Pilaa as local business tax collection tool
By: Atty. Kaeth Louis C. Estrada on October 1, 2026
EVERY January, many businesses renew their business permits and licenses while local government units (LGUs) impose fees and local business taxes (LBT). LGUs compute LBT on the gross sales or receipts of these businesses for the preceding calendar year.
Generally, LGUs compute LBT based on the gross sales or receipts declared in taxpayers’ audited financial statements.
Because taxpayers’ audited financial statements are ordinarily unavailable in January, LGUs allow taxpayers to submit sworn declarations of gross sales and receipts. LGUs then compute LBT based on these sworn declarations.
However, when the taxpayer is unable to provide proof of its actual gross sales or receipts, LGUs are authorized to base their assessments using the presumptive income level assessment approach (Pilaa).
Bureau of Local Government Finance Memorandum Circular 001-2020 provides that, in the absence of audited financial statements, the LBT shall be based on the sworn declaration of gross sales or receipts by the taxpayer or its income tax returns.
It further provides that Pilaa “may be used in computing the local business tax ONLY if the taxpayer is unable to provide proof of its gross sales or receipts. The Pilaa may be used in estimating the gross sales or receipts provided that the Pilaa is in the local tax ordinance and has undergone public hearings and publications. This is to ensure that the taxpayers are properly informed of the factors used in determining the presumptive income and for the taxpayers to agree [to] such level of presumptive income applicable to their industry. Without the ordinance authorizing the use of the Pilaa and embodying the presumptive income levels to be used by the Local Treasurer, the collection of additional local business taxes based on such Pilaa is illegal, and the taxpayer may properly claim the refund of the excess business taxes collected.”
Based on the foregoing, the use of Pilaa is justified only when the following conditions concur: the taxpayer is unable to provide proof of gross sales or receipts and the local tax ordinance allows its use and embodies the presumptive income levels to be used by the local treasurer.
In the case of First Planters Pawnshop Inc. v. City Treasurer of Pasay City, the Court of Tax Appeals (CTA) en banc observed that: “The Pilaa is indeed a tax collection tool which enables the local government units to set a certain income level standard for various business entities based on industry factors. However, the Pilaa does not give the LGUs a carte blanche authority to increase the gross sales or receipts of the taxpayers within its jurisdiction and on that basis, assess the local business tax.”
The CTA explained that: “The word “presumptive” is defined as “based on a presumption.” A “presumption” is “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 the foregoing definition, the “presumptive income” is a presumed or assumed income level based on known or proven factors. These factors may include information from the industry such as average customers per day, inventory turnover and mark-ups, and other measurable and verifiable indicators specific to the nature of business.”
The CTA held that: “Absent such ordinance authorizing the use of the Pilaa and embodying the presumptive income levels to be used by the City Treasurer, the collection of additional local business taxes based on such Pilaa was illegal, and the petitioner may properly claim the refund of the excess business taxes collected.”
While the Constitution and the LGC grant LGUs the power to create their own sources of revenue and levy taxes, the same is subject to the limitation that the tax be imposed through an appropriate ordinance. LGUs cannot simply apply Pilaa without a local tax ordinance.
In a recent line of cases decided by the CTA, the court held that while LGUs may have been justified in resorting to Pilaa due to a taxpayer’s failure to present documents, they nevertheless failed to establish that the assessment itself was arrived at through a valid and lawful application of that method. Specifically, the LGU failed to prove the existence of an ordinance or could not demonstrate the factual and mathematical basis used to arrive at the presumptive income figures.
Accordingly, even assuming that the LGU was justified to apply the Pilaa, it must still be established that the assessment was arrived at through a valid and lawful application of that method. Otherwise, such an assessment lacks sufficient factual and legal basis, and cannot be sustained and must be canceled.
Kaeth Louis C. Estrada is an Associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). This article 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 regarding this article, you may email the author at info@mtfcounsel.com or visit MTF website at www.mtfcounsel.com
The article was published at the More to Follow Column at The Manila Times on October 1, 2026. Please see this link.