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Are business taxes deemed to be business permit fees?

By: Atty. Jan Ethan Gordola on May 11,2023

IN the recent decision of Bases Conversion and Development Authority and John Hay Management Corp. v City Government of Baguio City (BCDA v Baguio Case, GR 192694. Feb. 22, 2023), the Supreme Court stated that “[t]he payment of fees for the issuance of business permits is regulatory in nature under the local government unit’s police power. It is not a tax for revenue generation. Tax-exempt entities, therefore, cannot claim to be exempted from paying fees for business permits.”

In the said case, the Bases Conversion and Development Authority (the Authority) and its subsidiary, John Hay Management Corp. (JHMC), are within the John Hay Special Economic Zone. Pursuant to Section 24 of Republic Act 7916, as amended, “except for real property taxes on land owned by developers, no taxes, local or national, shall be imposed on business establishments operating within the ecozone.” Based on this provision, the Authority and JHMC claimed that they cannot be made liable for “business taxes” imposed by the City of Baguio for the issuance of a business permit because it is “revenue-generating” for being based on the gross receipts from the previous fiscal year and are not regulatory in nature, and thus is a tax which they are exempt from.

Taxes vs regulatory fees

The distinction between what are taxes and what are regulatory fees is therefore crucial. Taxes are exactions by the government for the purpose of revenue generation, while fees are exactions for purposes of regulation and inspection, and are for that reason limited in amount to what is necessary to cover the cost of the services rendered in that connection (Calalang v Lorenzo, GR L-6961, June 17, 1955).

Regulatory fees are thus exacted under the police power of the State. In this regard, the Supreme Court held that while fees may have a revenue-raising aspect, the revenue incidentally generated must not exceed the cost of regulation (Ferrer v Bautista, GR 210551, June 30, 2015). In other words, the regulatory fees should have a correlation to the cost of regulation.

The Supreme Court, in the BCDA v Baguio Case, cited its ruling in Philippine Airlines v Edu, GR L-41383, Aug. 15, 1988, that regulatory fees may still be considered taxes if their purpose was primarily to generate revenue.

Therefore, as held by the Supreme Court in the BCDA v Baguio Case, to determine if an exaction is a fee or a tax, one must look into the purpose of its collection ― “If the exaction is made to raise revenue for the government to discharge its principal functions, the exaction is a tax. If the exaction is primarily regulatory, it is a fee, even if it incidentally raises revenue, as long as the revenue generated does not exceed the cost of regulation. If the revenue exceeds the regulatory costs, it is a tax.”

The power of local government unit/s (LGU/s)

There is no doubt that LGUs may impose both taxes and regulatory fees. Under Section 129 of the Local Government Code (LGC), each LGU shall exercise its power to create its own sources of revenue and to levy taxes, fees and charges subject to the provisions herein, consistent with the basic policy of local autonomy. Such taxes, fees and charges shall accrue exclusively to the LGUs. The power to impose taxes and fees by LGUs is also supported by Section 16 of the LGC or the General Welfare Clause, which authorizes LGUs to exercise powers to promote the general welfare of the people.

Municipalities are expressly granted by Section 143 of the LGC the power to impose taxes on certain businesses, while cities are expressly granted the power to impose the same tax pursuant to Section 151 of the same code.

The BCDA v Baguio Case

In the BCDA v Baguio Case, the Supreme Court held that while it may seem that LGUs impose business taxes to generate revenue, it held that such business taxes are deemed to be regulatory in nature, since they are essentially fees paid for the exercise of a privilege — they are paid as a prerequisite to the issuance of a mayor’s permit to conduct business. The Supreme Court noted that not paying business taxes will surely hinder the issuance of the mayor’s permit, and acknowledged that the LGC does not prohibit the local government from imposing other conditions before the issuance of such permit.

However, the issue in the said case was whether the payment of fees for a business permit in a special economic zone amounts to a payment of local taxes, and not business taxes.

The Supreme Court then concluded that in this case, the business “taxes” are thus a species of license fees that may be imposed by LGUs. The Supreme Court held that “[w]hile incidentally revenue-earning, fees for a mayor-issued business permit are primarily regulatory, since the LGU is not precluded from imposing conditions other than the payment of business taxes before the permit is issued.” The Supreme Court then emphasized that the issuance of business permits is exercising police power.

Lastly, the Supreme Court held that taxes are the lifeblood of the State, and thus, tax exemptions are construed strictly against the claimant.

In sum, the Supreme Court held that business taxes forming part of and which are required to be paid as a condition to the issuance of mayor’s permits are considered regulatory and not taxes for revenue generation. Thus, they are considered business fees, which are not covered by the tax exemptions of entities registered with the Authority and operating inside special economic zones.

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Jan Ethan L. Gordola is an associate of Mata-Perez, Tamayo & Francisco (MTF Counsel).

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