CHINA BANKING CORPORATION, Petitioner,
As it did not at that time contemplate the
vs.
C O U RT O F A P P E A L S , C O U RT O F TA X A P P E A L S , a n d
COMMISSIONER OF INTERNAL REVENUE, Respondents.
FACTS:
CBC is a universal banking corporation organized and existing under Philippine
law. On 20 July 1994, CBC paid ₱12,354,933.00 as gross receipts tax on its
income from interests on loan investments, commissions, services, collection
charges, foreign exchange profits and other operating earnings during the
second quarter of 1994.
On 30 January 1996, the Court of Tax Appeals in Asian Bank Corporation v.
Commissioner of Internal Revenue4 ruled that the 20% final withholding tax
on a bank’s passive interest income does not form part of its taxable gross
receipts.5
On 19 July 1996, CBC filed with the Commissioner of Internal Revenue
("Commissioner") a formal claim for tax refund or credit of ₱1,140,623.82
from the ₱12,354,933.00 gross receipts tax that CBC paid for the second
quarter of 1994. To ensure that it filed its claim within the two-year prescriptive
period,6 CBC also filed on the same day a petition for review with the Court of
Tax Appeals. Citing Asian Bank, CBC argued that it was not liable for the
gross receipts tax - amounting to ₱1,140,623.82 - on the sums withheld by the
Bangko Sentral ng Pilipinas as final withholding tax on CBC’s passive interest
income7 in 1994.
Disputing CBC’s claim, the Commissioner asserted that CBC paid the gross
receipts tax pursuant to Section 119 (now Section 121) of the Tax Code and
pertinent BIR regulations. The Commissioner argued that the final withholding
tax on a bank’s interest income forms part of its gross receipts in computing the
gross receipts tax.8 The Commissioner contended that the term "gross receipts"
means the entire income or receipt, without any deduction.
CTA: ruled in favor of CBC and held that the 20% final withholding tax on
interest income does not form part of CBC’s taxable gross receipts. The tax
court based its decision mainly on its earlier ruling in Asian Bank9 which the tax
court quoted extensively, as follows:
That petitioner is liable for gross receipts tax is not disputed. The question that
is now left for our determination is the basis of the said tax which issue has
already been settled in the case cited by petitioner, Asian Bank Corporation
vs. Commissioner of Internal Revenue, supra. In said case, this Court held:
We agree with the petitioner that the 20% final withholding tax on its interest
income should not form part of its taxable gross receipts.
Revenue Regulations No. 12-80 dated Nov. 7, 1980 on Taxation of Certain
Income Derived from Banking Activities provides that the rates of tax to be
imposed on the gross receipts of such financial institution shall be based on all
items on income actually received, thus:
SEC. 4. xxx
(e) Gross receipts tax on banks, non-bank financial intermediaries, financing
companies, and other non-bank financial intermediaries not performing quasi-
banking activities. - The rates of taxes to be imposed on the gross receipts of
such financial institutions shall be based on all items of income actually
received. Mere accrual shall not be considered, but once payment is received on
such accrual or in cases of prepayment, then the amount actually received shall
be included in the tax base of such financial institutions, as provided hereunder.
From the foregoing, it is but logical to infer that the final tax, not having been
received by the petitioner but instead went to the coffers of the government,
should no longer form part of its gross receipts for the purpose of computing
the GRT. This conclusion is in accord with the interpretation of the Supreme
Court in the case entitled Collector of Internal Revenue vs. Manila Jockey
Club, 108 Phil. 821, as quoted by this Court in disposing of a similar issue in
the case entitled Compania Maritima vs. Acting Commissioner of Internal
Revenue, CTA Case No. 1426 dated November 14, 1966, thus:
In the second place, the highest tribunal of the land interpreted the term "gross
receipts" to mean all receipts of a taxpayer excluding those which have been
especially earmarked by law or regulation for the government or some person
other than the taxpayer. Thus, it was held:
xxx xx. The Government could not have meant to tax as gross receipts of the
Manila Jockey Club the 1/2% which it directs same Club to turn over to the
Board of Races. The latter being a Government institution, there would be
double taxation, which should be avoided unless the statute admits of no other
interpretation. In the same manner, the Government could not have intended to
consider as gross receipts the portion of the funds which it directed the Club to
give, or know the Club would give, to winning horses and Jockeys – admitted
5%. It is true that the law says that out of the total wager funds 12 1/2% shall be
set aside as the ‘commission’ of the track owners but the law itself takes official
notice, and virtually approves or directs payment of the portion that goes to
owners of horses as prizes and bonuses of jockeys, which portion is admittedly
5% out of the 12 1/2% commission.
application of ‘gross receipts’ revenue principle, the law in making a
distribution of the total wager funds, took no trouble of separating one item
from the other; and for convenience, grouped three items under one common
denomination.
Needless to say, gross receipts of the proprietor of the amusement place should
not include any money which although delivered to the amusement place has
been especially earmarked by law or regulation for some person other than the
proprietor."
It is to be noted that, under Section 260 of the Tax Code, a racetrack is subject
to an amusement tax of 20% of its gross receipts and the term ‘gross receipts’
embraces all the receipts of the proprietor, lessee, or operator of the amusement
place." Notwithstanding the broad and all-embracing definition of the term
"gross receipts" found in our amusement tax law, our Supreme Court did not
adopt a literal interpretation of the said term in the case of the Manila Jockey
Club, Inc., x x x.10
CA: The 14th Division of the Court of Appeals, in its Decision of 15 November
200013 in CA-G.R. SP No. 50839, affirmed the tax court’s ruling on the ground
that substantial evidence supported the factual findings of the tax court. The
13th Division of the Court of Appeals, in its Decision of 16 October 200014 in
CA-G.R. SP No. 50790, also affirmed the tax court’s ruling on the ground that
the 20% final withholding tax does not form part of CBC’s taxable gross
receipts.
The 14th Division of the appellate court denied CBC’s subsequent motion for
reconsideration in its Resolution of 8 January 2001.15 Likewise, the 13th
Division of the appellate court denied the Commissioner’s motion for
reconsideration in its Resolution of 25 April 2001.16
On 6 February 2001, CBC filed with the Court a petition for review assailing
the decision of the Court of Appeals in CA-G.R. SP No. 50839, and prayed that
the Court render a decision awarding CBC’s full claim for the refund of
₱1,140,623.82. CBC claimed that since it did not actually receive the final
withholding tax, the same should not form part of its taxable gross receipts.
CBC also asserted that it had presented sufficient evidence to prove its
overpayment of the gross receipts tax, and that it had a right to a refund of the
full ₱1,140,623.82 overpayment.
ISSUE:
1. Whether the 20% final withholding tax on interest income should form part
of CBC’s gross receipts in computing the gross receipts tax on banks; YES
2. Whether CBC has established by sufficient evidence its right to claim the full
refund of ₱1,140,623.82 representing alleged overpayment of the gross receipts
tax.
COURT:
(1) We rule that the amount of interest income withheld in payment of the
20% final withholding tax forms part of CBC’s gross receipts in computing
the gross receipts tax on banks.
Section 12122 of the Tax Code provides as follows:
Sec. 121. Tax on Banks and Non-bank Financial Intermediaries. – There shall
be collected a tax on gross receipts derived from sources within the Philippines
by all banks and non-bank financial intermediaries in accordance with the
following schedule:
(a) On interest, commissions and discounts from lending activities as well as
income from financial leasing, on the basis of remaining maturities on
instruments from which such receipts are derived.
Short-term maturity –
(not in excess of two [2] years)…..………… 5%
Medium-term maturity –
(over two [2] years but not
exceeding four [4] years).………………… 3%
Long-term maturity –
(i) over four (4) years but not exceeding
seven (7) years ..……………………… 1%
(ii) over seven (7) years) …………….…… 0%
(b) On dividends …………………………………. 0%
(c) On royalties, rentals of property, real or personal, profits from exchange and
all other items treated as gross income under Section 32 of this Code
……………………..……………………………..…. 5%;
Provided, however, That in case the maturity period referred to in paragraph (a)
is shortened thru pretermination, then the maturity period shall be reckoned to
end as of the date of pretermination for purposes of classifying the transaction
as short, medium or long term and the correct rate of tax shall be applied
accordingly.
Nothing in this Code shall preclude the Commissioner from imposing the same
tax herein provided on persons performing similar banking activities.
The gross receipts tax on banks was first imposed on 1 October 1946 by
Republic Act No. 39 ("RA No. 39") which amended Section 24923 of the Tax
Code of 1939. Interest income of banks, without any deduction, formed part of
their taxable gross receipts. From October 1946 to June 1977, there was no
withholding tax on interest income from bank deposits.
On 3 June 1977, Presidential Decree No. 1156 required the withholding at
source of a 15% tax on interest on bank deposits. This tax was a creditable, not
a final withholding tax. Despite the withholding of the 15% tax, the entire
interest income, without any deduction, formed part of the bank’s taxable gross
receipts. On 17 September 1980, Presidential Decree No. 1739 made the
withholding tax on interest a final tax at the rate of 15% on savings account,
and 20% on time deposits.24 Still, from 1980 until the Court of Tax Appeals
decision in Asian Bank on 30 January 1996, banks included the entire interest
income, without any deduction, in their taxable gross receipts.
In Asian Bank, the Court of Tax Appeals held that the final withholding tax is
not part of the bank’s taxable gross receipts. The tax court anchored its ruling
on Section 4(e) of Revenue Regulations No. 12-80,25 which stated that the
gross receipts "shall be based on all items actually received" by the bank. The
tax court ruled that the bank does not actually receive the final withholding tax.
As authority, the tax court cited Collector of Internal Revenue v. Manila Jockey
Club,26 which held that "gross receipts of the proprietor should not include any
money which although delivered to the amusement place has been especially
earmarked by law or regulation for some person other than the proprietor." In
effect, the tax court considered Section 4(e) of Revenue Regulations No. 12-80
as earmarking by regulation the final withholding tax in favor of the
government. This earmarking, according to the tax court, prevented the
final withholding tax from being "actually received" by the bank. The tax
court adopted the Asian Bank ruling in succeeding cases involving the same
issue.27
Subsequently, the Court of Tax Appeals reversed its ruling in Asian Bank. In
Far East Bank & Trust Co. v. Commissioner 28 and Standard Chartered Bank v.
Commissioner,29 both promulgated on 16 November 2001, the tax court ruled
that the final withholding tax forms part of the bank’s gross receipts in
computing the gross receipts tax. The tax court held that Section 4(e) of
Revenue Regulations No. 12-80 did not prescribe the computation of the gross
receipts but merely authorized "the determination of the amount of gross
receipts on the basis of the method of accounting being used by the taxpayer."
The tax court also held in Far East Bank and Standard Chartered Bank that the
exclusion of the final withholding tax from gross receipts operates as a tax
exemption which the law must expressly grant. No law provides for such
exemption. In addition, the tax court pointed out that Section 7(c) of Revenue
Regulations No. 17-84 had already superseded Section 4(e) of Revenue
Regulations No. 12-80. Section 7(c) of Revenue Regulations No. 17-84, the
existing applicable regulation, states:
Section 7. Nature and Treatment of Interest on Deposits and Yield on Deposit
Substitutes -
xxx
(c) If the recipient of the above-mentioned items of income are financial
institutions, the same shall be included as part of the tax base upon which the
gross receipts tax is imposed. (Emphasis supplied)
The items of income referred to in Section 7(c) are interest on bank deposits
and yield from deposit substitutes.
from deposit substitutes.
There are two related legal concepts that come into play in the resolution of the
first issue raised in the instant case. First is the meaning of the term "gross
receipts." Second is the determination of the circumstance when interest
income becomes part of gross receipts for tax purposes.
The Tax Code does not define the term "gross receipts" for purposes of the
gross receipts tax on banks. Since 1 October 1946 when RA No. 39 first
imposed the gross receipts tax on banks until the present, there has been no
statutory definition of the term "gross receipts." Absent a statutory definition,
the BIR has applied the term in its plain and ordinary meaning.
On 12 July 1952, four years after RA No. 39 imposed the gross receipts tax on
banks, the defunct Board of Tax Appeals30 had occasion to interpret the term
"gross receipts." In National City Bank v. Collector of Internal Revenue,31 the
bank contended that the amortized premium costs in buying U.S. Government
bonds should be deducted from the interest income from the bonds in
computing the bank’s gross receipts tax. On the other hand, the Collector of
Internal Revenue argued that "gross receipts should be interpreted as the whole
amount received as interests without deductions, otherwise, if deductions are
made from gross receipts, it will be considered as ‘net’ receipts." The Board of
Tax Appeals agreed with the Collector, ruling that –
Conceding that the premiums amortized form part of the capital invested by the
petitioner, to deduct same from the accrued interests of the bonds would result
in the realization of the net interests and not the gross receipts on the interests
earned by the petitioner in its investments as provided for in Section 249 of the
Tax Code. The denial, therefore, of the respondent in allowing the deduction of
the amortized premium in the amount of ₱239,678.41 from the accrued interest
of the bonds, is in order.
The National City Bank ruling remained unchallenged from 1952 until January
1996 when the Court of Tax Appeals rendered its decision in Asian Bank. In
November 2001, however, the same tax court, citing National City Bank among
other authorities, reversed Asian Bank in the twin cases of Far East Bank and
Standard Chartered Bank.
As commonly understood, the term "gross receipts" means the entire
receipts without any deduction. Deducting any amount from the gross
receipts changes the result, and the meaning, to net receipts. Any deduction
from gross receipts is inconsistent with a law that mandates a tax on gross
receipts, unless the law itself makes an exception.
Likewise, in Laclede Gas Co. v. City of St. Louis,33 the Supreme Court of
Missouri held:
The word ‘gross’ appearing in the term ‘gross receipts,’ as used in the
ordinance, must have been and was there used as the direct antithesis of the
word ‘net.’ In its usual and ordinary meaning ‘gross receipts’ of a business is
the whole and entire amount of the receipts without deduction. x x x On the
contrary ‘net receipts’ usually are the receipts which remain after
deductions are made from the gross amount thereof of the expenses and
cost of doing business, including fixed charges and depreciation. Gross
receipts become net receipts after certain proper deductions are made from the
gross. And in the use of the words ‘gross receipts,’ the instant ordinance, of
course, precluded plaintiff from first deducting its costs and expenses of doing
business, etc., in arriving at the higher base figure upon which it must pay the
5% tax under this ordinance.
Absent a statutory definition, the term "gross receipts" is understood in its plain
and ordinary meaning. Words in a statute are taken in their usual and familiar
signification, with due regard to their general and popular use.
Under Revenue Regulations Nos. 12-80 and 17-84, as well as in several
numbered rulings,40 the BIR has consistently ruled that the term "gross receipts"
does not admit of any deduction. This interpretation has remained unchanged
throughout the various re-enactments of the present Section 121 of the Tax
Code. The only conclusion that can be drawn is that the legislature has adopted
the BIR’s interpretation, following the principle of legislative approval by re-
enactment.
However, for the amusement tax, which is also a business tax under the same
Title V, the Tax Code makes a special definition of the term "gross receipts."
The term "gross receipts" for amusement tax purposes "embraces all receipts of
the proprietor, lessee or operator of the amusement place."43 The Tax Code
further adds that "[s]aid gross receipts also include income from television,
radio and motion picture rights, if any."44 This definition merely confirms that
the term "gross receipts" embraces the entire receipts without any deduction or
exclusion, as the term is generally and commonly understood.
Even without a statutory definition, the term "gross receipts" will have to
exclude any deduction of the withholding tax. Otherwise, other items of
income in Section 121 would also be subject to deductions despite the
absence of a specific provision of law excluding any portion of such items
of income from taxable gross receipts. Section 121 refers not only to
interest income, but also to "dividends, x x x rentals of property, real or
personal, profits from exchange and all other items treated as gross income
under Section 32 of this Code."
Under Revenue Regulations No. 13-78,45 rental income received by a bank is
subject to a creditable withholding tax. Under Section 121, such rental income,
without any deduction of the withholding tax, forms part of the bank’s taxable
gross receipts. The amount of the creditable withholding tax is indubitably part
of the bank’s rental income. The creditable withholding tax is merely an
advance payment by the bank of its tax on the rental income. The amount of the
withholding tax comes from the bank’s rental income and its payment
extinguishes the bank’s tax liability. The amount deducted by the payor-lessee
and remitted to the government, representing the creditable withholding tax, is
money the bank owns that is used to pay the bank’s tax liability. The amount
deducted and remitted as creditable withholding tax patently comes from the
bank’s rental income, and correctly forms part of the bank’s gross receipts.
In the same manner, the amount of the final withholding tax on interest
income should not be deducted from the bank’s interest income for
purposes of the gross receipts tax. The final withholding tax on interest,
like the creditable withholding tax on rentals, comes from the bank’s
income and is money the bank owns that is used to pay the bank’s tax
liability. The final withholding tax and the creditable withholding tax
constitute payment by the bank to extinguish a tax obligation to the
government. The bank can only pay with money it owns, or with money it
is authorized to spend. In either case, such money comes from the bank’s
revenues or receipts, and certainly not from the government’s coffers.
CBC’s argument will create tax exemptions where none exist. If the amount of
the final withholding tax is excluded from taxable gross receipts, then the
amount of the creditable withholding tax should also be excluded from taxable
gross receipts. For that matter, any withholding tax should be excluded from
taxable gross receipts because such withholding would qualify as "earmarking
by regulation." Under Section 57(B) of the Tax Code, the Commissioner, with
the approval of the Secretary of Finance, may by regulation impose a
withholding tax on other items of income to facilitate the collection of the
income tax. Every time the Commissioner expands the withholding tax, he will
create tax exemptions where the law provides for none. Obviously, the Court
cannot allow this.
Under Section 27(D)(4) of the Tax Code, dividends received by a domestic
corporation from another corporation are not subject to the corporate income
tax. Such intracorporate dividends are some of the passive incomes that are
subject to the 20% final tax, just like interest on bank deposits. Intracorporate
dividends, being already subject to the final tax on income, no longer form part
of the bank’s gross income under Section 32 of the Tax Code for purposes of
the corporate income tax. However, Section 121 expressly states that dividends
shall form part of the bank’s gross receipts for purposes of the gross receipts tax
on banks. This is the same treatment given to the bank’s interest income that is
subject to the final withholding tax. Such interest income, being already
subject to the final tax, no longer forms part of the bank’s gross income for
purposes of the corporate income tax. Section 121, however, expressly
includes such interest income as part of the bank’s gross receipts for
purposes of the gross receipts tax.
Whether an item of income is excluded from gross income or is subject to the
final withholding tax has no bearing on its inclusion in gross receipts if Section
121 expressly includes such income as part of gross receipts. As held in
Commonwealth of Pennsylvania, "[t]he exemption of dividends and interest
from taxation, through their exclusion from net income to be allocated, does not
also exclude those items from the gross receipts from business activity of the
corporation."46
There is a policy objective why no deductions, exemptions or exclusions are
normally allowed in a gross receipts tax. The gross receipts tax, as opposed
to the income tax, was devised to maintain simplicity in tax collection and
to assure a steady source of state revenue even during periods of economic
slowdown.47 Such a policy frowns upon erosion of the tax base. Deductions,
exemptions or exclusions complicate the tax system and lessen the tax
collection. By its nature, a gross receipts tax applies to the entire receipts
without any deduction, exemption or exclusion, unless the law clearly
provides otherwise.
CBC cites Collector of Internal Revenue v. Manila Jockey Club48 as authority
that the final withholding tax on interest income does not form part of a bank’s
gross receipts because the final tax is "earmarked by regulation" for the
government. CBC’s reliance on the Manila Jockey Club is misplaced. In this
case the Court stated that Republic Act No. 309 and Executive Order No. 320
apportioned the total amount of the bets in horse races.
Manila Jockey Club does not support CBC’s contention but rather the
Commissioner’s position. The Court ruled in Manila Jockey Club that receipts
not owned by the Manila Jockey Club but merely held by it in trust did not
form part of Manila Jockey Club’s gross receipts. Conversely, receipts owned
by the Manila Jockey Club would form part of its gross receipts.
In the instant case, CBC owns the interest income which is the source of
payment of the final withholding tax. The government subsequently becomes
the owner of the money constituting the final tax when CBC pays the final
withholding tax to extinguish its obligation to the government. This is the
consideration for the transfer of ownership of the money from CBC to the
government. Thus, the amount constituting the final tax, being originally owned
by CBC as part of its interest income, should form part of its taxable gross
receipts.
Unless otherwise provided by law, ownership is essential in determining
whether interest income forms part of taxable gross receipts. Ownership is the
circumstance that makes interest income part of the taxable gross receipts of the
taxpayer. When the taxpayer acquires ownership of money representing
interest, the money constitutes income or receipt of the taxpayer.
In contrast, the trustee or agent does not own the money received in trust and
such money does not constitute income or receipt for which the trustee or agent
is taxable. This is a fundamental concept in taxation. Thus, funds received by a
money remittance agency for transfer and delivery to the beneficiary do not
constitute income or gross receipts of the money remittance agency. Similarly, a
travel agency that collects ticket fares for an airline does not include the ticket
fare in its gross income or receipts. In these cases, the money remittance agency
or travel agency does not acquire ownership of the funds received.
Moreover, when Section 121 of the Tax Code includes "interest" as part of
gross receipts, it refers to the entire interest earned and owned by the bank
without any deduction. "Interest" means the gross amount paid by the borrower
to the lender as consideration for the use of the lender’s money. Section 2(h) of
Revenue Regulations No. 12-80, now Section 2(i) of Revenue Regulations No.
17-84, defines the term "interest" as "the amount which a depository bank
(borrower) may pay on savings and time deposit in accordance with rates
authorized by the Central Bank of the Philippines." This definition does not
allow any deduction. The entire interest paid by the depository bank, without
any deduction, is what forms part of the lending bank’s gross receipts.
To illustrate, assume that the gross amount of the interest income is ₱100. The
lending bank owns this entire ₱100 since this is the amount the depository bank
pays the lending bank for use of the lender’s money. In its books the depository
bank records an interest expense of ₱100 and claims a deduction for interest
expense of ₱100. The 20% final withholding tax52 on this interest income is
₱20, which the law requires the depository bank to withhold and remit directly
to the government. The depository bank withholds the final tax in trust for the
government which then becomes the owner of the ₱20. The final tax is the legal
liability of the lending bank as recipient of the interest income. The payment of
the ₱20 final tax extinguishes the tax liability of the lending bank. The interest
income that the depository bank turns over physically to the lending bank is
₱80, the net receipt after deducting the ₱20 final tax. Still, the interest income
that forms part of the lending bank’s gross receipts for purposes of the gross
receipts tax is ₱100 because the total amount earned by the lending bank from
its passive investment is ₱100, not ₱80.
Stated differently, the lending bank paid ₱20 as final tax which is 20% of the
interest income it received. Logically, the lending bank’s interest income is
₱100 to arrive at a ₱20 final withholding tax. Since what the law includes in
gross receipts is the interest income, then it is ₱100 and not ₱80 which forms
part of the lending bank’s gross receipts. If the lending bank’s interest income is
only ₱80, then its 20% final withholding tax should only be ₱16.
CBC also relies on the Tax Court’s ruling in Asian Bank that Section 4(e) of
Revenue Regulations No. 12-80 authorizes the exclusion of the final tax from
the bank’s taxable gross receipts. Section 4(e) provides that:
Sec. 4. x x x
(e) Gross receipts tax on banks, non-bank financial intermediaries, financing
companies, and other non-bank financial intermediaries not performing quasi-
banking functions. - The rates of taxes to be imposed on the gross receipts of
such financial institutions shall be based on all items of income actually
received. Mere accrual shall not be considered, but once payment is received on
such accrual or in cases of prepayment, then the amount actually received shall
be included in the tax base of such financial institutions, as provided hereunder:
x x x. (Emphasis supplied by Tax Court)
Section 4(e) states that the gross receipts "shall be based on all items of income
actually received." The tax court in Asian Bank concluded that "it is but logical
to infer that the final tax, not having been received by petitioner but instead
went to the coffers of the government, should no longer form part of its gross
receipts for the purpose of computing the GRT."
The Tax Court erred glaringly in interpreting Section 4(e) of Revenue
Regulations No. 12-80. Income may be taxable either at the time of its actual
receipt or its accrual, depending on the accounting method of the taxpayer.
Section 4(e) merely provides for an exception to the rule, making interest
income taxable for gross receipts tax purposes only upon actual receipt. Interest
is accrued, and not actually received, when the interest is due and demandable
but the borrower has not actually paid and remitted the interest, whether
physically or constructively. Section 4(e) does not exclude accrued interest
income from gross receipts but merely postpones its inclusion until actual
payment of the interest to the lending bank. This is clear when Section 4(e)
states that "[m]ere accrual shall not be considered, but once payment is received
on such accrual or in case of prepayment, then the amount actually received
shall be included in the tax base of such financial institutions x x x."
Actual receipt of interest income is not limited to physical receipt. Actual
receipt may either be physical receipt or constructive receipt.53 When the
depository bank withholds the final tax to pay the tax liability of the lending
bank, there is prior to the withholding a constructive receipt by the lending
bank of the amount withheld. From the amount constructively received by the
lending bank, the depository bank deducts the final withholding tax and remits
it to the government for the account of the lending bank. Thus, the interest
income actually received by the lending bank, both physically and
constructively, is the net interest plus the amount withheld as final tax.
The concept of a withholding tax on income obviously and necessarily implies
that the amount of the tax withheld comes from the income earned by the
taxpayer.54 Since the amount of the tax withheld constitutes income earned by
the taxpayer, then that amount manifestly forms part of the taxpayer’s gross
receipts. Because the amount withheld belongs to the taxpayer, he can transfer
its ownership to the government in payment of his tax liability. The amount
withheld indubitably comes from income of the taxpayer, and thus forms part of
his gross receipts.
In addition, Section 8 of Revenue Regulations No. 12-80 expressly states
that interest income, even if subject to the final withholding tax and
excluded from gross income for income tax purposes, should still form part
of the bank’s taxable gross receipts. Section 8 of Revenue Regulations No.
12-80 provides that –
Section 8. Nature and Treatment of Interest on Deposits and Yield on Deposit
