March 17, 2011

BUREAU OF LOCAL GOVERNMENT FINANCE OPINION

1st Indorsement
Respectfully returned to the ICO-Regional Director for Local Government
Finance, Department of Finance, Cordillera Administrative Region (CAR), his letter
dated March 23, 2009, relative to the letter of Mr. Laurence C. Bayongan, Municipal
Administrator, Tabuk, Kalinga, seeking clarification specifically on the following
issues:
1.

Whether the definitions of the terms Accumulated Reserves and

Undivided Net Savings cited under BIR Revenue Regulation
20-2001 are also applicable to local taxation; and

2.

Whether the "sales/services" rendered to non-members by the

cooperative is based on gross receipts.

At the outset, it is informed that this Bureau was looking forward to the
approval of Republic Act No. 9520, otherwise known as the "Cooperative Code of
2008", the law amending certain provisions of R.A. No. 6938, the Cooperative Code
of the Philippines, causing the delay in responding to the query raised herein.
TDCaSE

Notably however, neither R.A. No. 9520 nor R.A. No. 6938, as amended
provide for the definitions of the terms "Accumulated Reserves" and "Undivided Net
Savings" and therefore, this Bureau had to rely solely on the definitions provided
under Revenue Regulations No. 20-2001 of the Bureau of Internal Revenue (BIR).
Query No. 1
Section 2 of BIR Revenue Regulations No. 20-2001 dated November 12, 2001
defines Undivided Net Savings and Accumulated Reserves as follows:
"SEC. 2.

DEFINITIONS
"xxx

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xxx

xxx

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"(h)

Undivided Net Savings refers to the amount arising

from net surplus or any portion thereof which the Board
of Directors of the General Assembly of the cooperative
decides not to divide or make available to members in the
form of interest on share capital, patronage refund,
reserves refund, education and training fund, optional fund
or any other statutory reserve; this also includes the
amount arising from the net surplus or any portion thereof
which the cooperative is unable to divide because the
General Assembly of the cooperative has not been
convened for more than two (2) years:

"(i)

Accumulated Reserves refers to the amount of accrued

sum of money annually retained and deducted from the
net surplus which is not intended for allocation or
distribution to the members, usually deposited in the bank
for the protection of and stability of the cooperative
commonly referred to as the General Reserve Fund."

For purposes of local taxation, the terms Undivided Net Savings and
Accumulated Reserves defined respectively under RR No. 20-2001 of the Bureau of
Internal Revenue abovequoted are not applicable to local impositions, e.g., business
taxes on cooperatives, for the simple reason that local business taxation is basically
based on "gross sales or receipts for the preceding calendar" (Section 143, LGC).
IECcaA

In the particular case it may be noted from the abovequoted definitions that
Undivided Net Savings and Accumulated Reserves are either amounts arising from or
retained and deducted from the Net Surplus, which is the profit remaining after
subtracting the operating expenses, taxes, interest, insurance, and dividends.
In contrast gross sales or receipt applicable to local business tax (LBT), refers
to the "total amount of money or its equivalent representing the contract price,
compensation or service fee, including the amount charged or materials supplied with
the services and deposits or advance payments actually or constructively received
during the taxable" *(1) but excludes discounts if determinable at the time of sales,
sales return, excise tax, and value-added tax (VAT)."
In reply to the first query, the Undivided Net Savings and Accumulated
Reserves are therefore not applicable in computing LBT even if applied to transaction
by cooperatives to non-member clientele for reason already mentioned above.
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On Query No. 2
In answer to the second query, and as already mentioned above, local business
tax is basically computed based on "gross sales or receipts".
However, in dealing with this particular issue, the term "sales or services"
mentioned under Article 62 (3) and Section 61 (3) of R.A. No. 6938 and R.A. No.
9520, the law amending certain provisions of the former, has to be applied with
caution as regards LBT. In fine, the term "sales or services" rendered by a producer,
marketing or service cooperative to non-members has to be determined whether
applicable to LBT imposition.
AIaHES

At this point, it must be stressed that the provisions of Article 62 (3) of R.A.
No. 6938 and Section 61 (3) of R.A. No. 9520, speak of sales or services that are
subject to the applicable percentage tax, a kind of tax applicable to income taxation
under the NIRC but not to LBT.
In this regard, this Bureau is of the view that the transactions "sales or
services" rendered by said cooperative to non-members are beyond the taxing
authority of local government units (LGUs), in this case, the Municipality (now City)
of Tabuk.
Another issue that needs to be clarified is the alleged "business permit fee" in
the amount of Php93,578.61 being imposed by the Municipality of Tabuk on
TAMPCO for its Undivided Net Savings and Accumulated Reserves.
From a careful scrutiny of the attached copy of the "ANNUAL QUARTERLY
BUSINESS TAX RETURNS", it is very clear that out of P93,578.61, which the
Municipal Government of Tabuk is requiring TAMPCO to pay, P91,046.61 refers to
Business Tax and only P2,532.00 pertains to regulatory fees and other charges,
enumerated as follows:
Particular
Mayor's Permit Fee
Sanitary Bus. Fee
Garbage Fee
Fire Inspection fee
Fire Code Fee
Annual Inspection Fee
Cost of Form
Business Plate 3 Stickers
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Amount of Fee
P1,000.00
85.00
900.00
85.00
207.00
200.00
10.00
45.00
Philippine Taxation Encyclopedia 2015

Other Fee

P2,532.00
=======

Total

In this connection, this Bureau is of the view that the fees imposed by the
Municipality of Tabuk, Province of Kalinga are without legal basis and in direct
violation of Section 133 (n) of the LGC, which provides:
caTESD

"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:
xxx

xxx

xxx

(n) Taxes, fees, or charges, on Countryside and Barangay Business

Enterprises and cooperatives duly registered under R.A. No. 6810 and Republic
Act Numbered Sixty-nine hundred thirty-eight (R.A. No. 6938) otherwise known
as the "Cooperative Code of the Philippines" respectively;

It bears emphasis however, that the foregoing views are expressed in line with
the provisions of Art. 287 of the Implementing Rules and Regulations (IRR)
implementing the LGC and not a declaration of the nullity or illegality of the
duly-enacted local tax ordinance of the Municipality of Tabuk, a matter which is
within the jurisdiction of the Secretary of Justice or a court of competent jurisdiction.
Be guided accordingly.

(SGD.) MA. PRESENTACION R.

MONTESA, CESO III
Executive Director

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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.
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
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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
companies.
ATCEIc

The claim apparently implies that these holding companies although they
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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
Company

Year

Equasis
Incorporated

2010

Nature of Income
1) Equity in net
earnings of an
investee
company *
2) Interest Income

Globalift, Inc.

20092010

1) Equity in net
earnings of an
investee
company **

Petrolift
Holdings, Inc.

2008

Interest Income

Cargolift
Group, Inc.

2009

1) Dividend Income
2) Interest Income

Amount

Totals

P36,997,597

573,363

P37,570,960

P35,470,805

P35,470,805
(P31,034)

(P31,034)

P3,634,503
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.
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
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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
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
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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)
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
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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)
*
Note from the Publisher: Copied verbatim from the official copy. The phrase "during
the taxable" should read as "during the taxable quarter".

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