City of Davao vs. AP Holdings, Inc.

Dividends earned by a Coconut Industry Investment Fund (CIIF) holding company from SMC preferred shares that are public assets of the national government are exempt from local business taxation under Section 133(o) of the Local Government Code, and the holding company does not fall within the class of “banks and other financial institutions” taxable under Section 143(f) when its investment activities are not engaged in on a regular and recurring basis for profit but merely in furtherance of its function as a custodian of government property.

The Coconut Industry Investment Fund (CIIF) was created under Presidential Decree No. 582 from levies imposed on coconut products. The fund was invested in six oil mills (the CIIF Oil Mills Group). In 1983, the CIIF Oil Mills Group acquired shares of stock in San Miguel Corporation and simultaneously established fourteen holding companies, including AP Holdings, Inc. (APHI), for the sole purpose of owning and holding those shares. APHI’s Amended Articles of Incorporation designated it a “holding corporation” and expressly prohibited it from acting as an investment company, securities broker or dealer, or trust corporation. The SMC shares were later sequestered by the Presidential Commission on Good Government. On January 24, 2012, in G.R. Nos. 177857-58 entitled Philippine Coconut Producers Federation, Inc. v. Republic of the Philippines, the Supreme Court declared the CIIF companies—including APHI—and the CIIF block of SMC shares to be public funds necessarily owned by the national government. APHI received cash and stock dividends from the SMC preferred shares and deposited them in a trust account; the account, in turn, earned interest from money market placements.

• The CIIF Holding Companies: AP Holdings, Inc. is one of fourteen holding companies formed by the CIIF Oil Mills Group in 1983 for the sole purpose of owning and holding San Miguel Corporation shares acquired by the CIIF. Its Amended Articles of Incorporation defines its primary purpose as a “holding corporation” and expressly prohibits it from acting as an investment company, securities broker or dealer, or trust corporation. The SMC shares were sequestered by the Presidential Commission on Good Government in 1986.

• The Supreme Court’s 2012 Declaration: In G.R. Nos. 177857-58 (Philippine Coconut Producers Federation, Inc. v. Republic), the Court declared that the CIIF companies, including APHI, and the CIIF block of SMC shares were public funds owned by the national government for the benefit of the coconut industry. Dividends and any increment from the shares therefore belong to the Republic.

• Assessment and Protest: In 2011, the City Treasurer of Davao assessed APHI for 0.55% local business tax amounting to ₱723,531.50 on dividends received from SMC preferred shares and interest from money market placements where the dividends were deposited. The assessment was made under Section 69(f) of the 2005 Revenue Code of the City of Davao, which imposes the tax on “Banks and Other Financial Institutions.” APHI paid under protest and sought administrative refund.

• Lower Tribunals’ Findings: The RTC found APHI’s primary purpose akin to a financial intermediary as defined in Section 4101Q.1 of the BSP Manual of Regulations for Non-Bank Financial Institutions. The CTA Division affirmed. The CTA En Banc reversed, holding that APHI did not satisfy the requisites of a non-bank financial intermediary—its functions were not shown to be its principal purpose, it did not perform them on a regular and recurring basis, and it never held itself out as such. The En Banc also ruled that the shares and dividends were government property exempt from local taxation under Section 133(o) of the LGC.

• APHI as a Non-Bank Financial Intermediary: Petitioners maintained that APHI was a “bank and other financial institution” specifically a non-bank financial intermediary or investment company because it owned a substantial number of SMC shares and received millions of pesos in dividends. Its business purpose as stated in its Articles of Incorporation was broad enough to encompass the descriptive functions of a non-bank financial intermediary under Section 4101Q.1 of the BSP Manual.

• Prohibitory Clause Not Conclusive: Petitioners argued that the express prohibition in APHI’s charter against acting as an investment company or securities broker was not conclusive. Based on the tax audit and financial statements, APHI had no other business except its primary business of stock investment and money market placements with SMC, making it in substance a financial intermediary.

• BLGF Opinion: Petitioners contended that the Bureau of Local Government Finance’s opinion exempting APHI from local business taxes was not binding on the courts, as the BLGF is not a quasi-judicial body whose technical findings command judicial deference.

• Not Engaged in Banking or Financial Business: APHI countered that under Section 143(f) of the LGC, only “banks and other financial institutions” may be taxed on dividends and interest income. It was not engaged in those businesses; mere ownership of shares does not ipso facto make it a financial intermediary.

• No Regular and Recurring Investment Activity: APHI asserted it was not a non-bank financial intermediary because it did not lend, invest, reinvest, or trade securities on a regular and recurring basis. It never applied for or obtained a secondary license from the Securities and Exchange Commission, nor was it regulated by the BSP or the Insurance Commission.

• Holding Company with Express Prohibition: APHI emphasized that it was a holding company whose Articles of Incorporation expressly prohibited it from acting as a financial intermediary. Its management of dividends from SMC shares was incidental to its role as a CIIF holding company, not a business for profit.

