City of Davao v. Randy Allied Ventures, Inc.

[G.R. No. 241697. July 29, 2019.]

PERLAS-BERNABE, J.

DOCTRINE: (1) Local business taxes (LBT) are taxes imposed by LGUs on the privilege of doing business within their
jurisdictions.

(2) 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/umbrella structure along with other subsidiaries. While holding company
make 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.

SUMMARY: Respondent Randy Allied Ventures, Inc. (RAVI) is one of the Coconut Industry Investment Fund (CIIF)
holding companies established to own and hold SMC preferred shares of stock. In COCOFED v. Republic (2012), the SC
declared all CIIF companies (including RAVI) as well as the CIIF SMC shares to be public funds owned by the
Government. RAVI then put the dividends it earned from the SMC preferred shares into a trust account which yielded
interest.

In 2013, RAVI filed with the RTC a claim for refund or credit of erroneously collected local business taxes (LBT) for 2010,
claiming that petitioners erroneously assessed LBT on the dividends of the shares on the mistaken assumption that it was
a non-bank financial intermediary (NBFI) subject to LBT. The RTC denied the refund claim, but both the CTA and CTA
En Banc granted the same, ruling that RAVI is a holding company, not a bank or other financial institution (i.e., a NBFI)
that is subject to LBT. Hence, this petition.

The SC affirmed the CTA En Banc’s decision. RAVI is neither a bank nor other financial institution (i.e., NBFI). RAVI is a
CIIF holding company, and its management of the dividends from the SMC preferred shares (including placing them in a
trust account yielding interest) is not tantamount to doing business as a bank or other financial institution or NBFI.
Rather, it is an activity that is essential to its nature as a CIIF holding company. There is a stark distinction between a
holding company and a financial intermediary under the LGC in relation to other laws (see doctrine 2). The mere fact that
a holding company makes investments does not ipso fact convert it to an NBFI. Otherwise, there would be absolutely no
distinction between a mere holding company and financial intermediaries. Since RAVI is not a bank or other financial
institution or NBFI, it cannot be held liable for LBT under LGC Sec. 143 (f).

FACTS:
 DN: This case is acronym city. Here’s a summary of the acronyms in case you get lost:
o Randy Allied Ventures, Inc. (RAVI), the respondent
o Coconut Industry Investment Fund (CIIF)
o San Miguel Corp. (SMC)
o local business taxes (LBT)

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 o non-bank financial intermediary (NBFI)
 Respondent 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 Corp. (SMC).
 In COCOFED v. Republic (promulgated in 2012), the SC declared that CIIF companies (including RAVI) and the
CIIF block of SMC shares were "public funds necessarily owned by the Government."
 In 2013, RAVI filed with the RTC a claim for refund or credit of erroneously and illegally collected local business
taxes (LBT) for the taxable year 2010.
o Claimed that petitioners (City of Davao and Davao City Treasurer Tanjili) erroneously and illegally
collected P503,346.00 LBT from it, corresponding to its dividends from its SMC preferred shares, on the
mistaken assumption that it is a non-bank financial intermediary (NBFI).
 Petitioners claimed that:
o RAVI's activities (owning shares and receiving dividends and interest income) constitute investing or
doing business as an NBFI.
o The clause in RAVI's Amended Articles of Incorporation (AOI), which prohibits it from acting as an
investment company is not conclusive proof that it has not actually done so.
 RTC denied the refund claim.
o RAVI's dividends and interests are not merely incidental to its business but are its principal sources of
income, in line with the primary purpose stated in its Amended AOI.
o Being a financial intermediary, RAVI's income from dividends and interests is subject to LBT under LGC
Sec. 143 (f).
st
 CTA 1 Division reversed and granted the petition, ruling that RAVI was a holding company, not an NBFI subject
to LBT.
 CTA En Banc denied petitioners’ appeal and affirmed the CTA 1st Division.
o RAVI cannot be considered an NBFI because it fails to meet the requisites provided under the General
Banking Law, Manual of Regulations for Non-Bank Financial Institutions, and the NIRC.
 It is not authorized to act as an NBFI by the BSP; its principal function does not relate to NBFI
activities; and 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 basis.
o 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.
 Hence, this petition.
 Petitioners’ argument: RAVI’s liability for LBT finds basis under LGC Sec. 143(f).

