Bureau of Local Government Finance Opinion

November 15, 2002 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 2nd Indorsement Respectfully returned to the City Treasurer, Pasig City, the herein preceding indorsement requesting opinion/ruling on the taxability of the Philippine Stock Exchange ( PSE ) in view of the subjoined letters dated February 8, 1999 and March 18, 1999 of Atty. Enrico G. Valdez, in behalf of PSE addressed to that Office and this Bureau, respectively, protesting the assessment for local taxes from 1994 to 1997 amounting to P7,337,000.00. At the outset, we take this opportunity to extend our apologies for the delay in making this reply, which however was not in any way deliberate but occasioned only by our heavy workload and the efforts exerted to locate precedents on similar cases. This Office was able to find an opinion or ruling made by competent authority dated January 17, 2001, that would support the herein request of PSE. Representations are made that PSE is a non-stock, non-profit corporation whose primary objective is to provide and maintain a convenient, economical and suitable market for the exchange, purchase and sale of stocks, bonds and other securities of established companies and/or corporation. Its capitalization consists of contributions by the members stock brokers and donations from business interests. EDHCSI In 1994, PSE established its principal office and one of its trading floors at the Philippine Stock Exchange Centre at Pasig City. The other trading floor is located at the Philippine Stock Exchange Plaza at Makati City. Since that time, PSE has not paid any business tax to Pasig City and to Makati City due to its position that its income as a stock market is not subject to any local tax. However, on January 5, 1999 PSE received a letter dated December 21, 1998 from that Office demanding the payment of P7,337,000.00 representing the local tax assessment for the years 1994 to 1997. Apparently, PSE was classified as falling under "banks and other financial institutions" under Section 143 (f) of the Local Government Code of 1991 (LGC). On February 11, 1999, PSE through its Counsel, protested the assessment on the ground that its income from 1994 to 1997 are not among those taxable income of banks and other financial institution under Section 143 (f) of the Local Government Code (LGC) of 1991, enumerated as follows: 1. interest 2. commissions and discounts from lending investors; 3. income from financial leasing; 4. dividends; HCTDIS 5. rentals on property and profit from exchange or sale of property 6. insurance premium On the other hand, enumerated hereunder is the nature of PSE's income: 1. Listing Related Income - these are the fees collected from companies applying for initial public offering ("IPO") or additional listing 2. Membership Related Income (a) Entrance Fees - these are the fees collected from members for the following: ESTDcC i. Transfer from individual to corporate PHP10,000.00 ii. Change in nominee PHP50,000.00 iii. New Member PHP200,000.00 (b) Monthly Assessment Fees - these are monthly dues charged to members (c) Lounge Membership Fees - these are the fees collected from officers of listed companies and broker firms in order to get access to or use the Member's Lounge 3. Trading Related Income - these are the fees collected from date vendors, wire agencies, daily quotations and members who have connections to trading terminals. Thus, comparing the nature of PSE's gross receipts with the gross receipts subject to local tax, it is quite clear that none of the former falls under the enumerated gross receipts subject to local tax. In view of the foregoing, that Office reconsiders PSE as taxable under either Section 143 (e) or Section 143 (h) of the LGC. CAaSHI Section 131 (e) of the LGC provides as follows: "Section 131. Definition of Terms . When used in this title, the term; . . . "(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." On the basis of the aforequoted definition, there is no doubt that PSE may be considered as a financial institution falling well within the contemplation of Section 131 (e) of the Code. In view thereof, it may be stated that a person legally engaged in Section 143 (f) activities, cannot be taxed under Section 143 (h), on such activities. Section 143 (h) is quite clear that a city or municipality may only impose a tax on any business "not otherwise specified in the preceding paragraphs." ASIETa It is pointed out that the "business" in which PSE is engaged in is already specified in Section 143 (f) and is therefore expressly excluded from the coverage of Section 143 (h). Be that as it may, it may be stated that, cities and municipalities may impose tax pursuant to Section 143 (f) only on the following activities: a) gross receipts derived from interest, commissions and discounts from banking activities; b) income from financial leasing, dividends, rentals on property; c) profit from exchange or sale of property, insurance commission. Premises considered and based on the facts represented indicating PSEs gross receipts are not among those taxable income enumerated under said Section 143 (f), the City Treasurer of Pasig cannot assess PSE for business tax under either Section 143 (f) and 143 (h). HICEca It is hoped that matters are clarified. (SGD.) MA. PRESENTACION R. MONTESA Executive Director