. The ordinance is a tax on business not a tax on income. Business
specified in the preceding paragraphs, which the sanggunian concerned being defined by Sec. 131(d) of the LGC as “trade or commercial activity
may deem proper to tax. The treatment of the lease of poles as a separate regularly engaged in as a means of livelihood or with a view to profit.”
line of business is evident in Section 4(a) of the ordinance requiring CEPALCO’s act of leasing for a consideration the use of its posts, poles or
CEPALCO to apply for a separate business permit. And since "any person, towers to other pole users falls under the LGC’s definition of business. In
who in the course of trade or business x xx leases goods or properties x xx relation thereto, Section 131(d), Section 143(h) of the LGC provides that
shall be subject to the value-added tax," the imposable tax rate should not the city may impose taxes, fees, and charges on any business which is not
exceed two percent of gross receipts of the lease of poles of the preceding specified in Section 143(a) to (g) and which the Sanggunian concerned may
calendar year. deem proper to tax (Cagayan Electric Power and Light Co., Inc. v. City of
Section 143(h) states that "on any business subject to x xx value-added x Cagayan de Oro, G.R. No. 191761, November 14, 2012).
xx tax under the NIRC, as amended, the rate of tax shall not exceed 2% of
gross sales or receipts of the preceding calendar year" from the lease of Q: In accordance with the LGC, the Sangguniang Panglungsod of
goods or properties. Hence, the 10% tax rate imposed by the ordinance Baguio City enacted Tax Ordinance No. 19, s. 2014, imposing a P50 tax
clearly violates Section 143(h) of the LGC. on all the tourists and travellers going to Baguio City. In imposing the
local tax, the SP reasoned that the tax collected will be used to
Q: ABC Corp. is registered as a holding company and has an office in maintain the cleanliness of Baguio City and for the beautification of
the City of Makati. It has no actual business operations. It invested in its tourist attractions.
another company and its earnings are limited to dividends from this Claiming the tax to be unjust, Baguio Travellers Association (BTA), an
investment, interests on its bank deposits, and foreign exchange association of travel agencies in Baguio City, filed a petition for
gains from its foreign currency account. The City of Makati assessed declaratory relief before the RTC because BTA was apprehensive that
ABC Corp. as a contractor or one that sells services for a fee. Is the City tourists might cancel their bookings with BTA’s member agencies.
of Makati correct? (2013 Bar) BTA also prayed for the issuance of a TRO to enjoin Baguio City from
enforcing the local tax on their customers and on all tourists going to
A: The City of Makati is wrong in assessing ABC Corp. as a contractor. First, Baguio City. The RTC issued a TRO enjoining Baguio City from
ABC Corp. is not a contractor as defined in Section 131(h) of LGC. A imposing the local tax. Aggrieved, Baguio City filed a petition for
contractor as a person, natural or juridical, not subject to professional tax certiorari before the Supreme Court seeking to set aside the TRO
under the LGC, but whose activity consists essentially of the sale of all kinds issued by the RTC on the ground that collection of taxes cannot be
of services for a fee, regardless of whether or not the performance of the enjoined. Will the petition prosper? (2014 Bar)
service calls for the exercise or use of the physical or mental faculties of
such contractor or his employees. In the given problem, ABC Corp. is A: NO. The petition for certiorari filed by Baguio City will not prosper. The
merely a holding company whose earnings are limited to dividends, prohibition on the issuance of an order or writ enjoining the collection of
interests on bank deposits and foreign exchange gains from foreign taxes applies only to national internal revenue taxes, and not to local taxes.
currency account. Evidently, ABC Corp. is not engaged in the sale of Unlike the NIRC, there is no express provision in the LGC which prohibits
services for a fee. Second, Section 186 of LGC provides that LGUs cannot courts from enjoining the collection of such taxes. Therefore, the RTC was
levy taxes, fees or charges on any base or subject tax under the provisions properly vested with authority to issue the assailed TRO enjoining Baguio
of the NIRC. City from imposing the local tax.
In the given problem, ABC Corp.’s dividends, interest income and foreign
exchange gains from foreign currency account are already subject to final Q: The Sangguniang Panlungsod of Cagayan de Oro approved an
income tax under the NIRC, specifically, Sections 27(D)(4), 27(D)(1), ordinance on 10 January 2005. Section 5 of said ordinance provided
32(A), respectively. Consequently, the City of Makati cannot levy from ABC that the "Ordinance shall take effect after 15 days following its
Corp. taxes on these incomes. publication in a local newspaper of general circulation for at least 3
consecutive issues." Gold Star Daily published the ordinance on 1 to 3
Q: A sari-sari store initially paid the barangay treasurer of Barangay February 2005. The ordinance took effect on 19 February 2005.
