QUICKLY, WHAT THE DEBT IS ABOUT. (1) Bureau of Internal Revenue (BIR)-7 has been knocking at Cebu City Hall's door to collect an unpaid tax debt of almost P4 billion.
BIR officials had met with the office of the mayor and the city's legal and accounting departments. Last Wednesday, June 2, BIR representatives led by Regional Director Glen Geraldino and Assistant Director Editha Calipusan appealed to the City Council that the City pay up and benefit from the tax amnesty law to reduce the size of the debt.
(2) The taxes due from the City total P3 billion, P989 million plus. They comprise the LGU's liabilities for taxable years 2009 and 2010. If the City will pay on or before June 30 this year (2021), the new deadline for TAD or tax amnesty delinquencies, the amount is reduced to P230,610,000 plus.
Jose Hector Baronda, BIR-7's legal division chief, dangled to the Sanggunian the benefits of the City paying up under amnesty conditions.
(3) The debt is "final and executory," meaning it is no longer subject to further legal dispute. BIR has already registered its lien on some city properties to answer for the unpaid taxes.
ISN'T THE CITY EXEMPT FROM TAXES? Provinces, cities, municipalities and government agencies and instrumentalities are liable to pay taxes on their revenues from "proprietary activities.." They were exempt until Presidential Decree #1931, as amended, took that away, except taxes on GSIS, SSS, Philhealth and the local water district.
Exempt are only those incomes "pertaining to administration of government and are treated as absolute obligation on the part of the state to perform." LGUs and other government entities shall pay taxes on income from their proprietary functions, or money from business, just like private firms and corporations engaged in commerce or trade.
For example, Atty. Baronda said, the City has to pay for proceeds of its sale of South Road Properties lots, income from parking and towing, sale of low-cost condominium units, and joint ventures with private business, such as the JVs with Robinson's subsidiary on Kawit Island and Megawide's subsidiary at Carbon Market. Proprietary functions are those not essential to the main purpose of government, Baronda said.
PD 1931, signed on June 11, 1984, scored the tax exemption for "having resulted in serious tax base erosion and distortions in the tax treatment of similarly situated enterprises."
COUNCILORS CAN'T UNDERSTAND IT. The city councilors didn't get it. Councilor Joel Garganera reflected local legislative confusion when he asked why the City's money from business should be taxed when they plowed the money back into public service, "We are not in business for profit. I really can't understand it."
The issue is not for the tax collectors to decide; it is a function of the national legislature.
(The presidential decree was adopted in 1984 and martial law was lifted on January 17, 1981 but Ferdinand Marcos continued to rule the country until 1986.) It is the law, which the Cory Aquino government recognized, with the other PDs, as valid until repealed. PD 1931 has not been repealed; the central government shares in LGUs' business profits.)
The matter is within the province of the legislature, which in non-martial era is Congress. LGUs' complaint or recommendation may be sent to the BIR commissioner and finance secretary, all the way up to the president, but it's Congress that legislates on tax imposition and exemption.
SOME PEOPLE SLEPT IN “PANSITAN.” Atty. Baronda said he didn't want to blame anyone for the size of the tax delinquency but he and a councilor showed possible cause or causes:
The City did not act on the January 30, 2018 decision of the commissioner of internal revenue affirming the findings of the local BIR that the LGU was liable for the amount assessed, including taxes on business enterprises and amounts withheld from payments and not remitted to BIR. A motion for reconsideration, then an appeal to the Court of Tax Appeals could've been filed by the City.
But who in the City Government: its legal department, the Sanggunian, or the mayor's office and accounting department? In the Cebuano adage: Somebody must have slept at the noodle eatery.
Majority Floor Leader Raymond Garcia said, "Most of us were not yet councilors at the time." Change of administrations and policies and attention habits could also be a reason.
BOPK's Tomas Osmeña was the mayor in 2009. His protégé-turned-bitter rival Michael Rama of Partido Barug took over for two terms: from June 30, 2010 until June 30, 2016 when Osmeña came back and served until June 30, 2019. The liability occurred during Osmeña's and Rama's terms and the BIR ruling became final and executory, with no response from the City, during Osmeña's return rule. And the pay-up-or-else crunch comes during the term of Edgardo Labella, Rama's party-mate, when the bill showing the cost of tax delinquency is shoved in the face.
FROM OTHER CASES: WHEN LGU IS TREATED AS NOT PART OF REPUBLIC. The BIR cited local cases that are similar to that of the City Government. He mentioned the income of Cebu Province from lease of its properties near the Ayala Cebu Business Park and Filinvest's revenues from its joint venture with the City at the South Road Properties.
The local BIR didn't mention it Wednesday but in a March 13, 2018 ruling, Internal Revenue Commissioner Caesar Dulay ruled that the Municipality of Oslob (Cebu) was liable for income tax, value added tax, expanded withholding tax and many other taxes for its Butanding Watching Activities in taxable year 2012. It was an "exercise of proprietary function," he said, and did not "involve administration and governance" of Oslob and its inhabitants. The government treats Oslob as a "separate entity acting for its own purpose and not a subdivision of the Republic of the Philippines."
WHAT COULD'VE BEEN DONE. From the BIR briefing for the councilors last Wednesday, which drew ideas from some councilors:
 Cebu City needs to keep track and update records of all its liabilities including those due to the national government and its agencies. Government taxes, it should know better, cannot be avoided if left unpaid or otherwise settled. The lien on city-owned properties attaches forever until lifted by payment or compromise.
 While LGUs are not in the list of exempted entities, it can apply for exemptions on certain enterprises that are wholly or largely for public welfare or service, such as its low-cost housing project. BIR has granted many such requests, its legal officer said.
 As suggested by Councilor James Cuenco, the Sanggunian shall seek "guidance" on the LGU's liability to avoid a similar debt pile-up in the future. But even the BIR examined the two-year tax default only after being prodded by the Commission on Audit. Cuenco said the matter of taxes must be "factored" into any joint venture with a private corporation.
 Leaders of LGUs can lobby for legislation that will provide exemptions to local projects whose money-making outcome is minimal or negligible and thus encourage more pro-active public services.
IF THE CITY WOULD PAY, asked Councilor Garcia, would it forfeit right to question assessments in other taxable years? Could it signify its intention to enjoy the amnesty without making the actual payment yet?
Yes to the first. Yes to the second, if the BIR commissioner will approve the request about cash delay.
Findings and actions on the 2009-2010 audit are only for those years and won't affect the right of the City to raise defenses to other assessments. The City won't have to make the cash payment on or before June 30, given the procedure in appropriating public funds, but it has to secure the BIR commissioner's prior approval.
Can it pay under protest and still enjoy the benefits of the amnesty law -- which include "a clean slate," no more notices and disallowances, and removal of the BIR lien on city properties? No, BIR's Baronda said, tersely.