Bureau of Local Government Finance Opinion

January 17, 2001 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 1st Indorsement Respectfully referred to the City Treasurer of the City of Makati, our ruling contained herein on the letter dated March 23, 2000, from Messrs. C.P. Noel and E.P Guevara of SGV & Co., requesting on behalf of their client Sysmart Corp. (Sysmart for brevity) confirmation/ruling that Sysmart does not fall within the purview of "banks and financial institutions" under the Local Government Code of 1991 (LGC), its implementing rules and regulations, and the Makati Revenue Code and therefore, not subject to local business tax as such. Sysmart represented that it is a corporation duly organized and existing under and by virtue of the laws of the Philippines. It has an authorized capital stock of two billion pesos (P2,000,000,000.00) divided into twenty million shares with a par value of one hundred pesos per share. Its principal office is located in Makati. The primary purpose of Sysmart as stated in its articles of incorporation is: "To acquire by purchase, exchange, assigns, gift or otherwise, and to sell, assign, transfer, exchange, lease, let, develop, mortgage, pledge, traffic, deal in and with and otherwise operate, enjoy and dispose of, and all properties of every kind and description and wherever situated and as to the extent permitted by law, including but not limited to real estate, whether improved or unimproved, and any interest or right therein, as well as buildings tenements, warehouses, factories, edifices and structures and other improvements, and bonds, debentures, promissory notes, shares of capital stock, or other securities or obligations, created, negotiated or issued by any corporation, association or other entity, foreign or domestic and while the owner, holder or possessor thereof, to exercise all the rights, powers and privileges of ownership or any other interest therein, including the right to receive, collect and dispose of, any and all rentals, dividends, interests and income derived therefrom, and the right to vote on any proprietary or other interest on any shares of the capital stock, and upon any bonds, debentures, or other securities, having voting power so owned or held; provided that the corporation shall not engage in the business of an open-end investment company as defined in the Investment Company Act (R.A. 2629), without first complying with the applicable provision of the said Act. Provided, it shall not act as broker and dealer of securities." TaDAHE Sysmart referred to Section 131 (e) of the LGC, to determine whether it is proper to classify it as a "bank and financial institution". Section 131 (e) States: "Section 13.1. Definition of Terms. When used in this Title, the term: "(a) . . . "(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" Sysmart represents that it does not fall within the purview of "banks and financial institutions" under the LGC, its IRR and the Makati Revenue Code and therefore it is not subject to local business tax, as follows: A. NON-BANK FINANCIAL INTERMEDIARY By definition financial intermediaries act on regular and recurring basis as conduits between supplies of funds, on the one hand, and users of funds on the other. Thus, investment houses, investment companies, securities dealers and brokers and fund managers are financial intermediaries that regularly secure equity funds from the public that invest equity capital in investee companies. Banks, financing companies, non-stock savings and loan associations, and building and loan associations are financial intermediaries that regularly secure capital from lenders/investors for relending to borrowers of capital. On the other hand, holding companies, such as Sysmart, are simply a medium by which a single interest hold its investment, much in the same manner as if that same interest held that investment directly. Since only one single interest provides funds, it cannot be said that Sysmart obtains funds from the public through equity investments. Moreover, while Sysmart indeed may earn dividend, capital gains or interest income, this does not detract from the fact that its funds are not acquired from the public. Besides, this income is earned as an incidental part of the holdings of its investment, not as a business. Finally, it is important to note that Sysmart is not registered nor has it been required to register or secure a license from any regulatory agency as non-bank financial intermediary. B. LENDING INVESTOR Sysmart is not a lending investor as it is not in the practice of lending money for themselves or others at interest. C. FINANCING AND INVESTMENT COMPANIES Financing Companies Sysmart is a holding company. It clearly does not extend credit facilities to consumer and to industrial, commercial, or agricultural enterprise. Thus, Sysmart is not a financing company. Likewise, it is not registered with nor it is required to register with the SEC as a financing company. CIaHDc Investment Company As can be seen from its Articles of Incorporation, Sysmart is not organized primarily for the purpose of investing, reinvesting and trading in securities. D. PAWNSHOPS Sysmart is not a pawnshop, as it is not engaged in the business of lending money or personal property. E. MONEY SHOPS Sysmart is not a money shop because it is not authorized to accept money from deposit and extend short-term loan for specific purposes. F. INSURANCE COMPANIES Sysmart is not an insurance company because it was not formed to indemnify or to compensate any person or corporation for any loss, danger or liability. G. STOCK BROKERS AND DEALERS IN SECURITIES AND FOREIGN EXCHANGE Sysmart it not a stockbroker because it does not negotiate purchases or sales of stock, bonds or other securities. Sysmart does not engage in purchase