Bureau of Local Government Finance Opinion

January 20, 2012 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION Picazo Buyco Tan Fider & Santos Law Offices 18th, 19th & 17th Flrs., Liberty Center 104 H.V. dela Costa Street Salcedo Village, Makati City Attention: Atty. Daniel Winston C. Tan-Chi Gentlemen : This refers to your letter dated January 5, 2012, requesting in behalf of your client, Monte Oro Grid Resources Corporation (MOGRC), confirmation of your opinion that it is a holding company and, therefore, not taxable as a bank or financial institution under Section 143 (f) of the Local Government Code (LGC) of 1991 and Section 22 (F) of the Pasig Revenue Code of 1991, which provisions levy a business tax on banks and other financial institutions, including 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. Representations are made as follows: 1. On December 12, 2007, the Power Sector Assets and Liabilities Management Corporation (PSALM) conducted a public bidding for the Privatization by Way of Concession of the Facilities and Assets of the National Transmission Corporation (TRANSCO) in accordance with its mandate under the Electric Power Industry Reform Act of 2001 (EPIRA). 1 2. The consortium composed of Monte Oro Grid Resources Corporation (MOGRC), State Gris Corporation of China (SGCC) and Calaca High Power Corporation (CHPC) was the highest bidder for the TRANSCO Privatization and on January 11, 2008, PSALM officially declared the Consortium as the winning bidder for the TRANSCO Privatization. 3. On January 17, 2008, PSALM and the Consortium executed a Direct Agreement that would govern the relationship between the parties and the obligations of the consortium prior to taking over the facilities and assets of TRANSCO. aCTADI 4. Under the bidding rules for the TRANSCO Privatization, the Consortium was required to form a company that would take over the assets and facilities of TRANSCO. In compliance therewith, the Consortium formed the National Grid Corporation of the Philippines (NGCP) with the members of the Consortium as the sole shareholders. It was a one-time subscription to the shares of NGCP by the members of the Consortium in order to comply with the bidding rules and formalize the award by the government of the assets of TRANSCO. 5. On February 21, 2008, the Securities and Exchange Commission issued the Certificate of Incorporation of NGCP with MOGRC and the two (2) other Consortium members as the stockholders. 6. MOGRC holds 30% of the outstanding capital stock of NGCP and from 2008 to 2010, MOGRC had the power to influence the policies and management of NGCP as some of the directors of MOGRC were also directors of NGCP and the Chairman and President of MOGRC was always the President and CEO of NGCP. In connection with the above request, Section 22 (F) of the Pasig Revenue Code is quoted as follows: Sec. 22. Payment of Business Taxes. xxx xxx xxx F. BANKS AND OTHER FINANCIAL INSTITUTIONS which 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 shall be taxed at a rate not exceeding sixty percent (60%) of one percent, for 1993-1995, seventy percent (70%) of one percent (1%), for 1996-1997, of the gross receipts of the preceding calendar year derived from interest, financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium. (emphasis supplied) It is claimed that the power of the City of Pasig to levy such a tax is derived from Section 151 of the Local Government Code in relation to Section 143 (f). Section 151 of the LGC provides that cities may levy the taxes that a municipality may impose, while Section 143 (f) of the LGC allows a municipality to levy tax on the business of banks and financial institutions, as follows: "Section 143. Tax on Business. The municipality may impose taxes on the following businesses: SEHaTC "(f) On banks and other financial institutions, 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 lending activities, income from financial leasing, dividends, rentals on property and profit from exchange or sale of property, insurance premium. It is claimed further that as the Pasig Revenue Code does not contain a definition of "Banks and Other Financial Institutions," the definition provided under Section 131 (e) of the LGC, quoted hereunder, which is repeated under Article 220 (e), Part I, Rule XXX of its Implementing Rules and Regulations (IRR), should apply: "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 law, or rules and regulations thereunder; "xxx xxx xxx." It is contended that the LGC requires reference to applicable laws, rules and regulations to determine the definition of companies that are considered as banks and other financial institutions, hence, MOGRC does not fall within the purview of "banks and financial institutions" in view of the following: MOGRC is not a non-bank financial intermediary that is taxable under Section 22 (F) of the Pasig Revenue Code. Since the LGC does not contain a definition of a "non-bank financial intermediary," reference can be made to, in pari materia , Section 22 (w) of R.A. 8424, of the National Internal Revenue Code, (NIRC) which defines a non-bank financial intermediary as a financial intermediary as defined by Section 2 (D) (c) of the General Banking Act, authorized by the Bangko Sentral ng Pilipinas (BSP) to perform quasi-banking activities . The term "quasi-banking activities" is defined by the NIRC as borrowing funds through twenty (20) or more personal or corporate lenders at any one time. It is submitted that MOGRC is not engaged in any activity where it borrows funds from twenty (20) or more lenders. Therefore, it is not performing quasi-banking activities and there is no basis for it to be classified as a non-bank financial intermediary. cEaCAH