City of Davao v. ARC Investors, Inc.
REITERATIONFacts
The Antecedents: Respondent ARC Investors, Inc. (ARCH), a domestic corporation, earned P801,634,060.07 in 2010 from dividends from its preferred shares in San Miguel Corporation (SMC) and interest from money market placements. Petitioners, the City of Davao and its City Treasurer, assessed ARCH for local business taxes (LBT) amounting to P4,381,431.90, equivalent to 0.55% of the dividends and interests for the third and fourth quarters of 2011. Procedural History: ARCH filed an administrative protest with the City Treasurer, characterizing the assessment as erroneous and illegal. Following alleged inaction, ARCH filed a petition for review with the Regional Trial Court (RTC) of Davao City. The RTC denied ARCH's petition, ruling that ARCH was engaged in business as a financial intermediary and its income was subject to LBT. ARCH appealed to the Court of Tax Appeals (CTA) Division, which reversed the RTC ruling and cancelled the assessment. The CTA En Banc affirmed the CTA Division's decision, holding that ARCH was not a financial intermediary or a non-bank financial intermediary (NBFI) because it was not authorized by the Bangko Sentral ng Pilipinas (BSP) to perform quasi-banking activities, its functions did not principally relate to NBFI activities, and there was no showing of regular and recurring functions. The CTA En Banc denied the motion for reconsideration, leading to the present petition. The Petition: Petitioners assail the CTA En Banc's decision and resolution, arguing that ARCH is an NBFI subject to LBT.
Issue(s)
Whether ARC Investors, Inc. (ARCH) is a non-bank financial intermediary (NBFI) subject to local business tax (LBT) under Section 143(f) in relation to Section 131(e) of the Local Government Code (LGC). Whether ARCH's receipt of dividends and interests constitutes "doing business" as contemplated by the LGC for the imposition of LBT.
Ruling
The Court holds in the negative. The petition is DENIED. The Decision dated January 29, 2019 and the Resolution dated September 11, 2019 of the Court of Tax Appeals, En Banc in CTA EB No. 1589 are AFFIRMED.
Ratio Decidendi
On whether ARC Investors, Inc. (ARCH) is a non-bank financial intermediary (NBFI) subject to local business tax (LBT): The Court ruled in the negative. Local government units have the power to impose LBT on the privilege of doing business within their territorial jurisdictions, which contemplates some "trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit." Petitioners assessed ARCH based on Section 143(f) and Section 131(e) of the LGC. For an entity to be considered an NBFI under the LGC, certain requisites must concur: (a) authorization by the BSP to perform quasi-banking functions; (b) principal functions include lending, investing, or placement of funds; and (c) performance of these functions on a regular and recurring basis, not on an isolated basis. ARCH, by merely owning SMC preferred shares and deriving dividends and interests, cannot be said to be "doing business" as a bank or other financial institution. The Court noted that ARCH is one of the CIIF holding companies established to own and hold SMC shares, and these shares and their increments are considered assets of the National Government for the benefit of the coconut industry. Therefore, the management of dividends, including placing them in interest-yielding markets, does not, in itself, amount to doing business as an NBFI. On whether ARCH's receipt of dividends and interests constitutes "doing business" as contemplated by the LGC for the imposition of LBT: The Court held that ARCH's activities do not constitute "doing business" as an NBFI. The Court distinguished a holding company from a financial intermediary, stating that while holding companies may partake in investment activities, this does not per se qualify them as financial intermediaries. Financial intermediaries are regulated by the BSP because they deal with public funds, whereas holding companies' investment activities are merely incidental operations. The primary test for distinction is "regularity of function, not on an isolated basis, with the end in mind for self-profit." ARCH's placement of dividends in the market, incidentally earning interests, does not negate its restricted underlying purpose as a CIIF holding company. Lacking the element of regularity or recurrence for the purpose of earning a profit, ARCH's money market placements cannot amount to "doing business" as an NBFI subject to local business taxation. Furthermore, the Bureau of Local Government Finance Opinion dated February 22, 2011 clarified that unless imposed on banks and other financial institutions, taxes on interest and dividends for non-bank and non-financial institutions are considered passive investment income, not gross receipts derived in the ordinary course of business. The definition of "gross sales or receipts" under Section 131(n) of the LGC does not include passive income like dividends received from another domestic corporation.
Main Doctrine
A holding company, whose primary purpose is to own shares for policy-controlling purposes and whose receipt of dividends and interests is incidental to its ownership of shares and money market placements, is not considered a bank or other financial institution, specifically a non-bank financial intermediary (NBFI), subject to local business tax under Section 143(f) in relation to Section 131(e) of the Local Government Code.