FERNANDEZ HOLDINGS, INC. vs. CITY OF DAVAO and HON. RODRIGO S. RIOLA, in his capacity as the City Treasurer of Davao City

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY ENBANC FERNANDEZ HOLDINGS, INC., CTAEB N0.1531 (CTA AC No. 133) Petitioner, Present: DEL ROSARIO, P.J., CASTANEDA, JR., -versus- BAUTISTA, UY, CASANOVA, FABON-VICTORINO, MINDARO-GRULLA, RINGPIS-LIBAN, and MANAHAN, ]].. CITY OF DAVAO and HON. RODRIGO S. RIOLA, in his official Promulgated: capacity as the City Treasurer of Davao City, Respondents. DEC 05 2017 I I : 6:3 a .#?! 0 )C-------------------------------------- --------- ~:--~ DECISION RINGPIS-LIBAN,J.: The Case Before the Court is a Petition for Review seeking the nullification of the Decision1 dated July 21, 2016 (assailed Decision) and Resolution2 dated September 27, 2016 (assailed Reso~ution) of the Court of Ta2C Appeals Second Division (Second Division),"affirming the Orders dated October 15, 2014 and December 17, 2014 of the Regional Trial Court, Branch 16 of Davao City in Civil Case No. 35,672-14, which upheld the local business ta2C assessment issued fV Penned by Associate Justice Caesar A. Casanova, with Associate Justices Juanita C. Castaneda, Jr. and Amelia R. Cotangco-Manalastas concurring; Docket, pp . 283-300. 2 Penned by Associate Justice Caesar A. Casanova, with Associate Justice Juanita C. Castaneda, Jr. concurring; Id., pp. 343-347.

DECISION CTA EB No. 1531 (CTA AC No. 133) against Petitioner for the 3rd and 4lh quarters of 2011 amounting to a total of Php760,933.49. Tlte Parties Petitioner Fernandez Holdings, Inc. ("Petitioner") is a corporation duly organized and existing under Philippine laws with principal office address at Legaspi Oil Compound Km. 9.5, Sa$a, Davao City. It may be served with notices and other Court processes through its counsel, Carag Zaballero Llamado & Abiera Law Offices, with office ad~ress at Suite 2602, 26th Floor, The Adanta Centre, No. 31 Annapolis Street, Gteenhills, San Juan City, Metro Manila.3 Respondent City of Davao is. a local government unit duly created by law whose address is located at City Han Building, San Pedro Street, Davao City.4 Respondent Hon. Rodrigo S; Riola ("Respondent City Treasurer") is the incumbent City Treasurer of Dava<t> City and is being impleaded in his official capacity as it was he who issued thd 0.55% local business tax assessment on the dividends and interests received by Fetitioner for the 3rd and 4th quarters of 2011. 5 Respondent City of Davao and Respondent City Treasurer (Hereinafter shall be collectively referred to ~s "Public Respondents") may be served summons, notices and other Cour� processes at their respective offices at the City Hall Building, San Pedro Stree~, Davao City.6 jhe Facts The facts as found by the Se�ond Division are as follows: "In 2010, Petitioner r�:ceived the amount of One Hundred Thirty Nine [sic] Million Twq Hundred Twenty One Thousand Six Hundred Fifty and 65/1QO Pesos ([Php]139,221,650.65), as dividends from its San Miguel Corporation (SMC) Preferred shares of stock and interest from its money market placements, computed as follows: 3 Rollo, p. 10. 4 Docket, p. 284. 5 !d. 6 !d.

DECISION erA EB No. 1531 (erA AC No. 133) On January 20, 2014, �Respondent City of Davao, through Respondent City Treasurer, issued a Business Tax Order of Payment, assessing Petitioner for its tax obligation of 0.55% local business tax on the dividendsi derived from its SMC shares of stock and the interest on its mone~ market placements for the third and fourth quarters of 2011, in the amount of Seven Hundred Sixty Thousand Nine Hundred Jihirty Three [sic] and 49/100 Pesos ([Php]760,933.49). On March 21, 2014, Ifetitioner filed with Respondent City Treasurer its written admirustrative protest on the said local business tax assessment. In a letter dated April 4, 2014, Respondent City Treasurer responded by requiring Petlitioner to forward the proof of its payment of local business tax~s before the protest may be resolved. On April 24, 2014, ~spondent City Treasurer received a letter-reply dated April15, 2014, wherein Petitioner argues that the requirement of payment . under protest is invalid and unconstitutional for being in�onsistent with Section 252 in relation to Section 195 of Republic Att (RA) No. 7160, as amended, which provides that payment uncle~ protest is required only for protests on real property tax assessments and not on other local taxes. In response, Respond�nt City Treasurer wrote a letter dated May 5, 2014, citing Section 423 of City Ordinance No. 158-05, Series of 2005, otherwise kno~n as the "2005 Revenue Code of the City ofDavao", wherein it st~tes that no protest shall be entertained unless the taxpayer first pays the tax. He further asserts that the said Section does not distinguish between real property and business taxes. Thereafter, claiming inaction by Respondent City Treasurer, Petitioner then filed on June 9, 2014, a Petition for Review with the RTC-Branch 16 of the City af Davao. During trial, pertine:q.t facts of the case were admitted, leaving only questions oflaw to be resolved by the RTC-Branch 16 of the City of Davao. Accordingly, on October 15, 2014, the RTC-Branch 16 of the City of Davao rendered ~n Order, dismissing the Petition for Review based on the ground ~hat Petitioner is considered as a non- /

