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March 17, 2011

BUREAU OF LOCAL GOVERNMENT FINANCE OPINION

Atty. Liberato R. Lapia


Partner
The Law Firm of CASTILLO & LAPIA
Suite 215 Cityland III
Cor. Herrera/Esteban Streets
Legaspi Village, Makati City

Sir :

This refers to your undated letter, received by this Bureau on March 3, 2011,
requesting for a ruling in behalf of your clients listed hereunder, that the gross receipts
of these companies in the form of interest, dividend income and equity in the net
earnings of the investee company, are beyond the scope of the taxing powers of local
governments:

1) Equasis Incorporated

2) Globalift, Inc.

3) Cargolift Group, Inc.

4) Petrolift Holdings, Inc.

Representations are made that the Articles of Incorporation of these companies


have a common primary purpose, among others of which is "to acquire and dispose of
shares of stocks". The gross receipts of these companies consist mainly of dividend
and interest income.

It is submitted that with the equity method of accounting, the revenues of these
companies also reflect their equity in the net earnings of the company where they
invested their funds in shares of stocks even if there were no actual cash inflows of
these holding companies.

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Further, in the course of applying for business permit with the City of
Muntinlupa where the principal offices of these holding companies are located, they
were required to pay business taxes purportedly pursuant to the local tax ordinance of
the City.

It is contended however, that the local government, in this case the City
Government of Muntinlupa, has no power under the Local Government Code (LGC)
of 1991 to impose business taxes on the income of holding companies in view of
Section 133 (a) of the LGC, quoted as follows: (emphasis ours)

"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: HEDSIc

"(a) Income tax, except when levied on banks and other financial
institutions; (Emphasis our)

"xxx xxx xxx."

In view of the above contention and information, it is viewed that the following
issues have to be resolved:

1) Whether holding companies like Aquasis Incorporated and Globalift,


Inc., by the nature of their income, are beyond the taxing powers of
local government units based on the pertinent provisions of the Local
Government Code (LGC) of 1991;

2) Whether the revenues "equity in net earnings of an investee company"


derived by these holding companies (Aquasis Incorporated and
Globalift, Inc.) from other company/ies are subject to local business tax
(LBT); and

3) Whether interest and dividend incomes are subject to LBT in view of the
prohibition in Section 133 of the LGC.

Issue Nos. 1 & 2.

As claimed in the above representations, the revenues of these companies also


reflect their equity in the net earnings of the company where they invested their funds
in shares of stocks even if there were no actual cash inflows of these holding
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companies. ATCEIc

The claim apparently implies that these holding companies although they
reported incomes/revenues in their AFS, did not actually receive the amounts.

We disagree. As can be observed from the attached Audited Financial


Statements (AFS), both Aquasis Incorporated and Globalift, Inc., reported in their
respectively 2010 Income Statements the "Equity in net earnings of an investee
company" as revenues with the following amounts: P36,997,597 and 35,470,805,
respectively.

The respective audited Financial Statements of these holding companies show


the following information:

Name of Year Nature of Income Amount Totals


Company
Equasis 2010 1) Equity in net P36,997,597
Incorporated earnings of an
investee
company *(1)
2) Interest Income 573,363 P37,570,960
Globalift, Inc. 2009- 1) Equity in net P35,470,805
2010 earnings of an
investee
company **(2) P35,470,805
Petrolift 2008 Interest Income (P31,034) (P31,034)
Holdings, Inc.
Cargolift 2009 1) Dividend Income P3,634,503
Group, Inc. 2) Interest Income 568 P3,635,071

Notes: * Equity interest in Petrolift, Inc.

** Globalift owns the majority shares of Equasis, Inc. The Company has not yet
commenced commercial operations as of June 30, 2008

The above information and based on the attached Income Statements of


Equasis, Inc. and Globalift, Inc. the "Equity in net earnings of an investee company"
Account was treated as "income" in the "Revenue" Section of their respective Income
Statement.

