Taxation

Nature of Local Taxing Power

Local governments do not possess inherent taxing power; their authority to tax is a delegated power drawn from the Constitution and implemented by the Local Government Code. The constitutional grant authorizes each local government unit to create its own sources of revenue and to levy taxes, fees, and charges, but always subject to congressional guidelines and limitations.

Local fiscal autonomy means that revenues validly raised by a local government accrue to that local government and may be used for local public purposes, subject to law, accounting rules, and audit. It does not mean freedom to impose any revenue measure the sanggunian considers useful; the ordinance must remain within the powers conferred by statute.

The power is legislative in character. A local tax, fee, or charge must be imposed by ordinance enacted by the proper sanggunian, not by executive order, administrative circular, billing statement, or contract. The local chief executive implements and collects; the sanggunian creates the imposition.

Because taxation is a burden on property and business, grants of local taxing power are construed according to the statutory text. Doubt on whether an LGU has been authorized to impose a tax is resolved against the taxing authority, while doubt on whether a taxpayer is exempt is resolved against the taxpayer claiming exemption.

Local taxes are territorial. An LGU may tax persons, property, businesses, privileges, or activities only when the taxable incident has sufficient connection with its territorial jurisdiction under the Local Government Code and the applicable situs rules.

Tax, Fee, Charge, and Special Levy

Fundamental Principles and Limitations

Every local revenue measure must satisfy the fundamental principles governing local taxation. It must be uniform within the territorial jurisdiction of the LGU, equitable, levied for a public purpose, not unjust, excessive, oppressive, or confiscatory, and not contrary to law, public policy, national economic policy, or statutory limitations.

Uniformity in local taxation requires that all subjects or objects of the same class within the same taxing jurisdiction be treated alike. It does not require identical treatment of different classes if the classification is based on substantial distinctions, is germane to the purpose of the ordinance, is not limited to existing conditions only, and applies equally to all members of the class.

Equity requires relation to ability to pay or to the nature of the taxable activity, while due process prohibits arbitrary, irrational, or confiscatory impositions. A tax may be burdensome without being invalid; it becomes vulnerable when the burden is so disproportionate or irrational that it ceases to be a lawful revenue measure.

Public purpose is satisfied when the proceeds are for governmental, public, or local community objectives. The benefit need not be enjoyed equally by every inhabitant, but the measure cannot be a device to transfer public money to a purely private interest.

Prohibited Local Impositions

The Local Government Code withholds certain subjects from local taxation because they are reserved to the national government, protected by national policy, or inconsistent with the free flow of commerce among localities. An ordinance that reaches a prohibited subject is void to that extent even if the LGU labels the exaction as a fee or charge.

• LGUs generally may not impose income taxes, documentary stamp taxes, estate or inheritance taxes, customs duties, tonnage dues, wharfage charges of the kind reserved to national law, or taxes that duplicate national internal revenue taxes not locally delegated.
• A local imposition cannot operate as a value-added tax, national percentage tax, or excise tax, although the Code may authorize local business taxes measured by gross sales or receipts.
• Taxes, fees, or charges on petroleum products are prohibited as local impositions, because the Code removes that subject from local taxing power.
• Goods, merchandise, or commodities carried into, out of, or merely passing through an LGU cannot be burdened by local taxes, tolls, fees, or charges for passage or movement.
• Agricultural and aquatic products sold by marginal farmers or fisherfolk are protected from local taxation in order to avoid burdening subsistence production and market access.
• Local taxes on gross receipts of transportation contractors and common carriers by air, land, or water are generally prohibited, subject to the special local treatment of tricycles and other authority expressly conferred by law.
• LGUs may not impose taxes, fees, or charges of any kind on the National Government, its agencies and instrumentalities, or other LGUs, subject to the rule that taxable beneficial use of otherwise exempt property may be assessed against the beneficial user.
• Businesses or entities enjoying specific statutory protection, such as registered cooperatives and enterprises under a valid incentive period, cannot be taxed contrary to the protection granted by national law.

Exemptions and Incentives

Tax exemptions are never presumed. A person, entity, property, or activity claiming exemption from a local tax must point to a clear constitutional or statutory basis and must prove that it falls within the exemption.

The Local Government Code withdrew many prior local tax exemptions and preserved only those recognized by the Code or by later valid law. A special law enacted after the Code may grant or restore a local tax exemption if the intent to exempt from local taxes is clear and controlling.

A local sanggunian may grant exemptions, incentives, or relief only within authority granted by national law. Local fiscal autonomy allows LGUs to manage their revenue base, but it does not authorize an ordinance to nullify a national tax rule, revive an exemption withdrawn by statute, or surrender revenues in a manner prohibited by law.

Taxing Powers by Level of LGU

The Local Government Code distributes taxing powers among provinces, cities, municipalities, and barangays. The allocation prevents lower-level duplication, reflects the administrative capacity of each LGU, and identifies which unit may tax particular activities or property.

