I. Overview

In the Philippines, every business operating within a city or municipality must:

Secure a Mayor’s Permit (also called a business permit), and
Pay the corresponding Local Business Tax (LBT) and other local fees.

Both are grounded in the Local Government Code of 1991 (Republic Act No. 7160) and the local tax and revenue ordinances of each Local Government Unit (LGU). While the Local Government Code sets the general rules and maximum rates, every LGU has its own Local Revenue Code that specifies the exact amounts, brackets, and procedures.

This article walks through the legal framework and the step-by-step method for computing:

Mayor’s Permit fees
Local Business Taxes
Surcharges and interest for late payment
Other related local charges

All explanations are in the Philippine legal context.

II. Legal Framework

Constitutional basis The 1987 Constitution grants LGUs the power to create their own sources of revenue and to levy taxes, fees, and charges, subject to guidelines and limitations set by Congress.
Statutory basis The main law is RA 7160 (Local Government Code), especially:
- Book II (Local Taxation and Fiscal Matters)
- Provisions on:
  - Municipal/city taxes on business (often cited around Section 143)
  - Cities’ authority to increase rates (around Section 151)
  - Situs of taxation and allocation of business taxes between LGUs (around Section 150)
  - Surcharges and interest for late payment These provisions are fleshed out and made concrete by each LGU through local ordinances.
Local ordinances and revenue codes Every city/municipality passes a Local Revenue Code that:
- Classifies businesses (e.g., manufacturer, wholesaler, retailer, contractor, lessor, bank, etc.)
- Sets rate schedules for Local Business Tax
- Prescribes Mayor’s Permit fees and other regulatory fees
- Provides rules on deadlines, penalties, exemptions, and procedures

Key point: You cannot compute the exact amount without referring to the specific LGU’s ordinance, but you can apply the same legal method and formulas everywhere.

III. Mayor’s Permit vs Local Business Tax

Understanding the distinction is crucial:

Mayor’s Permit (Business Permit)
- A regulatory license issued under the LGU’s police power to ensure public safety, health, and order.
- Fees are intended to cover the cost of regulation and inspection (e.g., sanitary inspection, fire inspection, health certificates).
- Typically fixed amounts or schedule-based (e.g., per square meter of floor area, per employee, per type of business).
Local Business Tax (LBT)
- A revenue measure under the LGU’s power to tax.
- Computed as a percentage of gross sales/receipts (for existing businesses) or based on capitalization or initial operations (for new businesses), as defined by the ordinance.
- Usually assessed annually, but may be paid in quarterly installments.
Other fees and charges LGUs often collect additional regulatory fees together with the Mayor’s Permit and LBT, such as:
- Barangay business clearance fee
- Sanitary inspection fee
- Garbage fee
- Environmental fee
- Zoning fee
- Signboard/billboard fee
- Fire Safety Inspection Fee (collected for BFP but often processed at City Hall)

These are separate and distinct from the LBT.

IV. Who Must Pay and Where

Persons liable
- Individuals/sole proprietors
- Partnerships
- Corporations (including non-stock corporations if engaged in business)
- Cooperatives (subject to special rules; many enjoy tax exemptions by law, but may still pay certain regulatory fees)
- Branches, sales offices, warehouses, and other fixed places of business
Where to register and pay
- You pay Mayor’s Permit fees and LBT in the city/municipality where the business is physically located.
- If you have multiple branches across different LGUs, each branch generally needs its own Mayor’s Permit and LBT in its respective LGU.
- The principal office and branches are treated separately for business tax purposes.
Situs of taxation (allocation of LBT) – general principles
- For retailers and most service businesses, tax is due where the sale or service is made (branch or office).
- For manufacturers, producers, exporters, the LGC prescribes rules on how the business tax is split between the LGU where the factory is located and the LGU where the sales office is located (often a 30%–70% allocation, depending on the specific provision and ordinance).
- LGUs rely on books and records to determine where sales are properly attributable.

V. Compliance Cycle: When to Secure and Renew

New businesses
- Must obtain a Mayor’s Permit before commencing operations.
- Initial LBT is based on rules for newly started businesses (see Section VIII below).
Renewal of existing businesses
- Business taxes generally accrue on January 1 of every year.
- Payment is typically required within the first 20 days of January (some LGUs extend by ordinance, but the default rule remains).
- For LBT, taxpayers may often choose to:
  - Pay the entire annual tax in January, or
  - Pay in four equal installments, usually due within the first 20 days of each quarter.

