By: Atty. Rey Christian M. Guintibano on April 24,2025

LOCAL government units (LGUs) have the power to create their own sources of revenue pursuant to Section 5, Article X of the 1987 Constitution. This power to tax was further defined by Republic Act 7160, or the Local Government Code of 1991 (LGC), which enumerates the specific types of taxes that may be levied by provinces, cities, municipalities and barangay. Nowadays, businesses may operate in various locations across different municipalities; hence, it is important for business owners to understand the situs of taxation to ensure the proper payment of taxes.

The Court of Tax Appeals (CTA) tackled the issue of situs of local franchise tax in the recent case of Smart Communications Inc. v. Province of Cagayan (CTA Administrative Circular 291, Feb. 27 2025). In the Smart case, the province assessed franchise taxes against the telecommunications company for the years 2011 to 2015, in the total amount of P48.5 million, pursuant to Section 137 of the LGC. This provision authorizes provinces to impose a franchise tax on businesses enjoying a franchise, based on gross annual receipts from income received or realized within their territorial jurisdiction.

Smart argued that under Article 266 of the Implementing Rules and Regulations of the LGC, provinces cannot impose franchise taxes on businesses operating within the territorial jurisdiction of any city located within the province. It claimed that it operates within the territory of Tuguegarao City.

Cagayan countered that the prohibition under Article 266 of the IRR applied only to businesses operating solely within the confines of a city. It further argued that since Smart has installed and maintained cellular towers across various municipalities in the province, its gross receipts should not be considered as earned solely within Tuguegarao City.

The CTA ruled in favor of Smart. It held that while the LGC did not explicitly provide for the situs of local franchise tax, guidance may be drawn from Section 150(a) of the same Code. It provides that, for purposes of collecting local business taxes, “businesses maintaining or operating a branch or sales outlet elsewhere shall record the sale in the branch or sales outlet making the sale or the transaction, and the tax thereon shall accrue and shall be paid to the municipality where such branch or sales outlet is located.”

By analogy, the CTA ruled that the franchise tax under Section 137 should follow a similar situs rule. Since the franchise tax is imposed on gross receipts, and such receipts are recorded in a specific location, it is the place of recording — not the place where the service is consumed — that determines the situs of taxation.

The CTA’s interpretation underscores the principle that territorial jurisdiction is not determined merely by the presence of physical assets or customers but by the location where the taxable event, i.e., the recording of income, occurs. The fact that a business operates in or serves consumers within a locality does not automatically render it liable to pay taxes in that jurisdiction.

On the other hand, this ruling may be seen as unfavorable to LGUs where businesses have established a tangible presence and exert significant impact on the locality’s infrastructure and community yet contribute no tax revenue due to the technicality that income is recorded elsewhere. This tension is heightened by the absence of any explicit provision in the LGC that defines the situs of local franchise taxes.

While it is helpful for taxpayers to be aware of the scope and limitations of LGUs’ taxing powers, situations where the rules are unclear or open to competing interpretations often place business owners at the short end of the stick. With the 2025 elections approaching, future lawmakers may consider revisiting and refining the framework for local taxation under the LGC. Clarifying the rules on situs would not only reduce disputes but also promote a more balanced tax system for both LGUs and taxpayers.

#LGU #LGC #Situs #LocalTax #LocalTaxation #LocalBusinessTax #LocalFranchiseTax

Rey Christian M. Guintibano is an associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). He acknowledges the contribution of Joshua Rizlan A. Simbillo in this article, which is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment, you can email the author at info@mtfcounsel.com or visit the MTF website at www.mtfcounsel.com.

https://www.manilatimes.net/2025/04/24/business/top-business/situs-of-local-franchise-tax/2097786