G.R. No. 245887 - City of Davao vs. AP Holdings, Inc.

Case Summary (G.R. No. 245887)

Key Dates and Procedural Posture

Significant procedural events: business tax assessment issued by City of Davao in 2011; APHI paid under protest and sought refund; trial court decision (June 22, 2015) found APHI taxable; CTA Division affirmed (January 30, 2017); CTA En Banc reversed (August 20, 2018) and denied reconsideration (January 23, 2019). The present Supreme Court decision affirmed the CTA En Banc disposition and denied the petition.

Applicable Law and Constitutional Basis

Primary legal instruments invoked: 1987 Philippine Constitution (as the controlling constitutional framework), Presidential Decree No. 582 (establishing the CIIF), the City of Davao 2005 Revenue Code (Section 69(f) — local business tax on banks and other financial institutions), the Local Government Code (LGC) provisions cited (Sections 131(e), 133(o), 143(f)), relevant definitional authority in the National Internal Revenue Code (Section 22(W)), and the Bangko Sentral ng Pilipinas Manual provision (Section 4101Q.1) defining financial intermediaries/non‑bank financial intermediaries. Administrative guidance from the Bureau of Local Government Finance (BLGF) was referenced but not treated as binding on courts.

Facts

APHI was formed as one of the CIIF holding companies with a primary purpose clause authorizing the ownership and holding of shares, receipt and disposition of dividends and income, and other holding-company activities, expressly stating that it shall not act as an investment company, securities broker/dealer, or trust corporation. In 2011 the City assessed a 0.55% local business tax under the City Revenue Code on APHI’s dividends and interest for taxable year 2010; APHI paid under protest and sought administrative refund/credit. The CIIF block of SMC shares, and the CIIF entities including APHI, were declared by this Court in earlier proceedings to be public assets owned by the Republic of the Philippines for the coconut industry.

Trial Court and CTA Division Findings

The Regional Trial Court held that APHI’s articles and activities resembled the statutory definition of a non‑bank financial intermediary (NBFI) under Section 4101Q.1 of the BSP Manual, thereby subjecting APHI to taxation under Section 69(f) of the City Revenue Code. The CTA Division affirmed the trial court’s ruling.

CTA En Banc Findings and Reasoning

The CTA En Banc reversed, granting APHI a refund/credit, for multiple reasons: (1) APHI did not meet the definitions of a non‑bank financial intermediary under applicable legal and regulatory provisions (LGC Section 131(e), NIRC Section 22(W), BSP Manual Section 4101Q.1); (2) although APHI’s articles listed functions that could correspond to an NBFI, those functions were not shown to be APHI’s principal purpose; (3) APHI did not perform NBFI functions on a regular and recurring basis as required to qualify as such; (4) there was no evidence that APHI held itself out to the public as a non‑bank intermediary; and (5) APHI and the CIIF SMC shares are public assets owned by the national government; therefore any tax imposed on APHI’s dividends would be a tax on the government, which local government units cannot impose under the LGC (Section 133(o)) and the constitutional framework governing the taxing powers and immunities of the national government.

Petitioners’ Arguments on Review

Petitioners contended that APHI should be deemed a “bank and other financial institution” — specifically a non‑bank financial intermediary or investment company — because it owned substantial SMC shares and received substantial dividends; that the broad language of APHI’s amended articles encompassed NBFI functions; and that BLGF’s opinion supporting tax-exempt status is not binding on courts.

Respondent’s Contentions

APHI argued that it was not engaged in NBFI activities such as regular lending, investing or trading, that it was not required to be licensed or regulated by BSP or the Insurance Commission, that mere share ownership does not transform it into an NBFI, and that its articles expressly prohibited acting as an investment company or trust corporation. APHI also asserted that, as a CIIF holding company, its shares, dividends and resulting income are national government property exempt from local business taxation.

Legal Issue Presented

Whether APHI, as a CIIF holding company, is liable for local business taxes imposed by the City of Davao on dividends earned from its SMC preferred shares.

Court’s Analysis

The Court relied on prior authoritative determinations concerning CIIF holding companies (including the COCOFED decision and the later City of Davao v. Randy Allied Ventures, Inc. decision cited by the Court) to conclude that CIIF holding companies were created solely to own and hold the CIIF block of SMC shares and that these shares and any dividends therefrom are public assets owned by the Republic for the benefit of the coconut industry. The Court applied the regulatory and statutory tests for identifying non‑bank financial intermediaries: authorization by BSP to perform quasi‑banking functions, the requirement that lending/investing/placement of funds be a principal function, and that such functions be performed on a regular and recurring basis. APHI failed to satisfy these tests because its management of dividends (including placing them in trust accounts that earn interest) was inci

Case Syllabus (G.R. No. 245887)

The Case

Petition for Review on Certiorari filed by petitioners assails the Decision dated August 20, 2018 and the Resolution dated January 23, 2019 of the Court of Tax Appeals (CTA) En Banc in CTA EB No. 1640.
The CTA En Banc had found respondent AP Holdings, Inc. (APHI) entitled to a refund or tax credit of the 0.55% local business taxes it paid to petitioner City of Davao for dividends earned from San Miguel Corporation (SMC) preferred shares and interest from money market placements for the taxable year 2010.
The Supreme Court decision under Justice Lazaro-Javier denies the petition and affirms the CTA En Banc Decision and Resolution.