Substitutes –
(a) The interest earned on Philippine currency, bank deposits and yield from
deposit substitutes subjected to the withholding taxes in accordance with these
regulations need not be included in the gross income in computing the
depositor’s/investor’s income tax liability in accordance with the provision of
Section 29(b), (c) and (d) of the Tax Code.
(b) x x x
(c) If the recipient of the above-mentioned items of income are financial
institutions, the same shall be included as part of the tax base upon which the
gross receipts tax is imposed." (Emphasis supplied)
Thus, interest earned by banks, even if subject to the final tax and excluded
from taxable gross income, forms part of its gross receipts for gross receipts tax
purposes. The interest earned refers to the gross interest without deduction
since the regulations do not provide for any deduction. The gross interest,
without deduction, is the amount the borrower pays, and the income the lender
earns, for the use by the borrower of the lender’s money. The amount of the
final tax plainly comes from the interest earned and is consequently part of the
bank’s taxable gross receipts.
In PLDT v. Collector of Internal Revenue,55 the Court ruled that PLDT’s gross
receipts included the uncollected fees from customers because PLDT already
earned the uncollected fees. The Court declared that fees earned, even if not
collected, formed part of PLDT’s gross receipts for purposes of the franchise
tax. Construing "‘gross receipts’ x x x as meaning the same as ‘gross
earnings’," the Court refused to allow deductions of uncollected or bad
accounts from the gross receipts in computing the franchise tax.
Presidential Decree No. 1739 ("PD No. 1739"), which took effect on 17
September 1980, made the withholding tax on interest from bank deposits a
final tax. To implement PD No. 1739, the then Ministry of Finance, upon
recommendation of the BIR, issued Revenue Regulations No. 12-80 "to govern
the manner of taxation of certain income derived from banking activities as
provided for by Presidential Decree No. 1739." Subsequently, Presidential
Decree No. 1959, which took effect on 10 October 1984, amended PD No.
1739. The Ministry of Finance, upon recommendation of the BIR, issued on 12
October 1984 Revenue Regulations No. 17-84 "to govern the manner of
taxation of interest income derived from deposit and deposit substitutes as
provided for by Presidential Decree No. 1959." Thus, as early as 12 October
1984 Revenue Regulations No. 17-84 had supplanted Revenue Regulations No.
12-80.
Among the changes introduced by PD No. 1959 was the reduction of the final
withholding tax on time deposits and yield on deposit substitutes to 15% from
the 20% rate in PD No. 1739. Revenue Regulations No. 17-84 readopted
verbatim Section 2(h) on the definition of "interest,"56 as well as Section 8(c) on
the computation of the taxable base of the bank’s gross receipts,57 found in
Revenue Regulations No. 12-80. However, Revenue Regulations No. 17-84 did
not readopt Section 4(e) of Revenue Regulations No. 12-80, which was the
regulation cited in Asian Bank as basis for excluding the final withholding tax
from the bank’s taxable gross receipts. As early as 12 years before the tax court
decided Asian Bank, the revenue regulations already required interest income,
whether actually received or merely accrued, to form part of the bank’s taxable
gross receipts.
On the other hand, Section 7 of Revenue Regulations No. 17-84, which
replaced Section 4 of Revenue Regulations No. 12-80, provides that –
Section 7. Nature and Treatment of Interest on Deposits and Yield on Deposit
Substitutes. —
(a) The interest earned on Philippine Currency bank deposits and yield from
deposit substitutes subjected to the withholding taxes in accordance with these
regulations need not be included in the gross income in computing the
depositor's/investor's income tax liability in accordance with the provision of
Section 29(b), (c) and (d) of the National Internal Revenue Code, as amended.
(b) Only interest paid or accrued on bank deposits, or yield from deposit
substitutes declared for purposes of imposing the withholding taxes in
accordance with these regulations shall be allowed as interest expense
deductible for purposes of computing taxable net income of the payor.
(c) If the recipient of the above-mentioned items of income are financial
institutions, the same shall be included as part of the tax base upon which the
gross receipt tax is imposed. (Emphasis supplied)
Thus, the Tax Court, which decided Asian Bank on 30 January 1996, not only
erroneously interpreted Section 4(e) of Revenue Regulations No. 12-80, it also
cited Section 4(e) when it was no longer the applicable revenue regulation. To
reiterate, the revenue regulations applicable at the time the tax court decided
Asian Bank was Revenue Regulations No. 17-84, not Revenue Regulations No.
12-80.
The argument that Section 7(c) of Revenue Regulations No. 17-84 does not
apply to banks but only to finance companies deserves scant consideration. This
argument proceeds from the interpretation58 that the term "financial institutions"
in Section 7(c) is the equivalent of the term "finance companies." Section 7(c)
states as follows:
If the recipient of the above-mentioned items of income are financial
institutions, the same shall be included as part of their tax base upon which the
gross receipts tax is imposed." (Emphasis supplied)
However, the immediately succeeding section belies this interpretation. Section
8 of Revenue Regulations No. 17-84 states:
Section 8. Statement to be attached to the corporate tax return of financial
institutions. - There shall be attached to the final consolidated corporate return
of the authorized agent bank or non-financial intermediaries for each taxable
year, a statement summarizing the pertinent information required by these
regulations with respect to the computation of the aggregate interest paid on
savings, time deposits and deposit substitutes and taxes withheld therefrom and
paid to the Bureau, during the year (B.I.R. Form No. ___). (Emphasis supplied)
Section 8 expressly specifies banks and non-bank financial intermediaries as
the "financial institutions" that should attach to their corporate tax returns
statements summarizing certain pertinent information on the computation of
their interest income subject to the final tax. Revenue Regulations No. 17-84
applies to "banks, non-bank financial intermediaries," "finance companies,"
"lending investors, investment houses, trust companies and similar institutions
and corporations."59 Obviously, the term "financial institutions" is not the same
as the term "finance companies," but signifies a broader meaning to embrace
banks.
Of course, the term "financial institutions" also covers finance companies since
Section 7(c) uses this term to refer to institutions that are subject to the "gross
receipts tax." Section 7(c) states that interest income received by financial
institutions shall form part of their "tax base upon which the gross receipts tax
is based." Under Sections 121 and 12260 of the Tax Code, the financial
institutions that are subject to the gross receipts tax are banks, non-bank
financial intermediaries and finance companies. These financial institutions are
taxable on the same class of interest income and at the same tax rates.
Evidently, the term "financial institutions" refers to banks, non-bank financial
intermediaries, and finance companies.
CBC’s contention that it can deduct the final withholding tax from its interest
income amounts to a claim of tax exemption. The cardinal rule in taxation is
exemptions are highly disfavored and whoever claims an exemption must
justify his right by the clearest grant of organic or statute law.61 CBC must point
to a specific provision of law granting the tax exemption.62 The tax exemption
cannot arise by mere implication and any doubt about whether the exemption
exists is strictly construed against the taxpayer and in favor of the taxing
authority.63
Section 121 of the Tax Code expressly subjects interest income to the gross
receipts tax on banks. Such express inclusion of interest income in taxable
gross receipts creates a presumption that the entire amount of the interest
income, without any deduction, is subject to the gross receipts tax. As ruled by
the Supreme Court of New Mexico in Kewanee Industries, Inc. v. Reese,64 -
x x x There is a presumption that receipts of a person engaging in business are
subject to the gross receipts tax. For Kewanee to prevail, it must clearly
overcome this presumption. Additionally, where an exception is claimed, the
statute is construed strictly in favor of the taxing authority. The exemption must
be clearly and unambiguously expressed in the statute, and must be clearly
established by the taxpayer claiming the right thereto. Thus, taxation is the rule
and the claimant must show that his demand is within the letter as well as the
spirit of the law. (Citations and quotations omitted)
To overcome this presumption, CBC must point to a specific provision of law
allowing the deduction of the final withholding tax from its taxable gross
receipts. CBC has failed to cite any provision of law allowing the final tax as an
exemption, deduction or exclusion. Thus, CBC’s claim has no legal leg to stand
on.
In Asian Bank, the Court of Tax Appeals quoted Manila Jockey Club that the
legislature could not have intended the Board of Races’ 1/2% share to be
subjected to the amusement tax because it would constitute double taxation.
The Court in Manila Jockey Club explained that "double taxation x x x should
be avoided unless the statute admits of no other interpretation." This statement
was not the ratio decidendi in Manila Jockey Club. There, the Court found that
the Board of Races’ 1/2% share, and the horse-owners’ and jockeys’ 5% share,
were not owned by the Manila Jockey Club and thus did not form part of the
Manila Jockey Club’s gross receipts.
Nevertheless, the tax court quoted with approval this particular statement in
Manila Jockey Club, thus implying two interpretations. One, the court should
avoid an interpretation that will tax twice the same interest income, first to the
20% final tax and then to the gross receipts tax. Two, the court should avoid an
interpretation that will impose a "tax on a tax," such as subjecting the final tax
to the gross receipts tax.
The first interpretation raises the bogey of a constitutional prohibition on
double taxation.1âwphi1 The rule, however, is well-settled that there is no
constitutional prohibition against double taxation. As the Court aptly explained
in City of Baguio v. De Leon65 -
To repeat, the challenged ordinance cannot be considered ultra vires as there is
more than ample statutory authority for the enactment thereof. Nonetheless, its
validity on constitutional grounds is challenged because the allegation that it
imposed double taxation, which is repugnant to the due process clause, and that
it violated the requirement of uniformity. We do not view the matter thus.
As to why double taxation is not violative of due process, Justice Holmes made
clear in this language: "The objection to the taxation as double may be laid
down on one side . . . . The 14th Amendment [the due process clause] no more
forbids double taxation than it does doubling the amount of a tax, short of
confiscation or proceedings unconstitutional on other grounds." With that
decision rendered at a time when American sovereignty in the Philippines was
recognized, it possesses more than just a persuasive effect. To some, it
delivered the coup de grace to the bogey of double taxation as a constitutional
bar to the exercise of the taxing power. It would seem though that in the United
States, as with us, its ghost, as noted by an eminent critic, still stalks the
juridical stage. In a 1947 decision, however, we quoted with approval this
excerpt from a leading American decision: ‘Where, as here, Congress has
clearly expressed its intention, the statute must be sustained even though double
taxation results.’
Besides, there is no double taxation when Section 121 of the Tax Code imposes
a gross receipts tax on interest income that is already subjected to the 20% final
withholding tax under Section 27 of the Tax Code. The gross receipts tax is a
business tax under Title V of the Tax Code, while the final withholding tax is an
income tax under Title II of the Code. There is no double taxation if the law
imposes two different taxes on the same income, business or property.
The second interpretation, of a prohibition on "a tax on a tax," is as illusory as
the prohibition on double taxation. The gross receipts tax falls not on the final
withholding tax, but on the amount of the interest income withheld as the final
tax. What is being taxed is still the interest income. The law imposes the gross
receipts tax on that portion of the interest income that the depository bank
withholds and remits to the government. Consequently, the entire amount of the
interest income is taxable and not only the net interest income.
Moreover, whenever the legislature excludes a certain tax from gross receipts,
the legislature states so clearly and unequivocally. Thus, for purposes of the
value-added tax, Section 10666 of the Tax Code expressly excludes the value-
added tax from the "gross selling price" to avoid a "tax on the tax." To clarify
that only the value-added tax does not form part of the gross selling price,
Section 106 expressly states that the gross selling price shall include any excise
tax, effectively resulting in a "tax on a tax." Of course, the "tax on a tax" is in
reality a tax on the portion of the income or receipt that is equivalent to the tax,
usually withheld and remitted to the government.
There is no constitutional prohibition on subjecting the same income or receipt
to an income tax and to some other tax like the gross receipts tax. Similarly, the
same income or receipt may be subject to the value-added tax and the excise tax
like the specific tax. If the tax law follows the constitutional rule on uniformity,
making all income, business or property of the same class taxable at the same
rate, there can be no valid objection to taxing the same income, business or
property twice.
In summary, CBC has failed to point to any specific provision of law allowing
the deduction, exemption or exclusion, from its taxable gross receipts, of the
amount withheld as final tax. Such amount should therefore form part of CBC’s
gross receipts in computing the gross receipts tax. There being no legal basis
for CBC’s claim for a tax refund or credit, the second issue raised in this
petition is now moot.
REPUBLIC OF THE PHILIPPINES, Represented by the
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
SUNLIFE ASSURANCE COMPANY OF CANADA, Respondent.
FACTS:
"Sun Life is a mutual life insurance company organized and existing under the
laws of Canada. It is registered and authorized by the Securities and Exchange
Commission and the Insurance Commission to engage in business in the
Philippines as a mutual life insurance company with principal office at Paseo de
Roxas, Legaspi Village, Makati City.
"On October 20, 1997, Sun Life filed with the CIR its insurance premium tax
return for the third quarter of 1997 and paid the premium tax in the amount of
₱31,485,834.51. For the period covering August 21 to December 18, 1997,
petitioner filed with the CIR its [documentary stamp tax (DST)] declaration
returns and paid the total amount of ₱30,000,000.00.
"On December 29, 1997, the [Court of Tax Appeals] (CTA) rendered its
decision in Insular Life Assurance Co. Ltd. v. [CIR], which held that mutual life
insurance companies are purely cooperative companies and are exempt from
the payment of premium tax and DST. This pronouncement was later affirmed
by this court in [CIR] v. Insular Life Assurance Company, Ltd. Sun Life
surmised that[,] being a mutual life insurance company, it was likewise exempt
from the payment of premium tax and DST. Hence, on August 20, 1999, Sun
Life filed with the CIR an administrative claim for tax credit of its alleged
erroneously paid premium tax and DST for the aforestated tax periods.
"For failure of the CIR to act upon the administrative claim for tax credit and
with the 2-year period to file a claim for tax credit or refund dwindling away
and about to expire, Sun Life filed with the CTA a petition for review on
August 23, 1999. In its petition, it prayed for the issuance of a tax credit
certificate in the amount of ₱61,485,834.51 representing ₱31,485,834.51 of
erroneously paid premium tax for the third quarter of 1997 and
₱30,000[,000].00 of DST on policies of insurance from August 21 to December
18, 1997. Sun Life stood firm on its contention that it is a mutual life insurance
company vested with all the characteristic features and elements of a
cooperative company or association as defined in [S]ection 121 of the Tax
Code. Primarily, the management and affairs of Sun Life were conducted by its
members; secondly, it is operated with money collected from its members; and,
lastly, it has for its purpose the mutual protection of its members and not for
profit or gain.
"On November 12, 2002, the CTA found in favor of Sun Life. Quoting largely
from its earlier findings in Insular Life Assurance Company, Ltd. v. [CIR],
which it found to be on all fours with the present action, the CTA ruled:
‘The [CA] has already spoken. It ruled that a mutual life insurance company is
a purely cooperative company[;] thus, exempted from the payment of premium
and documentary stamp taxes. Petitioner Sun Life is without doubt a mutual life
insurance company. x x x.
‘Being similarly situated with Insular, Petitioner at bar is entitled to the same
interpretation given by this Court in the earlier cases of The Insular Life
Assurance Company, Ltd. vs. [CIR] (CTA Case Nos. 5336 and 5601) and by the
[CA] in the case entitled [CIR] vs. The Insular Life Assurance Company, Ltd.,
C.A. G.R. SP No. 46516, September 29, 1998. Petitioner Sun Life as a mutual
life insurance company is[,] therefore[,] a cooperative company or association
and is exempted from the payment of premium tax and [DST] on policies of
insurance pursuant to Section 121 (now Section 123) and Section 199[1]) (now
Section 199[a]) of the Tax Code.’
"Seeking reconsideration of the decision of the CTA, the CIR argued that Sun
Life ought to have registered, foremost, with the Cooperative Development
Authority before it could enjoy the exemptions from premium tax and DST
extended to purely cooperative companies or associations under [S]ections 121
and 199 of the Tax Code. For its failure to register, it could not avail of the
exemptions prayed for. Moreover, the CIR alleged that Sun Life failed to prove
that ownership of the company was vested in its members who are entitled to
vote and elect the Board of Trustees among [them]. The CIR further claimed
that change in the 1997 Tax Code subjecting mutual life insurance companies to
the regular corporate income tax rate reflected the legislature’s recognition that
these companies must be earning profits.
"Notwithstanding these arguments, the CTA denied the CIR’s motion for
reconsideration.
"Thwarted anew but nonetheless undaunted, the CIR comes to this
court via this petition on the sole ground that:
‘The Tax Court erred in granting the refund[,] because respondent does not fall
under the exception provided for under Section 121 (now 123) of the Tax Code
to be exempted from premium tax and DST and be entitled to the refund.’
"The CIR repleads the arguments it raised with the CTA and proposes further
that the [CA] decision in [CIR] v. Insular Life Assurance Company, Ltd. is not
controlling and cannot constitute res judicata in the present action. At best, the
pronouncements are merely persuasive as the decisions of the Supreme Court
alone have a universal and mandatory effect."5
CA: respondent was a purely cooperative corporation duly licensed to engage
in mutual life insurance business in the Philippines. Thus, respondent was
deemed exempt from premium and documentary stamp taxes, because its
affairs are managed and conducted by its members with money collected from
among themselves, solely for their own protection, and not for profit. Its
members or policyholders constituted both insurer and insured who contribute,
by a system of premiums or assessments, to the creation of a fund from which
all losses and liabilities were paid. The dividends it distributed to them were not
profits, but returns of amounts that had been overcharged them for insurance.
Hence, this Petition.6
ISSUES:
(1) “Whether or not respondent is a purely cooperative company or association
under Section 121 of the National Internal Revenue Code and a fraternal or
beneficiary society, order or cooperative company on the lodge system or local
cooperation plan and organized and conducted solely by the members thereof
for the exclusive benefit of each member and not for profit under Section 199
of the National Internal Revenue Code.
(2) “Whether or not registration with the Cooperative Development Authority is
a sine qua non requirement to be entitled to tax exemption.
(3) "Whether or not respondent is exempted from payment of tax on life
insurance premiums and documentary stamp tax.”
COURT: The Petition has no merit.
(1) Whether Respondent Is a Cooperative
The Tax Code defines a cooperative as an association "conducted by the
members thereof with the money collected from among themselves and solely
for their own protection and not for profit."8 Without a doubt, respondent is a
cooperative engaged in a mutual life insurance business.
First, it is managed by its members. Both the CA and the CTA found that the
management and affairs of respondent were conducted by its member-
policyholders.9
A stock insurance company doing business in the Philippines may "alter its
organization and transform itself into a mutual insurance
company." Respondent has been mutualized or converted from a stock life
insurance company to a nonstock mutual life insurance corporation pursuant to
Section 266 of the Insurance Code of 1978. On the basis of its bylaws, its
ownership has been vested in its member-policyholders who are each entitled to
one vote;13 and who, in turn, elect from among themselves the members of its
board of trustees.14 Being the governing body of a nonstock corporation, the
board exercises corporate powers, lays down all corporate business policies,
and assumes responsibility for the efficiency of management
Second, it is operated with money collected from its members. Since
respondent is composed entirely of members who are also its policyholders, all
premiums collected obviously come only from them.16
The member-policyholders constitute "both insurer and insured"17 who
"contribute, by a system of premiums or assessments, to the creation of a fund
from which all losses and liabilities are paid."18 The premiums19 pooled into
this fund are earmarked for the payment of their indemnity and benefit claims.
Third, it is licensed for the mutual protection of its members, not for the profit
of anyone.
As early as October 30, 1947, the director of commerce had already issued a
license to respondent -- a corporation organized and existing under the laws of
Canada -- to engage in business in the Philippines.20 Pursuant to Section 225 of
Canada’s Insurance Companies Act, the Canadian minister of state (for finance
and privatization) also declared in its Amending Letters Patent that respondent
would be a mutual company effective June 1, 1992.21 In the Philippines, the
insurance commissioner also granted it annual Certificates of Authority to
transact life insurance business, the most relevant of which were dated July 1,
1997 and July 1, 1998.22
A mutual life insurance company is conducted for the benefit of its member-
policyholders,23 who pay into its capital by way of premiums. To that extent,
they are responsible for the payment of all its losses.24 "The cash paid in for
premiums and the premium notes constitute their assets x x x."25 In the event
that the company itself fails before the terms of the policies expire, the
member-policyholders do not acquire the status of creditors.26 Rather, they
simply become debtors for whatever premiums that they have originally agreed
to pay the company, if they have not yet paid those amounts in full, for
"[m]utual companies x x x depend solely upon x x x premiums."27 Only when
the premiums will have accumulated to a sum larger than that required to pay
for company losses will the member-policyholders be entitled to a "pro
rata division thereof as profits."28
Contributing to its capital, the member-policyholders of a mutual company are
obviously also its owners.29 Sustaining a dual relationship inter se, they not
only contribute to the payment of its losses, but are also entitled to a
proportionate share30 and participate alike31 in its profits and surplus.
Where the insurance is taken at cost, it is important that the rates of premium
charged by a mutual company be larger than might reasonably be expected to
carry the insurance, in order to constitute a margin of safety. The table of
mortality used will show an admittedly higher death rate than will probably
prevail; the assumed interest rate on the investments of the company is made
lower than is expected to be realized; and the provision for contingencies and
expenses, made greater than would ordinarily be necessary.32 This course of
action is taken, because a mutual company has no capital stock and relies solely
upon its premiums to meet unexpected losses, contingencies and expenses.
Certainly, many factors are considered in calculating the insurance premium.
Since they vary with the kind of insurance taken and with the group of
policyholders insured, any excess in the amount anticipated by a mutual
company to cover the cost of providing for the insurance over its actual realized
cost will also vary. If a member-policyholder receives an excess payment, then
the apportionment must have been based upon a calculation of the actual cost of
insurance that the company has provided for that particular member-
policyholder. Accordingly, in apportioning divisible surpluses, any mutual
company uses a contribution method that aims to distribute those surpluses
among its member-policyholders, in the same proportion as they have
contributed to the surpluses by their payments.33
Sharing in the common fund, any member-policyholder may choose to
withdraw dividends in cash or to apply them in order to reduce a subsequent
premium, purchase additional insurance, or accelerate the payment period.
Although the premium made at the beginning of a year is more than necessary
to provide for the cost of carrying the insurance, the member-policyholder will
nevertheless receive the benefit of the overcharge by way of dividends, at the
end of the year when the cost is actually ascertained. "The declaration of a
dividend upon a policy reduces pro tanto the cost of insurance to the holder of
the policy. That is its purpose and effect."34
A stipulated insurance premium "cannot be increased, but may be lessened
annually by so much as the experience of the preceding year has determined it
to have been greater than the cost of carrying the insurance x x x."35 The
difference between that premium and the cost of carrying the risk of loss
constitutes the so-called "dividend" which, however, "is not in any real sense a
dividend."36 It is a technical term that is well understood in the insurance
business to be widely different from that to which it is ordinarily attached.
The so-called "dividend" that is received by member-policyholders is not a
portion of profits set aside for distribution to the stockholders in proportion to
their subscription to the capital stock of a corporation.37 One, a mutual
company has no capital stock
to which subscription is necessary; there are no stockholders to speak of, but
only members. And, two, the amount they receive does not partake of the nature
of a profit or income. The quasi-appearance of profit will not change its
character. It remains an overpayment, a benefit to which the member-
policyholder is equitably entitled.38
Verily, a mutual life insurance corporation is a cooperative that promotes the
welfare of its own members. It does not operate for profit, but for the mutual
benefit of its member-policyholders. They receive their insurance at cost, while
reasonably and properly guarding and maintaining the stability and solvency of
the company.39 "The economic benefits filter to the cooperative members.
Either equally or proportionally, they are distributed among members in
correlation with the resources of the association utilized."40
It does not follow that because respondent is registered as a nonstock
corporation and thus exists for a purpose other than profit, the company can no
longer make any profits.41 Earning profits is merely its secondary, not primary,
purpose. In fact, it may not lawfully engage in any business activity for profit,
for to do so would change or contradict its nature42 as a non-profit entity.43 It
may, however, invest its corporate funds in order to earn additional income for
paying its operating expenses and meeting benefit claims. Any excess profit it
obtains as an incident to its operations can only be used, whenever necessary or
proper, for the furtherance of the purpose for which it was organized.44
(2) Whether CDA Registration Is Necessary
Under the Tax Code although respondent is a cooperative, registration
with the Cooperative Development Authority (CDA)45 is not necessary in
order for it to be exempt from the payment of both percentage taxes on
insurance premiums, under Section 121; and documentary stamp taxes on
policies of insurance or annuities it grants, under Section 199.
First, the Tax Code does not require registration with the CDA. No tax
provision requires a mutual life insurance company to register with that agency
in order to enjoy exemption from both percentage and documentary stamp
taxes.
A provision of Section 8 of Revenue Memorandum Circular (RMC) No. 48-91
requires the submission of the Certificate of Registration with the
CDA,46 before the issuance of a tax exemption certificate. That provision
cannot prevail over the clear absence of an equivalent requirement under the
Tax Code. One, as we will explain below, the Circular does not apply to
respondent, but only to cooperatives that need to be registered under the
Cooperative Code. Two, it is a mere issuance directing all internal revenue
officers to publicize a new tax legislation. Although the Circular does not
derogate from their authority to implement the law, it cannot add a registration
requirement,47 when there is none under the law to begin with.
True, the provisions of the Insurance Code relative to the organization and
operation of an insurance company also apply to cooperative insurance entities
organized under the Cooperative Code.67 The latter law, however, does not
apply to respondent, which already existed as a cooperative company engaged
in mutual life insurance prior to the laws passage of that law. The statutes
prevailing at the time of its organization and mutualization were the Insurance
Code and the Corporation Code, which imposed no registration requirement
with the CDA.
(3) Whether Respondent Is Exempted from Premium Taxes and DST