DECISION CTA EB No. 1531 (CTA AC No. 133) bank financial intermediary, since its primary purpose in its amended Articles of Incorp<:>ration resembles the definition of a financial intermediary as deftned under Section 41 01 Q.1 of the Manual of Regulations for Npn-Bank Financial Institutions issued by the Bangko Sentral ng Pilipinas (BSP). The Jallo of said Order reads: 'FOR REASONS STATED, the instant 'Petition for Review' ftled by the [P]etitioner under Section 195 of Repu~lic Act No. 7160 is hereby DENIED and/or DISMISSED. SO ORDEREb.' On November 20, 4014, Petitioner ftled a Motion for Reconsideration praying that! the above Order be reversed and set aside, insisting that it is not1 engaged in the business of lending, investing, or trading securitie~ either for its own account or for the account of others. On December 17, 2014, the RTC-Branch 16 of the City of Davao issued an Order denying Petitioner's Motion for Reconsideration for lack of rherit. Aggrieved, Petitioner! elevated the matter on February 6, 2015, to the Court of Tax Appeals (CTA), via [a] Petition for Review."7 The Ruling qf the Second Division On July 21,2016, the Seconq Division promulgated the assailed Decision denying the Petition for Review, the dispositive portion of which reads: "WHEREFORE, premises considered, the Petition for Review is DENIED for lack of merit."8 Aggrieved, Petitioner filed a1 Motion for Reconsideration on August 09, 2016, which the Second Division d~nied in the assailed Resolution, thus: "WHEREFORE, premises considered, [P]etitioner's Motion for Reconsideration lis DENIED for lack of merit."9 7 /d., pp. 284-286. 8 Id., p. 300. 9 /d., p. 347.

DECISION CTA EB No. 1531 (CTA AC No. 133) On September 13, 2016, Peti~oner filed a Motion for Extension of Time to File Petition for Review,10 whicb the Court granted in a Resolution dated October 17, 2016.11 On November 04, 2016, Petitioner filed the instant Petition for Review. 12 On December 07, 2016, the Court issued a Resolution13 which ordered Public Respondents to comment qn the Petition for Review. On January 20, 2017, Public Respondents filed theit Comment via registered mail. 14 On February 22, 2017, the Court resolved to give due course to the Petition for Review.15 Petitioner add Public Respondents filed their respective Memorandum on April 10, 201716 abd April 19, 201717, respectively. On May 22, 2017, the Court issued a Resolution18 submitting the case for decision. ]he Issue The lone issue submitted by Petitioner in this case is whether or not Respondent City ofDavao may req~re it to pay 0.55% local business tax, for the 3rd and 4th quarters of 2011, on the dividends on its San Miguel Corporation ("San Miguel") preferred shares o~ stock and interest income on its money market placements for the year 2010.19 The Rumng of the Court Petitioner submits that it was ~rroneous and illegal for Public Respondents to assess and collect from Petitio~er local business tax on its dividends and interest income because for one, it is not a financial institution, specifically a non- bank financial intermediary. Secondly, its income partakes the nature of public funds on which local business tax may not be imposed. 20 ;v 10 Rollo, pp. 1-6. 11 /d., p. 7. 12 Id., pp. 8-42. 13 /d., pp. 83-84. 14 Id., pp. 85-104. 15 /d., pp. 106-107' 16 /d., pp. 85-104. 17 /d., pp. 85-104. 18 /d., pp. 162-163. 19 /d., p. 16. 20 /d., pp. 16-17.