and sale of properties for the account of others. In fact, Sysmarts articles of incorporation also provide that it shall not act as a stockbroker. CcAHEI Sysmart stated that the buying and selling of stocks and bonds is only a secondary purpose. As stated in its articles of incorporation, the primary purpose of Sysmart is "to acquire by purchase . . . to sell . . . all properties of every kind . . . including but not limited to real estate . . . and any interest or right therein . . . and bonds, debentures, promissory notes, shares, capital stock or other securities or obligations, created, negotiated or issued by any corporation, association or other entity, . . . ." (Underlining supplied.) Under its financial statement, Sysmart realized the following revenues: 1. Gain on sale of marketable securities 2. Dividends 3. Interest Discussion At the outset, we take notice that this is not the first time that the City Treasurer of Makati, seeks to tax a person or entity as a "bank and other financial institution" pursuant to Section 143 (f) of the Local Government Code as implemented under the Makati Revenue Code, by virtue of the fact that such person or entity is engaged in activities mentioned under such Section 143 (f). We also take notice that notwithstanding a determination that an entity engaged in Section 143 (f) activities is not a "bank and other financial institution," the City Treasurer of Makati still assesses business taxes pursuant to Section 143 (h) of the Local Government Code as implemented by the Makati Revenue Code. We thus need to examine Section 143 (f) and (h) of the Local Government Code to determine the extent of the taxing powers of cities and municipalities thereunder. The pertinent subsections, states: Section 143. Tax on Business. The municipality may impose taxes on the following businesses: DHECac (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. xxx xxx xxx (h) On any business, not otherwise specified in the preceding paragraphs, which the sanggunian concerned may deem proper to tax: Provided, That on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year. 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). There is likewise no showing that Sysmart has violated applicable laws, rules and regulations by doing business as a "bank and other financial institution." 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. TIaEDC Section 143 (f) 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: "SEC. 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;" Going further, and consistent with Section 133 of the Local Government Code, while Section 143 (f) provides that "banks and other financial institutions," may be taxed on activities specified therein, the same Section 143 (f) does not preclude persons and entities other than "banks and other financial institutions" from engaging in such Section 143 (f) activities nor does it render persons engaged in Section 143 (f) activities taxable as "banks or other financial institutions." Section 131 (e) of the Local Government Code, clearly provides that included in "banks and other financial institutions" are those defined under applicable law rules and regulations, as such: "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; Having said the foregoing, we wish to remind the City Treasurer's Office of Makati that a person legally engaged in Section 143 (f) activities, who is not a "bank and other financial institution" 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" provision. 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": Section 143. Tax on Business. The municipality may impose taxes on the following businesses: DCcAIS xxx xxx xxx (h) On any business not otherwise specified in the preceding paragraphs , which the sanggunian concerned may deem proper to tax: Provided, That on any business subject to the excise, value-added or percentage tax under the National Internal Revenue Code, as amended, the rate of tax shall not exceed two percent (2%) of gross sales or receipts of the preceding calendar year. A "business" is defined under the Section 131 (d) of the Local Government Code, in reference to an "activity" and not in reference to a person or entity, as follows: Section 131. Definition of Terms. When used in this Title, the term: xxx xxx xxx (d) "Business" means trade or commercial activity regularly engaged in as a means of livelihood or with a view to a profit." (Underscoring supplied) The "business" in which Sysmart is engaged in is already specified in Section 143 (f) and is therefore expressly excluded from the coverage of Section 143 (h). The fact that Sysmart does not fall under "bank and other financial institutions" and automatically excludes it from the coverage of Section 143 (f), does not imply that Sysmart can be taxed under Section 143 (h), because the latter section allows taxation only on "unspecified" activities. The City Treasurer of Makati cannot therefore assess Sysmart for business tax under either Sections 143 (f) or 143 (h), based on the facts represented. Such assessment is devoid of any legal basis and is void ab initio . Sysmart is under no obligation under the Local Government Code or the Makati Revenue Code to pay such taxes. The City Treasurer of Makati is therefore directed to immediately desist from further requiring Sysmart from paying business tax on the activities in question either under Section 143 (f) or Section 143 (h) as implemented by the Makati Revenue Code. Violation of this order shall be dealt with accordingly. The City is hereby directed to report compliance with the directives contained herein within five (5) days from receipt of this Indorsement. (SGD.) JUAN JOSE RODOM T. FETIZA Assistant Secretary <www.blgf.gov.ph/downloads/opinion/localtax/2001/a2000-0331.pdf> last visited January 16, 2014.