Second, the provisions of the Cooperative Code of the Philippines48 do not

Having determined that respondent is a cooperative that does not have to be
apply. Let us trace the Code’s development in our history.
registered with the CDA, we hold that it is entitled to exemption from both
premium taxes and documentary stamp taxes (DST).
As early as 1917, a cooperative company or association was already defined as
one "conducted by the members thereof with money collected from among
The Tax Code is clear. On the one hand, Section 121 of the Code exempts
themselves and solely for their own protection and not profit."49 In 1990, it was
cooperative companies from the 5 percent percentage tax on insurance
further defined by the Cooperative Code as a "duly registered association of
premiums. On the other hand, Section 199 also exempts from the DST, policies
persons, with a common bond of interest, who have voluntarily joined together
of insurance or annuities made or granted by cooperative companies. Being a
to achieve a lawful common social or economic end, making equitable
cooperative, respondent is thus exempt from both types of taxes.
contributions to the capital required and accepting a fair share of the risks and
benefits of the undertaking in accordance with universally accepted cooperative
principles."50 It is worthy to note that while RA 8424 amending the Tax Code has deleted the
income tax of 10 percent imposed upon the gross investment income of mutual
life insurance companies -- domestic68 and foreign69 -- the provisions of Section
The Cooperative Code was actually an offshoot of the old law on cooperatives.
121 and 199 remain unchanged.70
In 1973, Presidential Decree (PD) No. 175 was
signed into law by then President Ferdinand E. Marcos in order to strengthen
the cooperative movement.51 The promotion of cooperative development was Having been seasonably filed and amply substantiated, the claim for exemption
one of the major programs of the "New Society" under his administration. It in the amount of ₱61,485,834.51, representing percentage taxes on insurance
sought to improve the country’s trade and commerce by enhancing agricultural premiums and documentary stamp taxes on policies of insurance or annuities
production, cottage industries, community development, and agrarian reform that were paid by respondent in 1997, is in order. Thus, the grant of a tax credit
through cooperatives.52 certificate to respondent as ordered by the appellate court was correct.

