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Dividends and renewing holding companies’ LGU registrations
Des Politado-Aclan
06 Dec 2016
It is only 19 days to go before Christmas. But before the merriment of Christmas engulfs us, we should also prepare for the upcoming rush of renewing local government unit (LGU) registrations for businesses.
The Local Government Code of the Philippines provides that all local taxes, fees, and charges shall be paid on or before Jan. 20 of each year. For quarterly payments, succeeding payments must be paid not later than 20th day of the first month of the quarter. The local government unit (LGU), however, may for a justifiable reason or cause, extend the time for payment of such taxes, fees, or charges without surcharges or penalties, but only for a period not exceeding six months.
Based on prior years’ experience, there are LGUs that actually extend the deadline for payment of local taxes until the end of January or even later. Nevertheless, though payment is actually being extended, processing of the assessment for local taxes due must be made on or before Jan. 20. Thus, it is still advisable that documents and schedules required for the processing of renewal of LGU registration be prepared as early as this month.
For holding companies, it may be worthwhile to revisit if they are actually subject to local business tax based on the existing local revenue codes of their respective LGUs.
In a previous case decided by the Court of Tax Appeals (CTA) en banc, the CTA ruled that the holding company cannot be subject to local business tax on its dividend income (CTA EB CASE NO. 1093, April 13, 2016).
According to the CTA, under Section 133(a) of the Local Government Code (LGC) of the Philippines, the taxing powers of LGUs shall not extend to the levy of income tax, except on banks and other financial institutions. The LGC 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. This enumeration appears to be exclusive of other entities. Nowhere in the entirety of the definition is a holding company mentioned.
Thus, the Revised Makati Revenue Code’s provision on taxing holding companies in the same way as as banks and other financial institutions violates the prohibition under the LGC. Holdings companies cannot be taxed on their dividend income.
However, in the recent case of First Meridian Development, Inc. vs. City of Davao (CTA AC No. 159, Nov. 29, 2016), the Court ruled that a holding company, like First Meridian, can actually be considered a non-bank financial intermediary. Its act of investing in equity securities, holding of assets consisting of shares of stocks and placement of funds on a regular and recurring basis explicitly affirms that the company is a non-bank financial intermediary.
Also, First Meridian’s income came only from two sources, i.e. dividends and interest. Thus, these dividends and interests are not considered incidental to its business quest, but are the principal income of the company in the regular course of its business in line with the primary purpose of its Amended Articles of Incorporation.
Therefore, if the recent decision of the CTA will be followed, dividend income, being principal income of holding companies, may be subject to local business tax.
It may be noted that the Michigan case was decided already by the CTA en banc while First Meridian’s case was decided only by CTA. Thus, the rule on not taxing dividend income may have more weight. But it is also worthwhile to point out that the two cases had different arguments. The former attacks the validity of the ordinance taxing holding companies while the latter focused on the argument of how the company derives its income.
Given the differences in these cases, it would be prudent for holding companies to revisit relevant laws and provisions of the respective local revenue codes in taxing holding companies, together with the company’s primary purpose and current income structure.
Nevertheless, in case the holding company is actually subject to LBT, the company must then prepare already the required documents and schedules for the assessment and payment of LBT.
Generally, requirements for the assessment of local business tax include certificate of gross receipts, duly filed VAT returns, latest audited financial statements, among others. Local business tax, if any, shall then be computed based on prior year’s revenue. Thus, amount to be declared in the certificate of gross receipts/revenue must more or less be the adjusted amount of revenue during the year.
However, considering the early deadline for the assessment of local business tax, most of the companies are not yet done with the closing of their books. Most of the time, additional local business tax, due to adjustments in sales, will be settled only at a later date subject to penalties. Thus, LGUs must allow businesses to do adjustments in their local business tax payments without assessing penalties. Ideally, deadline for adjustments, if any, must be made after the audit of the financial statements is concluded.
With the many compliance requirements by various agencies of the government, it would be a relief to businesses if the deadline for payment of local taxes is reasonably moved to a later date. After all, most LGUs actually extend the payment deadline, announcement of which, though, is usually made only a day prior to Jan. 20 or even on the deadline itself.
As published in BusinessWorld, dated 6 December 2016