Antecedents / Factual Background

The Coconut Industry Investment Fund (CIIF) was created under Presidential Decree No. 582 (PD 582) from a levy on initial sales by coconut farmers of copra and other coconut products.
The CIIF was invested in six oil mills known as the CIIF Oil Mills Group (CIIF OMG).
In or around 1983, the CIIF OMG acquired shares of stock in San Miguel Corporation (SMC).
Fourteen holding companies, including APHI, were established for the sole purpose of owning and holding the SMC shares acquired by the CIIF OMG.
APHI’s Amended Articles of Incorporation state its primary purpose as a holding corporation to acquire and own shares and to receive, collect, and dispose of interest, dividends and income arising from such property, and to exercise all rights of ownership; the Articles also expressly provide that the corporation "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; these dividends were deposited in a trust account which earned interest from money market placements.
In 1986 APHI’s SMC shares were sequestered by the Presidential Commission on Good Government; subsequent litigation questioned ownership of the CIIF, CIIF OMG, the fourteen holding companies and the SMC shares they held.
The Supreme Court, in related consolidated cases (G.R. Nos. 177857-58, Philippine Coconut Producers Federation, Inc. v. Republic of the Philippines), later declared the CIIF companies, including APHI, and the CIIF block of SMC shares to be public funds or property necessarily owned by the government.

Administrative and Local Tax Assessment

In 2011 the City of Davao, through its City Treasurer, issued a Business Tax Order of Payment directing APHI to pay 0.55% local business tax in the amount of P723,531.50.
The assessment was made pursuant to Section 69(f) of the 2005 Revenue Code of the City of Davao, which imposed the tax on dividends and interest income APHI earned from its SMC preferred shares and money market placements.
APHI paid the assessment under protest and filed an administrative claim for refund or tax credit with the City Treasurer; alleging failure of the City Treasurer to act on the protest, APHI elevated the matter to the Regional Trial Court.

Procedural History — Regional Trial Court

By Decision dated June 22, 2015, the trial court ruled that APHI’s primary purpose reflected in its Amended Articles of Incorporation resembled the definition of a financial intermediary under Section 4101Q.1 of the Manual of Regulations for Non-Bank Financial Institutions (BSP), and therefore APHI was taxable under Section 69(f) of the City of Davao 2005 Revenue Code.
The trial court applied Section 69(f) imposing a business tax on "Banks and Other Financial Institutions" at specified rates and included dividends and income within the taxable base.
APHI moved for reconsideration, which the trial court denied by Order dated September 11, 2015.

Procedural History — Court of Tax Appeals Division

By Decision dated January 30, 2017, the Court of Tax Appeals (CTA) Division affirmed the trial court’s decision that APHI was subject to the local business tax.
The CTA Division’s Decision was penned by Associate Justice Caesar A. Casanova; Associate Justice Juanito C. Castañeda, Jr. concurred, while Associate Justice Catherine T. Manahan wrote a Dissenting Opinion.
Petitioners’ motion for reconsideration before the CTA Division was denied through Resolution dated April 17, 2017.

Procedural History — Court of Tax Appeals En Banc

By Decision dated August 20, 2018, the CTA En Banc reversed the lower tribunals and declared APHI entitled to a tax refund or credit for the 0.55% local business taxes paid.
The CTA En Banc’s principal findings for reversing were:
- APHI did not fall within the definition of a non-bank financial intermediary under Section 131(e) of the Local Government Code (LGC), Section 22(W) of the National Internal Revenue Code (NIRC) of 1997, and Section 4101Q.1 of the BSP Manual of Regulations for Non-Bank Financial Institutions.
- Although APHI’s Amended Articles of Incorporation included functions that resembled those of a non-bank financial intermediary, those functions were not shown to be its principal purpose.
- It was not established that APHI performed the functions characteristic of non-bank financial intermediaries on a regular and recurring basis.
- There was no evidence that APHI held itself out as a non-bank intermediary.
- APHI was part of the CIIF block of SMC shares which had been declared to be owned by the government; consequently any tax imposed upon APHI was effectively a tax on the government, and under Section 133(o) of the LGC local government units cannot tax the National Government.
The CTA En Banc denied petitioners’ motion for reconsideration by Resolution dated January 23, 2019.
The CTA En Banc Decision was penned by Associate Justice Erlinda P. Uy and concurred in by multiple justices; Associate Justice Juanito C. Castañeda, Jr. wrote a Dissenting Opinion.

Parties’ Principal Contentions Before the Supreme Court

Petitioners (City of Davao and City Treasurer Erwin Alparaque) essentially assert:
- APHI is deemed a "bank and other financial institution," specifically a "non-bank financial intermediary or an investment company," on the basis that it owned a substantial number of shares and received millions of pesos in dividends from its investments.
- The business purpose
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