The whole cooperative system, with its vertical and horizontal linkages -- from
the market cooperative of agricultural products to cooperative rural banks,
consumer cooperatives and cooperative insurance -- was envisioned to offer
considerable economic opportunities to people who joined cooperatives.53 As
an effective instrument in redistributing income and wealth,54 cooperatives
were promoted primarily to support the agrarian reform program of the
government.55

Notably, the cooperative under PD 175 referred only to an organization

composed primarily of small producers and consumers who voluntarily joined
to form a business enterprise that they themselves owned, controlled, and
patronized.56 The Bureau of Cooperatives Development -- under the
Department of Local Government and Community Development (later Ministry
of Agriculture)57 -- had the authority to register, regulate and supervise only the
following cooperatives: (1) barrio associations involved in the issuance of
certificates of land transfer; (2) local or primary cooperatives composed of
natural persons and/or barrio associations; (3) federations composed of
cooperatives that may or may not perform business activities; and (4) unions of
cooperatives that did not perform any business activities.58 Respondent does not
fall under any of the above-mentioned types of cooperatives required to be
registered under PD 175.

When the Cooperative Code was enacted years later, all cooperatives that were
registered under PD 175 and previous laws were also deemed registered with
the CDA.59 Since respondent was not required to be registered under the old
law on cooperatives, it followed that it was not required to be registered even
under the new law.

Furthermore, only cooperatives to be formed or organized under the

Cooperative Code needed registration with the CDA.60 Respondent already
existed before the passage of the new law on cooperatives. It was not even
required to organize under the Cooperative Code, not only because it performed
a different set of functions, but also because it did not operate to serve the same
objectives under the new law -- particularly on productivity, marketing and
credit extension.61

The insurance against losses of the members of a cooperative referred to in

Article 6(7) of the Cooperative Code is not the same as the life insurance
provided by respondent to member-policyholders. The former is a function of a
service cooperative,62 the latter is not. Cooperative insurance under the Code is
limited in scope and local in character. It is not the same as mutual life
insurance.

We have already determined that respondent is a cooperative. The

distinguishing feature of a cooperative enterprise63 is the mutuality of
cooperation among its member-policyholders united for that purpose.64 So long
as respondent meets this essential feature, it does not even have to use65 and
carry the name of a cooperative to operate its mutual life insurance
business. Gratia argumenti that registration is mandatory, it cannot deprive
respondent of its tax exemption privilege merely because it failed to register.
The nature of its operations is clear; its purpose well-defined. Exemption when
granted cannot prevail over administrative convenience.

