LOCAL

TAXATION TAX
Michigan Holdings v. City Treasurer of other financial institutions. Section 131 (e) defines
“banks and other financial institutions,” which excludes
Makati
holding companies. Section 3.A.02(h) of the Revised
CTA EB No. 1093|June 17, 2015| RINGPIS-LIBAN, J.:
Local Taxation Makati Revenue Code imposes an LBT on the dividend
Local business tax on dividends received by Holding income of banks and other financial institutions.
companies Section 3.A.02(p), however, makes holding
companies, such as MHI, liable for the same
FACTS business tax. Section 3.A.02(p) of the Revised
Respondent City Treasurer of Makati assessed Makati Revenue Code violates the limit set by
Petitioner Michigan Holdings, Inc. (MHI) for alleged Section 133(a) of the LGC, which prohibits the
deficiency local business tax (LBT) on dividend income imposition of income tax except when levied on
earned for taxable year 2006. MHI protested the banks and other financial institutions.
deficiency LBT assessment, arguing that dividend
In addition to that, Section 27 (D) of the National
income is subject to income tax hence exempt from LBT
Internal Revenue Code deals with rates of tax on certain
under Section 133(a) of the Local Government Code
passive incomes. Subsection (4) thereof, covering
(LGC). As the City Treasurer did not act on its protest
intercorporate dividends, states that "Dividends
within the 60-day period, MHI filed a complaint before
received by a domestic corporation from another
the Makati Regional Trial Court (RTC) for the
cancellation of the LBT assessment. The RTC dismissed domestic corporation shall not be subject to tax" -
meaning corporate income tax. Dividends are instead
MHI’s appeal on the ground that it was directed at the
subject, under Section 27(D)(1), to "a final tax at the
validity of Section 3A.02(p) of the Revised Makati
Revenue Code, which should have been questioned rate of twenty percent (20%)
before the Secretary of Justice within 30 days from "Under Section 27(D)(4) of the Tax Code, dividends
effectivity of the said ordinance as prescribed by received by a domestic corporation from another
Section 187 of the LGC. MHI filed a Petition for Review corporation are not subject to the corporate income tax.
with the CTA. The CTA Second Division upheld the Such intracorporate dividends are some of the passive
ruling of the RTC. MHI elevated the case to the CTA En incomes that are subject to the 20% final tax, just like
Banc. interest on bank deposits. Intracorporate dividends,
being already subject to the final tax on income, no

ISSUE & HELD: longer form part of the bank's gross income under
Section 32 of the Tax Code for purposes of the
(1) Is MHI prohibited from questioning the legality corporate income tax.”
of the basis oft he LBT assessments?
Thus, Section 3A.02(p) in relation to Section 3A.02(h),

both of the Revised Makati Revenue Code, likewise
No. Section 195 of the LGC does not limit the grounds violates Section 27(D)(4) of the National Internal
for contesting an LBT assessment. Thus, an aggrieved Revenue Code. Section 3A.02(p) of the Revised
taxpayer is not barred from challenging the validity of a Makati Revenue Code is thus an ultra vires exercise
tax ordinance or a provision thereof upon which the of local taxing power, and cannot be given effect
assessment is based. There is nothing in Section 195 of without violating the principle that an ordinance
the LGC that requires a taxpayer who relies on this can neither amend nor repeal but must conform to
ground to first assail the validity of the ordinance a statute.
before the Secretary of Justice. Section 195 as a
taxpayer’s remedy against an assessment is separate,
distinct, and independent from Section 187 that
prescribes the procedure for contesting the
constitutionality of a tax ordinance.

(2) Can the Makati City Treasurer levy LBT on MHI’s

dividend income? (SYLLABUS TOPIC)

No. Makati City has no authority to impose LBT on the
dividend income of MHI. Section 133(a) of the LGC
expressly provides that the taxing powers of provinces,
cities, municipalities, and barangays shall not extend to
the levy of income tax, except when levied on banks and