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In view hereof, it is viewed that the "Revenues" of Equasis, Inc. and Globalift,
Inc. representing the "equity in net earnings of an investee company" constitute their
respective "gross sales or receipts" provided for in Section 131 (n) of the LGC, the
same having been derived in pursuit of their primary business purpose embodied in
the Articles of Incorporation of said companies and therefore subject to LBT pursuant
to Section 143 (h) of the LGC, quoted hereunder, and as implemented in the
duly-enacted tax ordinance of the local government unit concerned.

"Section 143. Tax on Business. The municipality may impose


taxes on the following businesses:"

"xxx xxx xxx.

"(h) On any business, not otherwise specified in the preceding


paragraphs, which the sanggunian concerned may deem proper to tax:
Provided, however, 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."

Issue No. 3.

In resolving this particular issue, reference is made to Section 143 (f) of the
LGC quoted hereunder which enumerates the types of income earned by banks and
other financial institutions which local governments may tax by way of exception to
the prohibition against income taxation provided under Section 133 aforementioned:

"Section 143. Tax on Business. The municipality may impose


taxes on the following businesses:"

"xxx xxx xxx.

"(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 premiums. (Emphasis
supplied) CDISAc

"xxx xxx xxx."

It is clear that unless imposed on banks and other financial institutions, any tax
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imposed on interest or dividends received by non-bank and non-financial institutions
assume the nature of income tax. The reason for this is evident: while banks and other
financial institutions derive such gross receipts in the ordinary course of their business
as financial institutions, the same cannot be said for non-bank and non-financial
institutions like Aquasis Incorporated, Petrolift Holdings, Inc. and Cargolift Group,
Inc. The interest and dividend incomes are merely passive investment incomes.

Further, as to banks and other financial institutions, the foregoing types of


income are in the nature of ordinary business income since these are derived in pursuit
of their primary purpose as financial institutions. Thus, the tax imposed thereon
assumes the nature of ordinary business tax. In contrast, interest income and dividends
when derived by non-bank or non-financial institutions like Aquasis Incorporated,
Petrolift Holdings, Inc. and Cargolift Group, Inc. are not ordinary business income but
passive investment income, not being derived in pursuit of their primary purpose or
business activity which is to "to acquire and dispose of shares of stocks". Thus, any
tax imposed thereon constitutes income taxation which local government units are
clearly prohibited from levying, other than on banks and financial institutions
pursuant to the aforequoted Section 133 (a) of the LGC.

To sum it up, this Bureau expresses the following views on the herein matters
submitted for resolution:

1) The "Equity in net earnings of an investee company" reported as


"Revenues" in the Audited Financial Statements of Equasis, Inc. and
Globalift, Inc. are considered income which constitute their respective "gross
sales or receipts" subject to local business tax under Section 143(h) of the
LGC, quoted hereunder, and as implemented under the duly-enacted revenue
code of the City of Muntinlupa.

"SEC. 143. Tax on Business. The municipality may


impose taxes on the following businesses:

xxx xxx xxx

"(h) On any business, not otherwise specified in the


preceding paragraphs, which the sanggunian concerned may
deem proper to tax: Provided, however, 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." (emphasis ours)

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2) The interests and/or dividend income reported in the respective
AFS of Aquasis Incorporated, Petrolift Holdings, Inc. and Cargolift Group,
Inc., all of which are non-bank or non-financial institutions, are not subject to
LBT inasmuch as the same are considered as passive investment incomes, not
being derived in pursuit of their primary purpose or business activity of the
business entities concerned.

We hope that this will help clarify matters.

Very truly yours,

(SGD.) MA. PRESENTACION R.


MONTESA, CESO III
Executive Director

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Endnotes

1 (Popup - Popup)
* Equity interest in Petrolift, Inc.
2 (Popup - Popup)
** Globalift owns the majority shares of Equasis, Inc. The Company has not yet
commenced commercial operations as of June 30, 2008.

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