August 6, 2015

BUREAU OF LOCAL GOVERNMENT FINANCE OPINION

Ms. Ma. Corazon M. Mendoza

GM — Finance and Accounting
Kawasaki Motors (Phils.) Corporation
Km. 23 East Service Road
Cupang, Muntinlupa City

Madam :

This refers to your letter dated July 10, 2015 requesting

clarification/opinion regarding Situs of Taxation particularly Sales
Allocation regulated under Article 243 of the Implementing Rules
and Regulations (IRR), implementing Section 150 of the Local
Government Code (LGC) of 1991.
In view hereof, the following queries are being raised:
1. Is Muntinlupa City correct in its position that the
70%-30% sales allocation shall be applied for all
sales allocated/delivered by your regional offices in
the cities of Mandaue City and Davao City since your
factory is located in Muntinlupa? Or is Davao City
correct in its argument that the 70%-30% sales
allocation is not applicable since you already
maintain regional office (branch) in Davao? cDTACE

2. Can Delivery Receipt serve as valid evidence of

sales allocation? If not, if Kawasaki Motors (Phils.)
Corporation (KMPC) issued sales invoices in the
regional offices will it be considered evidence of sales
allocation?
3. In case this Bureau provides opinion and you
determined that KMPC's current practice is not
aligned with our interpretation as to the local
business taxes payments, can KMPC ask for tax
credit/refund of business taxes erroneously paid to
the concerned cities or in case of underpayment, can
 KMPC be granted with condonation of penalties that
may be charged against it since the underpayment (if
there's any) is due to the conflict in interpretation of
the LGC and such that the payment of taxes was
made in good faith without any intention to deprive
the local government on what is due to them?
It is represented that KMPC is a duly registered domestic
corporation where its primary purpose is to manufacture,
assemble, buy, sell on wholesale, trade, use, service, repair, alter,
deal in motorcycles and articles of every kind and description. Its
principal office and factory are both located in Muntinlupa City.
However, it has two existing regional offices serving as extension
of the principal office. One is located in Mandaue City catering
motorcycle deliveries in Visayas area and the other is located in
Davao City for deliveries in Mindanao area.
The principal office in Muntinlupa City performs all the
following administrative and accounting functions:
1. recording all sales and other transactions in the
books of accounts;
2. maintains consolidated books of accounts and other
accounting records;
3. prints and issues sales invoices, collection receipts,
and other accounting documents for all sales
nationwide;
4. prepares and issues delivery receipts for motorcycle
deliveries to dealers in Luzon area;
5. prepares all kinds of tax returns remitted to the
Bureau of Internal Revenue; and
6. prepares consolidated and audited financial
statements.
The regional offices in Mandaue City and Davao City do not
perform any of the accounting functions but have the following
limited functions in their respective areas:
1. serve as quarters for personnel involved in sales
coordination with the dealers (customers); cCHITA

2. include warehouses that maintain stock-in trade

(motorcycles) inventories;
3. allocate and accept sales orders; and
 4. prepare and issue delivery receipts for motorcycle
deliveries to dealers withdrawn from warehouses
within their jurisdiction.
For purposes of business tax and renewal of business
permit, KMPC has been consistently paying tax dues in this
manner:
1. 100% of sales allocated/delivered in the entire Luzon
area are declared and corresponding business taxes
are paid in the City of Muntinlupa;
2. 100% of sales allocated/delivered in the entire
Visayas area are declared and corresponding
business taxes are paid in the City of Mandaue; and
3. 100% of sales allocated/delivered in the entire
Mindanao area are declared and corresponding
business taxes are paid in the City of Davao.
The above determination of sales allocation is on the basis
of delivery receipts issued in their respective territories.
In 2014, the City Government of Muntinlupa conducted a
post-audit evaluation of KPMC's five (5)-year business tax
payments covering the period 2009-2013. After the evaluation,
Muntinlupa City issued a letter of assessment to KMPC for the
taxable periods 2010-2014, the basis of which is Section 150 (b)
of the LGC quoted below:
"Section 150. Situs of the Tax. — (a) . . . CScaDH