Third, not even the Insurance Code requires registration with the CDA. The
provisions of this Code primarily govern insurance contracts; only if a
particular matter in question is not specifically provided for shall the provisions
of the Civil Code on contracts and special laws govern.66
COMMISSIONER OF INTERNAL REVENUE, petitioner,
vs.
MICHEL J. LHUILLIER PAWNSHOP, INC., respondent.
FACTS:
On 11 March 1991, CIR Jose U. Ong issued Revenue Memorandum Order
(RMO) No. 15-91 imposing a 5% lending investor’s tax on pawnshops; thus:
A restudy of P.D. [No.] 114 shows that the principal activity of pawnshops is
lending money at interest and incidentally accepting a "pawn" of personal
property delivered by the pawner to the pawnee as security for the loan.(Sec. 3,
Ibid). Clearly, this makes pawnshop business akin to lending investor’s
business activity which is broad enough to encompass the business of lending
money at interest by any person whether natural or juridical. Such being the
case, pawnshops shall be subject to the 5% lending investor’s tax based on their
gross income pursuant to Section 116 of the Tax Code, as amended.
This RMO was clarified by Revenue Memorandum Circular (RMC) No. 43-91
on 27 May 1991, which reads:
1. RM[O] 15-91 dated March 11, 1991.
This Circular subjects to the 5% lending investor’s tax the gross income of
pawnshops pursuant to Section 116 of the Tax Code, and it thus revokes BIR
Ruling No[]. 6-90, and VAT Ruling Nos. 22-90 and 67-90. In order to have a
uniform cut-off date, avoid unfairness on the part of tax- payers if they are
required to pay the tax on past transactions, and so as to give meaning to the
express provisions of Section 246 of the Tax Code, pawnshop owners or
operators shall become liable to the lending investor’s tax on their gross income
beginning January 1, 1991. Since the deadline for the filing of percentage tax
return (BIR Form No. 2529A-0) and the payment of the tax on lending
investors covering the first calendar quarter of 1991 has already lapsed,
taxpayers are given up to June 30, 1991 within which to pay the said tax
without penalty. If the tax is paid after June 30, 1991, the corresponding
penalties shall be assessed and computed from April 21, 1991.
Since pawnshops are considered as lending investors effective January 1,
1991, they also become subject to documentary stamp taxes prescribed in
Title VII of the Tax Code. BIR Ruling No. 325-88 dated July 13, 1988 is
hereby revoked.
On 11 September 1997, pursuant to these issuances, the Bureau of Internal
Revenue (BIR) issued Assessment Notice No. 81-PT-13-94-97-9-118 against
Lhuillier demanding payment of deficiency percentage tax in the sum
of P3,360,335.11 for 1994 inclusive of interest and surcharges.
On 3 October 1997, Lhuillier filed an administrative protest with the Office
of the Revenue Regional Director contending that (1) neither the Tax Code
nor the VAT Law expressly imposes 5% percentage tax on the gross income of
pawnshops; (2) pawnshops are different from lending investors, which are
subject to the 5% percentage tax under the specific provision of the Tax Code;
(3) RMO No. 15-91 is not implementing any provision of the Internal Revenue
laws but is a new and additional tax measure on pawnshops, which only
Congress could enact; (4) RMO No. 15-91 impliedly amends the Tax Code and
is therefore taxation by implication, which is proscribed by law; and (5) RMO
No. 15-91 is a "class legislation" because it singles out pawnshops among other
lending and financial operations.
On 12 October 1998, Deputy BIR Commissioner Romeo S. Panganiban issued
Warrant of Distraint and/or Levy No. 81-043-98 against Lhuillier’s property for
the enforcement and payment of the assessed percentage tax.
Its protest having been unacted upon, Lhuillier, in a letter dated 3 March 1998,
elevated the matter to the CIR. Still, the protest was not acted upon by the CIR.
Thus, on 11 November 1998, Lhuillier filed a "Notice and Memorandum on
Appeal" with the Court of Tax Appeals invoking Section 228 of Republic Act
No. 8424, otherwise known as the Tax Reform Act of 199
CTA: (1) RMO No. 15-91 and RMC No. 43-91 null and void insofar as they
classify pawnshops as lending investors subject to 5% percentage tax; and (2)
Assessment Notice No. 81-PT-13-94-97-9-118 as cancelled, withdrawn, and
with no force and effect.2
CA: affirmed the CTA decision on 20 November 2001.
CIR’S CONTENTION: He invokes then Section 116 of the Tax Code, which
imposed a 5% percentage tax on lending investors. He argues that the legal
definition of lending investors provided in Section 157 (u) of the Tax Code is
broad enough to include pawnshop operators. Section 3 of Presidential Decree
No. 114 states that the principal business activity of a pawnshop is lending
money; thus, a pawnshop easily falls under the legal definition of lending
investors. RMO No. 15-91 and RMC No. 43-91, which subject pawnshops to
the 5% lending investor’s tax based on their gross income, are valid. Being
mere interpretations of the NIRC, they need not be published. Lastly, the CIR
invokes the case of Commissioner of Internal Revenue vs. Agencia Exquisite of
Bohol, Inc.,3 where the Court of Appeals’ Special Fourteenth Division ruled
that a pawnshop is subject to the 5% lending investor’s tax.4
Lhuillier, on the other hand, maintains that before and after the amendment of
the Tax Code by E.O. No. 273, which took effect on 1 January 1988,
pawnshops and lending investors were subjected to different tax treatments.
Pawnshops were required to pay an annual fixed tax of only P1,000, while
lending investors were subject to a 5% percentage tax on their gross income in
addition to their fixed annual taxes. Accordingly, during the period from April
1982 up to December 1990, the CIR consistently ruled that a pawnshop is not a
lending investor and should not therefore be required to pay percentage tax on
its gross income.
Lhuillier likewise asserts that RMO No. 15-91 and RMC No. 43-91 are not
implementing rules but are new and additional tax measures, which only
Congress is empowered to enact. Besides, they are invalid because they have
never been published in the Official Gazette or any newspaper of general
circulation.
Lhuillier further points out that pawnshops are strictly regulated by the Central
Bank pursuant to P.D. No. 114, otherwise known as The Pawnshop Regulation
Act. On the other hand, there is no special law governing lending investors.
Due to the wide differences between the two, pawnshops had never been
considered as lending investors for tax purposes. In fact, in 1994, Congress
passed House Bill No. 11197,5 which attempted to amend Section 116 of the
NIRC, as amended, to include owners of pawnshops as among those subject to
percentage tax. However, the Senate Bill and the subsequent Bicameral
Committee version, which eventually became the E-VAT Law, did not
incorporate such proposed amendment.
Lastly, Lhuillier argues that following the maxim in statutory construction
"expressio unius est exclusio alterius," it was not the intention of the
Legislature to impose percentage taxes on pawnshops because if it were so,
pawnshops would have been included as among the businesses subject to the
said tax. Inasmuch as revenue laws impose special burdens upon taxpayers, the
enforcement of such laws should not be extended by implication beyond the
clear import of the language used.
ISSUE:
Whether pawnshops are subject to the 5% lending investor’s tax.
COURT: NO
RMO No. 15-91 and RMC No. 43-91 were issued in accordance with the power
of the CIR to make rulings and opinions in connection with the implementation
of internal revenue laws, which was bestowed by then Section 245 of the NIRC
of 1977, as amended by E.O. No. 273.6 Such power of the CIR cannot be
controverted. However, the CIR cannot, in the exercise of such power, issue
administrative rulings or circulars not consistent with the law sought to be
applied. Indeed, administrative issuances must not override, supplant or modify
the law, but must remain consistent with the law they intend to carry out. Only
Congress can repeal or amend the law.7
The CIR argues that both issuances are mere rules and regulations
implementing then Section 116 of the NIRC, as amended, which provided:
SEC. 116. Percentage tax on dealers in securities; lending investors. - Dealers
in securities and lending investors shall pay a tax equivalent to six (6) per
centum of their gross income. Lending investors shall pay a tax equivalent to
five (5%) percent of their gross income.
It is clear from the aforequoted provision that pawnshops are not
specifically included. Thus, the question is whether pawnshops are considered
lending investors for the purpose of imposing percentage tax.
We rule in the negative.
Incidentally, we observe that both parties, as well as the Court of Tax Appeals
and the Court of Appeals, refer to the National Internal Revenue Code as the
Tax Code. They did not specify whether the provisions they cited were taken
from the NIRC of 1977, as amended, or the NIRC of 1986, as amended. For
clarity, it must be pointed out that the NIRC of 1977 as renumbered and
rearranged by E.O. No. 273 is a later law than the NIRC of 1986, as amended
by P.D. Nos. 1991, 1994, 2006 and 2031. The citation of the specific Code is
important for us to determine the intent of the law.
Under Section 157(u) of the NIRC of 1986, as amended, the term lending
investor includes "all persons who make a practice of lending money for
themselves or others at interest." A pawnshop, on the other hand, is defined
under Section 3 of P.D. No. 114 as "a person or entity engaged in the business
of lending money on personal property delivered as security for loans and shall
be synonymous, and may be used interchangeably, with pawnbroker or pawn
brokerage."
While it is true that pawnshops are engaged in the business of lending money,
they are not considered "lending investors" for the purpose of imposing the 5%
percentage taxes for the following reasons:
First. Under Section 192, paragraph 3, sub-paragraphs (dd) and (ff), of the
NIRC of 1977, prior to its amendment by E.O. No. 273, as well as Section 161,
paragraph 2, sub-paragraphs (dd) and (ff), of the NIRC of 1986, pawnshops and
lending investors were subjected to different tax treatments; thus:
(3) Other Fixed Taxes. – The following fixed taxes shall be collected as
follows, the amount stated being for the whole year, when not otherwise
specified:
….
(dd) Lending investors –
1. In chartered cities and first class municipalities, one thousand pesos;
2. In second and third class municipalities, five hundred pesos;
3. In fourth and fifth class municipalities and municipal districts, two hundred
fifty pesos: Provided, That lending investors who do business as such in more
than one province shall pay a tax of one thousand pesos.
….
(ff) Pawnshops, one thousand pesos (underscoring ours)
Second. Congress never intended pawnshops to be treated in the same way as
lending investors. Section 116 of the NIRC of 1977, as renumbered and
rearranged by E.O. No. 273, was basically lifted from Section 1758 of the NIRC
of 1986, which treated both tax subjects differently. Section 175 of the latter
Code read as follows:
Sec. 175. Percentage tax on dealers in securities, lending investors. -- Dealers in
securities shall pay a tax equivalent to six (6%) percent of their gross income.
Lending investors shall pay a tax equivalent to five (5%) percent of their gross
income. (As amended by P.D. No. 1739, P.D. No. 1959 and P.D. No. 1994).
We note that the definition of lending investors found in Section 157 (u) of the
NIRC of 1986 is not found in the NIRC of 1977, as amended by E.O. No. 273,
where Section 116 invoked by the CIR is found. However, as emphasized
earlier, both the NIRC of 1986 and the NIRC of 1977 dealt with pawnshops and
lending investors differently. Verily then, it was the intent of Congress to deal
with both subjects differently. Hence, we must likewise interpret the statute to
conform with such legislative intent.
Third. Section 116 of the NIRC of 1977, as amended by E.O. No. 273, subjects
to percentage tax dealers in securities and lending investors only. There is no
mention of pawnshops. Under the maxim expressio unius est exclusio alterius,
the mention of one thing implies the exclusion of another thing not mentioned.
Thus, if a statute enumerates the things upon which it is to operate, everything
else must necessarily and by implication be excluded from its operation and
effect.9 This rule, as a guide to probable legislative intent, is based upon the
rules of logic and natural workings of the human mind.10
Fourth. The BIR had ruled several times prior to the issuance of RMO No.
15-91 and RMC 43-91 that pawnshops were not subject to the 5% percentage
tax imposed by Section 116 of the NIRC of 1977, as amended by E.O. No. 273.
This was even admitted by the CIR in RMO No. 15-91 itself. Considering that
Section 116 of the NIRC of 1977, as amended, was practically lifted from
Section 175 of the NIRC of 1986, as amended, and there being no change in the
law, the interpretation thereof should not have been altered.
It may not be amiss to state that, as pointed out by the respondent, pawnshops
was sought to be included as among those subject to 5% percentage tax by
House Bill No. 11197 in 1994. Section 13 thereof reads:
Section 13. Section 116 of the National Internal Revenue Code, as amended, is
hereby further amended to read as follows:
"SEC. 116. Percentage tax on dealers in securities; lending investors;
OWNERS OF PAWNSHOPS; FOREIGN CURRENCY DEALERS AND/OR
MONEY CHANGERS. – Dealers in securities shall pay a tax equivalent to Six
(6%) per centum of their gross income. Lending investors, OWNERS OF
PAWNSHOPS AND FOREIGN CURRENCY DEALERS AND/OR MONEY
CHANGERS shall pay a tax equivalent to Five (5%) percent of their gross
income."
If pawnshops were covered within the term lending investor, there would have
been no need to introduce such amendment to include owners of pawnshops. At
any rate, such proposed amendment was not adopted. Instead, the approved bill
which became R.A. No. 771611 repealed Section 116 of NIRC of 1977, as
amended, which was the basis of RMO No. 15-91 and RMC No. 43-91; thus:
SEC. 20. Repealing Clauses. -- The provisions of any special law relative to the
rate of franchise taxes are hereby expressly repealed. Sections 113, 114 and 116
of the National Internal Revenue Code are hereby repealed.
Section 21 of the same law provides that the law shall take effect fifteen (15)
days after its complete publication in the Official Gazette or in at least two (2)
national newspapers of general circulation whichever comes earlier. R.A. No.
7716 was published in the Official Gazette on 1 August 199412; in the Journal
and Malaya newspapers, on 12 May 1994; and in the Manila Bulletin, on 5 June
1994. Thus, R.A. No. 7716 is deemed effective on 27 May 1994.
Since Section 116 of the NIRC of 1977, which breathed life on the questioned
administrative issuances, had already been repealed, RMO 15-91 and RMC
43-91, which depended upon it, are deemed automatically repealed. Hence,
even granting that pawnshops are included within the term lending investors,
the assessment from 27 May 1994 onward would have no leg to stand on.
Adding to the invalidity of the RMC No. 43-91 and RMO No. 15-91 is the
absence of publication. While the rule-making authority of the CIR is not
doubted, like any other government agency, the CIR may not disregard legal
requirements or applicable principles in the exercise of quasi-legislative
powers.
Let us first distinguish between two kinds of administrative issuances: the
legislative rule and the interpretative rule. A legislative rule is in the nature of
subordinate legislation, designed to implement a primary legislation by
providing the details thereof. An interpretative rule, on the other hand, is
designed to provide guidelines to the law which the administrative agency is in
charge of enforcing.13
In Misamis Oriental Association of Coco Traders, Inc. vs. Department of
Finance Secretary,14 this Tribunal ruled:
… In the same way that laws must have the benefit of public hearing, it is
generally required that before a legislative rule is adopted there must be
hearing. In this connection, the Administrative Code of 1987 provides:
Public Participation. - If not otherwise required by law, an agency shall, as far
as practicable, publish or circulate notices of proposed rules and afford
interested parties the opportunity to submit their views prior to the adoption of
any rule.
(2) In the fixing of rates, no rule or final order shall be valid unless the
proposed rates shall have been published in a newspaper of general circulation
at least two weeks before the first hearing thereon.
(3) In case of opposition, the rules on contested cases shall be observed.
In addition, such rule must be published.
When an administrative rule is merely interpretative in nature, its applicability
needs nothing further than its bare issuance, for it gives no real consequence
more than what the law itself has already prescribed. When, on the other hand,
the administrative rule goes beyond merely providing for the means that can
facilitate or render least cumbersome the implementation of the law but
substantially increases the burden of those governed, it behooves the agency to
accord at least to those directly affected a chance to be heard, and thereafter to
be duly informed, before that new issuance is given the force and effect of
law.15
RMO No. 15-91 and RMC No. 43-91 cannot be viewed simply as
implementing rules or corrective measures revoking in the process the previous
rulings of past Commissioners. Specifically, they would have been amendatory
provisions applicable to pawnshops. Without these disputed CIR issuances,
pawnshops would not be liable to pay the 5% percentage tax, considering that
they were not specifically included in Section 116 of the NIRC of 1977, as
amended. In so doing, the CIR did not simply interpret the law. The due
observance of the requirements of notice, hearing, and publication should not
have been ignored.
There is no need for us to discuss the ruling in CA-G.R. SP No. 59282 entitled
Commissioner of Internal Revenue v. Agencia Exquisite of Bohol Inc., which
upheld the validity of RMO No. 15-91 and RMC No. 43-91. Suffice it to say
that the judgment in that case cannot be binding upon the Supreme Court
because it is only a decision of the Court of Appeals. The Supreme Court, by
tradition and in our system of judicial administration, has the last word on what
the law is; it is the final arbiter of any justifiable controversy. There is only one
Supreme Court from whose decisions all other courts should take their
bearings.16
In view of the foregoing, RMO No. 15-91 and RMC No. 43-91 are hereby
declared null and void. Consequently, Lhuillier is not liable to pay the 5%
lending investor’s tax.
FIRST PLANTERS PAWNSHOP, INC., Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
FACTS:
In a Pre-Assessment Notice dated July 7, 2003, petitioner was informed by the
BIR that it has an existing tax deficiency on its VAT and DST liabilities for the
year 2000. The deficiency assessment was at ₱541,102.79 for VAT and
₱23,646.33 for DST.1 Petitioner protested the assessment for lack of legal and
factual bases.2
Petitioner subsequently received a Formal Assessment Notice on December 29,
2003, directing payment of VAT deficiency in the amount of ₱541,102.79 and
DST deficiency in the amount of ₱24,747.13, inclusive of surcharge and
interest.3 Petitioner filed a protest,4 which was denied by Acting Regional
Director Anselmo G. Adriano per Final Decision on Disputed Assessment dated
January 29, 2004.5
Petitioner then filed a petition for review with the Court of Tax Appeals
(CTA).6 In a Decision dated May 9, 2005, the 2nd Division of the CTA upheld
the deficiency assessment.7 Petitioner filed a motion for reconsideration8 which
was denied in a Resolution dated October 7, 2005.9
Petitioner appealed to the CTA En Banc which rendered a Decision dated June
7, 2006, the dispositive portion of which reads as follows:
WHEREFORE, premises considered, the Petition for Review is hereby
DENIED for lack of merit. The assailed Decision dated May 9, 2005 and
Resolution dated October 7, 2005 are hereby AFFIRMED.
The core of petitioner's argument is that it is not a lending investor within the
purview of Section 108(A) of the National Internal Revenue Code (NIRC), as
amended, and therefore not subject to value-added tax (VAT). Petitioner also
contends that a pawn ticket is not subject to documentary stamp tax (DST)
because it is not proof of the pledge transaction, and even assuming that it is so,
still, it is not subject to tax since a documentary stamp tax is levied on the
document issued and not on the transaction.
COURT: liable for percentage tax not VAT
The BIR itself has maintained an ambivalent stance on this issue. Initially,
in Revenue Memorandum Order No. 15-91 issued on March 11, 1991, a
pawnshop business was considered as "akin to lending investor’s business
activity" and subject to 5% percentage tax beginning January 1, 1991, under
Section 116 of the Tax Code of 1977, as amended by E.O. No. 273.13
With the passage of Republic Act (R.A.) No. 7716 or the EVAT Law in
1994,14 the BIR abandoned its earlier position and maintained that pawnshops
are subject to 10% VAT, as implemented by Revenue Regulations No. 7-95.
This was complemented by Revenue Memorandum Circular No. 45-01 dated
October 12, 2001, which provided that pawnshop operators are liable to the
10% VAT based on gross receipts beginning January 1, 1996, while pawnshops
whose gross annual receipts do not exceed ₱550,000.00 are liable for
percentage tax, pursuant to Section 109(z) of the Tax Code of 1997.
CTA decisions affirmed the BIR's position that pawnshops are subject to VAT.
In H. Tambunting Pawnshop, Inc. v. Commissioner of Internal Revenue,15 the
CTA ruled that the petitioner therein was subject to 10% VAT under Section 108
of the Tax Code of 1997. Antam Pawnshop Corporation v. Commissioner of
Internal Revenue16 reiterates said ruling. It was the CTA's view that the services
rendered by pawnshops fall under the general definition of "sale or exchange of
services" under Section 108(A) of the Tax Code of 1997.
On July 15, 2003, the Court rendered Commissioner of Internal Revenue v.
Michel J. Lhuillier Pawnshop, Inc.17 in which it was categorically ruled that
while pawnshops are engaged in the business of lending money, they are not
considered "lending investors" for the purpose of imposing percentage
taxes.18 The Court gave the following reasons: first, under the 1997 Tax Code,
pawnshops and lending investors were subjected to different tax treatments;
second, Congress never intended pawnshops to be treated in the same way as
lending investors; third, Section 116 of the NIRC of 1977 subjects to
percentage tax dealers in securities and lending investors only; and lastly, the
BIR had ruled several times prior to the issuance of RMO No. 15-91 and RMC
43-91 that pawnshops were not subject to the 5% percentage tax on lending
investors imposed by Section 116 of the NIRC of 1977, as amended by
Executive Order No. 273.
In view of said ruling, the BIR issued Revenue Memorandum Circular No.
36-2004 dated June 16, 2004, canceling the previous lending investor's tax
assessments on pawnshops. Said Circular stated, inter alia:
In view of the said Supreme Court decision, all assessments on pawnshops for
percentage taxes as lending investors are hereby cancelled. This Circular is
being issued for the sole purpose of resolving the tax liability of pawnshops to
the 5% lending investors tax provided under the then Section 116 of the NIRC
of 1977, as amended, and shall not cover issues relating to their other tax
liabilities. All internal revenue officials are enjoined from issuing assessments
on pawnshops for percentage taxes on lending investors, under the then Section
116 of the NIRC of 1977, as amended.
For purposes of the gross receipt tax provided for under Republic Act No. 9294,
the pawnshops are now subject thereof. This shall however, be covered by
another issuance.19
Revenue Memorandum Circular No. 37-2004 was issued on the same date
whereby pawnshop businesses were allowed to settle their VAT liabilities for
the tax years 1996-2002 pursuant to a memorandum of agreement entered into
by the Commissioner of Internal Revenue and the Chambers of Pawnbrokers of
the Philippines, Inc. The Circular likewise instructed all revenue officers to
ensure that "all VAT due from pawnshops beginning January 1, 2003, including
increments thereto, if any, are assessed and collected from pawnshops under its
jurisdiction."
In the interim, however, Congress passed Republic Act (R.A.) No. 9238 on
February 5, 2004 entitled, "An Act Amending Certain Sections of the National
Internal Revenue Code of 1997, as amended, by Excluding Several Services
from the Coverage of the Value-added Tax and Re-imposing the Gross Receipts
Tax on Banks and Non-bank Financial Intermediaries Performing Quasi-
banking Functions and Other Non-bank Financial Intermediaries beginning
January 01, 2004."20
Pending publication of R.A. No. 9238, the BIR issued Bank Bulletin No.
2004-01 on February 10, 2004 advising all banks and non-bank financial
intermediaries that they shall remain liable under the VAT system.
When R.A. No. 9238 took effect on February 16, 2004, the Department of
Finance issued Revenue Regulations No. 10-2004 dated October 18, 2004,
classifying pawnshops as Other Non-bank Financial Intermediaries. The BIR
then issued Revenue Memorandum Circular No. 73-2004 on November 25,
2004, prescribing the guidelines and policies on the assessment and collection
of 10% VAT for gross annual sales/receipts exceeding ₱550,000.00 or 3%
percentage tax for gross annual sales/receipts not exceeding ₱550,000.00 of
pawnshops prior to January 1, 2005.
In fine, prior to the EVAT Law, pawnshops were treated as lending investors
subject to lending investor's tax. Subsequently, with the Court's ruling
in Lhuillier, pawnshops were then treated as VAT-able enterprises under the
general classification of "sale or exchange of services" under Section 108(A) of
the Tax Code of 1997, as amended. R.A. No. 9238 finally classified pawnshops
as Other Non-bank Financial Intermediaries.
The Court finds that pawnshops should have been treated as non-bank financial
intermediaries from the very beginning, subject to the appropriate taxes
provided by law, thus –
· Under the National Internal Revenue Code of 1977,21 pawnshops should have
been levied the 5% percentage tax on gross receipts imposed on bank and non-
bank financial intermediaries under Section 119 (now Section 121 of the Tax
Code of 1997);
· With the imposition of the VAT under R.A. No. 7716 or the EVAT
Law,22 pawnshops should have been subjected to the 10% VAT imposed on
banks and non-bank financial intermediaries and financial institutions under
Section 102 of the Tax Code of 1977 (now Section 108 of the Tax Code of
1997);23
· This was restated by R.A. No. 8241,24 which amended R.A. No. 7716,
although the levy, collection and assessment of the 10% VAT on services
rendered by banks, non-bank financial intermediaries, finance companies, and
other financial intermediaries not performing quasi-banking functions, were
made effective January 1, 1998;25
· R.A. No. 8424 or the Tax Reform Act of 199726 likewise imposed a 10% VAT
under Section 108 but the levy, collection and assessment thereof were again
deferred until December 31, 1999;27
· The levy, collection and assessment of the 10% VAT was further deferred by
R.A. No. 8761 until December 31, 2000, and by R.A. No. 9010, until December
31, 2002;
· With no further deferments given by law, the levy, collection and assessment
of the 10% VAT on banks, non-bank financial intermediaries, finance
companies, and other financial intermediaries not performing quasi-banking
functions were finally made effective beginning January 1, 2003;
· Finally, with the enactment of R.A. No. 9238, the services of banks, non-bank
financial intermediaries, finance companies, and other financial intermediaries
not performing quasi-banking functions were specifically exempted from
VAT,28 and the 0% to 5% percentage tax on gross receipts on other non-bank
financial intermediaries was reimposed under Section 122 of the Tax Code of
1997.29
At the time of the disputed assessment, that is, for the year 2000, pawnshops
were not subject to 10% VAT under the general provision on "sale or exchange
of services" as defined under Section 108(A) of the Tax Code of 1997, which
states: "'sale or exchange of services' means the performance of all kinds of
services in the Philippines for others for a fee, remuneration or consideration x
x x." Instead, due to the specific nature of its business, pawnshops were then
subject to 10% VAT under the category of non-bank financial intermediaries, as
provided in the same Section 108(A), which reads:
SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties.
- VAT system on non-bank financial intermediaries starting January 1, 2003,
(A) Rate and Base of Tax. - There shall be levied, assessed and collected, a
value-added tax equivalent to ten percent (10%) of gross receipts derived from
the sale or exchange of services, including the use or lease of properties.
Ultimately, R.A. No. 9238 categorically confirmed the classification of
pawnshops as non-bank financial intermediaries.
Coming now to the issue at hand - Since petitioner is a non-bank financial
intermediary, it is subject to 10% VAT for the tax years 1996 to 2002; however,
with the levy, assessment and collection of VAT from non-bank financial
intermediaries being specifically deferred by law,34 then petitioner is not
liable for VAT during these tax years. But with the full implementation of the
petitioner is liable for 10% VAT for said tax year. And beginning 2004 up to the
present, by virtue of R.A. No. 9238, petitioner is no longer liable for VAT but it
is subject to percentage tax on gross receipts from 0% to 5 %, as the case may
be.

The phrase "sale or exchange of services" means the performance of all kinds
or services in the Philippines for others for a fee, remuneration or consideration,
including x x x services of banks, non-bank financial intermediaries and
finance companies; and non-life insurance companies (except their crop
insurances), including surety, fidelity, indemnity and bonding companies; and
similar services regardless of whether or not the performance thereof calls for
the exercise or use of the physical or mental faculties. The phrase 'sale or
exchange of services' shall likewise include: x x x (Emphasis and underscoring
supplied)

The tax treatment of pawnshops as non-bank financial intermediaries is not

without basis.

R.A. No. 337, as amended, or the General Banking Act characterizes the
terms banking institution and bank as synonymous and interchangeable and
specifically include commercial banks, savings bank, mortgage banks,
development banks, rural banks, stock savings and loan associations, and
branches and agencies in the Philippines of foreign banks.30 R.A. No. 8791 or
the General Banking Law of 2000, meanwhile, provided that banks shall refer
to entities engaged in the lending of funds obtained in the form of
deposits.31 R.A. No. 8791 also included cooperative banks, Islamic banks and
other banks as determined by the Monetary Board of the Bangko Sentral ng
Pilipinas in the classification of banks.32lavvphi1

Financial intermediaries, on the other hand, are defined as "persons or entities

whose principal functions include the lending, investing or placement of funds
or evidences of indebtedness or equity deposited with them, acquired by them,
or otherwise coursed through them, either for their own account or for the
account of others."33

It need not be elaborated that pawnshops are non-banks/banking institutions.

Moreover, the nature of their business activities partakes that of a financial
intermediary in that its principal function is lending.

A pawnshop's business and operations are governed by Presidential Decree

(P.D.) No. 114 or the Pawnshop Regulation Act and Central Bank Circular No.
374 (Rules and Regulations for Pawnshops). Section 3 of P.D. No. 114
defines pawnshop as "a person or entity engaged in the business of lending
money on personal property delivered as security for loans and shall be
synonymous, and may be used interchangeably, with pawnbroker or pawn
brokerage."

That pawnshops are to be treated as non-bank financial intermediaries is further

bolstered by the fact that pawnshops are under the regulatory supervision of
the Bangko Sentral ng Pilipinas and covered by its Manual of Regulations for
Non-Bank Financial Institutions. The Manual includes pawnshops in the list of
non-bank financial intermediaries, viz.:

§ 4101Q.1 Financial Intermediaries

xxx

Non-bank financial intermediaries shall include the following:

(1) A person or entity licensed and/or registered with any government

regulatory body as a non-bank financial intermediary, such as investment
house, investment company, financing company, securities dealer/broker,
lending investor, pawnshop, money broker x x x. (Emphasis supplied)

Revenue Regulations No. 10-2004, in fact, recognized these bases, to wit:

SEC. 2. BASES OF QUALIFYING PAWNSHOPS AS NON-BANK

FINANCIAL INTERMEDIARIES. - Whereas, in relation to Sec. 2.3 of Rev.
Regs No. 9-2004 defining "Non-bank Financial Intermediaries, the term
"pawnshop" as defined under Presidential Decree No. 114 which authorized its
creation, to be a person or entity engaged in the business of lending money, all
fall within the classification of Non-bank Financial Intermediaries and
therefore, covered by Sec. 4 of R.A. No. 9238.