• Government Property Exempt from Local Tax: APHI contended that the SMC shares, dividends, and income derived therefrom were all national government properties—declared as such by the Supreme Court in 2012 and confirmed by the BLGF—hence exempt from local business taxes under Section 133(o) of the LGC.

• Liability for Local Business Tax: Whether a CIIF holding company whose SMC preferred shares and dividends are public assets owned by the national government may be assessed local business taxes under Section 143(f) of the Local Government Code in relation to Section 69(f) of the Davao City Revenue Code.

• Liability for Local Business Tax: The assessment was invalid. Applying the precedent in City of Davao v. Randy Allied Ventures, Inc. (RAVI), a CIIF holding company is neither a bank nor a non-bank financial intermediary. To qualify as a non-bank financial intermediary, the entity must be authorized by the BSP to perform quasi-banking functions, its principal functions must include lending, investing or placement of funds, and it must perform such functions on a regular and recurring, not isolated, basis. APHI was exclusively established to own and hold SMC shares, which the Court had already declared to be government assets. Its management of dividends, including placing them in a trust account that earned interest, was not a profit-seeking business activity but merely an act essential to its nature as a holding company for government property. Because the SMC shares and all dividends derived from them are public funds owned by the Republic, local government units are barred from taxing them under Section 133(o) of the LGC. The City of Davao therefore acted beyond its taxing authority.

• Test for Classification as a Non-Bank Financial Intermediary (NBFI) — To be considered an NBFI under the National Internal Revenue Code, banking laws, and BSP regulations, three elements must concur: (1) the entity is authorized by the BSP to perform quasi-banking functions; (2) its principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with, acquired by, or coursed through it, either for its own account or for the account of others; and (3) it performs any of the enumerated functions on a regular and recurring, not isolated, basis. In this case, APHI’s activities did not meet these requisites; it merely held shares and managed dividends incidental to its role as a government-asset holding company.

• Government Exemption from Local Taxation under Section 133(o) of the LGC — Local government units may not tax the national government. When the Supreme Court declared the CIIF block of SMC shares as public funds owned by the Republic, the dividends and all income from those shares likewise became government property. Consequently, any local business tax imposed on such dividends constitutes a tax on the national government and is void for lack of taxing authority.

• “In the recent case of City of Davao, et al. v. Randy Allied Ventures, Inc. (RAVI), the Court ordained that RAVI, a CIIF holding company like APHI, was exclusively established to own and hold SMC shares of stock. As such, it is not liable to pay local business taxes on the dividends earned from its SMC preferred shares as the same shares are government assets owned by the national government for the benefit of the coconut industry…” This passage encapsulates the ratio decidendi, grounding the exemption both in the absence of a business taxable as a financial institution and in the public ownership of the assets.

• “Verily, therefore, CIIF holding companies, including APHI itself and the entire CIIF block of SMC shares, are public assets owned by the Republic of the Philippines. Consequently, dividends and any income from these shares are also owned by the Republic.” This directly links the 2012 declaration of public ownership to the invalidity of the local business tax.

• City of Davao v. Randy Allied Ventures, Inc., G.R. No. 241697, July 29, 2019 — Followed. The Supreme Court applied this recent ruling as controlling precedent, holding that a CIIF holding company is not a non-bank financial intermediary and that dividends from its SMC shares are exempt from local business tax because the shares are government property.

• Philippine Coconut Producers Federation, Inc. v. Republic of the Philippines, G.R. Nos. 177857-58, January 24, 2012 — The case that declared the CIIF companies and the CIIF block of SMC shares to be public funds owned by the national government. Its holding provided the juridical foundation for the exemption claimed by APHI.

• Section 143(f), Local Government Code — Authorizes municipalities to impose business taxes on banks and other financial institutions at a rate not exceeding 50% of 1% on gross receipts from interest, dividends, and other specified income. APHI did not fall within the class of persons covered by this provision.

• Section 131(e), Local Government Code — Defines “banks and other financial institutions” to include non-bank financial intermediaries as defined under applicable laws. APHI did not satisfy the applicable NIRC and BSP definitions.

• Section 133(o), Local Government Code — Prohibits local government units from taxing the national government. The SMC shares and dividends being public funds owned by the Republic, the City of Davao lacked authority to impose the local business tax.

• Section 22(W), National Internal Revenue Code of 1997 — Defines a “non-bank financial intermediary” as a financial intermediary authorized by the BSP to perform quasi-banking activities. APHI had no such authorization.

• Section 4101Q.1, Manual of Regulations for Non-Bank Financial Institutions — Elaborates the definition of financial intermediaries as persons or entities whose principal functions include lending, investing, or placing funds. Held inapplicable to APHI because its investment activity was not its principal function and was not performed on a regular and recurring basis.

• Presidential Decree No. 582 — Created the Coconut Industry Investment Fund (CIIF), the source of the public funds that were eventually used to acquire the SMC shares now held by the holding companies.

Peralta, C.J., Caguioa, J. Reyes, Jr., and Lopez, JJ., concurred.