MOGRC is also not a financing company that is taxable under Section 22 (F) of the Pasig Revenue Code. Section 3 (a) of R.A. 8556, or the Financing Company Act, defines a financing company as corporations, except banks, investment houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivable, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable property. Again, it is submitted that MOGRC does not extend credit facilities to consumers or enterprises and does not issue any evidence of indebtedness. Neither does MOGRC perform any financing activities that the law defines for it to be classified as a finance company. To repeat, MOGRC merely holds shares in NGCP. MOGRC is also not an investment company that is taxable under Section 22 (F) of the Pasig Revenue Code. Under Section 4 of R.A. 2629, or the Investment Company Act, an investment company is defined as any issuer which is or holds itself out as being engaged primarily, or proposes to engage primarily, in the business of investing, reinvesting, or trading in securities. MOGRC does not engage in the business of investing, reinvesting, or trading in securities. As stated above, MOGRC merely holds shares of NGCP to comply with the bidding rules for the TRANSCO Privatization and apart from that single transaction, MOGRC has not made any investments or any trades in any securities. Therefore, MOGRC is not performing any investment activities for it to be classified as an investment company. MOGRC is not a pawnshop, money shop, insurance company, stock market, stock broker or a dealer in securities and foreign exchange. These companies require a license from the BSP and MOGRC does not engage in any of these activities for it to be required to secure a license from the BSP. SIcEHD To support further the above discussion, you mentioned a settled rule of statutory construction that the express mention of one person, thing, act or consequence excludes all others. Stating further that this rule is expressed in the familiar maxim expressio unius est exclusio alterius. Where a statute, by its terms, is expressly limited to certain matters, it may not, by interpretation or construction, be extended to others. The rule proceeds from the premise that the legislature would not have specified enumerations in a statute had the intention been not to restrict its meaning and to confine its terms to those expressly mentioned. 2 Thus, it is contended that it would be unjust and inequitable to impose upon MOGRC the responsibility to pay the tax under Section 22 (F) of the Pasig Revenue Code because MOGRC is clearly not covered thereby. It is contended further that the business tax levied on non-bank financial intermediaries, financing companies or investment companies pursuant to Section 22 (F) is based on the activities that these companies pursue, which are the lending out or investment of funds to earn interest and dividends from their activities. These activities are done on a recurring basis and the companies have to continuously engage in these activities to generate income. This is simply not the case with MOGRC. It is likewise contended that MOGRC is merely a holding company and not a bank or financial institution citing the opinions 3 of the Securities and Exchange Commission (SEC) which provides that the element of control must be present to classify a corporation as a holding company and that the dominant character of a holding company is the ownership of securities coupled with an element of control and power to influence the policies and management of one or more operating companies. 4 In view of the above opinion it is claimed that there was the element of control over the management and policies of NGCP by MOGRC at all times. This fact was never concealed by MOGRC claiming that under Note 5 to the audited financial Statements of MOGRC, 5 it is clear that MOGRC, along with the two (2) other members of the Consortium formed NGCP, with MOGRC owning 30% of the shares of NGCP. These shareholding were enough to give MOGRC an element of control and power to influence the policies and management of NGCP, which was the operating company. Furthermore, it was pointed out that an examination of the General Information Sheets (GIS) for both MOGRC and NGCP will show that MOGRC has substantial control over NGCP as some of the directors of MOGRC were also the directors of NGCP and the position of President & CEO of NGCP was always controlled by MOGRC. For emphasis, it is reiterated that MOGRC merely holds shares in NGCP and has the ability to influence the policies of the operating company, NGCP. MOGRC does not hold the shares for trading. A one-time subscription of shares to comply with the bidding rules for the TRANSCO Privatization cannot be classified as being engaged in business as a finance or investment company nor of a non-bank financial intermediary. Aside from merely holding shares in NGCP, MOGRC has no other shares or investments in any other company and it has no other activities other than the ownership of shares in NGCP. It is next argued that the language of Section 22 (F) of the Pasig Revenue Code is too plain to be mistaken. Even assuming for the sake of argument that there is a doubt as to whether or not the MOGRC is covered by the said provision, it is an established rule that tax laws must be construed strictly against the State and liberally in favor for the taxpayer because taxes, as burdens which must be endured by the taxpayer, should not be presumed to go beyond what the law expressly and clearly declares. 