A previous BusinessMirror issue highlighted a recent ruling by the Supreme Court that says local government units (LGUs) cannot impose local business tax on petroleum products. That decision (in G.R. 187631, July 8, 2015) is significant, not only to the parties involved in the case, but also to all other players, including smaller dealers and retailers, as well as consumers. The message is clear that local taxing power cannot be exercised at will, especially if that power is limited by a statute.
Indeed, no less than the Constitution grants each LGU the power to create its own sources of revenues. The Local Government Code (LGC) of 1991 further recognizes that power as consistent with the basic policy of local autonomy. It is on this basis that some LGUs believe that the power is so broad that any activity, involving the rendering of services, production, manufacturing, distribution, selling or any business activity can be the subject of taxation.
Jurisprudence, however, has taught us that local taxation has many limitations. Foremost is that for a transaction to be subject to local business tax, it is imperative that the activity falls within the sphere of commercial activity regularly engaged in as a means of livelihood or with a view to profit (G.R. 154993, October 25, 2005). If the activities are not geared toward maintaining a livelihood or obtaining profit, the party involved in such transaction is not required to pay local business tax.
But even an activity that is regularly conducted for profit may not necessarily be covered by the taxing power of LGUs. There are restrictions on the power to tax provided in our laws.
Going back to that recent decision regarding local taxation of petroleum products, the Court emphasized that the power to tax is not inherent in LGUs. The Constitution itself provides that this power shall be subject to the guidelines and limitations which Congress may provide. Thus, local taxation must be exercised within such guidelines and limitations provided in statutes.
On this aspect, Section 133 of the LGC enumerates the common limitations on the taxing powers of LGUs. This provision clearly provides that local taxation does not extend to, among others, taxes, fees or charges on petroleum products. As so explained by the Court, this is a specific provision of the LGC that prevails over Section 143 of the same code from where the power of LGUs to impose tax is derived. Thus, as long as the subject matter of the taxing power of the LGUs is the petroleum per se or even the activity or privilege related to petroleum products, such as manufacturing and distribution of products, it is covered by the limitation and no levy can be imposed.
This categorical pronouncement from the Court hopefully settles the issue on the taxability of petroleum product, in all its forms.
Related to this, one of the favorite subjects of local taxation is the levy of taxes on liquefied petroleum gas (LPG). Some LGUs are taking the view that LPG is subject to their taxing power. Those who take this position categorize LPG as cooking gas and tax it based on Section 143(c)(3) of LGC and Section 232(c)(3) of the Rules and Regulations Implementing the LGC, which specifically impose local tax on exporters, manufacturers, millers, producers, wholesalers, distributors, dealers or retailers of essential commodities, such as cooking gas.
Contrary to this view, the Bureau of Local Government Finance had made various issuances confirming that the sale of LPG is not subject to local business tax. This is so because imposing taxes on LPG would mean additional burden, which shall ultimately be shouldered by the consuming public.
More important though, the definition of “petroleum products” includes LPG (Republic Act 8479). Since Section 133 (h) of the LGC is very clear that it is beyond the power of LGUs to impose any kind of tax on petroleum products and, the fact that LPG is a petroleum product, sales of LPG should, likewise, be benefited by the decision in G.R. 187631, July 8, 2015.
The limitation on the taxing power of LGUs is clearly defined in the law and without any qualification. LGUs should adhere to this pronouncement and restrain themselves from levying taxes on petroleum products of any kind.
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The author is a senior partner of Du-Baladad and Associates Law Offices, a member-firm of World Tax Services Alliance.
The article is for general information only and is not intended, nor should be construed as a substitute for tax, legal or financial advice on any specific matter. Applicability of this article to any actual or particular tax or legal issue should be supported therefore by a professional study or advice. If you have any comments or questions concerning the article, you may e-mail the author at fulvio.dawilan@bdblaw.com.ph or call 403-2001 local 310.