This classification is equally supported by Subsection 4101Q.1 of the BSP

Manual of Regulations for Non-Bank Financial Intermediaries and reiterated in
BSP Circular No. 204-99, classifying pawnshops as one of Non-bank Financial
Intermediaries within the supervision of the Bangko Sentral ng Pilipinas.
PHILIPPINE BANKING CORPORATION (NOW: GLOBAL BUSINESS
BANK, INC.), Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
FACTS
Petitioner is a domestic corporation duly licensed as a banking institution.3 For
the taxable years 1996 and 1997, petitioner offered its SSDA to its depositors.
The SSDA is a form of a savings deposit evidenced by a passbook and earning
a higher interest rate than a regular savings account. Petitioner believes that
the SSDA is not subject to Documentary Stamp Tax (DST) under Section
180 of the 1977 National Internal Revenue Code (NIRC), as amended.4
On 10 January 2000, the Commissioner of Internal Revenue (respondent) sent
petitioner a Final Assessment Notice assessing deficiency DST based on the
outstanding balances of its SSDA, including increments, in the total sum of
₱17,595,488.75 for 1996 and ₱47,767,756.24 for 1997. These assessments were
based on the outstanding balances of the SSDA appearing in the schedule
attached to petitioner’s audited financial statements for the taxable years 1996
and 1997.5
Petitioner claims that the SSDA is in the nature of a regular savings account
since both types of accounts have the following common features:
a. They are both evidenced by a passbook;
b. The depositors can make deposits or withdrawals anytime which are not
subject to penalty; and
c. Both can have an Automatic Transfer Agreement (ATA) with the depositor’s
current or checking account.6
Petitioner alleges that the only difference between the regular savings account
and the SSDA is that the SSDA is for depositors who maintain savings deposits
with a substantial average daily balance, and as an incentive, they are given
higher interest rates than regular savings accounts. These deposits are classified
separately in petitioner’s financial statements in order to maintain a separate
record for savings deposits with substantial balances entitled to higher interest
rates.7
Petitioner maintains that the tax assessments are erroneous because
Section 180 of the 1977 NIRC does not include deposits evidenced by a
passbook among the enumeration of instruments subject to DST. Petitioner
asserts that the language of the law is clear and requires no
interpretation.8 Section 180 of the 1977 NIRC, as amended,9 provides:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of
exchange, drafts, instruments and securities issued by the government or
any of its instrumentalities, certificates of deposit bearing interest and
others not payable on sight or demand. — On all loan agreements signed
abroad wherein the object of the contract is located or used in the Philippines;
bills of exchange (between points within the Philippines), drafts, instruments
and securities issued by the Government or any of its instrumentalities
or certificates of deposits drawing interest, or orders for the payment of any
sum of money otherwise than at the sight or on demand, or on all promissory
notes, whether negotiable or non-negotiable, except bank notes issued for
circulation, and on each renewal of any such note, there shall be collected a
documentary stamp tax of Thirty centavos (₱0.30) on each Two hundred pesos,
or fractional part thereof, of the face value of any such agreement, bill of
exchange, draft, certificate of deposit, or note: provided, that only one
documentary stamp tax shall be imposed on either loan agreement, or
promissory note issued to secure such loan, whichever will yield a higher tax:
provided, however, that loan agreements or promissory notes the aggregate of
which does not exceed Two hundred fifty thousand pesos (₱250,000) executed
by an individual for his purchase on installment for his personal use or that of
his family and not for business, resale, barter or hire of a house, lot, motor
vehicle, appliance or furniture shall be exempt from the payment of the
documentary stamp tax provided under this section. (Boldfacing supplied)
Petitioner insists that the SSDA, being issued in the form of a passbook, cannot
be construed as a certificate of deposit subject to DST under Section 180 of the
1977 NIRC. Petitioner explains that the SSDA is a necessary offshoot of the
deregulated interest rate regime in bank deposits.10 Petitioner elucidates:
With the removal of the respective interest rate ceilings on savings and time
deposit, banks are enabled to legitimately offer higher rates on savings account
which may even be at par with rates on time deposit. Practically, the distinction
between a savings and a time deposit was removed insofar as interest rates are
concerned. This being so, and for the legitimate purpose of further enticing
deposits for savings account, banks have evolved a product – the Super/Special
Savings Account – which offers the flexibility of a savings deposit but does
away with the rigidity of a time deposit account and with interest rate at par
with the latter. This is offered as an incentive for depositors who maintain or
who wish to maintain deposits with substantial average daily balance. Such
depositors will be entitled to an attractive interest rate, a rate higher than that to
which the regular savings account is entitled. Just like an ordinary savings,
Super/Special Savings Deposits can be withdrawn anytime. Of course, to be
entitled to preferential interest rate, such account must conform to a stated
minimum deposit balance within a specified holding period. Otherwise, the
depositor will lose the incentive of a higher interest rate and the account will
revert to an ordinary savings account and be entitled only to prevailing rates of
interest applicable to regular savings account. And unlike a time deposit
account, the Super/Special Savings Account comes in the form of a passbook,
hence need not be formally renewed in the manner that a time deposit
certificate has to be formally surrendered and renewed upon maturity.11
Petitioner argues that the DST is imposed on the basis of a mere inference or
perceived implication of what the SSDA is supposed to be and not on the basis
of what the law specifically states. Petitioner points out the differences between
the SSDA and time deposits:12
Time Deposits SSDA
1. The holding period is fixed 1. The holding period floats at
beforehand. the option of the depositor. It
can be 30, 60, 90 or 120 days
or more and as an incentive
for maintaining a longer
holding period, the depositor
earns higher interest.
2. There is pre-termination 2. No pre-termination and the
because there is no partial passbook account is simply
withdrawal of a certificate. reverted to an ordinary
Pre-termination results in the savings status in case of early
surrender and cancellation of or partial withdrawal or if the
the certificate of deposit. required holding period is not
met.
Petitioner also argues that even on the assumption that a passbook evidencing
the SSDA is a certificate of deposit, no DST will be imposed because only
negotiable certificates of deposits are subject to tax under Section 180 of the
1977 NIRC.13 Petitioner reasons that a savings passbook is not a negotiable
instrument and it cannot be denied that savings passbooks have never been
taxed as certificates of deposits.14
Petitioner alleges that prior to the passage of Republic Act No. 924315 (RA
9243), there was no law subjecting SSDA to DST during the taxable years 1996
and 1997. The amendatory provision in RA 9243 now specifically includes
"certificates or other evidences of deposits that are either drawing interest
significantly higher than the regular savings deposit taking into consideration
the size of the deposit and the risks involved or drawing interest and having a
specific maturity date."16 Petitioner admits that with this new taxing clause, its
SSDA is now subject to DST. However, the fact remains that this provision was
non-existent during the taxable years 1996 and 1997 subject of the assessments
in the present case.17
Respondent, through the Office of the Solicitor General, contends that the
SSDA is substantially the same and identical to that of a time deposit account
because in order to avail of the SSDA, one has to deposit a minimum of
₱50,000 and this amount must be maintained for a required period of time to
earn higher interest rates.18 In a time deposit account, the minimum deposit
requirement is ₱20,000 and this amount must be maintained for the agreed
period to earn the agreed interest rate. If a time deposit is pre-terminated, a
penalty will be imposed resulting in a lower interest income. In a regular
savings account, the interest rate is fixed and there is no penalty imposed for as
long as the required minimum balance is maintained. Thus, respondent asserts
that the SSDA is a time deposit account, albeit in the guise of a regular savings
account evidenced by a passbook.19
Respondent explains that under Section 180 of the 1977 NIRC, certificates of
deposits deriving interest are subject to the payment of DST. Petitioner’s
passbook evidencing its SSDA is considered a certificate of deposit, and being
very similar to a time deposit account, it should be subject to the payment of
DST.20
Respondent also argues that Section 180 of the 1977 NIRC categorically states
that certificates of deposit deriving interest are subject to DST without limiting
the enumeration to negotiable certificates of deposit. Based on the definition of
a certificate of deposit in Far East Bank and Trust Company v. Querimit,21 a
certificate of deposit may or may not be negotiable, since it may be payable
only to the depositor.22
ISSUE:
WON petitioner’s product called Special/Super Savings Account is subject to
DST under Section 180 of the 1977 NIRC prior to the passage of RA 9243 in
2004?
COURT:
The issue in the present case is whether petitioner’s SSDAs are "certificates of
deposits drawing interest" as used in Section 180 of the 1977 NIRC. If they are,
then the SSDAs are subject to DST. If not, then they are merely regular savings
account which concededly are not subject to DST. So what are "certificates of
deposits drawing interest," and how do they differ from a regular savings
account?
Section 180 of the 1977 NIRC, as amended, provides:
Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of
exchange, drafts, instruments and securities issued by the government or
any of its instrumentalities, certificates of deposit bearing interest and
others not payable on sight or demand. — On all loan agreements signed
abroad wherein the object of the contract is located or used in the Philippines;
bills of exchange (between points within the Philippines), drafts, instruments
and securities issued by the Government or any of its instrumentalities
or certificates of deposits drawing interest, or orders for the payment of any
sum of money otherwise than at the sight or on demand, or on all promissory
notes, whether negotiable or non- negotiable, except bank notes issued for
circulation, and on each renewal of any such note, there shall be collected a
documentary stamp tax of Thirty centavos (₱0.30) on each Two hundred pesos,
or fractional part thereof, of the face value of any such agreement, bill of
exchange, draft, certificate of deposit, or note: provided, that only one
documentary stamp tax shall be imposed on either loan agreement, or
promissory note issued to secure such loan, whichever will yield a higher tax:
provided, however, that loan agreements or promissory notes the aggregate of
which does not exceed Two hundred fifty thousand pesos (₱250,000) executed
by an individual for his purchase on installment for his personal use or that of
his family and not for business, resale, barter or hire of a house, lot, motor
vehicle, appliance or furniture shall be exempt from the payment of the
documentary stamp tax provided under this section. lavvphil.zw+(Boldfacing
and underscoring supplied)
In Far East Bank and Trust Company v. Querimit,39 the Court defined a
certificate of deposit as "a written acknowledgment by a bank or banker of
the receipt of a sum of money on deposit which the bank or banker
promises to pay to the depositor, to the order of the depositor, or to some
other person or his order, whereby the relation of debtor and creditor
between the bank and the depositor is created." A certificate of deposit is
also defined as "a receipt issued by a bank for an interest-bearing time
deposit coming due at a specified future date."40
The deposit operations of a bank as listed in the Bangko Sentral ng
Pilipinas Manual of Regulations for Banks41 consist of the following:
1. Demand Deposits – are deposits, subject to withdrawal either by check or
thru the automated tellering machines which are otherwise known as current or
checking accounts. The Bank may or may not pay interest on these accounts.42
2. Savings Deposits – are interest-bearing deposits which are withdrawable
either upon presentation of a properly accomplished withdrawal slip together
with the corresponding passbook or thru the automated tellering machines.43
3. Negotiable Order of Withdrawal Accounts – are interest-bearing savings
deposit which are withdrawable by means of Negotiable Orders of
Withdrawal.44
4. Time Deposits – are interest-bearing deposits with specific maturity dates
and evidenced by certificates issued by the bank.45
Petitioner treats the SSDA as a regular savings deposit account since it is
evidenced by a passbook and allows withdrawal. Respondent treats the
SSDA as a time deposit account because of the higher interest rates and
holding period. It is then significant to differentiate a regular savings deposit
and a time deposit vis-à-vis the SSDA to determine if the SSDA is a certificate
of deposit drawing interest referred to in Section 180 of the 1977 NIRC. A
comparison of a savings account, time deposit account, and SSDA is shown in
the table below:
Savings Account Time Deposit SSDA
Interest rate Regular savings Higher interest Higher interest
interest rate rate
Period None Fixed Term Fixed Term
Evidenced Passbook Certificate of Passbook
by: Time Deposit
Pre- None With penalty With penalty
termination
Holding None Yes Yes
Period
Withdrawal Allowed Withdrawal Allowed
amounts to provided the
pre-termination minimum
amount to earn
the higher
interest rate is
maintained,
otherwise, the
regular
savings
interest rate
will apply.
Based on the definition and comparison, it is clear that a certificate of deposit
drawing interest as used in Section 180 of the 1977 NIRC refers to a time
deposit account. As the Bureau of Internal Revenue (BIR) explained in
Revenue Memorandum Circular No. 16-2003,46 the distinct features of a
certificate of deposit from a technical point of view are as follows:
a. Minimum deposit requirement;
b. Stated maturity period;
c. Interest rate is higher than the ordinary savings account;
d. Not payable on sight or demand, but upon maturity or in case of pre-
termination, prior notice is required; and
e. Early withdrawal penalty in the form of partial loss or total loss of interest in
case of pre-termination.
The SSDA is for depositors who maintain savings deposits with substantial
average daily balance and which earn higher interest rates. The holding period
of an SSDA floats at the option of the depositor at 30, 60, 90, 120 days or more
and for maintaining a longer holding period, the depositor earns higher interest
rates. There is no pre-termination of accounts in an SSDA because the account
is simply reverted to an ordinary savings status in case of early or partial
withdrawal or if the required holding period is not met. Based on the foregoing,
the SSDA has all of the distinct features of a certificate of deposit.
Petitioner argues that a deposit account evidenced by a passbook cannot be
construed as a certificate of deposit subject to DST under Section 180 of the
1977 NIRC. In International Exchange Bank v. Commissioner of Internal
Revenue,47 this Court categorically ruled that a passbook representing an
interest earning deposit account issued by a bank qualifies as a certificate of
deposit drawing interest and should be subject to DST. The Court added that "a
document to be deemed a certificate of deposit requires no specific form as
long as there is some written memorandum that the bank accepted a deposit of a
sum of money from a depositor."48
Petitioner also argues that prior to the passage of RA 9243, there was no law
subjecting SSDA to DST. In International Exchange Bank v. Commissioner of
Internal Revenue,49 the Court held that the amendment to include "other
evidences of deposits that are drawing interest significantly higher than the
regular savings deposit" was intended to eliminate the ambiguity.
DST is imposed on Certificates of Deposits Bearing Interest
including a special savings account evidenced by a passbook.
Documentary stamp tax is a tax on documents, instruments, loan agreements,
and papers evidencing the acceptance, assignment, sale or transfer of an
obligation, right or property incident thereto. A DST is actually an excise tax
because it is imposed on the transaction rather than on the document.50 A DST
is also levied on the exercise by persons of certain privileges conferred by law
for the creation, revision, or termination of specific legal relationships through
the execution of specific instruments.51 Hence, in imposing the DST, the Court
considers not only the document but also the nature and character of the
transaction.
Section 180 of the 1977 NIRC imposes a DST of ₱0.30 on each ₱200 of the
face value of any certificate of deposit drawing interest. As correctly observed
by the CTA, a certificate of deposit is a written acknowledgment by a bank of
the receipt of a sum of money on deposit which the bank promises to pay to the
depositor, to the order of the depositor, or to some other person or his order,
whereby the relation of debtor or creditor between the bank and the depositor is
created.52
Petitioner’s SSDA has the following features:
1. Although the money placed in the SSDA can be withdrawn anytime, the
money is subject to a holding period in order to earn a higher interest rate.
Otherwise, in case of premature withdrawal, the depositor will not earn the
preferred interest ranging from 8% or higher but only the normal interest rate
on regular savings deposit.
2. In order to qualify for an SSDA, the depositor must place a substantial
amount of money of not less than ₱50,000. This amount is even larger than
what is needed to open a time deposit which is ₱20,000. Aside from the
substantial amount of money required, this amount must be maintained within a
certain period just like a time deposit.
3. On the issue of penalty, in an SSDA, if the depositor withdraws the money
and the balance falls below the "minimum balance" of ₱50,000, the interest is
reduced. This condition is identical to that imposed on a time deposit that is
withdrawn before maturity. 53
Based on these features, it is clear that the SSDA is a certificate of deposit
drawing interest subject to DST even if it is evidenced by a passbook and non-
negotiable in character. In International Exchange Bank v. Commissioner of
Internal Revenue,54 we held that:
A document to be deemed a certificate of deposit requires no specific form as
long as there is some written memorandum that the bank accepted a deposit of a
sum of money from a depositor. What is important and controlling is the nature
or meaning conveyed by the passbook and not the particular label or
nomenclature attached to it, inasmuch as substance, not form, is
paramount.lavvph!l.net
Moreover, a certificate of deposit may be payable to the depositor, to the order
of the depositor, or to some other person or his order. From the use of the
conjunction or, instead of and, the negotiable character of a certificate of
deposit is immaterial in determining the imposition of DST.55
In Banco de Oro Universal Bank v. Commissioner of Internal Revenue,56 this
Court upheld the CTA’s decision and ruled:
The CTA en banc likewise declared that in practice, a time deposit transaction
is covered by a certificate of deposit while petitioner's Investment Savings
