G.R. No. 245887 , January 22, 2020
CITY OF DAVAO AND MR. ERWIN ALPARAQUE, IN HIS OFFICIAL CAPACITY AS ACTING CITY TREASURER OF THE CITY OF DAVAO, PETITIONERS, VS. AP HOLDINGS, INC., RESPONDENT.

FACTS

The Coconut Industry Investment Fund (CIIF) was established under Presidential Decree 582. The CIIF Oil Mills Group (CIIF OMG) invested in shares of San Miguel Corporation (SMC) and established fourteen holding companies, including respondent AP Holdings, Inc. (APHI), for the sole purpose of owning and holding these SMC shares. APHI’s Amended Articles of Incorporation stated its primary purpose was to act as a holding corporation, with an express proviso that it “shall not act as an investment company or a securities broker and/or dealer nor exercise the functions of a trust corporation.” Over time, APHI received cash and stock dividends from its SMC preferred shares, which were deposited in a trust account earning interest from money market placements. In 1986, APHI’s SMC shares were sequestered by the Presidential Commission on Good Government. In 2012, the Supreme Court in G.R. Nos. 177857-58 declared the CIIF companies, including APHI and the CIIF block of SMC shares, as public funds or property owned by the government. In 2011, petitioner City of Davao, through its City Treasurer, issued a Business Tax Order of Payment directing APHI to pay a 0.55% local business tax under Section 69(f) of the 2005 Revenue Code of the City of Davao, assessed on the dividends and interest APHI earned. APHI paid under protest and filed an administrative claim for refund, which led to a petition for review with the Regional Trial Court (RTC). The RTC ruled APHI was taxable, finding its primary purpose resembled a financial intermediary. The Court of Tax Appeals (CTA) Division affirmed. The CTA En Banc reversed, finding APHI was not a non-bank financial intermediary and that the SMC shares and income were government property exempt from local tax under Section 133(o) of the Local Government Code.

ISSUE

As a CIIF holding company, is APHI liable to pay local business taxes on its dividend earnings from its SMC preferred shares?

RULING

No. The Supreme Court ruled APHI is not liable to pay local business taxes on its dividend earnings. Citing the precedent in City of Davao, et al. v. Randy Allied Ventures, Inc., the Court held that APHI, as a CIIF holding company, is neither a bank nor a non-bank financial institution (NBFI). To be considered an NBFI, an entity must be authorized by the Bangko Sentral ng Pilipinas (BSP) to perform quasi-banking functions, its principal functions must include lending, investing, or placement of funds, and it must perform these functions on a regular and recurring basis. APHI did not meet these criteria. Its sole purpose was to hold SMC shares for the CIIF. The SMC preferred shares held by APHI are government assets owned by the National Government for the benefit of the coconut industry. Any resulting dividends or increments are owned by the National Government. Therefore, APHI’s management of the dividends, including placing them in a trust account, is an activity essential to its nature as a holding company and not tantamount to doing business as a bank or financial institution. Consequently, under Section 133(o) of the Local Government Code, local government units cannot tax the National Government, making APHI exempt from the local business tax assessment.