DECISION CTA EB No. 1531 (CTA AC No. 133) On the other hand, Public :Respondents insist that Petitioner is a non- bank financial intermediary, and a$ a result thereof, it is subject to the local business tax imposition under Secclon 143 of the Local Government Code of 199121 ("1991 LGC"). In support of its claim, Public Respondents list down the following reasons in their Comment: 1) Petitioner's business ope~ation, which consists solely of stock investments and money p)lacement in San Miguel is well within the purview of definidon of banks and other financial institutions under SectiotJ. 131 (e) of the 1991 LGC. In fact, Petitioner's revenue com~s only from the two (2) stated sources as revealed by its Financi~l Statements; 2) Petitioner's business pu~ose in its Amended Articles of Incorporation ("Amende~ AOI") is wittingly and unwittingly broad enough to catch all the descriptive function of a non-bank financial intermediary ut}der the Manual of Regulations for Non-Bank Financial Ins~tutions issued by the Bangko Sentral ng Pilipinas ("BSP Manuil"); 3) Petitioner's Amended AGH which states that it shall not act as investment company or �securities broker or dealer is not a conclusive proof that it� is not a "bank and other financial institution"; and 4) Being a stock corporation, Petitioner is presumed to have been organized with the end ip view of a profit and hence cannot deny that it is engaged in business; The instant petition is impressed with merit. The imposition oflocal busines$ tax on dividends and interest income received by Petitioner is erronf?ous since there is no showing that it is a non-bank financial intermediary,. Unlike the power to tax by the state which is inherent,22 the power to tax by provinces, cities and municipalities is limited by the law that granted it, the 1991 LGC. t 21 Republic Act 7160. 22 Pelizloy Realty Corporation v. The Province of Benguet, G.R. No. 183137, April 10, 2013.

DECISION CTA EB No. 1531 (CTA AC No. 133) Following this, the taxing power of Respondent City of Davao does not extend to the levy of income tax,*3 except when levied on banks and other financial institutions under Section: 143(�) of the 1991 LGC. 24 The dividends25 and interests26 in this case are ther~fore not subject to the city's taxing power, unless Petitioner is a bank or other financial institution. The term "banks and other financial institutions" is defined under Section 131(e) of the 1991 LGC, as follows:' "'Banks and other fin~ncial institutions' include non-bank financial intermediaries, i 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."27 While said provision includels "nonbank financial intermediaries" in the term "banks and other financial institutions," it does not define the term "non- bank financial intermediaries". H�nce, resort to applicable laws, rules and regulations is proper. The National Internal Revttnue Code (NIRC) of 1997, as amended, defines the term "non-bank financi~l intermediary" in Section 22(W), viz "The term 'non-bank financial intermediary' means a financial intermediary, as defined in $ection 2(D)(c) of Republic Act No. 337, as amended, otherwise ~known as the General Banking Act, authorized by the BangJto Sentral ng Pilipinas (BSP) to perform quasi-banking actiivities."28 / 23 Section 133(a) of the 1991 LGC provides: SECTION 133. Common Limitations on the Taxing Power of Local Government Units. - Unless otherwise provided herein, the exercise pf the taxing powers of provinces, cities, municipalities, and barangays shall not extend to the l�vy of the following: (a) Income tax, except when levied on lbanks and financial institutions[.] 24 Section 143(f) of the 1991 LGC provide$: SECTION 143. Tax on Business. - T~e municipality may impose taxes on the following businesses: (f) On banks and other financial institutipns, at a rate not exceeding fifty percent (50%) of one percent ( 1%) on the gross receipts of the preceding calendar year derived from interest, commissions and discounts from lendirlg activities, income from financial leasing, dividends, rentals on property and profit from exc~ange or sale of property, insurance premium. 25 Section 32(A)(7) of the NIRC of 1997, C:ls amended. 26 Section 32(A)(4) of the NIRC of 1997, *amended. 27 Emphasis supplied 28 Emphasis supplied.

DECISION CTA EB No. 1531 (CTA AC No. 133) The Bureau of Internal Reveque, in turn, elaborated on the said definition. Section 2.3 of Revenue Regulations:No. 09-2004 reads to wit: "Non-bank Financial In~ermediaries- shall refer to persons or entities whose principal functt~ns include the lending, investing or placement of funds or eviidences of indebtedness or equity deposited with them, acqui(red by them or otherwise coursed through them, either for thelr own account or for the account of others. This includes all entities regularly engaged in the lending of funds or purchasing of receivables or other obligations with funds obtained from the public t~rough the issuance, endorsement or acceptance of debt instrumerjlts of any kind for their own account, or through the issuance of :certificates of assignment or similar instruments with recourse, 1 trust certificates, or of repurchase agreements, whether any of fhese means of obtaining funds from the public is done on a reguMr basis or only occasionally." The General Banking Act,F9 on the other hand, defines "financial intermediaries" in Section 2-D(c), dims: "'Financial intermedi4ries' shall mean persons or entltles whose principal functions : include the lending, investing or placement of funds or evlidences of indebtedness or equity deposited with them, acqui(red by them, or otherwise coursed through them, either for the~r own account or for the account of others." Additionally, the BSP Manual defines "financial intermediaries" in Section 4.101Q.1, as follows: "� 4101Q.1 Finanpial intermediaries. - Financial intermediaries shall mean phsons or entities whose principal functions include the lendin*, investing or placement of funds or evidences of indebtedness o~ equity deposited with them, acquired by them, or otherwise coursed through them either for their own account or for the account of others. Principal shall mean chief, main, most considerable or important, of first impo~tance, leading, primary, foremost, dominant or preponderant, �as distinguished from secondary or incidental. Functions shall mean ~ctions, actlvttles 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 29 Republic Act No. 337, as amended by Plresidential Decree No. 71. ~

