More hope for holding companies: Local business tax on dividend income
Some of you may be aware that Supreme Court decisions become the law of the land upon reaching finality. This principle comes from our Civil Code which provides that “judicial decisions applying to or interpreting the laws or the Constitution shall form part of the legal system of the Philippines.” Thus, if a Supreme Court decision on a particular issue becomes final, generally, there is no room for overturning it unless circumstances warrant its reversal, change, or modification as pronounced in another case. On most occasions, these rulings become a source of hope for those relying on such jurisprudence in making their claims.
In a resolution dated March 24, 2021, docketed as G.R. No. 224322, the First Division of the Supreme Court ruled that a holding company not authorized to perform quasi-banking activities or qualified as a bank and other financial institution under the Bangko Sentral ng Pilipinas (BSP) rules, is not subject to local business tax (LBT) on its dividend income. The high court upheld a Court of Tax Appeals en banc resolution dated April 13, 2016, canceling the LBT assessment on the dividend income of the taxpayer. Ruling in favor of the holding company, the Supreme Court based its resolution on Section 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 business tax assessment imposed on the dividend income is an ultra vires act of the local government unit (LGU), for being beyond the powers granted to it by the law. It thus emphasized the limitation in terms of the taxing power of LGUs, citing Section 143 in relation to Section 151 of the LGC. Accordingly, cities and municipalities may impose taxes only on businesses specifically enumerated under the Code. These businesses include manufacturers, wholesalers, distributors, dealers of any article of commerce of whatever nature; those engaged in the export or commerce of essential commodities; retailers; contractors and other independent contractors; banks and financial institutions; and peddlers engaged in the sale of any merchandise or article of commerce. The Court also noted that this enumeration is not exclusive since the LGC authorizes cities and municipalities to impose taxes on any other business not otherwise specified in Section 143.
Moreover, it cited Section 133(a) of the LGC explicitly prohibiting LGUs from imposing income taxes on dividend and interest income, except when levied on banks and other financial institutions whose dividend and interest income are considered gross receipts from the conduct of their principal trade or business. In conjunction with Banking Laws and Regulations, the income of non-bank financial intermediaries should be derived from their regular and recurring business activities and not merely from isolated transactions, much like the case of a holding company. Therefore, the taxing power of LGUs on dividend and interest income should extend only to gross receipts of banks and other financial institutions arising on a regular and recurring basis.
The Supreme Court also cited a 2019 refund case as a precedent, although involving a different LGU, which likewise held that dividends derived from passive income by a holding company not engaged as a bank or financial institution are not subject to LBT. In that case, the Court ruled that while holding companies may partake in investment activities, they do not qualify as a financial intermediary under the purview of Section 143(f) of the LGC; therefore should not be held liable for LBT. That case has already reached finality, thus forming 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 business tax on a holding company not qualified as a bank and other financial institution, as provided in the LGC. In doing so, the LGU might be performing an act which is beyond its power to perform. The notable difference, however, is that the 2019 case already forms part of our legal system while, as of this writing, the recent one does not. Considering that a Motion for Reconsideration is still pending in G.R. No. 224322, the case has not reached its final resolution.
There is no guarantee that the Supreme Court will adopt its previous ruling on the same issue, or that the LGU will acknowledge or abide by the 2019 ruling owing to the difference in the litigating party to the case (i.e., different LGU). That said, I believe that taxpayers may rest in the hope that a favorable decision on their claims is likely to be forthcoming. After all, the two decisions were founded on the same basis (i.e., the LGC), resolving the same issue with the taxpayers resting on the same circumstance of being a holding company. Hence, there should be a little less room for a different interpretation.
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 content is for general information purposes only, and should not be used as a substitute for specific advice.
Mary Rose Lara at the Tax Services department of Isla Lipana & Co., a Philippine member firm of the PwC network.
+63 (2) 8845-2728