Holding firms’ exemptions reconsidered in their favor

Every January, during the renewal of local business permits, I collect anecdotes from our staff, specifically actual stories of the challenges faced while processing the business permits of our clients. They range from the usual time wasting queue in certain local government offices to technical issues. At times the problem is not even a technical issue -- like a local government unit’s refusal to process an application simply because the latest sales figure is lower than the previous year’s.

So as not to delay the renewal of their required business permits, some taxpayers have resorted to “paying under protest,” reserving their right to dispute the assessed local business tax (LBT) because they do not believe that they are subject to the (additional) tax. On the other hand, the local government is hell-bent on collecting.

This has been the case for some holding companies. The issue arose when some local government units (LGU) introduced amendments in their local revenue codes by inserting the term “holding companies” among the entities subject to LBT. Other LGUs classified holding companies as non-bank financial intermediaries and imposed the corresponding LBT.

This is why the recent decision of the 3rd Division of the Court of Tax Appeals (CTA) promulgated on April 6 is a very welcome development.

It involves the case of a holding company against the City Treasurer of a city down south. The taxpayer was seeking a refund or tax credit on the LBT that it paid under protest in 2011.

The taxpayer’s income comprises dividend and interest income, from its shareholdings in a local company and from money market placements, respectively. Based on the holding company’s investment activities and the primary purpose provided in its Articles of Incorporation, the city classified the taxpayer as a non-bank financial intermediary. This left the taxpayer with no other choice but to pay the assessed LBT under protest and subsequently file a claim for refund or credit.

However, due to the inaction of the city on the refund claim, the taxpayer filed a case with the Regional Trial Court, with no success. On appeal, the decision was reversed, with the CTA declaring the taxpayer a non-financial institution, and thus, not subject to LBT. The CTA’s conclusion was based on the following considerations:

• The definitions under the Manual of Regulations for Non-bank Financial Institutions as prescribed by the Bangko Sentral ng Pilipinas (BSP) do not qualify the taxpayer as a non-bank financial intermediary;

• No document can show that the principal activities of the taxpayer qualifies it as a financial intermediary;

• The taxpayer has no secondary license and does not hold itself out as a financial intermediary nor perform functions as such;

• Its Articles of Incorporation shows that its principal purpose cannot fall under the definition of a financial intermediary; and

• The LGU was not able to present any proof that the BSP has authorized the taxpayer to operate as a non-bank financial intermediary.

As I mentioned earlier, this decision is a very positive development for holding companies. While it may have gone the opposite direction against two previous decisions of the CTA (concerning the same taxpayer), it is hoped that this latest decision be the last straw on this issue.

In this case, the court also ruled that even without addressing the issue on financial intermediaries, the taxpayer shall still be exempt from LBT. This is based on the fact that while the taxpayer is a private holding company, its investments in shares of stock are government-owned. Therefore, the related revenue earned by such shares (dividend and interest) likewise belong to the government. Hence, it is not subject to LBT following Section 133(o) of the Local Government Code, which provides that the exercise of the taxing power of the LGU shall not extend to the levy of taxes, fees or charges on the National Government, its agencies and instrumentalities.

Based on the CTA’s rationale in resolving whether or not the dividend and interest income of a holding company is subject to LBT, it is clear that, in this particular case, the holding company is not subject to LBT.

The Bureau of Local Government Finance (BLGF) may have solidified further the position taken by the court. In its recent memorandum circular, the BLGF categorically provided that passive income (i.e., interest, dividends, gains from the sale of shares) should not form part of gross receipts subject to LBT.

It may be worth mentioning also that in another case, decided upon by the CTA En Banc in 2016, the court ruled that imposing LBT on the dividend income of holdcos is beyond the scope of the LGU’s taxing powers. Doing so was considered to be a deliberate circumvention by the LGU of the prohibitions laid down in the LGC which limits their income taxing powers to banks and other financial institutions -- especially in particular cases wherein the LGU merely inserted a provision in its local revenue code subjecting holding companies to LBT.

Of course, one can say that the issue as to whether holding companies are subject to or exempt from LBT is not yet fully resolved since the case may still be appealed to the Supreme Court. But in the case at hand, in my opinion, an appeal to the high courts may be futile.

The CTA decision addressed two important points: 1) the holding company does not qualify as non-bank financial intermediary and 2) the investment in shares of stock is government-owned. Both aspects exempt the holding company from LBT. Furthermore, the source upon which the CTA based its decision seems impregnable.

As taxpayers, we understand our role in nation-building through paying the proper taxes. But then, the implementation of the taxing power by our tax authorities be it national or local, should be just and equitable. The challenges that taxpayers encounter during the renewal of business permits, as I have mentioned in this article, are becoming common and alarming. It also goes against the reform programs that the current administration wants to carry out.

As for LGUs that continue to make the renewal of business permits difficult for resident businesses, while their zeal in exercising such power may help them attain their collection targets, such practices can backfire. Taxpayers will continue to look for more investor-friendly locales where they can operate their business without going through the hassle of renewing annual permits.

The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.

John Edgar S. Maghinay is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.

(02) 845-2728

john.edgar.s.maghinay@ph.pwc.com 

source:  Businessworld