Account (ISA) transaction is through a passbook. Despite the differences in the
form of any documents, the CTA en banc ruled that a time deposit and ISA
have essentially the same attributes and features. It explained that like time
deposit, ISA transactions bear a fixed term or maturity because the bank
acknowledges receipt of a sum of money on deposit which the bank promises to
pay the depositor, bearer or to the order of a bearer on a specified period of
time. Section 180 of the 1997 NIRC does not prescribed the form of a
certificate of deposit. It may be any 'written acknowledgment by a bank of the
receipt of money on deposit.' The definition of a certificate of deposit is all
encompassing to include a savings account deposit such as ISA. (Emphasis
supplied)
JAKA INVESTMENTS CORPORATION, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent.
FACTS:
Sometime in 1994, petitioner sought to invest in JAKA Equities Corporation
(JEC), which was then planning to undertake an initial public offering (IPO)
and listing of its shares of stock with the Philippine Stock Exchange. JEC
increased its authorized capital stock from One Hundred Eighty-Five Million
Pesos (₱185,000,000.00) to Two Billion Pesos (₱2,000,000,000.00). Petitioner
proposed to subscribe to Five Hundred Eight Million Eight Hundred Six
Thousand Two Hundred Pesos (₱508,806,200.00) out of the increase in the
authorized capital stock of JEC through a tax-free exchange under Section
34(c)(2) of the National Internal Revenue Code (NIRC) of 1977, as amended,
which was effected by the execution of a Subscription Agreement and Deed
of Assignment of Property in Payment of Subscription. Under this
Agreement, as payment for its subscription, petitioner will assign and transfer
to JEC the following shares of stock:
(a) 154,208,404 shares in Republic Glass Holdings Corporation (RGHC),
(b) 2,822,500 shares in Philippine Global Communications, Inc. (PGCI),
(c) 7,495,488 shares in United Coconut Planters Bank (UCPB), and
(d) 1,313,176 shares in Far East Bank and Trust Company (FEBTC).3
The intended IPO and listing of shares of JEC did not materialize. However,
JEC still decided to proceed with the increase in its authorized capital stock and
petitioner agreed to subscribe thereto, but under different terms of payment.
Thus, petitioner and JEC executed the Amended Subscription
Agreement4 on September 5, 1994, wherein the above-enumerated RGHC,
PGCI, and UCPB shares of stock were transferred to JEC. In lieu of the
FEBTC shares, however, the amount of Three Hundred Seventy Million
Seven Hundred Sixty-Six Thousand Pesos (₱370,766,000.00) was paid for
in cash by petitioner to JEC.
On October 14, 1994, petitioner paid One Million Three Thousand Eight
Hundred Ninety-Five Pesos and Sixty-Five Centavos (₱1,003,895.65) for basic
documentary stamp tax inclusive of the 25% surcharge for late payment on the
Amended Subscription Agreement, broken down as follows:
Documentary Stamp Tax - ₱803,116.72
25% Surcharge - 200,778.93
Total ₱1,003,895.655
On October 17, 1994, Revenue District Officer (RDO) Atty. Sixto S. Esquivias
IV (RDO Esquivias) issued three Certifications,6 as follows:
Cert. No. Shares of Stock Documentary Stamps
94-10-17-07 7,495,488 UCPB shares ₱23,423.14
94-10-17-08 154,208,403 RGHC shares 481,901.88
94-10-17-14 2,822,500 PGCI shares 88,203.13
₱593,528.15
Petitioner, after seeing the RDO’s certifications, the total amount of which
was less than the actual amount it had paid as documentary stamp tax,
concluded that it had overpaid. Petitioner subsequently sought a refund for
the alleged excess documentary stamp tax and surcharges it had paid on
the Amended Subscription Agreement in the amount of Four Hundred Ten
Thousand Three Hundred Sixty-Seven Pesos (₱410,367.00), the difference
between the amount of documentary stamp tax it had paid and the amount of
documentary stamp tax certified to by the RDO, through a letter-request7 to the
BIR dated October 10, 1996.
PETITIONER’S CONTENTION:
Petitioner’s main contention in this claim for refund is that the tax base for the
documentary stamp tax on the Amended Subscription Agreement should have
been only the shares of stock in RGHC, PGCI, and UCPB that petitioner had
transferred to JEC as payment for its subscription to the JEC shares, and should
not have included the cash portion of its payment, based on Section 176 of
the National Internal Revenue Code of 1977, as amended by Republic Act
No. 7660, or the New Documentary Stamps Tax Law (the 1994 Tax Code),
the law applicable at the time of the transaction. Petitioner argues that the
cash component of its payment for its subscription to the JEC shares, totaling
Three Hundred Seventy Million Seven Hundred Sixty-Six Thousand Pesos
(₱370,766,000.00) should not have been charged any documentary stamp tax.
Petitioner claims that there was overpayment because the tax due on the
transferred shares was only Five Hundred Ninety-Three Thousand Five
Hundred Twenty-Eight and 15/100 Pesos (₱593,528.15), as indicated in the
certifications issued by RDO Esquivias.
Petitioner contends that both the Court of Appeals and the Court of Tax Appeals
erroneously relied on respondent’s (Commissioner of Internal Revenue’s)
assertions that it had paid the documentary stamp tax on the original issuance of
the shares of stock of JEC under Section 175 of the 1994 Tax Code.
Petitioner explains that in this instance where shares of stock are used as
subscription payment, there are two documentary stamp tax incidences, namely,
the documentary stamp tax on the original issuance of the shares
subscribed (the JEC shares), which is imposed under Section 175; and the
documentary stamp tax on the shares transferred in payment of such
subscription (the transfer of the RGHC, PGCI and UCPB shares of stock from
petitioner to JEC), which is imposed under Section 176 of the 1994 Tax Code.
Petitioner argues that the documentary stamp tax imposed under Section 175 is
due on original issuances of certificates of stock and is computed based on the
aggregate par value of the shares to be issued; and that these certificates of
stock are issued only upon full payment of the subscription price such that
under the Bureau of Internal Revenue’s (BIR’s) Revised Documentary Stamp
Tax Regulations,10 it is stated that the documentary stamp tax on the original
issuance of certificates of stock is imposed on fully paid shares of stock only.
Petitioner alleges that it is the issuing corporation which is primarily liable
for the payment of the documentary stamp tax on the original issuance of
shares of stock. Petitioner further argues that the documentary stamp tax on
Section 176 of the 1994 Tax Code is imposed for every transfer of shares or
certificates of stock, computed based on the par value of the shares to be
transferred, and is due whether a certificate of stock is actually issued, indorsed
or delivered pursuant to such transfer. It is the transferor who is liable for the
documentary stamp tax on the transfer of shares.
Petitioner claims that the documentary stamp tax under Section 175 attaches to
the certificate/s of stock to be issued by virtue of petitioner’s subscription while
the documentary stamp tax under Section 176 attaches to the Amended
Subscription Agreement, since it is this instrument that evidences the transfer of
the RGHC, PGCI and UCPB shares from petitioner to JEC.
Petitioner contends that at the time of the execution of the Amended
Subscription Agreement, the JEC shares or certificates subscribed by petitioner
could not have been issued by JEC because the same were yet to be sourced
from the increase in authorized capital stock of JEC, which in turn had yet to be
approved by the Securities and Exchange Commission (SEC). Petitioner thus
reasons that the documentary stamp tax under Section 175 could not have
accrued at the time the Amended Subscription Agreement was executed
because no right to the shares had neither been nor could be established in favor
of the petitioner at such time. Petitioner theorizes that the earliest time that the
subscription could actually be executed would be when the SEC approves the
increase in the authorized capital stock of JEC. On the other hand, upon the
execution of the Amended Subscription Agreement, the assignment or the
transfer of RGHC, PGCI and UCPB shares in favor of JEC (which is evidenced
by said agreement), is deemed immediately enforceable as this is a necessary
requirement of the SEC.
Petitioner points out that Section 175 of the 1994 Tax Code imposes a
documentary stamp tax on every original issuance of certificates of stock,
whereas Republic Act No. 8424, the Tax Reform Act of 1997 (the 1997 Tax
Code), amended this provision and imposed a documentary stamp tax on the
original issuance of shares of stock. Petitioner argues that under Section 175 of
the 1994 Tax Code, there was no documentary stamp tax due on the mere
execution of a subscription agreement to shares of stock, and the tax only
accrued upon issuance of the certificates of stock. In this case, the change in
wording introduced by the 1997 Tax Code cannot be made applicable to the
Amended Subscription Agreement, which was executed in 1994, because it is a
well-settled doctrine in taxation that a law must have prospective application.
RESPONDENT’S CONTENTION:.
Respondent maintains that the documentary stamp tax imposed in this case
is on the original issue of certificates of stock of JEC on the subscription by
the petitioner of the ₱508,806,200.00 shares out of the increase in the
authorized capital stock of the former pursuant to Section 175 of the NIRC. The
documentary stamp tax was not imposed on the shares of stock owned by
petitioner in RGHC, PGCI, and UCPB, which merely form part of the partial
payment of the subscribed shares in JEC. Respondent avers that the amounts
indicated in the Certificates of RDO Esquivias are the amounts of documentary
stamp tax representing the equivalent of each group of shares being applied for
payment. Considering that the amount of documentary stamp tax represented
by the shares of stock in the aforementioned companies amounted only to
₱593,528.15, while the basic documentary stamp tax for the entire subscription
of ₱508,806,200.00 was computed by respondent’s revenue officers to the tune
of ₱803,116.72, exclusive of the penalties, leaving a balance of ₱209,588.57, is
a clear indication that the payment made with the shares of stock is insufficient.
Respondent claims that the certifications were issued by RDO Esquivias
purposely to allow the registration of transfer of the shares of stock used in
payment of the subscribed shares in the name of JEC from petitioner by the
Corporate Secretary of the UCPB and are not evidence of the payment of the
documentary stamp tax on the issuance of the increased shares of stocks of
JEC.13
Respondent argues that the documentary stamp tax attaches upon
acceptance by the corporation of the stockholder’s subscription in the
capital stock of the corporation, and that the term "original issue" of the
certificate of stock means "the point at which the stockholder acquires and
may exercise attributes of ownership over the stocks."14 Respondent further
argues that the stocks can be alienated; the dividends or fruits derived therefrom
can be enjoyed; and they can be conveyed, pledged, or encumbered; that the
certificate, irrespective of whether or not it is in the actual constructive
possession of the stockholder, is considered issued because it is with value and,
hence, the documentary stamp tax must be paid; and concludes that a person
may own shares of stock without possessing a certificate of stock. Respondent
cites Commissioner of Internal Revenue v. Construction Resources of Asia,
Inc.,15 where the Court held:
The delivery of the certificates of stocks to the private respondent's
stockholders whether actual or constructive, is not essential for the
documentary and science stamps taxes to attach. What is taxed is the privilege
of issuing shares of stock and, therefore, the taxes accrue at the time the shares
are issued. The only question before us is whether or not said private
respondents issued the certificates of stock covering the paid-in-capital of
₱17,880,000.00.
Respondent claims that it is well-settled as a general rule of Corporation Law
that a subscriber for stock in a corporation or purchaser of stock becomes a
stockholder as soon as his subscription is accepted by the corporation whether a
certificate of stock is issued to him or not, and although he may have no
certificate, he is thereupon entitled to all the rights and is subject to all the
liabilities of a stockholder.
Respondent argues, based on the above, that the contention of petitioner that the
documentary stamp tax under Section 175 of the 1994 Tax Code could not have
accrued at the time the Amended Subscription Agreement was executed since
the increase in capital stock of JEC had yet to be approved by the SEC was
inaccurate. He states that it is evident from the Amended Subscription
Agreement that the subscribed shares from the increase in JEC’s stock were
fully paid through cash and shares of stock.
Respondent submits that the change in wording, from "certificates" to "shares"
of stock, introduced to Section 175 by the 1997 Tax Code, was a mere
clarification and codification of the foregoing principle or policy.
Respondent stresses that the documentary stamp tax can be levied or collected
from the person making, signing, issuing, accepting, or transferring the
obligation or property, as provided in Section 173 of the Tax Code.
In its Reply to Respondent’s Comment to the Petition,16 petitioner contends that
respondent erroneously insists that the documentary stamp tax sought to be
refunded is the one imposed on the subscription by petitioner to
₱508,806,200.00 new shares of JEC. Petitioner further contends that since the
documentary stamp tax due on the issuance of new shares or on original shares
is ₱2.00 for every ₱200 under Section 175 of the Tax Code, then the
documentary stamp tax on petitioner’s subscription to JEC shares should
amount to ₱5,088,062.00, which is much higher than the ₱803,116.72 basic
documentary stamp tax paid under ATAP No. 1511920.17 Petitioner argues that
at the time the documentary stamp tax was paid, before a taxpayer was allowed
to pay the taxes due, a BIR revenue officer would first compute the tax due and
then issue an authority to accept payment (ATAP) and it was very unlikely that
the revenue officer could have made such a glaring mistake.
Petitioner alleges that there is no BIR certification requirement prior to the
issuance of original shares of stock; and that it is only upon the regular annual
audit of the books of a corporation that the BIR determines if the documentary
stamp tax on new or original issuances of shares, if any were issued, had in fact
been paid. If not, then a deficiency assessment, with penalties and surcharges,
would then be made by the BIR. Petitioner further alleges that, on the other
hand, before the transfer of issued and outstanding shares to a new owner is
recorded in the books of a corporation, the capital gains tax thereon and the
documentary stamp tax on the transfer must first be paid, and a BIR
certification must be presented to the Corporate Secretary authorizing the
corporation to record the transfer, otherwise, the corporate secretary shall be
subjected to penalties.
Petitioner claims that the three BIR certifications in this case specifically allow
the registration of the UCPB, RGHC, and PGCI shares in the name of JEC, the
transferee, and that said certifications evidence payment of the taxes due on the
transfer of the shares from petitioner to JEC, not on the original issuance of
shares of JEC.
The parties’ respective memoranda contained reiterations of the allegations
raised in their respective pleadings as discussed above.
ISSUE:
whether petitioner is entitled to a partial refund of the documentary stamp tax
and surcharges it paid on the execution of the Amended Subscription
Agreement.
COURT:
A documentary stamp tax is in the nature of an excise tax. It is not imposed
upon the business transacted but is an excise upon the privilege, opportunity or
facility offered at exchanges for the transaction of the business. It is an excise
upon the facilities used in the transaction of the business separate and apart
from the business itself. Documentary stamp taxes are levied on the exercise by
persons of certain privileges conferred by law for the creation, revision, or
termination of specific legal relationships through the execution of specific
instruments.20
Thus, we have held that documentary stamp taxes are levied independently of
the legal status of the transactions giving rise thereto. The documentary stamp
taxes must be paid upon the issuance of the said instruments, without regard to
whether the contracts which gave rise to them are rescissible, void, voidable, or
unenforceable.21
The relevant provisions of the Tax Code at the time of the transaction are
quoted below:
Sec. 175. Stamp tax on original issue of certificates of stock. — On every
original issue, whether on organization, reorganization or for any lawful
purpose, of certificates of stock by any association, company, or corporations,
there shall be collected a documentary stamp tax of Two pesos (P2.00) on each
two hundred pesos, or fractional part thereof, of the par value of such
certificates: Provided, That in the case of the original issue of stock without par
value the amount of the documentary stamp tax herein prescribed shall be based
upon the actual consideration received by the association, company, or
corporation for the issuance of such stock, and in the case of stock dividends on
the actual value represented by each share.
Sec. 176. Stamp tax on sales, agreements to sell, memoranda of sales,
deliveries or transfer of due-bills, certificates of obligation, or shares or
certificates of stock. — On all sales, or agreements to sell, or memoranda of
sales, or deliveries, or transfer of due-bills, certificates of obligation, or shares
or certificates of stock in any association, company or corporation, or transfer
of such securities by assignment in blank, or by delivery, or by any paper or
agreement, or memorandum or other evidences of transfer or sale whether
entitling the holder in any manner to the benefit of such due-bills, certificates of
obligation or stock, or to secure the future payment of money, or for the future
transfer of any due-bill, certificates of obligation or stock, there shall be
collected a documentary stamp tax of One peso (₱1.00) on each two hundred
pesos, or fractional part thereof, of the par value of such due-bill, certificates of
obligation or stock: Provided, That only one tax shall be collected on each sale
or transfer of stock or securities from one person to another, regardless of
whether or not a certificate of stock or obligation is issued, endorsed, or
delivered in pursuance of such sale or transfer: and Provided, further, That in
the case of stock without par value the amount of the documentary stamp herein
prescribed shall be equivalent to twenty-five per centum of the documentary
stamp tax paid upon the original issue of said stock: Provided, furthermore,
That the tax herein imposed shall be increased to One peso and fifty centavos
(₱1.50) beginning 1996.
We find our discussion in the case of Commissioner of Internal Revenue v. First
Express Pawnshop Company, Inc.22 regarding these same provisions of the Tax
Code to be instructive, and we quote:
In Section 175 of the Tax Code, DST is imposed on the original issue of shares
of stock. The DST, as an excise tax, is levied upon the privilege, the
opportunity and the facility of issuing shares of stock. In Commissioner of
Internal Revenue v. Construction Resources of Asia, Inc., this Court explained
that the DST attaches upon acceptance of the stockholder's subscription in the
corporation's capital stock regardless of actual or constructive delivery of the
certificates of stock. Citing Philippine Consolidated Coconut Ind., Inc. v.
Collector of Internal Revenue, the Court held:
The documentary stamp tax under this provision of the law may be levied
