Quick answer

Every business operating in a city or municipality is subject to the local business tax (LBT) imposed by that LGU under its taxing power in the Local Government Code, in addition to national taxes paid to the BIR. The LBT is generally based on the gross sales or receipts of the preceding calendar year, with rates that vary by the type of business (manufacturers, wholesalers, distributors, retailers, contractors, banks and financial institutions, and other businesses each have their own schedule and rates, some graduated and some at a flat percentage). Because it is based on gross receipts rather than net income, the LBT is payable even by a business that operated at a loss. Along with the tax, a business must secure and annually renew the mayor's permit (business permit), which is generally due in January of each year, along with the payment of the LBT and various regulatory fees (sanitary permit, fire safety inspection, garbage fee, and others); late renewal carries surcharges and interest. A frequently litigated area is the situs of the tax, the rule on which LGU may tax which portion of the sales: where a business maintains a principal office in one LGU and a factory, plant, or branch in another, the Code allocates the gross sales among them under specified percentages, so that the tax is shared and the business is not doubly taxed on the same receipts. Businesses that cease operations must formally retire the business with the LGU, filing an application for retirement and settling the tax due on the gross sales realized in the current year up to the date of closure; failing to retire properly means the LGU will continue to assess the business. Certain entities enjoy exemptions or preferential treatment, such as registered cooperatives and businesses covered by incentive laws, within the limits of the LGC. So the LBT is an annual gross-receipts-based local tax tied to the January renewal of the mayor's permit, allocated among LGUs under the situs rules, and requiring formal retirement upon closure.

A Local Tax on Gross Receipts

Every business pays a local business tax (LBT) to its city/municipality, in addition to national BIR taxes. It is based on gross sales or receipts of the preceding year, with rates varying by business type — so it is payable even at a loss.

The January Renewal

A business must secure and annually renew the mayor's (business) permit, generally due in January, together with the LBT and regulatory fees (sanitary, fire safety, garbage). Late renewal carries surcharges and interest.

Situs and Retirement

The situs rules allocate gross sales among LGUs where the business has a principal office and a factory, plant, or branch, so receipts are shared, not doubly taxed. A closing business must formally retire with the LGU and settle tax on current-year sales up to closure, or the LGU keeps assessing it.

Practical Takeaways

Frequently Asked Questions

What is the local business tax based on? The gross sales or receipts of the preceding calendar year, with rates varying by the type of business. Because it is based on gross receipts rather than net income, it is payable even by a business that operated at a loss.

When is the mayor's permit renewed? Generally in January of each year, along with the payment of the local business tax and regulatory fees such as the sanitary permit, fire safety inspection, and garbage fee. Late renewal carries surcharges and interest.

What are the situs rules? Rules allocating gross sales among the LGUs where a business maintains its principal office and its factory, plant, or branch, under specified percentages, so the tax is shared and the same receipts are not doubly taxed.

What should I do when closing my business? Formally retire the business with the LGU by filing an application for retirement and settling the tax due on the gross sales realized in the current year up to the date of closure, or the LGU will continue to assess the business.

This commentary is for general informational purposes only and does not constitute legal advice. For guidance specific to your situation, please consult a licensed attorney.

If you have questions about your rights or options under Philippine law, our firm is available to assist. You may reach us via Viber or WhatsApp, call us at 0995 433 5550, or send an email to vivasnobles@gmail.com. We look forward to hearing from you.