THE CITY OF MAKATI AND THE CITY TREASURER OF MAKATI v. CEMCO HOLDINGS, INC.

REPUBLIC OF THE PHILI PPI NES COURT O F TAX APP EA LS QUEZON CITY FIRST DIVISION THE CITY OF MAKATI AND THE CTA AC No. 166 CITY TREASURER OF MAKATI, Members: Petitioners, -versus- D EL ROS A RIO, Chairperson, UY, and CEMCO HOLDINGS, INC., MI NDARO-G RULLA, JJ. Respondent. MINDARO-GRULLA, J.: Submitted for resolution is a Motion for Reconsideration (of the Decision dated 06 January 2017) filed by petitioners' The City of Makati and the City Treasurer of Makati with respondent's Comment/Opposition (Re: Motion for Reconsideration dated January 18, 2017) filed on February 10, 2017. Petitioners pray that this Court reconsider, reverse and set aside the Decision which denied their Petition for Review for lack of merit, the dispositive portion of which reads as follows: "WHEREFORE, premises considered, the instant Petition for Review is hereby D EN IED. The Assailed Decision dated September 22, 2015 and Order dated December 7, 2015 issued by the Regional Trial Court (RTC) Branch 65, Makati City, in Civil Case No. 14-137 entitled 'CEMCO Holdings, Inc., vs. The City of Makati and Hon. Nelia A. Barlis, in her capacity as City Treasurer', are hereby AFFIRMED .

The City of Makati and The City treasurer of Makati vs. Page 2 of 6 CEMCO Holdings, Inc. CTA AC No. 166 RESOLUTION SO ORDERED." In its Motion, petitioners mainly assert that, contrary to the finding of the Court, respondent is not a holding company, but a non-bank financial institution or intermediary which subjects its dividends and interest income to local business tax. After due consideration, this Court finds that the arguments proffered by petitioners in the instant Motion are mere rehash of the same facts and issues which have already been analyzed and passed upon in the assailed Decision. Nonetheless, this Court shall expound the discussion of the issues reiterated herein for clarity and petitioners' better understanding. To recapitulate, respondent's Amended Articles of Incorporation reveal that the scope of its primary purpose is not extensive enough to cover most of the principal functions of a financial intermediary. Let petitioners be reminded that the city's taxing power does not extend to the levy of income tax, except when levied on banks and other financial institutions1. The dividends and interests in this case are therefore not subject to local business tax considering that respondent is not a bank or other financial institution. While Section 131(e)2 of the LGC defines the term banks and other financial institutions, it did not define what 1 Section 133(a) of the Local Government Code of 1991. Section 133. Common Limitations on the Taxing Power of Local Government Units. - Unless otherwise provided herein, the exercise of the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: (a) Income tax, except when levied on banks and financial institutions; XXX XXX XXX 2 Section 131 (e) of the Local Government Code of 1991. Section 131. Definition of Terms. -When used in this Title, the term: XXX XXX XXX (e) "Banks and other financial institutions" include non-bank financial intermediaries, lending investors, finance and investment companies, pawnshops, money shops, insurance companies, stock markets, stock brokers and dealers in securities and foreign exchange, as defined under applicable laws, or rules and regulations thereunder; XXX XXX XXX

The City of Makati and The City Treasurer of Makati vs. Page 3 of 6 CEMCO Holdings, Inc. CTA AC No. 166 RESOLUTION is a non-bank financial intermediary. Thus, this Court finds it necessary to resort to other applicable laws which may enlighten us in its definition. The National Internal Revenue Code (NIRC) of 1997, as amended, defines the term "non-bank financial intermediary in Section 22(W) as follows: "The term a non-bank financial intermediary" means a financial intermediary, as defined in Section 2(D)(c) of Republic Act No. 337, as amended, otherwise known as the General Banking Act, authorized by the Bangko Sentral ng Pilipinas (BSP) to perform quasi-banking activities. Accordingly, Section 2-D(c) of the General Banking Act defines "financial intermediaries" as follows: "Financial intermediaries" shall mean persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them, or otherwise coursed through them, either for their own account or for the account of others." Section 4.101 Q.1 of the Manual of Regulations for Non- Bank Financial Institutions (Manual) defines "financial intermediaries" to be persons or entities whose orincioal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them, or otherwise coursed through them either for their own account or for the account of others. (Emphasis supplied) The same section further clarifies the definition by elaborating the terms "Principal and Functions", to wit: "Principal shall mean chief, main, most considerable or important, of first importance,

