City of Davao vs. Randy Allied Ventures, Inc.

A holding company that merely receives and manages dividends from shares it holds for policy control purposes, without engaging in lending activities, financial leasing, or dealing in securities on a regular and recurring basis for profit, does not qualify as a "bank or other financial institution" (specifically a non-bank financial intermediary) under Section 143(f) of the Local Government Code of 1991, and is thus entitled to a refund or credit of local business taxes erroneously collected thereon.

The case arises from the aftermath of the Coconut Industry Investment Fund (CIIF) controversy, where the Supreme Court previously ruled in Philippine Coconut Producers Federation, Inc. v. Republic (COCOFED) that CIIF companies, including Randy Allied Ventures, Inc. (RAVI), and the San Miguel Corporation (SMC) shares they hold, are public funds owned by the National Government for the benefit of coconut farmers and the development of the coconut industry. The City of Davao assessed LBT on RAVI's dividends from SMC shares, characterizing RAVI as a non-bank financial intermediary engaged in investment activities, prompting RAVI to avail of the local taxpayer's remedy for refund or credit of erroneously paid taxes.

• Randy Allied Ventures, Inc. (RAVI) is a Coconut Industry Investment Fund (CIIF) holding company established to own and hold shares of stock of San Miguel Corporation (SMC).
• On January 24, 2012, the Supreme Court rendered its decision in Philippine Coconut Producers Federation, Inc. v. Republic (COCOFED), declaring CIIF companies, including RAVI, and the CIIF block of SMC shares as "public funds necessarily owned by the Government" to be used only for the benefit of coconut farmers and the development of the coconut industry.
• On January 17, 2013, RAVI filed a claim for refund or credit of erroneously and illegally collected local business taxes (LBT) for taxable year 2010 with the Regional Trial Court, claiming that petitioners erroneously collected LBT in the amount of P503,346.00 on dividends from its SMC preferred shares based on the mistaken assumption that RAVI is a non-bank financial intermediary (NBFI).
• RAVI's Amended Articles of Incorporation contain a clause prohibiting it from acting as an investment company.
• RAVI placed the dividends from the SMC preferred shares in a trust account which yielded interest income.
• The City of Davao assessed LBT on RAVI under Section 143(f) of the Local Government Code, characterizing RAVI's activities of owning shares and receiving dividends and interest income as constituting investing or doing business as an NBFI.

• Petitioners argued that RAVI's activities in owning shares and receiving dividends and interest income constitute investing or doing business as a non-bank financial intermediary (NBFI).
• Petitioners maintained that the clause in RAVI's Amended Articles of Incorporation prohibiting it from acting as an investment company is not conclusive proof that it has not actually engaged in such activities.
• Petitioners asserted that RAVI's dividends and interests are not merely incidental to its business but are its principal sources of income, aligning with the broad primary purpose stated in its Amended Articles of Incorporation.
• Petitioners contended that RAVI is a financial intermediary whose income from dividends and interests is subject to LBT under Section 143(f) of the Local Government Code.

• RAVI claimed that it is not an NBFI but merely a holding company managing government-owned assets.
• RAVI argued that the COCOFED case already settled that RAVI, as a CIIF company, and the SMC shares it holds are government properties, hence beyond the City of Davao's power to tax.
• RAVI maintained that it is not authorized by the Bangko Sentral ng Pilipinas (BSP) to act as an NBFI; its principal function does not relate to NBFI activities; and there was no proof that it performed such activities as its principal function and on a regular and recurring basis.
• RAVI contended that it is restricted to managing the dividends of the SMC preferred shares on behalf of the government and is not engaged in lending activities, financial leasing, or dealing in securities for profit on a regular basis.

• Procedural Issues: N/A
• Substantive Issues: Whether the Court of Tax Appeals En Banc erred in finding that RAVI is not a non-bank financial intermediary subject to local business tax under Section 143(f) of the Local Government Code of 1991, thereby entitling RAVI to a refund or credit of erroneously paid taxes.

• Procedural: N/A
• Substantive: The Supreme Court denied the petition and affirmed the CTA En Banc decision granting the refund. The Court held that to be considered an NBFI under the National Internal Revenue Code, banking laws, and pertinent regulations, the following must concur: (1) the person or entity is authorized by the BSP to perform quasi-banking functions; (2) the principal functions include the lending, investing or placement of funds deposited to them, acquired by them, or coursed through them, either for their own account or for the account of others; and (3) the person or entity must perform these functions on a regular and recurring, not isolated, basis. RAVI is a CIIF holding company managing government-owned SMC shares for the benefit of coconut farmers. Its receipt of dividends and placement of the same in a trust account yielding interest is incidental to its nature as a holding company and does not constitute "doing business" as an NBFI because it is not done with a view to self-profit but as a trustee for government assets. The Court distinguished between a holding company, which invests substantially in equity securities to control policies, and a financial intermediary, which deals with public funds and is regulated by the BSP. Since RAVI is not a bank or other financial institution, it cannot be held liable for LBT under Section 143(f) of the LGC, and the refund or credit of erroneously paid taxes is proper.