Important: Failure to renew on time leads to surcharges and interest.

VI. How to Compute Mayor’s Permit Fees

Mayor’s Permit fees are not uniform nationwide; they are determined by the LGU’s schedule of fees. However, almost all LGUs follow a similar logic.

1. Identify your business classification and line(s) of business

Common categories include:

Retailer
Wholesaler/distributor
Manufacturer/producer
Contractor (general or specialty)
Service provider (e.g., repair shop, salon, clinic)
Lessors of real property
Banks and other financial institutions
Restaurants, bars, and similar establishments

Each line of business may have its own permit fee.

2. Determine the basis for the Mayor’s Permit fee

The ordinance may compute the Mayor’s Permit fee based on:

Fixed amount (e.g., PHP 1,000 per business per year)
Floor area (e.g., amount per square meter)
Capitalization (e.g., bracketed according to paid-in capital or capital invested)
Number of employees
Capacity (e.g., number of seats for restaurants, beds for hotels, units for apartments)

Example (purely illustrative, not an actual ordinance):

Mayor’s Permit fee for retail store

Capitalization up to PHP 300,000 – PHP 1,000

PHP 300,001 to PHP 1,000,000 – PHP 2,000

Above PHP 1,000,000 – PHP 3,000

If your capitalization is PHP 800,000, the Mayor’s Permit fee = PHP 2,000.

3. Add associated regulatory fees

When you apply or renew, the LGU usually assesses additional regulatory fees, such as:

Sanitary inspection fee
Garbage fee
Health certificate fees for employees
Zoning/locational clearance fee
Fire Safety Inspection Fee (FSIF)
Environmental or pollution control fee
Barangay clearance fee

Each will have its own schedule, often based on floor area, number of employees, or nature of business.

4. Formula for total permit-related charges

For each LGU:

Total Mayor’s Permit–related fees = Mayor’s Permit (license) fee

Sanitary inspection fee

Garbage fee

Fire inspection fee

Barangay clearance fee

Other regulatory fees (signboard, zoning, etc.)

5. Sample computation (hypothetical)

Assume an LGU ordinance provides:

Mayor’s Permit fee for retail store with capital PHP 800,000: PHP 2,000
Sanitary inspection fee for commercial establishments up to 100 sqm: PHP 500
Garbage fee for small businesses: PHP 600
Fire inspection fee: PHP 1,000
Barangay clearance: PHP 300

Then:

Mayor’s Permit fee: PHP 2,000
Sanitary fee: PHP 500
Garbage fee: PHP 600
Fire fee: PHP 1,000
Barangay clearance: PHP 300

Total Mayor’s Permit–related charges = PHP 4,400

This is separate from Local Business Tax.

VII. How to Compute Local Business Tax (LBT): Existing Businesses

For existing businesses, the general rule is:

Tax base = Gross sales or receipts of the preceding calendar year, as declared for local business tax purposes in that LGU (excluding VAT, but following specific ordinance rules).

Then:

Local Business Tax (LBT) = Tax base × Applicable rate

1. Step-by-step method

Step 1: Determine your business classification

Look at the ordinance to identify the category that matches your main activity, such as:

Manufacturer/producer/exporter
Wholesaler/distributor/importer
Retailer
Contractor or independent contractor
Bank, financial institution, lending company
Lessors of real property (commercial, residential, industrial)
Transport operator, etc.

Step 2: Identify the applicable tax rate or bracket

The Local Government Code sets maximum rates; the local ordinance sets actual rates, usually as a percentage (%) of gross sales/receipts.
Some ordinances also use brackets (e.g., different rates depending on total gross sales).

For example (hypothetical only):

Retailers with annual gross sales:

Up to PHP 400,000: 1% of gross sales

Above PHP 400,000: 1.5% of gross sales

Step 3: Determine your gross sales/receipts for the preceding year

Use audited financial statements or BIR returns (e.g., VAT/percentage tax returns, income tax returns) as references.
Gross sales/receipts usually exclude VAT; percentage tax may or may not be included depending on the ordinance.

Step 4: Apply the rate

Annual LBT = Gross sales/receipts × rate

Step 5: Decide whether to pay annually or quarterly

If the ordinance allows installment:

Annual LBT ÷ 4 = Quarterly LBT

Each quarter’s installment is due within the period set by ordinance (often within the first 20 days of each quarter).