DECISION CTA EB No. 1531 {CTA AC No. 133) detennined from the purpose clause in its articles of incorporation/partnership, apd from the nature of the business indicated in his/its applicatiotb. for registration of business flied with the appropriate government *gency. To be considered a fin~ncial intermediary, a person or entity must perform any of the f<!>llowing functions on a regular and recurring, not on an isolated basis: a. Receive funds from one (1) group of persons, irrespective of number, through traditiopal deposits, or issuance of debt or equity securities; and make ~vailable/lend these funds to another I person or entity, and in the prbcess acquire debt or equity securities; b. Use principally the. funds received for acquiring various types of debt or equity securiities; c. Borrow against, or lend on, or buy or sell debt or equity securities; d. Hold assets cons~stmg principally of debt or equity securities such as promissory notes, bills of exchange, mortgages, stocks, bonds, and commerdal papers; e. Realize regular income in the nature of, but need not be limited to, interest, discouri.ts, capital gains, underwriting fees, guarantees, fees, commissiotjls, and service fees, principally from transactions in debt or equity; securities or by being an intermediary between suppliers and users of funds. Non-banking financiU 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 hous�, 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 a~ by the use of a business name, which includes the term financing, jinance, investment, lending and/or any word/phrase of similar ~mport which connotes financial intermediation, or an entity !which advertises itself as a financial intermediary and is engageJ! in the function(s) where financial intermediation is implied. I

DECISION CTA EB No. 1531 (CTA AC No. 133) (3) A person or entity perfonning any of the functions enumerated in Items a to eo� this Subsection." From the foregoing definitiqns, for an entity to be considered a "non- bank financial intermediary", the following requirements must be met: 1) The person or entity isf authorized by the Bangko Sentral ng Pilipinas (BSP) to perfprm quasi-banking activities;30 2) The principal functioqs of the said person or entity include the lending. investing ~r placement of funds or evidences of indebtedness or equity! deposited to them. acquired by them. or otherwise coursed ithrough them. either for their own account or for the acc<jmnt of others; and31 3) The person or entity ,must perform any of the following functions on a regular ~nd recurring. not on an isolated basis, to wit: a. Receive funds f~tom one (1) group of persons, irrespective of, number, through traditional deposits, or ifsuance of debt or equity securities; and nb.ake available/lend these funds I to another pers?n or entity, and in the process acquire debt or iequity securities; b. Use principally the funds received for acquiring various types o~ debt or equity securities; c. Borrow against~ or lend on, or buy or sell debt or equity securities; d. Hold assets copsisting principally of debt or equity securities such as promissory notes, bills of exchange, mortgages, stocks, bonds, and commercial papers; and e. Realize regular i income in the nature of, but need not be Umited to, interest, discounts, capital gains, lfl.nderwriting fees, guarantees, fees, commissiqns, and service fees, principally from transactiops in debt or equity securities or /' 30 Section 131 (e) of the LGC of 1991, i~ relation to Section 22(W) of the NIRC of 1997, as amended and Section 2-D(c) of RA No. j337, as amended by PD No. 71. 31 Section 2-D(c) of RA No. 337, as ame~ded by PD No. 71; and Section 4101Q.I of the BSP's Manual of Regulations for Non-Bank Fi~ancial Institutions.