• Definition of Non-Bank Financial Intermediary (NBFI) — Under Section 131(e) of the Local Government Code in relation to the National Internal Revenue Code and BSP regulations, an NBFI must satisfy three requisites: (a) authorization by the BSP to perform quasi-banking functions; (b) principal functions relating to lending, investing or placement of funds; and (c) performance of these functions on a regular and recurring basis, not merely on an isolated basis. The Court applied this three-pronged test to determine that RAVI is not an NBFI because it lacks BSP authorization and does not engage in financial intermediary activities as a principal function on a regular basis.
• Distinction Between Holding Company and Financial Intermediary — A holding company is organized to invest substantially in equity securities of another company for the purpose of controlling their policies and holding them in a conglomerate structure, as opposed to directly engaging in operating activities. 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 when offering quasi-banking functions, whereas holding companies are not similarly regulated because any investment activities are mere incidental operations since their main purpose is to hold shares for policy-controlling purposes.
• Public Funds Immunity from Local Taxation — Following the COCOFED doctrine, CIIF companies and the SMC shares they hold, being acquired using public coconut levy funds, are government properties owned by the National Government and are thus beyond the power of local government units to tax.
• Local Taxpayers' Remedy of Refund or Credit — A local taxpayer may file a written claim for recovery within the period prescribed by the Local Government Code for taxes found to be erroneously or illegally assessed and collected. This remedy is available when the taxpayer demonstrates that no tax liability actually exists, as in the case of an entity not constituting a bank or other financial intermediary under Section 143(f) of the LGC.

• "Essentially, LBT are taxes imposed by local government units on the privilege of doing business within their jurisdictions."
• "To be sure, the phrase 'doing business' means some 'trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit.'"
• "Indeed, there is a stark distinction between a holding company and a financial intermediary as contemplated under the LGC, in relation to other laws."
• "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."
• "As above-stated, the primary test is regularity of function, not on an isolated basis, with the end in mind for self-profit."
• "The mere fact that a holding company makes investments does not ipso facto convert it to an NBFI. Otherwise, there would be absolutely no distinction between a mere holding company and financial intermediaries."

• Philippine Coconut Producers Federation, Inc. v. Republic (COCOFED), G.R. Nos. 177857-58 and 178793, January 24, 2012 — Cited as the controlling precedent declaring CIIF companies, including RAVI, and the CIIF block of SMC shares as public funds necessarily owned by the Government, to be used only for the benefit of coconut farmers and the development of the coconut industry.
• Maricalum Mining Corporation v. Florentino, G.R. No. 221813, July 23, 2018 — Cited for the definition of a holding company as one organized to invest substantially in equity securities of another company for the purpose of controlling their policies and holding them in a conglomerate structure.
• The City of Manila v. Coca-Cola Bottlers Philippines, Inc., 612 Phil. 609 (2009) — Cited for the principle that local business taxes are imposed by local government units on the privilege of doing business within their jurisdictions.

• Section 143(f) of Republic Act No. 7160 (Local Government Code of 1991) — The provision imposing local business tax on banks and other financial institutions at a rate not exceeding 0.5% on gross receipts derived from interest, commissions, discounts from lending activities, income from financial leasing, dividends, rentals on property, and profit from exchange or sale of property, insurance premium.
• Section 131(e) of Republic Act No. 7160 (Local Government Code of 1991) — The definitional section for "banks and other financial institutions" including non-bank financial intermediaries, lending investors, finance and investment companies, pawnshops, money shops, insurance companies, stock markets, stock brokers and dealers in securities and foreign exchange.
• Section 131(d) of Republic Act No. 7160 (Local Government Code of 1991) — Defines "doing business" as some trade or commercial activity regularly engaged in as a means of livelihood or with a view to profit.
• Section 22(W) of the National Internal Revenue Code — Cited in relation to the definition of non-bank financial intermediaries.
• Section 36 of Batas Pambansa Blg. 68 (Corporation Code of the Philippines) — Cited for the common corporate powers including the power to purchase and sell real and personal property, including shares, and to receive dividends thereon.
• Presidential Decree No. 71 (Amending R.A. No. 337, General Banking Act) — Cited for the definition of "Quasi-Banking Functions" as borrowing funds for the borrower's own account through issuance of debt instruments from twenty or more lenders for purposes of relending or purchasing receivables.
• Section 4101Q.1 of the BSP Manual of Regulations for Non-Bank Financial Institutions — Cited for the requisites of quasi-banking functions: receiving funds from one group and making them available to another, using funds for acquiring debt or equity securities, or borrowing against, lending on, or buying or selling debt or equity securities.
• BIR Revenue Regulations No. 09-04, Section 2 (2.3) — Cited for the definition of principal functions of non-bank financial intermediaries.

• Associate Justice Juanito C. Castañeda, Jr. (joined by Associate Justice Caesar A. Casanova) — Dissented from the CTA En Banc decision (which the Supreme Court affirmed). The dissent argued that: (1) the required authorization by the BSP to perform NBFI activities and the Monetary Board's determination are mere regulatory measures, not jurisdictional requirements for tax liability; (2) RAVI performed NBFI activities despite limitations in its Articles of Incorporation because its consistent receipt of dividends and interest income leads to the conclusion that it engaged in NBFI activities; and (3) although the SMC shares belong to the government, it is not the shares but RAVI itself, as an NBFI, who is subject to local business tax.