2. Sample computation – existing retailer (hypothetical)

Assumptions:

Business: Retail store
Location: City X
Preceding year’s gross sales (excluding VAT): PHP 5,000,000
City X ordinance: rate for retailers with sales above PHP 400,000 is 1.5% of gross sales.

Compute annual LBT:

Annual LBT = 5,000,000 × 1.5% = 5,000,000 × 0.015 = PHP 75,000

If you pay quarterly:

Quarterly LBT = 75,000 ÷ 4 = PHP 18,750 per quarter.

VIII. How to Compute LBT: Newly Started Businesses

For newly started businesses (first year of operation), the Local Government Code allows LGUs to compute LBT differently from existing businesses.

Common approaches in local ordinances include:

Tax based on declared capitalization
- The taxpayer declares the capital invested in the business (e.g., for a sole prop, the capital invested; for a corporation, subscribed capital or amount allocated to the branch).
- The ordinance prescribes a rate or brackets based on this capitalization.
Example (hypothetical):
For newly started retailers:
- Capitalization up to PHP 100,000 – LBT = PHP 500 fixed
- PHP 100,001 to PHP 500,000 – LBT = 0.5% of capitalization
- Above PHP 500,000 – LBT = 0.75% of capitalization
If your new retail business has capitalization of PHP 800,000, then:

LBT = 800,000 × 0.75% = PHP 6,000
Tax based on gross sales/receipts of the first quarter or first few months
- Some LGUs require newly started businesses to estimate or declare initial gross sales, then adjust once actual figures are available.
- Others tax pro rata based on annualization of initial months.
Transition to normal LBT computation
- From the second calendar year onwards, you typically shift to the standard rule: LBT based on gross sales/receipts of the preceding year.

Always refer to the exact wording of the LGU ordinance for newly started businesses.

IX. Special Cases: Business Types and Bases

Different business activities may have special bases and rates:

Manufacturers, producers, exporters
- LBT is usually based on gross sales or receipts derived from the sale of their products, but with special situs rules if they have factories and sales offices in different LGUs.
Contractors and independent contractors
- LBT is generally based on gross receipts, i.e., amounts billed or collected for services rendered within the LGU, subject to exclusions defined by ordinance.
Lessors of real property
- LBT is commonly based on gross rental income for the preceding year, at a rate prescribed in the ordinance.
- Different rates may apply to residential vs commercial leases.
Banks and other financial institutions
- LBT may be based on gross receipts (interest, commissions, discounts, fees, etc.) derived from business in the LGU.
Professionals and small service providers
- Some LGUs impose professional tax (often at provincial level) and/or LBT on certain professional practices organized as businesses.
- Others may impose only regulatory fees.
Peddlers, hawkers, ambulant vendors
- Frequently subject to a fixed tax or fee rather than a percentage of sales.

X. Penalties: Surcharges and Interest

If you fail to pay on time, LGUs are authorized (within limits) to impose:

Surcharge (penalty)
- Usually a fixed percentage of the basic tax, often up to 25% of the unpaid amount.
Interest
- Usually up to 2% per month on the unpaid tax plus surcharge, until fully paid, but capped at a certain number of months (often 36 months).

General formula for late payment (LBT):

Let:

T = basic Local Business Tax
s% = surcharge rate (e.g., 25%)
i% = monthly interest (e.g., 2%)
m = number of months of delay (capped by law/ordinance)

Then:

Surcharge = T × s%
Interest = (T + Surcharge) × i% × m
Total Amount Due = T + Surcharge + Interest

Sample penalty computation (hypothetical)

Basic LBT due (T) = PHP 75,000
Surcharge: 25%
Interest: 2% per month, delayed for 4 months

Surcharge = 75,000 × 25% = 18,750
Tax + surcharge = 75,000 + 18,750 = 93,750
Interest = 93,750 × 2% × 4 = 93,750 × 0.08 = 7,500

Total due = 75,000 + 18,750 + 7,500 = PHP 101,250

For regulatory fees (e.g., Mayor’s Permit fee, sanitary fee), the ordinance may impose similar or different penalty structures. Always check the LGU’s specific rules.

