Long before the lifeblood theory of taxation was laid down by the Supreme Court, the Roman philosopher, orator and political theorist Marcus Tullius Cicero (3 January 106 BC to 7 December 43 BC) stated: “Taxation is central to the existence and functioning of a nation, as well as to the functioning of its lower levels of government”. Under the Roman empire, paying taxes was an attribute of Roman citizenship which gave citizens the right to enforce their rights.
In the Philippines, local government units (LGUs) -- provinces, cities, municipalities and barangays -- are granted the constitutional right (Section 5, Article X of the Constitution) to create their own sources of revenue. Local governments may levy taxes, fees and charges in accordance with the guidelines and limitations set by Congress and only within the boundaries of their respective territorial jurisdictions. For those local governments under the autonomous regions, their taxing powers are limited and bound by their enabling laws.
This authority to tax residents, businesses, properties and activities within their jurisdictions enable LGUs to fund the local government projects and influence the business activities they wish to promote in their localities. It allows them to directly finance public sector activities, the legal system, police protection, local health and public assistance. It is a means for them to espouse appropriate social programs in the areas of health, education, community development and family planning. This is necessary for countryside development specially for localities that are far from Metro Manila, where agencies of the national government are chiefly seated.
As stated earlier, the power granted to local governments has a boundary. Section 25, Article II in relation to Section 2, Article X of the Constitution lays down the rule that taxpayers should not to be overburdened or saddled with multiple and unreasonable impositions. Further, since that power is not inherent, the local government’s exercise of taxing powers must be consistent with the limitations imposed by Congress.
In a tax case (CTA Case No. 120, 3 November 2015) involving a state-owned corporation (GOCC) engaged in the business of distributing electricity, the Court of Tax Appeals (CTA) resoundingly emphasized that the taxing power of an LGU is ring-fenced by the guidelines and limitations provided by Congress in the Local Government Code of 1991 (the “LGC”). The LGC provides for comprehensive instances as to when and how LGUs may impose tax. First, the power to tax is vested and must be exercised by the Sanggunian. As provided in Section 132 of the LGC, this power “shall be exercised through an appropriate ordinance”. Secondly, there must be a taxable business activity in the locality.
The LGU assessed business tax on the GOCC for maintaining a branch office within its locality. Pursuant to a tax ordinance issued by the Sanggunian, the municipality has the authority to impose business taxes “on any business, not otherwise specified” in its revenue code. The “branch office” being alluded to was the “electric substations” within the territorial jurisdiction of the municipality. However, the GOCC, a distributor of electricity, did not sell electricity nor conduct any economic activity in the locality. It only maintained substations and monitored assets and transmission facilities.
The GOCC assailed the assessment before the trial court, asserting that it was not subject to tax, and that the act of the municipality was beyond the bounds of its power to tax. First, the local ordinance did not authorize the LGU to tax the transmission of electricity. Second, the substations may not be considered as “branch offices” or a fixed place that conducts operations of the business as an extension of its principal office within the locality. Thus, the situs of taxation for purposes of imposing local business tax under Section 150 of the LGC was not established.
The trial court and the CTA upheld the position of the GOCC. The power of a local government to impose tax must be anchored on an ordinance and must be in accordance with the LGC. Otherwise, the municipality may not impose a tax. Secondly, the substations may not be considered as branch offices since the activities of the substations were limited to the operation and maintenance of various power equipment, reporting and correction of defects; they do not include the maintenance of transmission line facilities which involves regular inspection of various transmission/sub-transmission lines, reporting, scheduling, and correction of defects. The substations did not receive payments, issue receipts or book payments within the said municipality.
The key take away here is that the local government does not have the inherent power to tax and therefore, that right to tax may not go beyond the guidelines laid down by Congress under the LGC.
Interestingly, in the United States, the US Supreme Court recognized that under the US federal legal system, Indian Tribes do not just have a “devolved right to tax” but have the inherent right under the Indian Reorganization Act to impose tax on mining activities as part of their power to govern and to pay for the costs of self-governance. In the case of Merrion v. Jicarilla Apache Tribe, the US Supreme Court held that the power to tax is an essential attribute of Indian sovereignty because it is a necessary instrument of self-government and territorial management. The power enables a tribal government to receive revenues for its essential services. The power does not derive solely from the Tribe’s power to exclude non-Indians from tribal lands but also from its general authority as a sovereign to control economic affairs within its jurisdiction and to defray the cost of providing government services by requiring contributions from persons or enterprises engaged in such activities. The court pointed out that Merrion had carried on a business in a reservation, benefited from police protection and other governmental services, reaping the advantages of a civilized society assured by the tribal government. Under these circumstances, there is nothing exceptional in requiring Merrion to contribute to the state tax.
The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.
Ma. Teresa T. Ledesma is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
(02) 845-2728
ma.teresa.t.ledesma@ph.pwc.com
source: Businessworld
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