ISSUE(S), HOLDING, AND RATIO:

RULING RATIO

W/N the CTA En  LGC Sec. 143(f) provides:

Banc erred in o SECTION 143. Tax on Business . — The municipality may impose taxes on the
finding that RAVI is following businesses:
not an NBFI subject (f) On banks and other financial institutions, at a rate not exceeding fifty
to LBT under percent (50%) of one percent (1%) on the gross receipts of the preceding
Section 143 (f) of the calendar year derived from interest, commissions and discounts from lending
LGC. – NO. activities, income from financial leasing, dividends, rentals on property and

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 profit from exchange or sale of property, insurance premium.
 The LGC in Sec. 131(e) defines "Banks and other financial institutions" as to "include
NBFIs, lending investors, finance and investment companies, pawnshops, money
shops, insurance companies, stock markets, stockbrokers and dealers in securities and
foreign exchange, as defined under applicable laws, or rules and regulations
thereunder."
 LBT are taxes imposed by LGUs on the privilege of doing business within their
jurisdictions.
o The phrase "doing business" means some "trade or commercial activity
regularly engaged in as a means of livelihood or with a view to profit.”
 Particularly, the LBT imposed in Sec. 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.
 In this case, it is clear that RAVI is neither a bank nor other financial institution (i.e.,
NBFI).
 To be considered as an NBFI under the NIRC, banking laws, and pertinent
regulations, the following must concur:
o (a) The person or entity is authorized by the BSP to perform quasi banking
functions;
o (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; and
o (c) The person or entity must perform any of the following functions on a
regular and recurring, not on an isolated basis, to wit:
 1. Receive funds from one (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;
 2. Use principally the funds received for acquiring various types of
debt or equity securities;
 3. Borrow against, or lend on, or buy or sell debt or equity securities.
 As ruled in the COCOFED case, RAVI is a CIIF holding company. The SMC preferred
shares held by it are government assets owned by the National Government for the
coconut industry.
o These SMC shares as well as any resulting dividends or increments therefrom
are owned by the National Government and shall be used only for the benefit
of the coconut farmers and for the development of the coconut industry.
 Thus, RAVI's management of the dividends from the SMC preferred shares
(including placing them in a trust account yielding interest) is not tantamount to doing
business as a bank or other financial institution or NBFI. Rather, it is an activity that
is essential to its nature as a CIIF holding company.
 There is a stark distinction between a holding company and a financial intermediary
under the LGC in relation to other laws.

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 o 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/umbrella structure
along with other subsidiaries.
o While holding company make partake in investment activities, this does not
per se qualify them as financial intermediaries that are actively dealing in the
same.
o 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.
o TLDR: main purpose of holding companies is to hold shares in other
companies for policy-controlling purposes; participation in investment
activities is merely incidental. Main purpose of FIs is to deal with public funds
when they offer quasi-banking functions.
 RAVI’s act of placing the dividends from the SMC preferred shares into a trust account
earning interest does NOT make it an active investor/dealer in securities. The primary
test is regularity of function, not on an isolated basis, with the end in mind for self-
profit.
o Being restricted to managing the dividends of the SMC preferred shares on
behalf of the government, RAVI cannot be said to be "doing business" as a bank
or other financial institution, i.e. an NBFI.
 Moreover, while RAVI's stated primary purpose in its AOI is couched in broad terms as
to allow some functions similar to an NBFI, this does not necessarily mean it is engaged
in the same business.
o The power to “purchase and sell real & personal property, including shares”
and “receive dividends” is common to all corporations, including holding
companies.
 Again, the mere fact that a holding company makes investments does not ipso fact
convert it to an NBFI. Otherwise, there would be absolutely no distinction between a
mere holding company and financial intermediaries.
 Since RAVI is not a bank or other financial institution or NBFI, it cannot be held
liable for LBT under LGC Sec. 143 (f).
 However, this is without prejudice to RAVI's potential liability for other taxes should it
so engage in other profit making activities aside from its management of the SMC
preferred shares, and the dividends therefrom.

DISPOSITIVE: WHEREFORE, the petition is DENIED. The Decision dated February 20, 2018 and the Resolution
dated July 25, 2018 of the CTA En Banc in CTA EB No. 1591 are AFFIRMED. SO ORDERED.

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