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Protesting a business tax assessment

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Taxwise Or Otherwise

A few weeks ago, my friends and I had the chance to visit the fascinating beaches of Boracay after it underwent rehabilitation for six months. I can still remember the last time I was there about two decades ago, recapturing the same feeling of awe when I first set foot on its powdery white sand. It took a while for me to return after reading news articles of how exploitation and profiteering of various business establishments had debased the pristine beauty of this island gem.

Now that Boracay has repossessed its marvel, tourists can once again stroll freely and unobstructed along the shore to enjoy its clear azure water. I really have to commend both the national and local governments for their concerted efforts to restore the island to its former glory.

Speaking of government action, I also think that it is high time for local government units (LGUs) to revisit some of their local rules that contradict the Local Government Code (LGC). Take the case of a city ordinance regarding “payment under protest” for local business tax (LBT) assessments.

LBT is an annual tax paid by companies to secure their business permits in the locality where they are doing business. It is based on a certain percentage (3% maximum rate) of the taxpayer’s gross revenues or receipts for the prior year. For start-ups, LBT is based on the company’s initial capitalization. This tax is due to the local government within the first 20 days of January, or each subsequent quarter if paid on installment.

LGUs are allowed to conduct an audit of the taxpayer’s LBT payments for a period of five years from the date the tax becomes due. If deficient, the LGU will issue a notice of assessment to the taxpayer for the tax deficiency and will assess penalties. By way of recourse, taxpayers may file a protest within 60 days from the receipt of the assessment notice. Otherwise, the assessment becomes final and executory. If the protest is denied, the taxpayer’s remedy is to elevate the case to the appropriate courts.

Now here comes the tricky part. Under some city ordinances, a taxpayer is required to pay first the assessed local tax deficiency before the protest letter can be accepted by the LGU. Hence, taxpayers are barred from filing their protests without first paying the LBT assessment in the issued notice.




To prevent the LBT assessment from becoming final and to preserve their right to dispute the assessment, some taxpayers are forced to pay under protest. Aware that litigation is tedious and generally results in unbudgeted legal costs, taxpayers are constrained to pay the assessment in the hopes of resolving the issue at the LGU level without resorting to judicial remedies.

This requirement is unfair, especially if the assessed amount is exorbitant. I mean, what would prevent local tax examiners from coming up with tax findings that are arbitrary and capricious (sound familiar?), knowing that they can collect the assessment even under protest. The practice of “paying first before a protest can be entertained” is unreasonable, and worse, without any legal basis. Section 195 of the LGC, which provides the rules on protesting an LBT assessment, does not require prior payment of the assessment before a protest letter can be filed with the LGU.

Fortunately, the Supreme Court issued a decision (G.R. No. 196681 dated June 27, 2018) declaring that “payment under protest” is not a prerequisite before an LBT assessment can be contested. Hence, LGUs cannot enforce this condition though provided in their ordinances. The high court explained that for an ordinance to be valid, it must not contravene the Constitution or any statute, such as the LGC in this case.

Earlier, in August 2016, the Court of Tax Appeals (CTA) ruled that the city government cannot enjoy the presumption of validity when its policy deviates from the LGC. Thus, the onerous requirement of paying under protest is a void and ultra vires act contrary to the mandate of the LGC. By way of exception, payment under protest applies in real property tax assessments.

However, despite the Supreme Court’s decision, some LGUs continue to impose their policy with threats of not renewing the taxpayer’s business permit due to an unsettled assessment. This practice adds unwarranted pressure on the taxpayer to pay the tax assessment for fear of disrupting its business operations due to the absence of a valid permit.

While I can relate to the LGU’s zeal of finding efficient ways to achieve their collection targets and to run after tax evaders who shortchange the government, these initiatives should not be pursued at the expense of compliant taxpayers. Collection measures should maintain a healthy balance between the ends they seek to achieve and the means to realize those ends.

If left unchanged, unfair tax practices will turn away potential investors, persuade existing companies to relocate or cause business operations to slow down. Fewer business activities mean fewer tax collections to fund local projects and less employment opportunities in the locality.

I believe that LGUs can come up with better tax collection measures that are effective, fair, and most importantly, consistent with our tax laws. For now, compliance with the Supreme Court decision is one of the initiatives that LGUs can prioritize and focus on if they want to transform their current system.

Transformation involves a process of dramatic change, and its success is never achieved using temporary or band-aid approaches. Applying this to Boracay’s transformation, the LGU of Aklan likewise faced the challenge of closing the top tourist destination at the expense of losing an estimated $1.06 billion in tourist receipts. Despite the hard pinch on its revenue and livelihood, the province rallied to do what was right against all the odds. What first started as a vision has become a reality. The Boracay experience should inspire all LGU leaders that anything can be achieved, whatever the cost, through sheer political will.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.

 

Joel Roy C. Navarro is a director at the Tax Services Department of Isla Lipana & Co., a Philippine member firm of the PwC network.

+63 (2) 845-2728

joel.roy.navarro@pwc.com

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