DECISION CTA EB No. 1531 (CTA AC No. 133) by being an iqtermediary between suppliers and users of fut).ds. In the instant case, Public Re~pondents failed to present any credible and convincing proof that Petitioner is ai non-bank financial intermediary or has even engaged in the activities of a finan~ial institution/intermediary as defined and enumerated in the above-quoted la~s, and rules and regulations. First, there is no indication that Petitioner was authorized by the Bangko Sentral ng Pilipinas to perform qu~si-banking activities as a non-bank financial intermediary. This requisite is on~ established by law2 and thus cannot be disregarded. In this regard, the General 13anking Act provides that the authority to determine whether a person or entlity is performing banking or quasi-banking functions or engaged in other type4 of financial intermediation is vested in the Monetary Board.33 The record is h~wever bereft of any indication or finding by the Monetary Board that Petitioner ~sa non-bank financial intermediary. Second, there is also no indica~on which shows that Petitioner is a financial intermediary or that it has actually !engaged in the activities enumerated in the General Banking Act and in the BS~ Manual. Nor was it shown that Petitioner has held itself out nor advertised it~elf as a non-banking financial intermediary. On the contrary, Petitioner's name ~tself shows that it is a holding company, not a lending, investing, or financing company. Third, while Petitioner's prit!iary purpose, as stated in its Amended AOI, may involve one of the activities edumerated in the BSP Manual, there was no proof that Petitioner performed the~e activities as its principal function and on a regular and recurring basis. The Co$rt is not convinced that Petitioner's primary 32 . ~ Section 22(W) of National Internal Rev]ue Code (NIRC) of 1997. 33 Section 4 of R.A. No. 337, as amended y P.D. No. 1828 states: Section 4. The determination of hether a person or an entity is (a) performing banking or quasi-banking functio s, or (b) engaged in other types of financial intermediation shall be decided byi the Monetary Board subject to judicial review. For the purpose of resolving such is$ue, the Monetary Board may, through appropriate supervising department of the Central~ank, examine, inspect or investigate the books and records of such person or entity. The d partment head and the examiners of said appropriate supervising department are hereby a thorized to administer oaths to any such person or director, officer or employee of any sue entity and to compel the presentation or production of all books, documents, papers or recqrds necessary in their judgment to ascertain the facts relative to the true functions and ope~ations of such person or entity. Failure or refusal to comply with the required presentation 1 or production of such books, documents, papers or records shall subject the persons respqnsible therefor to the penal sanctions provided under Section 34 of R.A. No. 265, as amendet. Persons or entities found by the Monetary Board to be performing banking or quasi-bankin functions without the required prior authorization of the Monetary Board may, in addition to he proceedings provided under Section 34 of Republic Act No. 265, as amended, be subject to:the imposition of fine of not in excess of P500 per day reckoned from the date the unauthoriz~d banking or quasi-banking functions were performed and may be referred to the Securities an~ Exchange Commission for the revocation of its license to do business.

DECISION CfA EB No. 1531 (CfA AC No. 133) purpose as stated in its Amended A'PI is adequate to justify the conclusion that it is performing the functions of 1a non-bank financial intermediary. Such a conclusion would be based on mer~ conjecture, with no support in evidence. Fourth, an examination of P~titioner's primary purpose in its Amended AOI shows that Petitioner fits the 4efinition of a holding company, rather than a non-bank financial intermediary. As found by the Second Division, the primary purpose for which Petitioner was formed is to direct the operations of other corporations through the ownership of stock therein, viz I "To purchase, subscri~e for, or otherwise acquire and own, hold, use, sell, assign, tran~fer, mortgage, pledge, exchange, or otherwise dispose of real anq personal property of every kind and description, including shares 1of stock, voting trust certificates for shares of the capital stock, bpnds, debentures, notes, evidences of indebtedness, and other sec~rities, contracts, or obligations of any corporation or corporations,I association or associations, domestic or foreign, and to pay therefor in whole or in part in cash or by exchanging therefor stock~, bonds, or other evidences of indebtedness or securities, !contracts, or obligation, to receive, collect, and dispose of the it(lterest, dividends and income arising from such property, and to pbssess and exercise in respect thereof, all the rights, powers and grivileges of ownership, including all voting powers on any stock~I so owned; and to do every act and thing covered generally , by the denomination 'holding corporation', and especia4y to direct the operations of other corporations through the q\vnership of stock therein, provided however that the Corpora~on shall not act as an investment company or a securities br~ker and/ or dealer nor exercise the functions of a trust corporation."34 Clearly, Petitioner's primaryi purpose in its Amended AOI reflects the function of a "holding company'l', which is defined by the Securities and Exchange Commission as follows: � "A holding company has been defined by the Commission in several opinions. A holding company has been aptly defined as 'a corporation organizqd to hold the stock of another or other corporations.' Its ess~ntial feature is that it holds stock. The term 'holding company' is i equivalent to a parent corporation, having such an interest in an~ther corporation, or power of control, that it may elect its directors !and influence management. A parent or holding company is �one that controls another as a subsidiary or affiliate by the power to elect its management. I 34 Docket, p. 297; Emphasis and underscC!!ring supplied.