T the amount of P120.00 representing 1% of the gross sales of CEPALCO filed its petition for declaratory relief before the Regional
P12,000.00 CY 1994 in accordance with the barangay tax code. Trial Court on 30 September 2005, clearly beyond the 30-day period
Subsequently, the same store also filed application for business provided in Section 187. CEPALCO did not file anything before the
license with the Municipality of T for which a municipal business tax Secretary of Justice. Did Cepalco fail to exhaust administrative
and other regulatory fees was assessed for the same store based on remedies by immediately filing with the RTC?
its capital investment of P12,000.00 A: YES. The Ordinance is a local revenue measure. As such, Sections 187
Are the tax assessments by the barangay and the municipality and 188 of the LGC applies. Clearly, the law requires that the dissatisfied
correct? taxpayer who questions the validity or legality of a tax ordinance must file
his appeal to the Secretary of Justice, within 30 days from effectivity
A: The tax assessment by the barangay of 1% on the gross sales of P12, thereof. In case the Secretary decides the appeal, a period also of 30 days
000.00 is in accordance with Sec. 152 (a) of the LGC. The assessment of the is allowed for an aggrieved party to go to court. But if the Secretary does
municipality of an additional business tax, however, is erroneous since not act thereon, after the lapse of 60 days, a party could already proceed to
pursuant to Sec. 143(d) of the LGC the barangays “shall have exclusive seek relief in court. These three separate periods are clearly given for
power to levy taxes as provided under Sec. 152” of the same Code. The compliance as a prerequisite before seeking redress in a competent court.
municipality, nevertheless, may have to issue the corresponding business Such statutory periods are set to prevent delays as well as enhance the
permit/license in accordance with Sec. 152(c) of the LGC, and may impose orderly and speedy discharge of judicial functions. For this reason the
as well reasonable regulatory fees on the sari-sari store. courts construe these provisions of statutes as mandatory (Cagayan
Electric Power and Light Co., Inc. v. City of Cagayan de Oro, G.R. No. 191761,
Q: Pheleco is a power generation and distribution company operating November 14, 2012).
mainly from the City of Taguig. It owns electric poles which it also
rents out to other companies that use poles such as telephone and Q: Doña Evelina, a rich widow engaged in the business of currency
cable companies. Taguig passed an ordinance imposing a fee exchange, was assessed a considerable amount of local business taxes
equivalent to 1% of the annual rental for these poles. Pheleco by the City Government of Bagnet by virtue of Tax Ordinance No. 24.
questioned 'the legality of the ordinance on the ground that it Despite her objections thereto, Doña Evelina paid the taxes.
imposes an income tax which LGUs are prohibited from imposing. Nevertheless, unsatisfied with said Tax Ordinance, Doña Evelina,
Rule on the validity of the ordinance. (2013 Bar) through her counsel Atty. ELP, filed a written claim for recovery of
said local business taxes and contested the assessment. Her claim was
A: The ordinance is void. The fee is based on rental income and is denied, and so Atty. ELP elevated her case to the RTC.
therefore a tax on income. The Sec. 32(A)(5) of the NIRC includes “rents” The RTC declared Tax Ordinance No. 24 null and void and without
in the enumeration of taxable income. Under Section 1331 of the LGC, the legal effect for having been enacted in violation of the public action
exercise of the taxing powers of provinces, cities, municipalities, and requirement of tax ordinances and revenue measures under the Local
barangays shall not extend to the levy of income tax except when levied on Government Code (LGC) and on the ground of double taxation. On
banks and other financial institutions. appeal, the CTA affirmed the decision of the RTC. No motion for
reconsideration was filed and the decision became final and
executory.
 LOCAL GOVERNMENT TAX P a g e |6

a. If you are Atty. ELP, what advice will you give Doña
Evelina so that she can recover the subject local business taxes?
b. If Doña Evelina eventually recovers the local business
taxes, must the same be considered income taxable by the national
government? (2014 Bar)
A:
a. Move for the execution of the judgment which has already
become final.
b. YES, subject to the tax benefit rule. The local business tax paid
is a business-connected tax hence, deductible from gross income. If at the
time of its deduction it resulted to a tax benefit to Doña Evelina, then the
recovery will form part of gross income to the extent of the tax benefit on
the previous deduction (Section 34(C)(1),NIRC).