It is nineteen days before Christmas, twenty-five days before New Year. The holiday season is a time of countdowns. We always look forward to the moment when the clock strikes 12 at midnight. However, for businesses, the countdown never stops on New Year. From there, the 20-day countdown for the deadline of renewal of Local Government Unit (LGU) business registration starts to run. LGU permit renewal is important to kick-start your business year right since without it, your operations may be suspended.
The Local Government Code mandates business entities to renew their registration annually with the LGU. The renewal of business registration includes payment of the local business tax (LBT), mayor’s permit fee, sanitary inspection fee, garbage fee, building inspection fee, zoning fee, and other charges. These taxes, fees, and charges are due annually, on or before January 20, or quarterly, within the first 20 days of January and of each subsequent quarter. Extensions are usually granted for justifiable cause depending on the LGU involved.
Failure to pay the LBT, fees, or charges within the prescribed period will subject the taxpayer to a surcharge not exceeding 25% of the amount of taxes, fees, or charges not paid on time and an interest at a rate not exceeding 2% per month of the unpaid taxes, fees, or charges including surcharges until such amount is fully paid, but in no case shall the total interest exceed 36 months.
Different LGUs have their own specific requirements for the renewal of business registration. As preliminaries, LGUs usually require securing updated barangay clearance, locational clearance, and comprehensive general insurance policy, and paying the BIR annual registration fee. Note that failure to pay the BIR annual registration fee of P500 on time will subject the taxpayer to a surcharge of 25% and interest of 12% per annum in addition to the registration fee.
For the purpose of securing new mayor’s permit and payment of LBT, the basic requirements are the old mayor’s permit and filled-up application form. Considering that the latest Audited Financial Statements or Income Tax Returns may not be available by the time of the renewal period, a sworn declaration or certification of gross sales or receipts by the taxpayer are usually being required. Some LGUs also require VAT returns or Percentage Tax returns to verify the declaration made by the taxpayer.
As a rule, the LBT is based on the taxpayer’s prior year’s gross sales or receipts. In this relation, under BLGF Memorandum Circular (MC) No. 001-20, the following items of income do not form part of gross sales or receipts:
(a) Receipts from the sale of real properties or realty assets, unless one is engaged in the business of buying or selling real estate;
(b) Determinable discounts at the time of sales, sales returns, excise tax, and value-added tax (VAT);
(c) Passive income, i.e., interest, dividends, and gains from sale of shares; and
(d) Receipts from the printing and/or publishing of books or other reading materials prescribed by Department of Education as school text and reference, for those engaged in the business of printing and publication.
If the taxpayer is unable to provide proof of its gross sales or receipts, the LGU may use the so-called Presumptive Income Level Assessment Approach (PILAA) provided in a duly enacted local ordinance in computing the LBT. PILLA is a tax collection tool which allows the LGU to set a certain income level standard for business entities based on industry factors. The use of PILAA is not automatic as it is limited to situations where the taxpayer is unable to provide proof of its income. Note that cities in the Metropolitan Area may have this PILAA provision in their local ordinance.
As for the LBT rate to be used, it varies depending on the business activity an entity is engaged in. The LGU may prescribe the schedule of graduated tax rates but in no case may the rates exceed those provided in the Local Government Code. There are instances when an entity may be subject to several rates if it is engaged in different lines of business.
Note also that there are entities exempt from paying LBT such as enterprises registered with the Board of Investments, the Philippine Economic Zone Authority, or other special economic zones and cooperatives registered with the Cooperative Development Authority, among others. Although these entities, in general, are exempt from LBT, they may be subject to other regulatory fees and charges.
The other regulatory fees and charges are usually imposed at a fixed amount as provided in a duly enacted local ordinance by the LGU.
Twenty days from year-end is nothing but a short period of time in completing all documentary requirements, processing the manager’s check as the usual mode of payment, and addressing issues on the computation of taxes or fees, among others. While there are extensions of deadline given by some LGUs, it is prudent for companies to already start preparing requirements as early as December. We all want to avoid late registration and payment which would mean millions of surcharges and interests. As William Shakespeare once said, better three hours too soon than a minute too late.
Let's Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
As published in BusinessWorld, dated 06 December 2022