DECISION CTA EB No. 1531 (CTA AC No. 133) Affiliates are those concernsi that are subject to common control and operated as part of a sys~em." 35 Final!J, the Supreme Court )En Bane declared Petitioner as one of the fourteen holding companies fundedlby the coconut levy fund in Philippine Coconut Producers Federation, Inc. v. Republic o} the Philippines (((COCOFED''J6, which were formed or organized solely for the gurpose of holding the San Miguel shares. A holding company is not arpong the entities enumerated as "banks and other financial institutions" in Section 133(e) of the 1991 LGC. This was ruled upon by this Court En Bane in th~ case of Michigan Holdings, Inc. v. The City Treasurer ofMakati City, Nelia A. Ba,fis,37 thus: "Section 131 (e) of the LGC defines "banks and other financial institutions" tc:i> include "non-bank financial intermediaries, lending in[vestors, finance and investment companies, pawnshops, moqey shops, insurance companies, stock markets, stock brokers an~ dealers in securities and foreign exchange, as defined under a~plicable laws, or rules and regulations thereunder." This enumerat,on appears to be exclusive ofother entities. Nowhere in the ~ntirety of Section 131 is a holding company mentioned."38 Being a holding company, Petitioner cannot be made liable for local business tax clearly imposed on "b~nks and other financial institutions" under Section 143(f) of the 1991 LGC anti Section 69(F) of the Revenue Code of the City of Davao39. From all of the foregoing, P~blic Respondents utterly failed to establish by convincing and credible evide~ce that Petitioner is a non-bank financial intermediary, or is engaged in such !activities. Hence, it cannot be taxed as such by Respondent City of Davao. � As Petitioner, as well as the San Miguel shares it held, were decl~red to be owned by the Govem~ent, 35 Securities and Exchange Commission (SFC) -Office of the General Counsel (OGC) Opinion No. 15-15 dated November 03, 2015 add~essed to Waterfront Philippines Inc. citing SEC-OGC Opinion No. 14-32 dated November 10, !2014 and SEC-OGC Opinion No. 11-15 dated February 10, 2011; Emphasis and underscoring ~upplied. 36 G.R. Nos. 177857-58 & 178193, January 24, 2012. 37 C.T.A. EB CASE NO. 1093. June 17, 20~5. 38 Emphasis and underscoring supplied. : 39 Davao City Ordinance No. 158-05, Nov~mber 16, 2005.

DECISION CTA EB No. 1531 (CTA AC No. 133) they are national govern11)ent property exempt from local tax. Aside from the fact that Peti$oner is a holding company which cannot be made liable for local business tai imposed on "banks and other financial institutions" under Section 143(f) 'of the 1991 LGC, the local business tax assessment by Respondent City of'Davao against Petitioner for the Yd and 4th quarters of 2011 should be cancelled and set aside for being a tax on government property. In COCOFED, the Suprem~ Court categorically declared that Petitioner and the San Miguel shares it held ajre owned by the government. Moreover, as public property, all burdens and r~strictions attached by law to such property such as its non-taxability shall appl~, vir: "The CIIF Complanies and the CIIF Block I of SMC shares public funds I assets tire From the foregoing qiscussions, it is fairly established that I the coconut levy funds are s8ecial public funds. Consequently, any property purchased by ~eans of the coconut levy funds should likewise be treated 1as public funds or public property, subject to burdens and re~trictions attached ]zy: law to such property. (Emphasis and underscoring supplied) In this case, the 6 CIIIf Oil Mills were acquired by the UCPB using coconut levy funds. Oft the other hand, the 14 CIIF holding companies are wholly ownep subsidiaries of the CIIF Oil Mills. Conversely, these compa~es were acquired using or whose capitalization comes from t~e coconut levy funds. However, as in the case ofUCPB, UCPB itsflf distributed a part of its investments in the CIIF oil mills to cocotiut farmers, and retained a part thereof as administrator. The portiot(l distributed to the supposed coconut farmers followed the procedure outlined in PCA Resolution No. 033-78. And as the administrator of the CIIF holding companies, the UCPB authorized the aqquisition of the SMC shares. In fact, these companies were formed or organized solely for the purpose of holding the SMC shares. As found by the Sandiganbayan, the 14 CIIF holding companies us~d borrowed funds from the UCPB to acquire the SMC shares in the aggregate amount of [Php] 1.656 Billion. Since the CIIF companies and the CIIF block of SMC shares were acquired usiqg coconut levy funds, which have /