The City of Makati and The City Treasurer of Makati vs. Page 4 of 6 CEMCO Holdings, Inc. CTA AC No. 166 RESOLUTION leading, primary, foremost, dominant or preponderant, as distinguished from secondary or incidental. Functions shall mean actions, activities or operations of a person or entity by which his/its business or purpose is fulfilled or carried out. The business or purpose of a person or entity may be determined from the purpose clause in its articles of incorporation/partnership, and from the nature of the business indicated in his/its application for registration of business filed with the appropriate government agency." Relevantly thereto, in order to be considered a financial intermediary, any of the following functions must be performed on a regular and recurring, not on an isolated basis: a. Receive funds from one (1) group of persons, irrespective of number, through traditional deposits, or issuance of debt or equity securities; and make available/lend these funds to another person or entity, and in the process, acquire debt or equity securities; b. Use principally the funds received for acquiring various types of debt or equity securities; c. Borrow against, or lend on, or buy or sell debt or equity securities; d. Hold assets consisting principally of debt or equity securities such as promissory notes, bills of exchange, mortgages, stocks, bonds, and commercial papers; e. Realize regular income in the nature of, but need not be limited to, interest, discounts, capital gains, underwriting fees, guarantees, fees, commissions, and service fees, principally from transactions in debt or equity securities or

The City of Makati and The City Treasurer of Makati vs. Page 5 of 6 CEMCO Holdings, Inc. CTA AC No. 166 RESOLUTION by being an intermediary between suppliers and users of funds. On the other hand, non-banking financial intermediaries shall include the following: (1) A person or entity licensed and/ or registered with any government regulatory body as a non-bank financial intermediary, such as investment house, investment company, financing company, securities dealer/broker, lending investor, pawnshop, money broker, fund manager, cooperative, insurance company, non-stock savings and loan association and building and loan association. (2) A person or entity which holds itself out as a non-banking financial intermediary, such as by the use of a business name, which includes the term financing, finance, investment, lending and/ or any word/phrase of similar import which connotes financial intermediation, or an entity which advertises itself as a financial intermediary and is engaged in the function(s) where financial intermediation is implied. (3) A person or entity performing any of the functions enumerated in Items a to e of this Subsection. Based on the foregoing, there is nothing on record that shows that respondent can be categorized as a financial intermediary or that it has engaged in the activities defined and enumerated in the General Banking Act and in the Manual. The Court is not convinced that the stated primary purpose of petitioner in the Amended Articles of Incorporation is broad enough to catch all the descriptive functions of a financial intermediary. It is not proper to just assume that petitioner is engaged as a non-bank financial institution or intermediary based on the said primary purpose.

The City of Makati and The City Treasurer of Makati vs. Page 6 of 6 CEMCO Holdings, Inc. CTA AC No. 166 RESOLUTION Furthermore, it must be emphasized that the determination of whether a person or an entity is (a) performing banking or quasi-banking functions, or (b) engaged in other types of financial intermediation is vested in the Monetary Board subject to judicial review. In Commission of Internal Revenue vs. Hantex Trading Co., Inc. 3 , the Supreme Court ruled that an assessment must be based on actual facts. Accordingly, the local business tax assessment should be based on actual facts, and since there is no proof that petitioner can be considered as a non-bank financial institution or intermediary or is engaged in such activities, the local business tax assessment has no factual basis. Such a conclusion is based on an assumption, with no support in evidence. In view of the foregoing, this Court finds no cogent reason to disturb the assailed Decision. WHEREFORE, premises considered, the petitioners' Motion for Reconsideration is hereby DENIED for lack of merit. SO ORDERED. ~N. M~.-6'~ CIELITO N. MINDARO-GRULLA Associate Justice WE CONCUR: .. ROMAN G. DEL ROSARIO ER~P.UY Presiding Justice Associate Justice 3 Commission of Internal Revenue vs. Hantex Trading Co., Inc, G.R. No. 136975, March 31, 2005, citing Collector of Internal Revenue vs. Benipayo, 4 SCRA 182 (1962).