Davao v. Randy Allied Ventures
REITERATIONFacts
The Antecedents: The Coconut Industry Investment Fund (CIIF) was established under Presidential Decree 582 (PD 582) for investment in oil mills. Subsequently, holding companies, including AP Holdings, Inc. (APHI), were formed to own shares of stock in San Miguel Corporation (SMC). APHI's primary purpose was to acquire and hold shares of stock, receive dividends and income therefrom, and direct the operations of other corporations through stock ownership, with a prohibition against acting as an investment company or securities broker. APHI received cash and stock dividends from its SMC preferred shares, which earned interest from money market placements. In 2011, the City of Davao assessed APHI for local business tax on these dividends and interests, which APHI paid under protest and subsequently claimed for refund. The Presidential Commission on Good Government (PCGG) had previously sequestered APHI's SMC shares, and subsequent cases declared the CIIF companies, including APHI and the SMC shares, as public funds owned by the government. Procedural History: The Regional Trial Court (RTC) ruled that APHI's primary purpose resembled that of a financial intermediary, making it taxable under Section 69(f) of the 2005 Revenue Code of the City of Davao. The Court of Tax Appeals (CTA) Division affirmed the RTC's decision. However, the CTA En Banc reversed the ruling, finding APHI not to be a non-bank financial intermediary and declaring that any tax imposed on APHI would be a tax on the government, which is prohibited under Section 133(o) of the Local Government Code (LGC). The Petition: The City of Davao filed a Petition for Review on Certiorari, asserting that APHI is a "bank and other financial institution" due to its substantial share ownership and dividend earnings, and that its Articles of Incorporation are broad enough to encompass the functions of a non-bank financial intermediary. APHI, on the other hand, argued that it cannot be taxed under Section 143(f) of the LGC as it is not a bank or financial institution, that it is a holding company whose Articles expressly prohibit it from acting as a financial intermediary, and that its assets and income are national government properties exempt from local business taxes.
Issue(s)
Whether AP Holdings, Inc. (APHI), as a Coconut Industry Investment Fund (CIIF) holding company, is liable to pay local business taxes on its dividend earnings from its San Miguel Corporation (SMC) preferred shares. Whether APHI qualifies as a "bank and other financial institution" or a "non-bank financial intermediary" subject to local business taxes under the City of Davao's Revenue Code.
Ruling
The Court ruled in the negative. The Petition for Review on Certiorari was denied, and the Decision dated August 20, 2018, and Resolution dated January 23, 2019, of the Court of Tax Appeals En Banc in CTA EB No. 1640 were affirmed.
Ratio Decidendi
On the issue of APHI's liability for local business taxes on its dividend earnings: The Court ruled that APHI is not liable for local business taxes on its dividend earnings from its San Miguel Corporation (SMC) preferred shares. This ruling is based on the precedent set in City of Davao, et al. v. Randy Allied Ventures, Inc. (RAVI), which involved a similar CIIF holding company. The Court reiterated that RAVI, like APHI, was exclusively established to own and hold SMC shares. As such, these shares are considered government assets owned by the National Government for the benefit of the coconut industry. Consequently, any income derived from these shares, including dividends and interest from money market placements, is also owned by the National Government and is exempt from local taxation under Section 133(o) of the Local Government Code (LGC). The Court emphasized that the management of these dividends and income by APHI was not an act of doing business as a financial institution but rather an activity essential to its nature as a CIIF holding company, aimed at benefiting the Republic. On whether APHI qualifies as a "bank and other financial institution" or a "non-bank financial intermediary": The Court found that APHI does not fall under the definition of a non-bank financial intermediary (NBFI). For an entity to be considered an NBFI, it must meet several criteria: (a) be authorized by the Bangko Sentral ng Pilipinas (BSP) to perform quasi-banking functions; (b) have principal functions that include lending, investing, or placement of funds; and (c) perform specific functions on a regular and recurring basis, such as receiving funds and making them available to others, principally using funds for acquiring securities, or borrowing, lending, buying, or selling debt or equity securities. The Court observed that APHI's primary purpose, as stated in its Articles of Incorporation, was to hold shares and receive dividends, and it explicitly prohibited itself from acting as an investment company or securities broker. Furthermore, it was not shown that APHI performed the functions of an NBFI on a regular and recurring basis, nor was it regulated by the BSP. Therefore, APHI's activities, including the management of dividends and interest income, did not constitute "doing business" as a bank or other financial institution, but rather were incidental to its role as a holding company for government assets.
Main Doctrine
A Coconut Industry Investment Fund (CIIF) holding company, established solely to own and hold shares of stock in San Miguel Corporation (SMC), is not liable to pay local business taxes on dividends earned from such shares, as these shares and their income are considered government assets owned by the National Government for the benefit of the coconut industry, and thus exempt from local taxation.