Local Business Taxes and Situs

Local business tax is imposed on the privilege of engaging in business within the taxing jurisdiction. It is usually measured by gross sales or gross receipts of the preceding calendar year, but the taxable privilege is the conduct of business within the LGU.

Gross sales generally refer to the total selling price of goods or merchandise, while gross receipts refer to the total amount actually or constructively received for services or use of property. Deductions, exclusions, and graduated rates depend on the business classification fixed by the Code and the ordinance.

Situs rules prevent several LGUs from taxing the same receipts merely because a taxpayer has a principal office, branch, warehouse, plant, project office, or sales outlet in different places. A branch or sales outlet is normally taxable where it is located, while receipts recorded only at the principal office may be allocated according to the statutory rules when production, sales, and management occur in different LGUs.

A manufacturer, producer, contractor, or service provider may be subject to business tax in more than one LGU if distinct taxable incidents exist in those jurisdictions. What is prohibited is an assessment that ignores the statutory allocation and taxes receipts with no sufficient local connection.

A franchise tax is a local tax on the privilege of exercising a franchise within the LGU. A taxpayer with a legislative franchise is not exempt from local franchise tax unless a valid law clearly grants an exemption from local taxation or otherwise precludes the local imposition.

Real Property Tax as Local Taxation

Real property tax is a local ad valorem tax on real property, including land, buildings, machinery, and improvements. Provinces, cities, and municipalities in Metropolitan Manila may levy it under the Local Government Code, and the proceeds support local services and the special education fund where applicable.

Assessment and levy are distinct. The assessor classifies, appraises, and assesses property according to actual use and applicable assessment levels; the sanggunian levies the tax by ordinance within statutory limits; the treasurer collects the tax and enforces remedies for delinquency.

Actual use is central to classification. Real property is classified, valued, and assessed according to the purpose for which it is principally or predominantly used, even if the owner's corporate purpose, title, or intended use suggests another classification.

Real property tax attaches to the property itself. The tax lien is superior to private liens, follows the property despite transfers, and may be enforced through administrative levy and sale or through judicial action, subject to statutory notice and redemption requirements.

Real Property Tax Exemptions

Exemption from real property tax depends on clear law and, for use-based exemptions, on actual, direct, and exclusive use for the exempt purpose. Ownership alone is not always controlling; the property's actual use and beneficial user may determine taxability.

• Real property owned by the Republic or its political subdivisions is exempt, except when beneficial use is granted to a taxable person, in which case the beneficial user may be assessed.
• Charitable institutions, churches, parsonages or convents appurtenant to churches, mosques, nonprofit or religious cemeteries, and properties actually, directly, and exclusively used for religious, charitable, or educational purposes enjoy exemption to the extent of the exempt use.
• Machinery and equipment actually, directly, and exclusively used by local water districts or by government-owned or controlled corporations engaged in supplying or distributing water or electric power are exempt under the Code.
• Real property owned by duly registered cooperatives is exempt under the statutory policy favoring cooperatives.
• Machinery and equipment used for pollution control and environmental protection are exempt when they satisfy the statutory requirements.

The phrase actual, direct, and exclusive does not demand that the property be used every minute for the exempt purpose, but the exempt use must be primary, immediate, and not merely incidental to a profit-making or private purpose. If a separable portion is used for a taxable activity, that portion may be assessed.

Validity of Local Revenue Ordinances

Enactment Requirements

A local tax ordinance must be enacted through the procedure required for revenue measures. The requirements of notice, public hearing, approval, publication or posting, and effectivity are safeguards of due process and local accountability.

• The ordinance must identify the tax, fee, or charge; the taxpayer or taxable object; the rate or amount; the tax base; the time and manner of payment; and the penalties, surcharge, or interest for nonpayment.
• A public hearing must be conducted so affected taxpayers and sectors may be heard before the sanggunian enacts the revenue measure.
• The ordinance must comply with publication or posting requirements before it becomes effective against taxpayers.
• Rates may be adjusted only within statutory limits, including the rule that general adjustments under the Code cannot be made too frequently or beyond the allowed percentage increase.
• Penalties must stay within the statutory limits for surcharges and interest; an LGU cannot create punitive exactions that the Code does not authorize.

Substantial compliance may suffice for nonessential procedural details, but omission of a required public hearing or effectivity publication goes to the validity and enforceability of the ordinance. A taxpayer cannot be bound by a local tax that was never validly enacted or made effective.

Review of Revenue Measures

Questions on the constitutionality or legality of a local tax ordinance or revenue measure are raised by appeal to the Secretary of Justice within the statutory period from effectivity. The appeal does not automatically suspend the ordinance unless suspension is directed under the Code.

The Secretary of Justice reviews legality, not fiscal wisdom. The inquiry is whether the LGU had authority, followed required procedure, respected constitutional limitations, and stayed within statutory ceilings and prohibitions.

After the Secretary acts, or after the period for action lapses, the aggrieved party may go to the proper court within the period fixed by the Code. An action that is really a direct attack on the ordinance must respect this special review route, while an assessment protest or refund claim follows its own statutory remedy.

