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The non-automatic application of PILAA

Bustling defines this time of the year. On cue, taxpayers prepare for the renewal of their business permits. With barely six days left, taxpayers buckle down to meet the Jan. 20 deadline, hoping for an extension from the local government units (LGUs) having jurisdiction over their respective businesses.

The renewal of the business permit is not without challenges.

For the business permit to be renewed, the taxpayer must pay the local business tax (LBT) based on the gross sales or receipts of the preceding calendar year. The LBT shall be payable for every separate or distinct establishment or place where business subject to tax is conducted. Often, taxpayers have to struggle with bureaucratic procedures at best, and downright unreasonable presumptions at worst, such as some LGUs’ refusal to accept a decrease in gross sales or receipts compared to last year’s declaration, automatic application of additional increase of a certain percentage in gross sales or receipts, and the application of the presumptive income level assessment approach (PILAA). Unfortunately, taxpayers would often be forced to acquiesce to the LGUs assessment to beat the deadline and ensure the issuance of their business permit.

PILAA is a tax collection tool which enables LGUs to set a certain income level standard for various business entities based on industry factors. It is commonly utilized nationwide among LGUs as a tool for the efficient and effective collection of taxes.

PILAA is usually applied at the height of the renewal of business permits when transaction traffic is heavy, and LGUs have limited time to verify the gross sales or receipts declared by the taxpayers applying for business permits.

However, use of the PILAA should not be automatic. While the application of PILAA caters to the convenience of LGUs, the approach raises due process issues, both substantive and procedural, in the collection of LBT.

Black’s Law Dictionary (8th ed.) defines presumption as “a legal inference or assumption that a fact exists, based on the known or proven existence of some other fact or group of facts.” Based on this definition, it is inferred that presumptive income in PILAA is a presumed or assumed income level based on known or proven facts.

Through Memorandum Circular (MC) No. 001.2020 dated Jan. 2, 2020, the Bureau of Local Government Finance (BLGF) reminded treasurers that the PILAA is used in computing LBT only if these two requisites are present: (1) the use of PILAA should be embodied in a local tax ordinance which has undergone public hearings and publications, and (2) the taxpayer is unable to provide proof of income.

The first requisite aims to ensure that the taxpayers are informed of the factors used in determining the presumptive income, and they agree to such level of presumptive income applicable to their industry. Further, for the PILAA to be validly applied, the second condition requires that the taxpayer failed to submit financial data of its income for the preceding calendar year.

In proving the income for the preceding calendar year, MC No. 001.2020 provides that a taxpayer may submit a sworn declaration of gross sales or receipts instead of the audited financial statements and the income tax returns since these documents may not yet be available early on in the year.

In the 2017 opinions of the BLGF and decisions of the Court of Tax Appeals (in C.T.A. EB Case No. 501 dated Dec. 10, 2010 and C.T.A. AC Case No. 200 dated Oct. 22, 2018), the rule is that the use of PILAA is not automatic. Treasurers have no right to apply the PILAA if the taxpayer has provided proof of its income by submitting the sworn declaration of gross sales or receipts. Further, the BLGF stressed that treasurers should not unjustifiably use the PILAA at their convenience. The practice results in undue harassment of taxpayers who are compelled to secure the needed business permit to operate their businesses.

Though CTA decisions and BLGF opinions do not form part of the law of the land, these decisions and opinions have probative value as being valid interpretations of the local tax laws and issuances and may be used as basis by taxpayers to refute any LBT assessment using PILAA without proper basis.

In practice, while there are treasurers that give weight to these decisions and opinions, it is unfortunate that there are a number of them who still insist on using PILAA without legal basis and allege under-declaration of income on the part of the taxpayer to justify the use of the PILAA. But without using PILAA, treasurers are not left without recourse against under-declaration. MC No. 001.2020 provides that if there is suspected under-declaration of gross sales or receipts by the taxpayer, these should be tagged by the LGU, and the business may be subjected to an examination by the treasurer. However, the audit should not result in the deferment of the issuance of the business permit and should be done after the business renewal period. In other words, the taxpayer should not stand to suffer by the non-issuance of its business permit.

I hope treasurers assess LBTs in accordance with the requirements of the law and for LGUs to smoothly issue business permits if indeed the taxpayers have complied with all the requirements. This would give businesses small victories during these challenging times.

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.


Rachel D. Sison is a senior manager at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

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