DECISION CTA EB No. 1531 (CTA AC No. 133) been established to be p~blic in character it goes without saying that these acquire~ corporations and assets ought to be regarded and treate<it as government assets. Being government properties, t~ey are accordingly owned by the Government, for the cocqnut industry pursuant to currently existing laws. (Emphasis supplz~d) It may be conceded !hypothetically, as COCOFED et al. urge, that the CIIF holding cpmpanies acquired the SMC shares in question using advances from the CIIF companies and from UCPB loans. But there can be no g~insaying that the same advances and UCPB loans are public in ch~racter, constituting as they do assets of the 14 holding compani~s, which in turn are wholly-owned subsidiaries of the 6 CIIF bil Mills. And these oil mills were organized, capitalized and/o~ financed using coconut levy funds. In net effect, the CIIF block pf SMC shares are simply the fruits of the coconut levy funds acq~ired at the expense of the coconut industry. In Republic v. CO(J;OFED, the en bane Court, speaking through Justice Oater Chief ~ustice) Artemio Panganiban, stated: Because the suf?fect UCPB share~ were acquired with government funds, the government becomes theirprima f1cie beneficial and true owner. By parity of reasoning, the adverted blocW of SMC shares, acquired as they were with government funds, beldng to the government as, at the very least, their beneficial and trmt owner. XXX XXX XXX The Partial SummaryJudgment in Civil Case No. 0033-F dated May 7, 2004, is hertby MODIFIED, and shall read as follows: WHEREFORE, . the MOTION FOR EXECUTION OF: PARTIAL SUMMARY JUDGMENT (RE: CdF BLOCK OF SMC SHARES OF STOCK) dated AugJst 8, 2005 of the plaintiff is hereby denied for lack of merit. However, this Court orders the severance of this particUlar claim of Plaintiff. The Partial Summary Judgment date~ May 7, 2004 is now considered a separate final and appeal~ble judgment with respect to the said CIIF Block of SMC shares of stock. The Partial Summ:~try Judgment rendered on May 7, 2004 is modified by ddleting the last paragraph of the dispositive portion, which will now read, as follows: /'

DECISION CTA EB No. 1531 (CTA AC No. 133) WHEREFO~' in view of the foregoing, we hold that: The Motion fqr Partial Summary Judgment (Re: Defendants CI~F Companies, 14 Holding Companies and Cocofed, et al) ftled by Plaintiff is hereby GRANTED. ~CCORDINGLY, THE CIIF COMPANIES,iNAMELY: 1. Southern !Luzon Coconut Oil Mills (SOLCOM)i 2. Cagayan de <))ro Oil Co., Inc. (CAGOIL); 3. !ligan Coco~ut Industries, Inc. (ILICOCO); 4. San Pablo M1anufacturing Corp. (SPMC); 5. Granexport. Manufacturing Corp. (GRANEX)~ and 6. Legaspi Oil �=o., Inc. (LEGOIL), AS WELL AS i THE 14 HOLDING I COMPANIES, N~ELY: 1. Soriano Shares, Inc.; 2. ACS Inv~stors, Inc.; 3. Roxas Shiares, Inc.; I 4. Arc Inve$tors; Inc.; 5. Toda Holdings, Inc.; 6. AP Holcllngs, Inc.; 7. Fernand~z Holdings, Inc.; (Emphasis and underscoring supplied) 8. SMC Of$cers Corps, Inc.; 9. Te Deun:) Resources, Inc.; 10. Anglo Vehtures, Inc.; I 11. Randy Alllied Ventures, Inc.; 12. Rock Stedl Resources, Inc.; 13. Valhalla Properties Ltd., Inc.; and 14. First Meddian Development, Inc. AND THE CON~RTED SMC SERIES 1 PREFERRED SHARES TOTALING 7S3 848 312 SHA S SUB ECT OF THE RESOLUTION 0 THE COURT DATED SEPTEMBER 17 12009 TOGETHER WITH ALL DIVIDEND DECLARED PAID OR ISSUED THEREO AFTER THAT DATE AS WELL AS ~ANY INCREMENTS THERETO ARISI . G FROM, BUT NOT /V

