It is that time of the year again — the season of gifts, festivities, and indulgent delicacies is reaching its peak. Many of us are eagerly preparing to dress up and shine at much-anticipated year-end events. As we bid farewell to the year and immerse ourselves in the joy of these celebrations, let us remember, “All endings are also beginnings. We just don’t know it at the time” (Mitch Albom, The Five People You Meet in Heaven). For taxpayers and business owners, the year-end celebrations also signal the beginning of the challenging business permit renewal season.
Businesses are well aware that the Local Government Code (LGC) requires them to renew their registration annually with their respective local government units (LGUs), with the exception only to selected entities. In fact, many organizations may already be planning and preparing early to avoid the last-minute rush. The renewal process typically involves paying the local business tax (LBT) along with other fees, such as the sanitary inspection fee, building permit, and fire safety inspection fee, among others. Although the process may seem straightforward, taxpayers often express that, despite ongoing improvements, the experience remains demanding and challenging. This article serves as a simple guide to help taxpayers navigate the renewal process and successfully secure their permits.
GETTING STARTED
While specific requirements may vary among LGUs, the steps for renewal are generally similar across most cities. The first step typically begins at the barangay level, where businesses need to obtain a barangay clearance. This step is usually straightforward and can often be completed within a day or even less. Businesses can use their previous year’s clearance as a reference, pay the corresponding clearance fee, and secure the document swiftly. Once the barangay clearance is secured, the applicant may then proceed with processing the business permit, most commonly known as the Mayor’s permit.
The common documents required for the renewal of the business permit are as follows. The actual documents required by the LGUs may vary:
• Barangay clearance;
• A copy of the prior year’s business permit and official receipt as proof of payment of previous year’s LBT.
• Filled-up renewal application form;
• Valid local insurance policy or Comprehensive General Liability (CGL) official receipt;
• SEC registration, articles of incorporation, or latest general information sheet;
• Cedula, sanitary permit, and fire safety insurance certificate (FSIC)
• BoI/PEZA/CDA Certificate of Registration and Certificate of Tax Exemption for registered entities enjoying exemption from local business tax, such as those enrolled under 5% GIT.
• Proof of ownership of the building, or contract of lease for the building used in the business;
• Audited financial statements
• Payment of the local business tax
When applying for a business permit renewal, ensure that all required documents are ready. The application can be submitted as early as Jan. 1 and must be completed by Jan. 20. The deadline may be extended by the respective LGUs.
Given the significant paperwork, limited timeframe, and simultaneous applications from all businesses, the process often leads to delays and long queues, making the process challenging. It is advisable to prepare and secure the necessary documents as early as possible. As stated above, some LGUs may grant extensions for valid reasons, but keep in mind that these extensions often apply only to the payment of local business taxes and not to the processing of the renewal itself. Always check the specific terms of the extensions provided by your LGU.
PAYMENT OF THE LBT AND COMMON CHALLENGES
The LBT that taxpayers must pay is calculated based on the gross sales or gross receipts from the previous year (e.g., gross sales/receipts for 2024 will be used for the January 2025 renewal). The applicable tax rate varies depending on the LGU, in line with the provisions and limitations set by the Local Government Code. These rates also differ according to the type of business activity, meaning entities with multiple business lines may be subject to varying rates for each activity.
Typically, gross sales or receipts are evidenced by financial statements or income tax/VAT returns. However, since few taxpayers have these documents ready by Jan. 20, a sworn declaration of gross sales/receipts is required as an alternative to substantiate the prior year’s figures. In some instances, LGUs may request VAT returns from Q1 to Q3 to validate the sworn declaration’s reported amounts. Additionally, local treasurers may conduct post-renewal checks by examining the taxpayer’s books and accounting records once audited financial statements are finalized. Take note that any discrepancies between the initial declared amount and the finalized figures may result in a deficiency LBT assessment.
One common issue faced by taxpayers is the arbitrary increase of the tax base without legal justification. This practice assumes that all companies consistently and gradually grow their gross sales/receipts due to their profit-driven nature. However, such assumptions have been discouraged by BLGF Memorandum Circular No. 01-001-2017. Despite this, there are still instances where the LBT is calculated using a tax base higher than what was declared in the supporting documents provided. Unfortunately, paying the LBT is mandatory for the release of the business permit, leaving taxpayers with limited immediate recourse. If a taxpayer finds the assessed tax amount unreasonable, they may opt to pay the amount determined by the LGU and dispute it afterward.
Taxpayers may choose to pay their annual LBT in full by Jan. 20 or opt for installment payments due within the first 20 days of each subsequent quarter. It is important to note that failing to meet the prescribed deadline can result in penalties, including a surcharge of up to 25% of the due taxes, fees, and charges, along with an interest rate of up to 2% per month on the unpaid amount. This interest can accrue for a maximum period of 36 months.
Additionally, failure to pay the LBT constitutes non-renewal of the business registration, which can lead to the closure of the business. These significant penalties serve as a strong incentive for taxpayers to ensure the renewal process is completed successfully and on time.
SOMETHING NEW FOR RBEs
Recent updates to tax laws aim to foster the growth of businesses in specific industries. The CREATE and CREATE MORE Laws provide tax incentives for registered business enterprises, covering both local and national taxes.
Under the CREATE MORE Act (Republic Act No. 12066), LGUs, through ordinances issued by their respective Sanggunian, may levy an RBE local tax of up to 2% of an RBE’s gross income. This applies to businesses enjoying an Income Tax Holiday (ITH) or operating under the Enhanced Deduction Regime (EDR). The RBE local tax replaces all local taxes, fees, and charges imposed by the LGU under the Local Government Code, simplifying tax payments for registered enterprises.
Meanwhile, businesses under the Special Corporate Income Tax (SCIT) rate are exempt from local business taxes since the 5% tax on gross income, of which 2% is allocated to the LGU, already substitutes for national and local taxes.
As the law does not specify the timeline or procedures for paying the RBE local tax under the new law, businesses should monitor the implementing rules and regulations, announcements, and ordinances issued by their LGUs for detailed guidelines.
Renewing a business permit is an annual task that taxpayers plan for. I hope that getting ready for this process won’t clash with the joy and festivities as the year comes to a close. All endings are also beginnings, and as we step into the new year, I’d like to share another quote, this time from Abraham Lincoln: “Give me six hours to chop down a tree, and I will spend the first four sharpening the axe.” Wishing you all a wonderful holiday season.
John Alexis S.b. Sumulong is a manager from the Tax Advisory & Compliance Practice Area at P&A Grant Thornton.
