Could you imagine the retail business landscape in the LGUs nationwide 10, 20 years from now considering the rapid growth of digital technology? What would be the impact of the ever-increasing use of digital services by the so-called digital population in the revenue generation of LGUs? Should there be a need to revisit the more than 3-decade old Local Government Code that granted the authority to LGUs to raise their needed revenues?
“Territoriality” principle and the old notion of
“permanent (brick-and-mortar) establishment”
The Philippines imposes a territorial tax system, meaning, only Philippine-sourced income is subject to taxes. In the context of the Local Government Code of 1992, only gross receipts derived from businesses within the territorial jurisdiction of the local government unit shall be subject to local business taxes. Corollary, only business with physical presence in the territorial jurisdiction is covered by the reach of the taxing authority. There are, however, instances where the principal office is outside the territory of the LGU but such business has a branch or sales office, warehouse, plantation, or experimental farm located within the jurisdiction of the LGU, in which case, said branch or sales office, warehouse, plantation, or experimental farm shall be subject to tax applying the situs of taxation under Section 150 of the Local Government Code.
In this paper, emphasis shall be given to micro and small businesses in the province of Catanduanes – the sari-sari stores. For purposes of this article, we shall define sari-sari stores as not only those small spaces with small quantity of goods offered for sale (tingi) but also those mini groceries as they are also registered in the municipality as sari-sari store.
Sari-stores are endemic in every municipality of this province. They thrive in every nook and cranny. It is the lifeblood of rural communities. Their ubiquitous presence represents not only economic, social, and cultural importance but also the resilience of Catandunganons. They are currently described as “nanoprenuers” who want to survive with their families.
Rural communities are largely dependent on sari-sari stores rather than large groceries found in the municipal centers. The retail mentality of Catandunganons, largely due to lack of economic opportunities, is the reason for the proliferation of sari-sari stores. It is no wonder that competition among them is firm in terms of opportunities, as they exist near each other.
Under the Local Government Code, these sari-sari stores are taxed by the municipality based on their annual gross receipts if their annual sales amount to more than P/ 30,000.00. Stated differently, sari-sari stores whose annual sales fall below the 30,000-peso threshold shall bear a P/0.00 tax and shall be imposed only the corresponding regulatory fees for the issuance of the Mayor’s Permit.
The upsurge of digital platform use
The exponential increase in the use and popularity of digital platforms in Catanduanes can be traced to the Covid-19 pandemic. The implementation of lockdown (ECQ) limited in most aspect the mobility of the populace – from going to socialization to tending animals to going to market/groceries. Most of the time people stayed indoor due to social distancing requirements.
Official data from the International Trade Administration disclosed that the Covid-19 pandemic increased the eCommerce demand, with Filipinos working and studying from home. Based on a 2021 PPRO eCommerce and Payments Report, 50 percent of Filipino online shoppers have made cross-border transactions. Even in the local settings, Catandunganons with entrepreneurial mindset took the opportunity and made use of Facebook as a communication tool to broadcast and offer their goods or services to friends and distant family members. As these businesses develop and prosper, another class of economy rise in the digital realm – the underground economy – which up to this writing is unregulated not to mention it being not under the radar of the taxing authority through the Business Permit and Licensing Office (BPLO) of every municipality. In 2015, the World Bank estimated that 40 percent of the Philippine economy is “underground”, meaning, their business activities are unrecorded and not taxed by the government – national or local. The figure may have increased considerably, especially during the pandemic when a lot of Filipinos were forced to take odd jobs to survive.
The future of physical retail in a digital world
While some may argue that the future of physical retail is dim due to the more than doubled growth rate of e-commerce not to mention the impact of the pandemic lockdown, Techwire Asia, thru the Philippine Retailers Association published an article saying that despite growth in e-commerce, physical retail stores are gaining popularity again. This may be attributed to the adoption of e-commerce business strategies and leveraging digital sales to remain profitable during the pandemic. Many partnered with e-commerce platforms to move sales online while some brands even designed their own online shopping platforms and improve their websites to cater the growing demand for online sale.
It is worth to note that the above assessment made by Techwire Asia holds true only in the urban areas. It is very different in the rural setting where retail sari-sari stores do not have the technology, savvy and resources to be in the same playing field. Even assuming that rural nanoprenuers can employ such strategies, what is patent is the change in the spending behavior. By using the digital platform including digital payments the present set up at the LGU level to monitor such sales transactions is nil. Without any tool that would address the technological transformation of the present time, it would be impossible for the LGU to make an inventory of these businesses and monitor their transactions for purposes of local taxation.
The problem of physical presence requirement for
purposes of local business taxation
As has been noted earlier, LGUs in the rural areas can only assess and collect business tax on businesses that are under their monitoring lens – those that are physically present or has permanent establishment in their jurisdiction. As to those using the digital platform or any other digital means of doing business in their locality could hardly be checked and monitored.
With the pervasive use of digital technology, digital platform and social media, it cannot be denied that gradually the presence of “brick-and-mortar” store in each locality will dwindle. As these physical stores dissipate, collection of the needed local revenues will also be diminished thereby affecting the LGUs provision of basic services to its constituencies.
In the United States, there have been other major developments at the states level as regard the requirement that a seller have physical presence in the taxing state to be able to collect taxes – South Dakota case is in point here. The US Supreme Court, in a 2018 case of South Dakota v. Wayfair, eliminated the requirement that a seller have a physical presence in the taxing state to be able to collect the tax. It expanded states’ abilities to collect sales taxes from e-commerce and other remote transactions so long as there is a “nexus” – some sort of adequate connection – with a state for the state to impose a tax.
The logic in the above case may be applicable to our jurisdiction especially for remote online shopping (Lazada, Shopee, Tiktok, Shein, Temu, to name a few) where the seller is located somewhere (even overseas) but the buyer/consumer is in Catanduanes. Take notice that with this kind of transaction cash outflow overrides cash inflow within the jurisdiction.
State intervention is required to cushion impending
fiscal imbalance at the LGU level
It is the opinion of this writer that the provisions under the Local Government Code of 1991 no longer adapt with the rapid changes of the present time, thus the need to revisit the same. While Section 143 (h) of the Code provides for the “all-encompassing” provision that the local sanggunian may impose business taxes on business other than those mentioned in Section 143 (to include digital products and services), said statement is more apparent than real – due to limitations and difficulties encountered by LGUs.
LGUs do not have the financial capacity to fund design or formulation of tools or systems most especially to address digital-based business activities. More so, LGU personnel lack the technical savvy on information and communications technology. The sharing of information between national government agencies (BIR in particular) and the local government units must be institutionalized through a legislative enactment.
While there are a number of amendments to the National Internal Revenue Code to keep abreast with the digital transformation, the Local Government Code, as the source of local autonomy, is often neglected. Let us remember that the World Wide Web is here to stay and will continue to influence our lives in many, many ways, including taxation. We can only imagine what might come in the next 50 years.
The opinion herein is solely of the writer and does not in any way represent the views of the Provincial Treasurer’s Office.