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The first order of business: Local business tax and real property tax
08 Jan 2019As we hit the first month of the year, it is time for another round of renewal and compliance. What better way to start the year than to have a clear mind set of what needs to be accomplished.
Businesses are required to renew their business permits with the local government every year, and for 2019, this is due on or before Jan. 21. Companies need to pay the local business tax, real property tax, and other fees and charges. Because the processing period is short, companies should be aware of the requirements to ensure that the process can be completed within the due date.
LOCAL BUSINESS TAX
All entities doing business are required to pay local business tax (LBT), except for those granted exemption under the Local Government Code (LGC) and special laws. The tax can be paid annually, on or before Jan. 20, or quarterly, within the first 20 days of January and of the first month of each subsequent quarter. Failure to pay the LBT, fees, or charges on time will be subject to a surcharge not exceeding 25% of the amount of taxes, fees, or charges not paid on time and an interest at a rate not exceeding 2% per month of the unpaid taxes, fees, or charges, until such amount is fully paid. However, in no case will the total interest on the unpaid amount or portion thereof exceed 36 months. Since local taxes, fees, and charges accrue on the first day of January of each year, interest on late payments shall be computed from Jan. 1, not from the due date for payment. Failure to pay the LBT means the non-renewal of the business registration, which can be a ground for closure of the establishment by local authorities.
The LBT rate will depend on the local tax code or ordinance enacted by the LGU pursuant to the provisions and limitations of the LGC. Most local tax codes prescribe the annual LBT as a fixed amount, depending on the level of gross sales or receipts. Other rates are set at a percentage of gross sales or receipts. The rates vary depending on the business activity. Hence, an entity can be subject to different rates if it is engaged in several lines of business. If there are new or additional activities undertaken in 2018, confirm with the LGU the LBT rate to be applied.
The LBT for 2019 will initially be based on the gross sales or receipts for 2018. Given that the Audited Financial Statements are not yet available at the time the LBT is due, the taxpayer is required to prepare a Sworn Declaration of its gross sales or receipts for the year 2018. Most LGUs also require presenting VAT returns to countercheck the taxpayer’s declarations. If there is a suspected under declaration of gross sales or receipts, the application shall be tagged by the LGU and may be subject to the examination of books and accounts by the local treasurer after the business renewal period.
The Bureau of Local Government Finance (BLGF), in its Memorandum Circular No. 01-001-2017, enumerated the following items that are not to be included in gross sales or receipts: (a) receipts from the sale of real properties or realty assets, unless one is engaged in buying or selling real estate; (b) determinable discounts at the time of sales, sales returns, excise tax, and VAT; (c) passive income, i.e., interest, dividends, and gains from the sale of shares; and (d) receipts from the printing and/or publishing of books and/or other reading materials prescribed by the Department of Education as school text and reference.
BLGF Memorandum Circular No. 01-001-2017 emphasized that the automatic application of 10 to 15% increase on the previous year’s gross receipts as basis for LBT without legal basis is discouraged. Taxpayers, however, must be aware that this is the practice of some LGUs. The LGU of Quezon City does not mandate an increased LBT payment. Instead, it has announced that entities in the city that would be paying 30% or more LBT, as compared to their payment in 2018, would be exempt from audit for the years 2016, 2017, and 2018 pursuant to Ordinance SP-2780 s 2018.
The BLGF Memorandum Circular also states that the following entities are exempt from paying LBT: (a) Business enterprises certified by the Board of Investments (BOI) as pioneer and non-pioneer for six and four years, respectively, from the date of registration; (b) business that produce, manufacture, refine, distribute, or sell oil, gasoline, and other petroleum products; (c) Cooperatives duly registered with the Cooperative Development Authority; and (d) Philippine Economic Zone Authority (PEZA)-registered enterprises and other Special Economic Zones as may be provided for by the specific Republic Act. However, if the PEZA or BoI-registered entity has income from unregistered activities, it may be required to pay LBT on such income.
Entities exempt from LBT payment are still required to secure a Mayor’s Permit. Regional Operating Headquarters, as well as enterprises registered with PEZA, are exempt from securing a mayor’s permit. However, some LGUs require them to secure a business or mayor’s permit and to pay certain regulatory fees. BoI-registered enterprises, meanwhile, must secure a business or mayor’s permit and pay regulatory fees.
As part of the renewal requirements, businesses should secure a comprehensive general insurance policy. Some LGUs require business entities to secure their insurance from accredited insurance companies. Though this is not a requirement under the law, it is best to check with the LGU to ensure a smooth renewal process.
REAL PROPERTY TAX
Another obligation of entities with the LGU is the payment of real property tax (RPT) imposed on real property, such as land, buildings, and machinery deemed real property, and other improvements. If you have newly acquired real property, machinery, or additional improvements, file with the Local Assessor’s Office a sworn declaration of the value within 60 days from the acquisition, installation, or completion of the property.
RPT accrues on the first day of January of each year, and may be paid annually in full on or before March 31, or in quarterly installments on or before the last day of each quarter. For advance payments, some LGUs grant a discount of as much as 20% of the annual tax due. Check if your LGU provides this discount, so you can decide between paying in full or on installment.
The RPT is based on the assessed value of the property multiplied by the tax rate. For most cities and municipalities, the RPT rate is 2% and 1% of the assessed value for Metro Manila and the provinces, respectively. The assessed property value is the fair market value multiplied by the assessment level. Some cities may have different tax rates, and so it is best to verify your city’s tax rate with the city treasurer’s office.
Late payments will result in an interest of 2% per month to a maximum of 72% for 36 months. While interest stops on the 36th month, non-payment can result in the foreclosure and auction of the tax-delinquent properties, if the LGU decides to do so.
PEZA-registered enterprises under an income tax holiday (ITH) are not exempt from RPT on land and/or buildings, but are exempt from RPT on machinery (considered real property) for three years from acquisition. A PEZA-registered enterprise that has transitioned to the 5% gross income tax (GIT) regime, in lieu of all national and local taxes, is exempt from RPT on land, buildings, or machinery deemed real property, except for RPT on land owned by an economic zone developer. BoI-registered enterprises do not enjoy exemption from RPT.
Quezon City also announced an amnesty for RPT delinquencies for 2018 and prior years if settled not later than Oct. 30, 2019. You may check with your own LGUs if they are also offering an amnesty to save on interest and surcharge on past due taxes.
Be aware of the dates to avoid penalties and interest charges for late payment, and pay early to avoid long queues.
Ed Warren L. Balauag is a manager of the Tax Advisory and Compliance of P&A Grant Thornton.
As published in BusinessWorld, dated 08 January 2019