6 Therefore, since it cannot be clearly shown that MOGRC is covered by Section 22 (F), then the doubt has to be resolved against the levy of the tax and liberally in favor of MOGRC. Lastly, it is argued that MOGRC is clearly not among the entities subject to the business tax under said Section 22 (F) and its passive income should not be subject to the said business tax. The said tax cannot and should not be presumed to go beyond what is already clearly provided for in the law. Considering that MOGRC is not among the companies expressly enumerated as a "bank or financial institution" covered by Section 22 (F) and considering that in case of any doubt, the doubt has to be resolved in favor of the taxpayer, then an assessment of business taxes against MOGRC as a bank or financial institution under Section 22 (F) of the Pasig Revenue Code would constitute an illegal exaction. On the basis of the representations laid-out above, we agree with your view that MOGRC does not fall clearly under any of those enumerated in the definition of "banks and other financial institutions." In this connection, enclosed for your information and ready reference is a copy of the 1st Indorsement dated January 17, 2001 addressed to the City Treasurer of Makati relative to the request of SGV & Co. in behalf of their client, Sysmart Corp., a holding company, confirmation that it does not fall within the purview of "banks and other financial institutions", and therefore, not subject to local business tax, the relevant portions of which are quoted as follows: EHTISC "Section 143(f) does not prohibit a person or entity from engaging in Section 143(f) activities even if it is not a 'bank and other financial institution.' Likewise, the Local Government Code does not render the gross receipts or income of such person or entity, taxable as a 'bank and other financial institution' by the sole reason that it is engaged in Section 143(f) activities. A person or entity must first be determined to be a 'bank and other financial institution' under applicable laws, rules or regulations before such person or entity can be taxed under Section 143(f). . . . . "Cities and municipalities may impose tax pursuant to Section 143(f) only on 'banks and financial institutions' and only on the following activities: a) gross receipts derived from interest, commissions and discounts from lending activities ; b) income from financial leasing, dividends, rentals on property; and c) profit from exchange or sale of property, insurance premium. A close examination of this Section 143(f) shows that the taxes allowed to be imposed therein are in the nature of income taxes. "Section 143 of the Local Government Code, is in keeping with Section 133(a) of the Local Government Code, which latter Section prohibits local government units from imposing income tax, except on "banks and other financial institutions" as follows: "Section 133. Common Limitations on the Taxing Powers 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 other financial institutions; "xxx xxx xxx. ". . . a person legally engaged in Section 143(f) activities, who is not a 'bank and other financial institutions' cannot be taxed under section 143(h), on such activities. Broad as the language of section 143(h) might be, it is not a 'catch-all' provisions. "Section 143(h) is quite clear that a city or municipal sanggunian may only impose a tax on any business 'not otherwise specified in the preceding paragraphs': "xxx xxx xxx." It is worth noting that MOGRC primary purpose in its Articles of Incorporation is "to invest hold interest in shares of stock of companies engaged or proposing to engage in infrastructure projects, whether public or private, as well as in government privatization or similar projects, whether as proponent, equity investor or financial or technical advisor and to do all acts and things necessary to carry out the foregoing purpose." SaHcAC Accordingly, this Bureau concur with your opinion that MOGRC is a holding company and, therefore, not taxable as a bank or financial institution under Section 143 (f) of the Local Government Code (LGC) of 1991 and Section 22 (F) of the Pasig Revenue Code of 1991. With respect to the passive income of MOGRC, it may be stated that the definition of the phrase "gross sales or receipts" under Section 131 (n) of the LGC quoted hereunder does not include nor make mention of passive income as one of those that are considered part or form part of the "gross sales or receipts" and therefore such income is not subject to local business tax hence, subject only to income tax: "Section 131. Definition of Terms. When used in this Title, the term: "xxx xxx xxx. "(n) Gross Sales or Receipts include the total amount of money or its equivalent representing the contract price, compensation or service fee, including the amount charged or materials supplied with the services and deposits or advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person excluding discounts if determinable at the time of sales, sales return, excise tax, and value-added tax (VAT); "xxx xxx xxx." The above views are expressed based on the facts presented. However, any fact or representation that may be discovered to the contrary, after verification and investigation by the local government unit concerned, shall automatically render the views expressed herein as null and void. It is hoped that this will help clarify matters. aEcTDI Very truly yours, (SGD.) SALVADOR M. DEL CASTILLO OIC-Executive Director Footnotes 1. Republic Act No. 9136. 2. Public Schools District Supervisors Association, et al. vs. Edilberto C. de Jesus, et al. , G.R. No. 157286, 16 June 2006. 3. SEC Opinions dated 18 March 1996 and 25 March 1997. 4. SEC-OCG Opinion No. 30-09 dated 23 November 2009. 5. Attached as Annex C to the Petition dated 6 May 2011. 6. Lincoln Philippine Life Insurance Company, Inc., et al. vs. Court of Appeals, et al. , 293 SCRA 92.