G.R. No. 249668 . July 13, 2022.
CITY OF DAVAO AND BELLA LINDA N. TANJILI, IN HER OFFICIAL CAPACITY AS CITY TREASURER OF DAVAO CITY, PETITIONERS, VS. ARC INVESTORS, INC., RESPONDENT.

FACTS

ARC Investors, Inc. (ARCII) is a domestic holding corporation. In 2010, it earned income from dividends on its San Miguel Corporation shares and interest from money market placements. In 2014, the City of Davao assessed ARCII for local business tax (LBT) on these earnings, contending they arose from business activity. ARCII protested, arguing it was not engaged in business as a financial intermediary but was merely a holding company whose income was incidental to its investments. It also invoked a constitutional prohibition on taxing government funds, linking its SMC shares to the Coconut Industry Investment Fund (CIIF).
The Regional Trial Court upheld the assessment, ruling ARCII was a financial intermediary subject to LBT. ARCII appealed to the Court of Tax Appeals (CTA). The CTA Division reversed, canceling the assessment, a decision affirmed by the CTA En Banc. The CTA En Banc held ARCII was not a non-bank financial institution as it was not authorized by the Bangko Sentral ng Pilipinas for quasi-banking, its primary purpose was not financial intermediation, and its activities were not regular and recurring business operations. The City of Davao elevated the case to the Supreme Court via a Petition for Review on Certiorari.

ISSUE

Whether ARC Investors, Inc. is a non-bank financial intermediary subject to local business tax under Sections 143(f) and 151 of the Local Government Code.

RULING

The Supreme Court denied the petition and affirmed the CTA En Banc, holding ARCII is not subject to the LBT assessment. The legal logic proceeds from the fundamental principle that a local business tax is a tax on the privilege of doing business, which requires a regular course of conduct for livelihood or profit. The Court examined the statutory framework. Section 143(f) of the LGC authorizes a tax on “banks and other financial institutions,” which Section 131(e) defines to include “non-bank financial intermediaries.” The Court, citing precedent, clarified that a holding company like ARCII, whose primary purpose is to own assets and derive passive income, is not per se engaged in the business of financial intermediation. Financial intermediation involves the regular activity of channeling funds from savers to borrowers, which ARCII did not perform.
The Court found ARCII’s activities—receiving dividends and interest—were passive and incidental to its investment ownership, not a regular trade or commercial activity undertaken for profit as a business. Its Articles of Incorporation expressly prohibited it from acting as an investment company or securities dealer. Furthermore, the Court noted the CIIF angle, referencing COCOFED v. Republic, which characterized assets purchased with coconut levy funds as public in character. While not definitively ruling on ARCII’s specific shares, the Court acknowledged this public character as an additional layer supporting the tax exemption. Consequently, since ARCII was not engaged in the business of financial intermediation, the assessment under Section 143(f) of the LGC had no legal basis.