Local Business Tax vs BIR Income Tax: What's the Difference for a New Business Owner?

Local business tax and BIR income tax are two separate, mandatory taxes that a Philippine business pays at the same time, to two different governments. Local business tax — commonly bundled with the Mayor’s Permit fee — is a local tax that a city or municipality imposes under Section 143 of the Local Government Code (RA 7160), based on the business’s gross sales or receipts. BIR income tax is a national tax under the National Internal Revenue Code (NIRC), based on net taxable income. A new business owner needs to budget for and file both.

What exactly is “local business tax,” and how is it different from BIR tax? #

Local business tax (LBT) is a tax a city or municipality collects for the privilege of operating a business within its jurisdiction, authorized by Section 143 of the Local Government Code of 1991 (Republic Act No. 7160). It is computed on gross sales or receipts, not net income, and funds local services such as roads, barangay health centers, and the local BPLO itself — not the national government. BIR tax, by contrast, is computed on net taxable income (plus VAT/percentage tax and withholding obligations) and funds the national government.

RA 7160 gives municipalities and cities this taxing power directly. As commonly reproduced in Philippine local-tax commentary, Section 143 opens by granting municipalities the power to impose taxes on categories of business — manufacturers, wholesalers and distributors, exporters, contractors, retailers, and others — “in accordance with the following schedule,” with the tax base defined as gross sales or receipts for the preceding calendar year. For contractors and other independent contractors specifically, Section 143 caps the rate:

Contractors and other independent contractors are taxed “at a rate not exceeding fifty percent (50%) of one percent (1%)” of gross receipts for the preceding calendar year — Section 143, Local Government Code (RA 7160), as reproduced in Philippine local-taxation legal commentary (e.g., respicio.ph’s coverage of LGU taxing limits on contractors).

Cities may levy up to the same schedule cities/municipalities use, adjusted by ordinance, and the exact peso brackets and rates for each business category are fixed by each LGU’s own revenue code within the ceilings RA 7160 sets — which is why the LBT a business owes can differ from one city to the next even for identical gross sales.

LGU business tax vs BIR national taxes, side by side #

The two systems differ on every structural point that matters to a new business owner — who imposes the tax, what it’s based on, and when it’s due.

Nothing in this table is an either/or choice. A business registered and paying its LGU business tax on time can still be delinquent with the BIR, and vice versa — the two obligations run on separate clocks, filed with separate offices, under separate laws.

Which comes first: the Mayor’s Permit or BIR registration? #

New business owners often assume registration is a single event, but it is actually two parallel tracks that eventually reference each other. In the sequence most commonly described for new registrants, a business first secures its name (DTI for sole proprietors, SEC for corporations/partnerships), then a barangay clearance, then applies for the Mayor’s/business permit at the city or municipal BPLO, and then registers with the BIR — using the issued permit as one of the supporting documents for BIR Form 1901 or 1903.

In practice, this order isn’t rigid everywhere. Some BPLOs and RDOs ask for proof that BIR registration is already underway before finalizing the permit, and some issue a provisional or temporary permit precisely so the applicant can complete BIR registration and come back with the Certificate of Registration. Because the exact sequencing can vary by city and by RDO, confirm the current requirement with your specific BPLO and RDO rather than assuming a fixed universal order — see How to Register a New Business with the BIR: TIN, COR, and BIR Form 2303 Explained for the BIR-side steps (Form 1901/1903, TIN issuance, and what the Certificate of Registration lists) once you reach that stage. Either way, both registrations are mandatory and independent of each other — a Mayor’s Permit is not proof of BIR registration, and a BIR Certificate of Registration is not a substitute for a business permit.

A worked example: a sari-sari store’s first full year #

Consider Aling Rosa, who opens a small sari-sari store as a sole proprietor. In her first partial year she registers her business name with the DTI, secures her barangay clearance, applies for her Mayor’s Permit at the city BPLO (paying a minimal LBT since she has no “preceding year” gross sales yet — most LGUs charge a flat initial rate for new businesses), and separately registers with the BIR using Form 1901, receiving her TIN and BIR Form 2303 listing her as a percentage-tax filer since her projected annual sales fall well under the ₱3,000,000 VAT threshold.

The following January — her first full renewal cycle — the two obligations look like this for the same business, side by side:

She pays the LGU and the BIR separately, on separate schedules, computed on different bases — the LGU renewal doesn’t reduce what she owes the BIR, and neither payment is transferable to the other office.

What happens if a business skips or delays either payment? #

Missing either deadline carries its own penalty track because the two systems don’t share enforcement. Late LGU business tax generally draws a surcharge (commonly up to 25% of the amount due) plus monthly interest until paid, on top of possible non-renewal of the business permit — which can affect a business’s ability to operate legally in that locality. Late BIR filings carry their own separate NIRC penalties (surcharge, interest, and compromise penalties) regardless of whether the LGU side is current. A business that is current with its LGU permit but has never registered with the BIR is still operating without a valid Certificate of Registration — a Mayor’s Permit alone does not satisfy the national registration requirement.

Frequently asked questions #

Is local business tax the same as BIR income tax? #

No. Local business tax is a local government tax imposed by a city or municipality under Section 143 of the Local Government Code (RA 7160), based on gross sales or receipts. BIR income tax is a national tax imposed under the National Internal Revenue Code, based on net taxable income. They are collected by different levels of government, and paying one does not substitute for paying the other.

Do I have to pay both local business tax and BIR taxes? #

Yes. A business operating in the Philippines is subject to both systems at the same time — the LGU business tax (often bundled with the Mayor’s Permit fee) for operating in that city or municipality, and BIR national taxes (income tax, and VAT or percentage tax, plus withholding tax where applicable) for operating anywhere in the country. Neither payment is credited against the other.

When is local business tax due each year? #

Local business tax is generally due annually on or before January 20, or quarterly within the first 20 days of January and each subsequent quarter, as part of the annual business permit renewal. The exact schedule and any grace period are set by each LGU’s own revenue ordinance, so confirm the posted schedule with your city or municipal Business Permits and Licensing Office (BPLO).

Which comes first, the BIR registration or the Mayor’s Permit? #

In practice the sequence commonly followed is DTI or SEC registration of the business name or entity, then barangay clearance, then the Mayor’s/business permit application at the city or municipal BPLO, then BIR registration using the issued permit as a supporting document. Some LGUs and RDOs vary this order in practice, so confirm current requirements with both your BPLO and your BIR Revenue District Office (RDO) before assuming either registration is optional or that one can be skipped.

Summary #

Local business tax and BIR national taxes are two independent tax obligations, not two names for the same bill: LGU business tax is a local tax under Section 143 of the Local Government Code (RA 7160), based on gross sales or receipts, renewed annually (commonly by January 20) with the city or municipal BPLO; BIR taxes are national taxes under the NIRC — income tax, VAT or percentage tax, and withholding tax — filed on their own schedules with the BIR, based on net income and other bases. A new business owner registers with both, pays both, and tracks both deadlines separately. For the BIR-side registration steps, see How to Register a New Business with the BIR: TIN, COR, and BIR Form 2303 Explained; for a related income-tax exemption some very small businesses can also pursue at the LGU level, see BMBE Registration and BIR Income Tax Exemption: Who Qualifies Under RA 9178.