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By: Atty. Gerardo Maximo Francisco on July 30,2020

In a case we handled, the Supreme Court (SC) confirmed the entry of the judgment of its resolution affirming with finality the decisions of the Court of Tax Appeals (CTA) and the Regional Trial Court (RTC) of Makati that Makati City does not possess the power to assess local business taxes (LBT) on the dividends received by our client, which is not a bank or a financial institution.

More than six years ago, the City of Makati formally assessed our client, a holding company, with a deficiency in LBT based on the dividend income it received, as reflected in its audited financial statements. The assessment was based on the Revised Makati Revenue Code provision that specifically taxes holding companies.

We filed a complaint with the RTC to annul that assessment.

First, we asserted that local government units (LGUs) do not possess the inherent power to tax, and the assessment of LBT on the dividends of our client is contrary to law, citing Section 133(a) of the Local Government Code (LGC), which categorically states that “the exercise of the taxing powers of [cities] shall not extend to the levy of […] Income tax, except when levied on banks and other financial institutions.”

We pointed out that holding companies are not mentioned anywhere in Section 131(e) of the LGC, which defines “banks and other financial institutions” to include “nonbank 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 laws, or rules and regulations thereunder.”

Section 143(f) of the LGC enumerates “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” as the types of income earned by banks and other financial institutions that LGUs may tax through exception to the prohibition against income taxation provided under Section 133 of the code. If such income is derived by an entity that is not a bank or a financial institution, it follows that LGUs cannot validly assess LBT on such income.

Second, we asserted that the City of Makati can only impose LBT on the “gross sales or receipts” of our client and that the dividends received by our client did not fall under the definition of “gross sales or receipts” under the LGC. Section 131(n) of the LGC defines “gross sales or receipts” that may be subject to LBT to include the total amount of money or its equivalent, representing the contract price, compensation or service fee, including the amount charged or material supplied with the services, as well as deposits or advance payments actually or constructively received. This definition does not at all apply to the dividend income received by our client.

The RTC ordered the cancellation of the assessment, saying “when received by nonbank or nonfinancial institutions such as herein plaintiff, dividends constitute passive investment income, which are not derived in the pursuit of their business or activity, and thus do not constitute gross sales or receipts, unlike when these are received by banks and financial institutions in pursuit of the ordinary nature of their business on which local business taxes may then be validly imposed.”

It added that LGUs merely exercise delegated power from Congress, and exercising their taxing power is subject to limitations, and Section 133(a) of the LGC is among those limitations as it proscribes the imposition of local tax on income, except when levied on banks and financial institutions.

The CTA denied the petition for review filed by the City of Makati, holding that “such omnibus grant of taxing power in favor of LGUs under Section 143 of the LGC is not unbridled as enshrined in Section 133 of the same Code. In particular, paragraph (a) thereof decrees that, save for banks and other financial institutions, LGUs are explicitly proscribed from imposing taxes, fees or charges of any kind, on items of gain or yield which were levied income tax by the national government. The rule is animated by the doctrine of preemption or the instance where the national government elects to tax a particular area, impliedly withholding from the local government the delegated power to tax the same field. Ergo, as diametrically opposed with petitioners’ posture, Section 133(a) of the LGC does not allow, and in fact forbids the imposition of LBT on income realized by entities not classified as a bank or financial institution.”

The CTA further held that “petitioner’s imposition of LBT on dividend income realized by respondent undoubtedly traverses the statutory impediment enshrined under Section 133(a) of the LGC, rendering the issuance of the subject assessment ultra vires and without any legal consequence, effectively warranting its cancellation and withdrawal.”

The SC resolved to deny the petition for review on certiorari filed by the City of Makati, concluding that petitioner failed to show that the CTA committed any reversible error in the challenged decision.

This holding is now in the Book of Entries of Judgment of the SC.

Contact Information

Our office address:

15/f Unit A. ACT Tower, H.V. Dela Costa St.
Salcedo Village, Makati City 1227 Philippines

Telefax: +632 831-1297

Telephone: +632 808-5375 • +632 815-0069



Euney Marie J. Mata-Perez

Mark Anthony P. Tamayo

Gerardo Maximo V. Francisco