More hope for holding companies: Local business tax on dividend income

SSome of you may know that Supreme Court decisions become the law of the land when they are final. This principle derives from our Civil Code which states that “Judicial decisions applying or interpreting the laws or the Constitution are part of the legal system of the Philippines”. Thus, if a decision of the Supreme Court on a particular issue becomes final, generally there is no room to reverse it unless the circumstances justify its reversal, change or modification in another affair. In most cases, these decisions become a source of hope for those who rely on such case law to assert their rights.

In a resolution dated March 24, 2021, registered under GR No. 224322, the First Chamber of the Supreme Court ruled that a holding company not authorized to carry on quasi-banking activities or qualified as a bank and other financial institution under the Bangko Sentral ng Pilipinas (BSP), is not subject to local business tax (LBT) on its dividend income. The high court upheld a tax appeal court bench deliberation of April 13, 2016 canceling the LBT contribution on the taxpayer’s dividend income. Ruling in favor of the holding company, the Supreme Court based its decision on Article 133(a) of the Local Government Code (LGC), expressly prohibiting cities and municipalities from imposing income taxes, except on banks and other financial institutions.

The Supreme Court concluded that the imposition of the business tax levied on dividend income is an ultra vires act of the local government unit (LGU), as exceeding the powers conferred on it by law. She thus underlined the limitation in terms of LGU’s power to tax, citing article 143 in relation to article 151 of the LGC. Thus, cities and municipalities can only impose taxes on specific businesses.Iflisted in the Code. These businesses include manufacturers, wholesalers, distributors, dealers of any trade item of any kind; those engaged in the export or trade of essential commodities; retailers; contractors and other independent contractors; banks and financial institutions; and hawkers engaged in the sale of any merchandise or article of commerce. The Court also noted that this enumeration is not exclusive since the CGA authorizes cities and municipalities to impose taxes on any other business not otherwise specified.Ifin section 143.

Further, he cited Section 133(a) of the LGC explicitly prohibiting LGUs from imposing taxes on dividend and interest income, except when imposed on banks and other Iffinancial institutions whose dividend and interest income are considered gross receipts from the exercise of their principal activity. In conjunction with banking laws and regulations, the income of non-bank financial intermediaries must come from their regular and recurring business activities and not simply from isolated transactions, as in the case of a holding company. Therefore, the power of LGUs to tax dividend and interest income should only extend to the gross receipts of banks and other Iffinancial institutions occurring on a regular and recurring basis.

The Supreme Court also cited a 2019 refund case as precedent, albeit involving a different LGU, which also held that dividends from passive income by a holding company not engaged as a bank or financial institution are not subject to the LBT. In this case, the Court ruled that while holding companies may engage in investment activities, they are not considered financial intermediaries within the meaning of Section 143(f) of the LGC; therefore should not be held responsible for LBT. This case has already reached its finality, thus becoming part of the law of the land.

Reading these two cases together, the Supreme Court consistently ruled on the same issue – that LGUs cannot impose a business tax on an unqualified bank holding company and other Iffinancial institution, as provided for in the LGC. By doing so, the LGU could perform an act that it is not able to perform. The notable difference, however, is that the 2019 case is already part of our legal system whereas, at the time of this writing, the recent one is not. Considering that a request for reconsideration is still pending in GR n° 224322, the case has not come to an end Iffinal resolution.

There is no guarantee that the Supreme Court will adopt its previous decision on the same issue, or that the LGU will recognize or abide by the 2019 decision due to the difference in litigating party (i.e. a LGU different). That said, I believe that taxpayers can rest in hope that a favorable decision on their claims is likely to be forthcoming. After all, both decisions were based on the same foundation (i.e. the CGA), resolving the same issue with taxpayers resting on the same circumstance of being a holding company. Therefore, there should be a little less room for a different interpretation.

Any views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general informational purposes only and should not be used as a substitute forIfc advice.

Mary Rose Lara of the Tax Services Department of Isla Lipana & Co., a Philippine PwC network firm.

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