Assessment, Collection, Protest, and Refund

Assessment and Collection of Local Taxes

Local taxes, fees, and charges are assessed and collected by the local treasurer according to the ordinance and the Code. The assessment must inform the taxpayer of the nature of the tax, the amount due, the basis of computation, and the period covered so that the taxpayer can intelligently contest it.

Local taxes are generally collected within five years from the date they become due, or within the longer statutory period when fraud or intent to evade payment is present. The running of the period may be suspended by legal restraints, taxpayer waiver, reinvestigation arrangements, or absence from the country when recognized by law.

The LGU may enforce collection by administrative remedies such as distraint of personal property and levy on real property, or by civil action. These remedies are cumulative but must observe notice, due process, and statutory procedure.

Delinquency may give rise to surcharge and interest within the limits allowed by the Code. Interest cannot be expanded indefinitely by ordinance beyond the statutory cap.

Protest of Local Tax Assessment

1. A taxpayer who receives a local tax assessment may file a written protest with the local treasurer within the statutory period, stating the grounds and supporting facts.
2. The local treasurer must decide the protest within the period fixed by the Code. A denial, or inaction after the period for decision lapses, allows the taxpayer to bring the proper action in court within the statutory period.
3. Failure to protest within the period makes the assessment final and executory, subject only to exceptional grounds recognized by law.
4. The protest remedy attacks the assessment, computation, classification, taxpayer liability, or application of the ordinance to the taxpayer. It is distinct from a facial challenge to the legality of the ordinance.

Refund or Credit of Local Taxes

A claim for refund or credit arises when a local tax, fee, or charge has been erroneously or illegally collected, or when the taxpayer becomes entitled to a credit under law. The taxpayer must first file a written claim with the local treasurer.

The court action for refund or credit must be filed within the statutory two-year period counted from payment or from the date the taxpayer became entitled to refund or credit. The written administrative claim is a condition precedent, but it does not justify filing the judicial action beyond the period set by the Code.

The taxpayer must prove both the illegality or error in the collection and the amount refundable. A mere allegation that the ordinance is invalid, without proof of payment and entitlement, is insufficient for refund.

Real Property Tax Remedies

Real property tax remedies depend on the matter being contested. Disputes on assessment, classification, valuation, or exemption are brought through the assessment appeal process, beginning with the Local Board of Assessment Appeals within the statutory period from receipt of the assessment notice.

Disputes on collection of real property tax generally require payment under protest before the protest is entertained. The payment under protest rule reflects the policy that local revenues should not be stopped by unresolved disputes, while preserving the taxpayer's right to seek refund or credit if the collection is unlawful.

For delinquent real property tax, the LGU may levy the property, sell it at public auction, purchase it if there is no adequate bidder, and issue the corresponding certificate, subject to statutory notice and the owner's right of redemption within the period allowed by law.

Doctrinal Effects of Local Taxation

Fiscal Autonomy and National Supremacy

Local fiscal autonomy protects the ability of LGUs to raise and use local revenues, but Congress remains the source of the delegation and may define, limit, expand, or withdraw local taxing powers. Administrative issuances cannot defeat a local tax power granted by statute unless the issuing agency is implementing a valid law that controls the subject.

National agencies and regulators cannot create local tax exemptions by mere certification, opinion, or contract when the exemption requires a law. Conversely, an LGU cannot impose a local tax on a subject that national law has expressly removed from local taxation.

Double Taxation and Overlapping Impositions

Double taxation is not automatically unconstitutional, but a local ordinance may be invalid when it imposes the same kind of tax on the same subject, for the same purpose, by the same taxing authority, during the same period, in a manner that is oppressive or contrary to statutory limits.

Overlapping local taxes may be valid when different LGUs tax different privileges or when the Code expressly allocates shares or situs. The decisive inquiry is whether each imposition has a distinct legal basis and a taxable incident within the imposing LGU.

Territoriality and Non-impairment

An LGU cannot tax activities, receipts, or property beyond its territorial jurisdiction merely because the taxpayer is registered, has officers, or keeps records there. The taxable event must occur, be located, or be allocated to the LGU under the Code.

Contracts with an LGU cannot override statutory taxing power unless the law itself authorizes the exemption or limitation. The non-impairment clause does not protect a private agreement that attempts to bargain away a taxing power reserved by law for public purposes.

Police Power Measures with Revenue Effects

A regulatory fee remains valid even if it incidentally produces revenue, provided the amount is reasonably related to the cost of regulation, inspection, licensing, or supervision. When the charge is primarily designed to raise general revenue and lacks relation to regulation, it must be justified as a tax under delegated taxing authority.

Mayor's permit fees, inspection fees, market fees, garbage fees, and similar charges must be connected to the service, regulation, or facility for which they are imposed. A revenue ordinance may contain both taxes and regulatory fees, but each exaction must independently satisfy the legal requirements applicable to its character.