Bearing the burden of DST

Taxwise or Otherwise

By John Edgar Maghinay, 25 February 2016

Documentary stamp tax (DST) is one of the most overlooked taxes because normally this is just a
small percentage of a transaction unless the amount involved is quite significant. DST is imposed
on the privilege of entering into certain transactions through the execution of specific instruments or
documents, such as the sale or lease of land, issuance or transfer of shares of stock, loans or other
forms of indebtedness, and insurance premiums, among others.

The DST rate ranges from twenty centavos (P0.20) for every two hundred pesos (P200.00) up to
fifty centavos (P0.50) for every four pesos (P4.00) or sometimes a meager flat fee of as low as
P1.50. However, in the corporate world, where hundreds of millions, or even billions, of pesos are
involved in the regular conduct of business, the impact of DST can be significant. Hence, the
question as to who shall bear the payment of DST in certain transactions, becomes consequential.

While generally, either party may pay the DST, normally, it is the person that benefits from the
transaction who shoulders the DST due. Moreover, under the Tax Code, whenever one party to the
transaction enjoys exemption from paying the DST, the other party who is not exempt shall be the
one directly liable for the DST.

Take note, however, that the person who shoulders the DST cost may not necessarily be the same
person who is obliged to remit such DST to the Bureau of Internal Revenue (BIR). In the case of
banks for example, under Revenue Regulations No. 9-2000, they are obligated to collect and remit
the DST to the BIR whenever they are the counterparty to a transaction.

During tax investigations, however, there is a tendency for some revenue examiners to conduct
assessments hurriedly. For DST, the current favorite item that revenue examiners assess this tax
on would be loans and advances. Sometimes, the computation is done so hurriedly that they even
base their calculations on the year-end balance of the loan or advances just to come up with an
amount of exposure. It is now a relief that the Court of Tax Appeals (CTA) realized the erroneous
practice or procedures that are sometimes employed during a tax investigation.

I am referring to CTA Case No. 8459, promulgated on Nov. 23, 2015. This is a case between the
BIR and a corporate taxpayer who is being assessed for various deficiency taxes, including DST.

In this case, the taxpayer was assessed for deficiency DST on its short-term borrowings and
advances to various parties. The short-term borrowings were obtained from various local banks.
The taxpayer contested the assessment on the ground that the DST was already deducted from the
proceeds of such loans.

The CTA ruled that the taxpayer is not liable to pay the DST on its short-term borrowings. While the
rule provides that either party to the transaction shall pay the DST to the BIR, in transactions where
one of the parties is a bank, the remittance of the DST shall be the responsibility of the bank.

Actually, the more positive implication of the aforementioned CTA ruling is that the court did not
require the taxpayer to show proof of payment of the DST on the transaction. This means that the
taxpayer did not have to go to any length of asking its banks to provide proof that DST was indeed
already paid on its borrowings. The fact that the bank is responsible for the remittance of the DST in
such transactions was sufficient for the court to dismiss the DST assessment.

This is also a very welcome development for taxpayers, especially during a tax investigation. Where
the law or contract clearly shows that the party being investigated by the BIR is not responsible for
the DST, the BIR should not further insist on getting proof of payment, much less assess deficiency
DST if the party is not able to produce such proof. If the wrongful practices of some revenue
examiners are tolerated, taxpayers would inequitably suffer from the burden of double taxation.

With regard to the DST assessment on the taxpayer’s advances to various parties, the CTA ruled
that it should also be dismissed for being erroneous and for lack of factual basis.

The DST assessment was computed based on the year-end balances of the various advance
accounts lifted from the taxpayer’s audited financial statements. The amounts do not actually
represent new transactions entered into by the taxpayer during the year being assessed. Since the
assessment was a mere result of the revenue examiner’s arbitrary computation without factual
basis, the court also dismissed the issue.

Finally, while I focused mainly on the DST assessment, I would like to close on a side note to the
aforementioned case. I think this might also be helpful to other taxpayers who are currently being
investigated by the BIR.The taxpayer in that case was, in fact, being assessed for more than P1
billion for various deficiency taxes, inclusive of interest and penalties. However, most of the issues
were dismissed primarily due to prescription and invalid waivers.

The court took note of the fact that some of the taxpayer’s tax returns were amended. However, in
determining the basis for counting the three-year prescriptive period for the statute of limitations,
the court still used the filing dates of the original tax returns and not the amended returns, even
though the general rule is that the later date should apply.
Determining the statute of limitations is critical when evaluating whether an assessment is timely
issued, and therefore valid. How it is affected by amended returns is another topic which will be
discussed in next week’s article under this column.

The views or opinions expressed in this article are solely those of the author and do not necessarily
represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.