City of Davao, et. al. v. ARC Investors, Inc.

 City of Davao, et. al. v. ARC Investors, Inc. 

G.R. No. 249668 

July 13, 2022 

Indeed, local government units have the power to impose LBT on the privilege of doing business within their territorial jurisdictions. The term “doing business” contemplates some “trade or commercial activity regularly engaged in as a means of 

livelihood or with a view to profit”  

 

Whether ARCII is an NBFI subject to LBT under Section 143(f), in relation to Section 151, of the LGC.  

 

Under Section 143(f), the persons liable to pay LBT are banks or other financial institutions by virtue of the nature of their business. LBT are imposed on their gross receipts from “interest, commissions and discounts from lending activities, income from financial leasing, dividends, rentals or property and profit from exchange or sale of property, insurance premium.” In order to be considered as an NBFI under the LGC, in relation to the NIRC and pertinent banking laws and regulations, it must concur with all the necessary requisites and parameters laid 

down 

 

The primary test for the distinction between a holding company and a financial intermediary contemplates regularity of function. 

 

The taxpayer earned dividends from its preferred shares of stocks in SMC and interests on its money market placements. The City of Davao and its treasurer assessed the taxpayer LBT equivalent to 0.55% of the dividends and interests the latter earned for the third and fourth quarters of 2011. 

 

The Supreme Court ruled that LBT cannot be imposed against the taxpayer. The City of Davao assessed the taxpayer based on 

Section 143(f), in relation to Section 131 (e) of the LGC. Under Section 143(f) of the LGC, persons liable to pay LBT are banks or other financial institutions by virtue of the nature of their business. LBT are imposed on their gross receipts 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. 

 

The Court emphasizes that the primary test for the distinction between a holding company and a financial intermediary contemplates regularity of function, not on an isolated basis, with the end in mind for self-profit. Here, the taxpayer’s placement of dividends derived from its SMC shares in the market incidentally earning interests does not negate the corporation’s restricted underlying purpose as a holding company.