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Tax Case Digest: City of Davao v. Randy Allied Ventures, G.R. No. 241697, July 29, 2019

City of Davao v. Randy Allied Ventures, Inc.
G.R. No. 241697, July 29, 2019.

Second Division

Lessons Applicable:  non-bank financial intermediary, local business tax
Laws Applicable:

  • Randy Allied Ventures, Inc. (RAVI) is one of the Coconut Industry Investment Fund (CIIF) holding companies established to own and hold the shares of stock of San Miguel Corporation (SMC).
  • January 24, 2012: Supreme Court decision in Philippine Coconut Producers Federation, Inc. v. Republic (COCOFED), G.R. Nos. 177857-58 and 178793, declared the CIIF companies, including RAVI, and the CIIF block of SMC shares as "public funds necessarily owned by the Government”.
  • January 17, 2013: RAVI filed with the Regional Trial Court (RTC), a claim for refund or credit of erroneously and illegally collected LBT for the taxable year 2010 in the amount of P503,346.00, corresponding to its dividends from its SMC preferred shares, on the mistaken assumption that it is a non-bank financial intermediary (NBFI).
  • RTC: Denied the claim for refund or credit.  Being a financial intermediary, RAVI's income from dividends and interests is subject to LBT under Section 143 (f) of Republic Act (RA) No. 7160, or the Local Government Code of 1991 (LGC).  It is its principal source of income, in line with the primary purpose stated in its Amended AOI.
  • RAVI filed a Petition for Review with the CTA First Division.
  • CTA First Division granted the petition and held that RAVI is a holding company and not an NBFI subject to LBT and denied City of Davao’s Motion for Reconsideration (MR)
  • CTA EB: Denied City of Davao’s petition for lack of merit.  RAVI cannot be considered an NBFI for failing to meet the requisites provided under the General Banking Law, Manual of Regulations for Non-Bank Financial Institutions, and the National Internal Revenue Code, i.e., it is not authorized to act as an NBFI by the Bangko Sentral ng Pilipinas (BSP); its principal function does not relate to NBFI activities; and that while its primary purpose may involve one of the activities enumerated in the BSP Manual, there was no proof that it performed such activities as its principal function and on a regular and recurring basis.

ISSUE: W/N CTA EB erred in finding that RAVI is not an NBFI subject to LBT under Section 143 (f) of the LGC

HELD: Petition is denied.
  • Essentially, LBT are taxes imposed by local government units on the privilege of doing business within their jurisdictions.  "Doing business" means some "trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit."  LBT imposed pursuant to Section 143 (f) is premised on the fact that the persons made liable for such tax are banks or other financial institutions by virtue of their being engaged in the business as such. This is why the LBT are imposed on their gross receipts from "interest, commissions and discounts from lending activities, income from financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium."
  • In order to be considered as an NBFI under the National Internal Revenue Code, banking laws, and pertinent regulations, the following must concur:
    • a.    The person or entity is authorized by the BSP to perform quasi-banking functions;
    • b.    The principal functions of said person or entity include the lending, investing or placement of funds or evidences of indebtedness or equity deposited to them, acquired by them, or otherwise coursed through them, either for their own account or for the account of others; 
    • c.    The person or entity must perform any of the following functions on a regular and recurring, not on an isolated basis, to wit:
      • i.    Receive funds from 1 group of persons, irrespective of number, through traditional deposits, or issuance of debt or equity securities; and make available/lend these funds to another person or entity, and in the process acquire debt or equity securities;
      • ii.    Use principally the funds received for acquiring various types of debt or equity securities
      • iii.    Borrow against, or lend on, or buy or sell debt or equity securities.
  • A "'holding company' is 'organized' and is basically conducting its business by investing substantially in the equity securities of another company for the purpose of controlling their policies (as opposed to directly engaging in operating activities) and 'holding' them in a conglomerate or umbrella structure along with other subsidiaries."While holding companies may partake in investment activities, this does not per se qualify them as financial intermediaries that are actively dealing in the same. Financial intermediaries are regulated by the BSP because they deal with public funds when they offer quasi-banking functions. On the other hand, a holding company is not similarly regulated because any investment activities it conducts are mere incidental operations, since its main purpose is to hold shares for policy-controlling purposes