Davao v. AP Holdings
REITERATIONFacts
The Antecedents: The Coconut Industry Investment Fund (CIIF) was established under Presidential Decree 582 to invest in oil mills. AP Holdings, Inc. (APHI) was created as a holding company to own shares of stock in San Miguel Corporation (SMC). APHI received dividends from its SMC preferred shares and earned interest from money market placements of these dividends. In 1986, APHI's SMC shares were sequestered by the Presidential Commission on Good Government. Subsequently, this Court declared the CIIF companies, including APHI and its SMC shares, as public funds or property owned by the government. Procedural History: The City of Davao issued a Business Tax Order of Payment to APHI for local business tax on its dividends and interests, based on Section 69(f) of the City's 2005 Revenue Code. APHI paid under protest and filed an administrative claim for refund, which was not acted upon. APHI then filed a petition for review with the Regional Trial Court (RTC). The RTC ruled that APHI's primary purpose resembled that of a financial intermediary and was thus taxable. The Court of Tax Appeals (CTA) Division affirmed the RTC's decision. However, the CTA En Banc reversed, finding APHI not to be a non-bank financial intermediary and that its shares were government assets exempt from local taxation. The Petition: Petitioners City of Davao and its Acting City Treasurer filed a Petition for Review on Certiorari before the Supreme Court, assailing the CTA En Banc's decision. They argued that APHI is a "bank and other financial institution" or a "non-bank financial intermediary or an investment company" due to its substantial share ownership and dividend income. They contended that APHI's Articles of Incorporation were broad enough to encompass the functions of a non-bank financial intermediary, and that its statement to not act as an investment company was not conclusive. They also argued that the Bureau of Local Government Finance's opinion on exemption was not binding.
Issue(s)
Whether AP Holdings, Inc. (APHI), as a 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" for the purpose of local business taxation.
Ruling
The petition is DENIED. 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 are AFFIRMED. AP Holdings, Inc. (APHI) is not liable to pay local business taxes on its dividend earnings from its SMC preferred shares.
Ratio Decidendi
On the issue of whether AP Holdings, Inc. (APHI) is liable for local business taxes on its dividend earnings from SMC preferred shares: The Court ruled in the negative, reiterating its stance in City of Davao, et al. v. Randy Allied Ventures, Inc. (RAVI). It was established that APHI, like RAVI, is a CIIF holding company exclusively created to own and hold SMC shares. These shares, along with any dividends or increments derived from them, were declared by this Court to be government assets owned by the National Government for the benefit of the coconut industry. Consequently, any tax imposed by the City of Davao on these dividends would constitute a tax on the national government, which is expressly prohibited under Section 133(o) of the Local Government Code. Therefore, the City of Davao acted beyond its taxing authority in imposing the business tax on APHI's dividend income. On the issue of 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 these classifications. To be considered a non-bank financial intermediary (NBFI), several conditions must concur: (1) authorization by the Bangko Sentral ng Pilipinas (BSP) to perform quasi-banking functions; (2) principal functions involving lending, investing, or placement of funds; and (3) performance of specific functions on a regular and recurring basis. The Court noted that APHI was not authorized by the BSP, its principal purpose was to hold shares as a holding company, and its management of dividends was incidental to this purpose and not done on a regular and recurring basis for profit. Furthermore, APHI's Articles of Incorporation explicitly stated it shall not act as an investment company or a securities broker. Thus, its activities did not meet the criteria for being an NBFI or other financial institution subject to local business taxes under Section 143(f) of the Local Government Code.
Main Doctrine
A holding company established solely to own and hold shares of stock, which are declared government assets, is not liable for local business taxes on dividends earned from those shares. This is because such income is considered income of the national government, which is exempt from local taxation under Section 133(o) of the Local Government Code. The company's activities in managing these dividends, such as placing them in money market placements, do not transform it into a bank or non-bank financial intermediary subject to business taxes, especially when these activities are incidental to its primary purpose of holding government assets for the benefit of the public.