XI. Barangay Participation and Clearances

Barangay business clearance
- Before the city/municipality issues or renews the Mayor’s Permit, the business generally needs a barangay clearance from the barangay where the business is located.
- The barangay may charge a barangay business clearance fee, often a fixed amount per year.
Share of barangay in business taxes
- The Local Government Code grants barangays a share in the business taxes collected by cities/municipalities from businesses located within their area (subject to statutory rules).
- This share is internal to the LGUs and does not change how the business computes and pays LBT (you still pay at City Hall).

XII. LGU Audits and Assessment

LGUs have authority to:

Examine books and records to verify your declarations of gross sales/receipts.
Compare your local declarations with BIR filings and other documents.
Issue assessments for deficiency local business tax, surcharges, and interest within prescriptive periods (time limits set by law).

If you disagree with an assessment, the Local Government Code provides for:

Administrative remedies (e.g., protest, appeal to the local treasurer, then to the Secretary of Justice or regular courts, depending on the situation).
Judicial remedies in the proper courts after exhausting administrative remedies, subject to requirements such as payment under protest in some cases.

XIII. Interaction with National Taxes (BIR)

Local Business Tax vs National Internal Revenue Taxes

LBT is separate and distinct from:

Income tax
Value-added tax (VAT) or percentage tax
Documentary stamp tax
Withholding taxes

You cannot credit national taxes against LBT, and vice versa.

No double taxation issue in this sense

LBT is a local tax on the exercise of a business within the LGU.
Income tax and VAT are national taxes on income and on value-added or gross sales.
The same transaction can legally be taxed by both the LGU and the national government, because they are different taxing authorities and different tax bases, as recognized by law and jurisprudence.

XIV. Common Pitfalls and Practical Tips

Under-declaration of gross sales/receipts
- LGUs can cross-check with BIR returns, bank records, and supplier/customer documents.
- Underdeclaration can lead to back taxes plus surcharges and interest, and even possible criminal liability under local ordinances.
Failure to declare all lines of business or branches
- You must declare each line of business (e.g., retail, services, leasing) and each branch.
- Failing to do so may result in assessments and penalties once discovered.
Operating without a Mayor’s Permit
- LGUs may close or padlock establishments operating without permits.
- You may still be assessed for retroactive business taxes and fees.
Not securing “retirement” of business
- If a business closes or transfers, you must file for retirement/cancellation of the Mayor’s Permit and LBT registration.
- Until you do, the LGU may continue assessing annual LBT and fees because, on record, the business is still active.
Online and home-based businesses
- Even if primarily online, once there is a fixed place of business (office, warehouse, home office), the LGU where that place is located may require Mayor’s Permit and LBT, subject to its ordinances.
Failure to track the correct situs of sales
- For businesses with sales in multiple LGUs, ensure your books reflect where each sale is made, especially for manufacturers, multi-branch retailers, and service providers.

XV. Quick Checklist for Business Owners

When securing or renewing your Mayor’s Permit and paying Local Business Tax:

Gather documentation
- Previous year’s Mayor’s Permit and official receipts
- DTI/SEC registration, BIR Certificate of Registration
- Audited financial statements / BIR returns (for gross sales/receipts)
- Lease contract or proof of ownership of premises
- List of employees (for health/sanitary clearances)
Confirm your classification and tax base
- Identify: Are you a retailer, wholesaler, manufacturer, contractor, lessor, etc.?
- Determine gross sales/receipts for the preceding year or capitalization (for new business).
Apply the ordinance
- Look up the LBT rate or bracket applicable to your classification.
- Compute LBT = Tax base × rate.
- Decide: annual or quarterly payments.
Compute Mayor’s Permit fees and regulatory charges
- Apply LGU’s schedule for Mayor’s Permit fees based on capitalization, floor area, etc.
- Add sanitary, garbage, fire inspection, barangay clearance, and other fees.
Check deadlines and pay on time
- Note the deadline for renewal (usually within the first 20 days of January).
- Avoid surcharges and interest by paying on time.
Keep records
- Keep copies of all assessments and official receipts.
- Maintain accurate books that reconcile BIR and LGU figures.

XVI. Final Notes

Exact rates, brackets, and procedures differ from one LGU to another; always consult the Local Revenue Code and latest tax ordinance of the city or municipality where your business is located.
This guide explains the general legal framework and computation methods under Philippine law, but it is not a substitute for professional legal or tax advice.
For significant investments, complex operations, or disputes with LGUs, it is prudent to consult with a Philippine lawyer or tax professional familiar with local taxation.