DECISION CTA EB No. 1531 (CTA AC No. 133) LIMITED TO, E~CISE OF PRE-EMPTIVE RIGHTS ARE DEC RED OWNED BY THE GOVERNMENT 0 BE USED ONLY FOR THE BENEFIT I OF ALL COCONUT FARMERSANDFORTHEDEVELOPMENT OF THE COCONUT INDUSTRY, AND ORDERED REqONVEYED TO THE GOVERNMENT. THE COURT1 AFFIRMS THE RESOLUTIONS : ISSUED BY THE SANDIGANBAY~ ON JUNE 5, 2007 IN CIVIL CASE NO. P033-A AND ON MAY 11, 2007 IN CIVIL qASE NO. 0033-F, THAT THERE IS NO IMORE NECESSITY OF FURTHER TRIAL !wiTH RESPECT TO THE I ISSUE OF OWli'ERSHIP OF (1) THE SEQUESTERED iCPB SHARES, (2) THE CIIF BLOCK OF S C SHARES, AND (3) THE CIIF COMPANI S. AS THEY HAVE FINALLY BEEN~~JUDICATED IN THE AFOREMENTIO D PARTIAL SUMMARY JUDGMENTS DA . ED JULY 11, 2003 AND MAY7, 2004. SO ORDERED."40 The exercise of the taxing p<()wer of local government units is subject to the limitations enumerated in Sectipn 133 of the 1991 LGC. Under paragraph (o) of this provision, local governn)ent units have no power to impose any tax, fee or charge on the National Gov~rnment, to wit: "SECTION 133. Co"fmon Limitations on the Taxing Power of Local Government Units. - U~ess otherwise provided herein, the exercise of the taxing powets of provinces, cities, municipalities, and barangays shall not extend to the levy of the following: XXX� XXX XXX 40 As modified by Supreme Court in its Resplution dated September 4, 2012 clarifying the Decision dated January 24, 2012 in the same ca~. The underscored portion originally read: "AND THE CIIF BLOCK OF SAN MIGUEL COR ORATION (SMC) SHARES OF STOCK TOTALING 33,133,266 SHARES AS OF 1983 TOGETHER WITH ALL DIVIDENDS DECLARED, PAID AND ISSUED THEREON AS W LL AS ANY". The Resolution dated September 4, 2012 also DENIED with FINALITY the Motion lfor Reconsideration filed by Petitioners therein. !

DECISION CTA EB No. 1531 (CTA AC No. 133) (o) Taxes, fees or cJiarges, of any kind on the National Government, its agencie$ and instrumentalities, and local government units."41 I Since the subject San Mi~el shares of Petitioner are owned by the government, it follows that the diPJ.dends and any income therefrom are also owned by the government. Stated !otherwise, Petitioner's dividend and interest income from its San :Miguel shares ~elong to the government, and is beyond the scope of the taxing power of Resp~ndent City of Davao. Any local tax imposed on Petitioner is imposed on the na$onal government. To insist taxing Petitioner would clearly be in contravention ~f Section 133(o) of the 1991 LGC. Respondent City of Davao, !through Respondent City Treasurer, issued a Business Tax Order of Payment assessing Petitioner for alleged deficiency local business tax in the amount ofPhpi60,933.49 on January 20,201442. The case of COCOFED43 was promulgated oq January 24, 2012. At the time the subject assessment was issued, Petitioner ar!Id the San Miguel shares it holds were already declared owned by government. Hbnce, Public Respondents no longer had any authority to issue the said Business Tax Order ofPayment based on Section 143 1 of the 1991 LGC. WHEREFORE, in light qf the foregoing considerations, the instant Petition for Review filed with th~ Court En Bane on November 04, 2016 is GRANTED. The assailed Orders! dated October 15, 2014 and December 17, 2014, both issued by RTC-Branchl16 of the City of Davao, are REVERSED and SET ASIDE. Accordingly, th~ local business tax assessed against Petitioner for the 3rd and 4th quarters of ta~able year 2011 in the aggregate amount of Php760,933.49 is CANCELLED ~nd SET ASIDE. SO ORDERED. ~. ~ .,4 ' - ' WE CONCUR: MA. BELEN M. RINGPIS-LIBAN Associate Justice p. ROMAN DE ROSARIO Pre~iding Justice 41 Emphasis supplied. 42 Docket, p. 285. . 43 G.R. Nos. 177857-58 & 178193, Janua~ 24, 2012.

DECISION LOVEi R. BAUTISTA CTA EB No. 1531 (CTA AC No. 133) Associate Justice .-) (I vdtfo~m~thecA.ssaail.ed;Dtec-is~io~n/lcQf' ~ JUANITO C. CASTANEDA, JRf. Associate Justice , positkJ~ (Imaintain my Assailed Decision) ERL~P.UY CAESAR A. CASANOVA Associate Justice Associate Justice FABON-VICTORIN(:> ~N.M~~C~ CIELITO N. MINDARO-GRULLA Associate Justice C~"7-~ CATHERI~E T. MANAHAN As~ociate Justice CERtriFICATION Pursuant to Article VIII, Section 13 of the Constitution, it is hereby certified that the conclusions in the! above Decision were reached in consultation before the case was assigned to the writer of the opinion of the Court. Presiding Justice