"(b) The following sales allocation shall apply

to manufacturers, assemblers, contractors, producers,
and exporters with factories, project offices, plants, and
plantations in the pursuit of their business:
"(1) Thirty percent (30%) of all
sales recorded in the principal office shall be
taxable by the city or municipality where the
principal office is located; and
"(2) Seventy percent (70%) of all
sales recorded in the principal office shall be
taxable by the city or municipality where the
factory, project office, plant, or plantation is
located.
"xxx xxx xxx."
 Pursuant to the above provisions of the LGC, KMPC
requested opinions from Mandaue City and Davao City. The City
Treasurer of Mandaue was amenable in the assessment of
Muntinlupa City and even issued a certificate of tax credit for the
overpaid taxes. However, the City Treasurer of Davao is not
agreeable in the said assessment and cited the following
arguments:
"The law specifically provided for in Section 150,
paragraph A, that sales of the branch/sales outlet shall be
paid to the municipality or city where that particular
branch is located. It also states that in instances where
there is no branch or sales office in the said municipality,
the 30%-70% sharing of the gross sales will apply, but
since Kawasaki has already an existing branch in the city,
the contention of the City Government of Muntinlupa has
no legal or jurisdictional basis.
The Bureau of Local Government Finance stated in
its letter to Oscar Chan dated January 17, 2002 located in
page 89 of Local Business Taxation, The BLGF-DOF
Perspective, A compilation of BLGF-DOF Opinion from
1992 to December, 2002 with Syllabi of Opinions for
Quick Reference, that sales of branch or sales outlet
should be taxed by the local government unit (LGU)
where the aforementioned branch/outlet is situated, not
where the factory is located".
Those conflicting interpretations among the three localities
led to KMPC's confusion and in order to temporarily resolve the
issue, the management of KMPC voluntarily paid Muntinlupa City
the deficiency in business taxes for 2015 and applied the following
sales allocation in the renewal of its business permit: aHSTID

1. 100% of sales allocated/delivered in the entire Luzon

area and 70% of sales delivered in Visayas and
Mindanao area are declared and corresponding
business taxes are paid in the City of Muntinlupa;
2. 30% of sales allocated/delivered in the entire Visayas
area are declared and corresponding business taxes
are paid in the City of Mandaue; and
3. 100% of sales allocated/delivered in the entire
Mindanao area are declared and corresponding
business taxes are paid in the City of Davao.
 The above sales allocation showed that the 70% of sales
allocated/delivered in Mindanao area has been taxed twice, i.e., in
cities of Muntinlupa and Davao.
In view of the foregoing, you seek opinion on the
applicability of Situs of Taxation with the following circumstances:
1. Regional offices in the cities of Mandaue and Davao
do not record sales and do not issue sales invoices
and official receipts except delivery receipts;
2. Principal office in Muntinlupa City centrally records all
sales transactions in the books of accounts, and
prepares and issues sales invoices and other
receipts;
3. Factory is located in the same address as the
Principal office; and
4. Current sales allocation is on the basis of delivery
receipts issued in the three (3) offices.
In view of the immediate preceding representations, the
governing provisions of law applicable is Article 243 (b) (3) of the
Implementing Rules and Regulations (IRR), implementing Section
150 of the Code, are quoted as follows:
"Article 243. Situs of the Tax. — (a) Definition
of Terms —
(1) Principal Office — the head or main office
of the business appearing in the pertinent documents
submitted to the Securities and Exchange Commission, or
the Department of Trade and Industry, or other
appropriate agencies, as the case may be.
The city or municipality specifically mentioned in
the Articles of Incorporation or official registration papers
as being the official address of said principal office shall
be considered as the situs thereof.
xxx xxx xxx.
(2) Branch or Sales Office — a fixed place in a
locality which conducts operations of the business as an
extension of the principal office. However, offices used
only as display areas of the products where no stocks or
items are stored for sale, although orders for the products
may be received thereat, are not branch or sales offices
as herein contemplated. A warehouse which accepts
 orders and/or issues sales invoices independent of a
branch with sales office shall be considered as a sales
office.
CDHaET

"xxx xxx xxx.

(b) Sales Allocation — (1) . . . .
xxx xxx xxx.
(3) In cases where there is a
factory, project office, plant or plantation in
pursuit of business, thirty percent (30%) of
all sales recorded in the principal office
shall be taxable by the city or
municipality where the principal office is
located and seventy percent (70%) of all
sales recorded in the principal office
shall be taxable by the city or
municipality where the factory, project
office, plant or plantation is located. LGUs
where only experimental farms are located
shall not be entitled to the sale allocation
herein provided for. (Emphasis supplied)
xxx xxx xxx."
Applying the abovequoted provision of the IRR of the LGC,
this Bureau expresses the following views:
1. Considering that all sales transaction are
consummated and recorded in Muntinlupa City,
where both the principal and factory are located,
100% of the sales shall be declared and taxable in
Muntinlupa;
2. The 70%-30% allocation being claimed by Davao
City will not be applicable to both Davao and
Mandaue Cities since, as represented, only "Delivery
Receipts" are being issued by the those regional
offices of KMPC. For a fact and as commonly
understood, "Delivery receipt" refers to a document
evidencing the delivery of a shipment, typically
signed by the receiver to indicate that they have in
fact received the item being shipped and have taken
possession of it. In short, an acknowledgment by a
delivery receipt makes sure that the goods were
actually received by the intended recipient. However,
 in the event that the regional offices which maintain
warehouses in the Cities of Mandaue and Davao
accept sales orders, which is one of the functions of
the said regional offices, it should be considered as
sales offices and all accepted sales orders should be
recorded therein and 100% taxable to Mandaue and
Davao Cities, respectively.
3. As to the issue on tax refund or tax credit in case of
payment erroneously made to LGUs concerned,
Article 826 of the Implementing Rules and
Regulations (IRR) implementing Section 196 of the
LGC, which provides as follows:
"Article 286. Claim for Refund or Tax Credit.
— All taxpayers entitled to a refund or tax credit under this
Rule shall file with the local treasurer a claim in writing
duly supported by evidence of payment (e.g., office
receipts, tax clearance and other such proof of evidencing
overpayment) within two (2) years from the date of
payments of such tax, fee, or charge or from the date the
taxpayer is entitled to a refund or tax credit.
TaCEHA

"The tax credit granted a taxpayer shall not be

refundable in cash but shall only be applied to future tax
obligations of the same taxpayer for the same business. If
a taxpayer has paid in full the tax due for the entire year
and he shall have no other tax obligation payable to the
LGU concerned during the year, his tax credits, if any,
shall be applied in full during the first quarter of the next
calendar year on the tax due from him for the same
business of said calendar year.
"Any unapplied balance of the tax credit shall be
refunded in cash in the event that he terminates
operations of the business involved within the locality."
(Emphasis ours)
In view of the preceding provision of law, KMPC is entitled
to a refund or tax credit of the erroneous amount paid to Mandaue
and Davao City. However, the law provides that the same "shall
not be refundable in cash but shall only be applied to future tax
obligations of the same taxpayer for the same business".
However, with regard to the second condition providing the
two (2)-year prescription period within which to file the claim for
such refund or tax credit, this Bureau believes its inapplicability in
the herein case for the simple reason that the taxpayer cannot be
faulted for the prescription of the tax refund claim. When the tax
claimed to be refunded is illegally or erroneously collected, the
principle of solutio indebiti shall govern and not the two (2)-year
prescriptive period. The principle of solutio indebiti should apply in
the case at bar, thus, "In any case, a taxpayer should not be held
to suffer loss by his good intention to comply with what he
believes is his legal obligation, where such obligation does not
really exist." (Ramie Textiles v. Hon. Ismael Mathay Sr., G.R.
L-32364, 30 April 1979)
Furthermore, Article 2154 under the principle of solutio
indebiti, which is classified as quasi-contract under Section 2,
Chapter I, both of the Civil Code, provides that "[I]f something is
received when there is no right to demand it, and it was unduly
delivered through mistake, the obligation to return it arises." And
"since the collection was illegal, the obligation to return or refund
the same would be in the nature of solutio indebiti, which by the
Civil Code, prescribes in 6 years." (Victorias Milling Co., Inc. vs.
Central Bank of the Philippines, G.R. No. L-17798 March 31,
1965)
Further, it may be worth mentioning that the Supreme Court
in the case of Ramie Textile, Inc. vs. Hon. Ismael Mathay Sr.
(G.R. No. L-32364, April 30, 1979) similarly cited that:
"The quasi-contract of solutio indebiti is one of the
concrete manifestations of the ancient principle that no
one shall enrich himself unjustly at the expense of
another. Hence, it would seem unedifying for the
government, that knowing it has no right at all to collect or
to receive money for alleged taxes paid by mistake, it
would be reluctant to return the same." acHTIC

And finally, in view of the above views the issue on

condonation of penalties that the concerned LGUs may be
charged against KMPC becomes moot and academic.
It is emphasized however, that the above views are
expressed based on the facts and information presented in the
above letter dated July 10, 2015. However, if upon verification and
investigation the same shall be proven to the contrary then the
views rendered herein shall be considered null and void.

Very truly yours,

(SGD.) SALVADOR M. DEL
CASTILLO
OIC-Executive Director