only once, that is upon the original issue of the certificate. The crucial point
therefore, in the case before Us is the proper interpretation of the word 'issue'.
In other words, when is the certificate of stock deemed 'issued' for the purpose
of imposing the documentary stamp tax? Is it at the time the certificates of
stock are printed, at the time they are filled up (in whose name the stocks
represented in the certificate appear as certified by the proper officials of the
corporation), at the time they are released by the corporation, or at the time they
are in the possession (actual or constructive) of the stockholders owning them?
xxxx
Ordinarily, when a corporation issues a certificate of stock (representing the
ownership of stocks in the corporation to fully paid subscription) the certificate
of stock can be utilized for the exercise of the attributes of ownership over the
stocks mentioned on its face. The stocks can be alienated; the dividends or
fruits derived therefrom can be enjoyed, and they can be conveyed, pledged or
encumbered. The certificate as issued by the corporation, irrespective of
whether or not it is in the actual or constructive possession of the stockholder, is
considered issued because it is with value and hence the documentary stamp tax
must be paid as imposed by Section 212 of the National Internal Revenue Code,
as amended.
In Section 176 of the Tax Code, DST is imposed on the sales, agreements to
sell, memoranda of sales, deliveries or transfer of shares or certificates of stock
in any association, company, or corporation, or transfer of such securities by
assignment in blank, or by delivery, or by any paper or agreement, or
memorandum or other evidences of transfer or sale whether entitling the holder
in any manner to the benefit of such certificates of stock, or to secure the future
payment of money, or for the future transfer of certificates of stock.
In Compagnie Financiere Sucres et Denrees v. Commissioner of Internal
Revenue, this Court held that under Section 176 of the Tax Code, sales to secure
the future transfer of due-bills, certificates of obligation or certificates of stock
are subject to documentary stamp tax.
Revenue Memorandum Order No. 08-98 (RMO 08-98) provides the guidelines
on the corporate stock documentary stamp tax program. RMO 08-98 states that:
1. All existing corporations shall file the Corporation Stock DST Declaration,
and the DST Return, if applicable when DST is still due on the subscribed
share issued by the corporation, on or before the tenth day of the month
following publication of this Order.
xxxx
STDEH
3. All existing corporations with authorization for increased capital stock shall
file their Corporate Stock DST Declaration, together with the DST Return, if
applicable when DST is due on subscriptions made after the authorization,
on or before the tenth day of the month following the date of authorization.
(Boldfacing supplied)
RMO 08-98, reiterating Revenue Memorandum Circular No. 47-97 (RMC
47-97), also states that what is being taxed is the privilege of issuing shares of
stock, and, therefore, the taxes accrue at the time the shares are issued. RMC
47-97 also defines issuance as the point in which the stockholder acquires and
may exercise attributes of ownership over the stocks.
As pointed out by the CTA, Sections 175 and 176 of the Tax Code contemplate
a subscription agreement in order for a taxpayer to be liable to pay the DST. A
subscription contract is defined as any contract for the acquisition of unissued
stocks in an existing corporation or a corporation still to be formed. A stock
subscription is a contract by which the subscriber agrees to take a certain
number of shares of the capital stock of a corporation, paying for the same or
expressly or impliedly promising to pay for the same. (Emphases ours.)
Petitioner claims overpayment of the documentary stamp tax but its basis for
such is not clear at all. While insisting that the documentary stamp tax it had
paid for was not based on the original issuance of JEC shares as provided in
Section 175 of the 1994 Tax Code, petitioner failed in showing, even through a
mere basic computation of the tax base and the tax rate, that the documentary
stamp tax was based on the transfer of shares under Section 176 either. It would
have been helpful for petitioner’s cause had it submitted proof of the par value
of the shares of stock involved, to show the actual basis for the documentary
stamp tax computation. For comparison, the original Subscription Agreement
ought to have been submitted as well.
All that petitioner submitted to back up its claim were the certifications issued
by then RDO Esquivias.1âwphi1 As correctly pointed out by respondent,
however, the amounts in the RDO certificates were the amounts of
documentary stamp tax representing the equivalent of each group of shares
being applied for payment. The purpose for issuing such certifications was to
allow registration of transfer of shares of stock used in partial payment for
petitioner’s subscription to the original issuance of JEC shares. It should not be
used as evidence of payment of documentary stamp tax. Neither should it be the
lone basis of a claim for a documentary stamp tax refund.
The fact that it was petitioner and not JEC that paid for the documentary stamp
tax on the original issuance of shares is of no moment, as Section 173 of the
1994 Tax Code states that the documentary stamp tax shall be paid by the
person making, signing, issuing, accepting or transferring the property, right or
obligation.
Lastly, we deem it appropriate to reiterate the well-established doctrine that as a
matter of practice and principle, this Court will not set aside the conclusion
reached by an agency, like the Court of Tax Appeals, especially if affirmed by
the Court of Appeals. By the very nature of its function, it has dedicated itself
to the study and consideration of tax problems and has necessarily developed an
expertise on the subject, unless there has been an abuse or improvident exercise
of authority on its part, which we find is not present here.23
COMMISSIONER OF INTERNAL REVENUE, Petitioner,
vs.
FILINVEST DEVELOPMENT CORPORATION, Respondent.
FACTS:
The owner of 80% of the outstanding shares of respondent Filinvest Alabang,
Inc. (FAI), respondent Filinvest Development Corporation (FDC) is a holding
company which also owned 67.42% of the outstanding shares of Filinvest
Land, Inc. (FLI). On 29 November 1996, FDC and FAI entered into a Deed of
Exchange with FLI whereby the former both transferred in favor of the latter
parcels of land appraised at ₱4,306,777,000.00. In exchange for said parcels
which were intended to facilitate development of medium-rise residential and
commercial buildings, 463,094,301 shares of stock of FLI were issued to FDC
and FAI.3 As a result of the exchange, FLI’s ownership structure was changed
to the extent reflected in the following tabular précis, viz.:
Number and Number of Number and
Stockho Percentage of Additional Percentage of
lder Shares Held Prior to Shares Shares Held After
the Exchange Issued the Exchange
FDC 2,537,358,000 67.42% 42,217,000 2,579,575,00061.03%
FAI 0 0 420,877,000 420,877,000 9.96%
OTHER 1,226,177,000 32.58% 0 1,226,177,00029.01%
S extended to its affiliates were interest free despite the interest bearing loans it
3,763,535,000 100% 463,094,301 4,226,629,000(100%)
On 13 January 1997, FLI requested a ruling from the Bureau of Internal
Revenue (BIR) to the effect that no gain or loss should be recognized in the
aforesaid transfer of real properties. Acting on the request, the BIR issued
Ruling No. S-34-046-97 dated 3 February 1997, finding that the exchange is
among those contemplated under Section 34 (c) (2) of the old National Internal
Revenue Code (NIRC)4 which provides that "(n)o gain or loss shall be
recognized if property is transferred to a corporation by a person in exchange
for a stock in such corporation of which as a result of such exchange said
person, alone or together with others, not exceeding four (4) persons, gains
control of said corporation."5 With the BIR’s reiteration of the foregoing ruling
upon the 10 February 1997 request for clarification filed by FLI,6 the latter,
together with FDC and FAI, complied with all the requirements imposed in the
ruling.7
On various dates during the years 1996 and 1997, in the meantime, FDC also
extended advances in favor of its affiliates, namely, FAI, FLI, Davao Sugar
Central Corporation (DSCC) and Filinvest Capital, Inc. (FCI).8 Duly evidenced
by instructional letters as well as cash and journal vouchers, said cash advances
amounted to ₱2,557,213,942.60 in 19969 and ₱3,360,889,677.48 in 1997.10 On
15 November 1996, FDC also entered into a Shareholders’ Agreement with
Reco Herrera PTE Ltd. (RHPL) for the formation of a Singapore-based joint
venture company called Filinvest Asia Corporation (FAC), tasked to develop
and manage FDC’s 50% ownership of its PBCom Office Tower Project (the
Project). With their equity participation in FAC respectively pegged at 60% and
40% in the Shareholders’ Agreement, FDC subscribed to ₱500.7 million worth
of shares in said joint venture company to RHPL’s subscription worth ₱433.8
million. Having paid its subscription by executing a Deed of Assignment
transferring to FAC a portion of its rights and interest in the Project worth
₱500.7 million, FDC eventually reported a net loss of ₱190,695,061.00 in its
Annual Income Tax Return for the taxable year 1996.11
On 3 January 2000, FDC received from the BIR a Formal Notice of Demand to
pay deficiency income and documentary stamp taxes, plus interests and
compromise penalties,12 covered by the following Assessment Notices, viz.: (a)
Assessment Notice No. SP-INC-96-00018-2000 for deficiency income taxes in
the sum of ₱150,074,066.27 for 1996; (b) Assessment Notice No. SP-
DST-96-00020-2000 for deficiency documentary stamp taxes in the sum of
₱10,425,487.06 for 1996; (c) Assessment Notice No. SP-INC-97-00019-2000
for deficiency income taxes in the sum of ₱5,716,927.03 for 1997; and (d)
Assessment Notice No. SP-DST-97-00021-2000 for deficiency documentary
stamp taxes in the sum of ₱5,796,699.40 for 1997.13 The foregoing deficiency
taxes were assessed on the taxable gain supposedly realized by FDC from
the Deed of Exchange it executed with FAI and FLI, on the dilution
resulting from the Shareholders’ Agreement FDC executed with RHPL as
well as the "arm’s-length" interest rate and documentary stamp taxes
imposable on the advances FDC extended to its affiliates.14
On 3 January 2000, FAI similarly received from the BIR a Formal Letter of
Demand for deficiency income taxes in the sum of ₱1,477,494,638.23 for the
year 1997.15 Covered by Assessment Notice No. SP-INC-97-0027-2000,16 said
deficiency tax was also assessed on the taxable gain purportedly realized by
FAI from the Deed of Exchange it executed with FDC and FLI.17 On 26
January 2000 or within the reglementary period of thirty (30) days from notice
of the assessment, both FDC and FAI filed their respective requests for
reconsideration/protest, on the ground that the deficiency income and
documentary stamp taxes assessed by the BIR were bereft of factual and legal
basis.18 Having submitted the relevant supporting documents pursuant to the 31
January 2000 directive from the BIR Appellate Division, FDC and FAI filed on
11 September 2000 a letter requesting an early resolution of their request for
reconsideration/protest on the ground that the 180 days prescribed for the
resolution thereof under Section 228 of the NIRC was going to expire on 20
September 2000.19
In view of the failure of petitioner Commissioner of Internal Revenue (CIR) to
resolve their request for reconsideration/protest within the aforesaid period,
FDC and FAI filed on 17 October 2000 a petition for review with the Court of
Tax Appeals (CTA) pursuant to Section 228 of the 1997 NIRC. Docketed
before said court as CTA Case No. 6182, the petition alleged, among other
matters, that as previously opined in BIR Ruling No. S-34-046-97, no taxable
gain should have been assessed from the subject Deed of Exchange since FDC
and FAI collectively gained further control of FLI as a consequence of the
exchange; that correlative to the CIR's lack of authority to impute theoretical
interests on the cash advances FDC extended in favor of its affiliates, the rule is
settled that interests cannot be demanded in the absence of a stipulation to the
effect; that not being promissory notes or certificates of obligations, the
instructional letters as well as the cash and journal vouchers evidencing
said cash advances were not subject to documentary stamp taxes; and, that
no income tax may be imposed on the prospective gain from the supposed
appreciation of FDC's shareholdings in FAC. As a consequence, FDC and FAC
both prayed that the subject assessments for deficiency income and
documentary stamp taxes for the years 1996 and 1997 be cancelled and
annulled.20
On 4 December 2000, the CIR filed its answer, claiming that the transfer of
property in question should not be considered tax free since, with the resultant
diminution of its shares in FLI, FDC did not gain further control of said
corporation. Likewise calling attention to the fact that the cash advances FDC
obtained from banking institutions, the CIR invoked Section 43 of the old
NIRC which, as implemented by Revenue Regulations No. 2, Section 179 (b)
and (c), gave him "the power to allocate, distribute or apportion income or
deductions between or among such organizations, trades or business in order to
prevent evasion of taxes." The CIR justified the imposition of documentary
stamp taxes on the instructional letters as well as cash and journal
vouchers for said cash advances on the strength of Section 180 of the NIRC
and Revenue Regulations No. 9-94 which provide that loan transactions
are subject to said tax irrespective of whether or not they are evidenced by
a formal agreement or by mere office memo. The CIR also argued that FDC
realized taxable gain arising from the dilution of its shares in FAC as a result of
its Shareholders' Agreement with RHPL.21
Finding that the collective increase of the equity participation of FDC and FAI
in FLI rendered the gain derived from the exchange tax-free, the CTA also ruled
that the increase in the value of FDC's shares in FAC did not result in economic
advantage in the absence of actual sale or conversion thereof. While likewise
finding that the documents evidencing the cash advances FDC extended to its
affiliates cannot be considered as loan agreements that are subject to
documentary stamp tax, the CTA enunciated, however, that the CIR was
justified in assessing undeclared interests on the same cash advances pursuant
to his authority under Section 43 of the NIRC in order to forestall tax evasion.
For persuasive effect, the CTA referred to the equivalent provision in the
Internal Revenue Code of the United States (IRC-US), i.e., Sec. 482, as
implemented by Section 1.482-2 of 1965-1969 Regulations of the Law of
Federal Income Taxation.27
Dissatisfied with the foregoing decision, FDC filed on 5 November 2002 the
petition for review docketed before the CA as CA-G.R. No. 72992, pursuant to
Rule 43 of the 1997 Rules of Civil Procedure. Calling attention to the fact that
the cash advances it extended to its affiliates were interest-free in the absence of
the express stipulation on interest required under Article 1956 of the Civil
Code, FDC questioned the imposition of an arm's-length interest rate thereon on
the ground, among others, that the CIR's authority under Section 43 of the
NIRC: (a) does not include the power to impute imaginary interest on said
transactions; (b) is directed only against controlled taxpayers and not against
mother or holding corporations; and, (c) can only be invoked in cases of
understatement of taxable net income or evident tax evasion.28 Upholding
FDC's position, the CA's then Special Fifth Division rendered the herein
assailed decision dated 16 December 2003,29 the decretal portion of which
states:
WHEREFORE, premises considered, the instant petition is hereby GRANTED.
The assailed Decision dated September 10, 2002 rendered by the Court of Tax
Appeals in CTA Case No. 6182 directing petitioner Filinvest Development
Corporation to pay the amount of ₱5,691,972.03 representing deficiency
income tax on allegedly undeclared interest income for the taxable year 1997,
plus 20% delinquency interest computed from February 16, 2000 until full
payment thereof is REVERSED and SET ASIDE and, a new one entered
annulling Assessment Notice No. SP-INC-97-00019-2000 imposing deficiency
income tax on petitioner for taxable year 1997. No pronouncement as to costs.30
With the denial of its partial motion for reconsideration of the same 11
December 2002 resolution issued by the CTA,31 the CIR also filed the petition
for review docketed before the CA as CA-G.R. No. 74510. In essence, the CIR
argued that the CTA reversibly erred in cancelling the assessment notices: (a)
for deficiency income taxes on the exchange of property between FDC, FAI and
FLI; (b) for deficiency documentary stamp taxes on the documents evidencing
FDC's cash advances to its affiliates; and (c) for deficiency income tax on the
gain FDC purportedly realized from the increase of the value of its
shareholdings in FAC.32 The foregoing petition was, however, denied due
course and dismissed for lack of merit in the herein assailed decision dated 26
January 200533 rendered by the CA's then Fourteenth Division, upon the
following findings and conclusions, to wit:
1. As affirmed in the 3 February 1997 BIR Ruling No. S-34-046-97, the 29
November 1996 Deed of Exchange resulted in the combined control by FDC
and FAI of more than 51% of the outstanding shares of FLI, hence, no taxable
gain can be recognized from the transaction under Section 34 (c) (2) of the old
NIRC;
2. The instructional letters as well as the cash and journal vouchers evidencing
the advances FDC extended to its affiliates are not subject to documentary
stamp taxes pursuant to BIR Ruling No. 116-98, dated 30 July 1998, since they
do not partake the nature of loan agreements;
3. Although BIR Ruling No. 116-98 had been subsequently modified by BIR
Ruling No. 108-99, dated 15 July 1999, to the effect that documentary stamp
taxes are imposable on inter-office memos evidencing cash advances similar to
those extended by FDC, said latter ruling cannot be given retroactive
application if to do so would be prejudicial to the taxpayer;
4. FDC's alleged gain from the increase of its shareholdings in FAC as a
consequence of the Shareholders' Agreement it executed with RHPL cannot be
considered taxable income since, until actually converted thru sale or
disposition of said shares, they merely represent unrealized increase in capital.34
Respectively docketed before this Court as G.R. Nos. 163653 and 167689, the
CIR's petitions for review on certiorari assailing the 16 December 2003
decision in CA-G.R. No. 72992 and the 26 January 2005 decision in CA-G.R.
SP No. 74510 were consolidated pursuant to the 1 March 2006 resolution
issued by this Court’s Third Division.
In cases where no formal agreements or promissory notes have been executed
to cover credit facilities, the documentary stamp tax shall be based on the
amount of drawings or availment of the facilities, which may be evidenced by
credit/debit memo, advice or drawings by any form of check or withdrawal slip,
under Section 180 of the Tax Code.
Applying the aforesaid provisions to the case at bench, we find that the
instructional letters as well as the journal and cash vouchers evidencing the
advances FDC extended to its affiliates in 1996 and 1997 qualified as loan
agreements upon which documentary stamp taxes may be imposed. In keeping
with the caveat attendant to every BIR Ruling to the effect that it is valid only if
the facts claimed by the taxpayer are correct, we find that the CA reversibly
erred in utilizing BIR Ruling No. 116-98, dated 30 July 1998 which, strictly
speaking, could be invoked only by ASB Development Corporation, the
taxpayer who sought the same. In said ruling, the CIR opined that documents
like those evidencing the advances FDC extended to its affiliates are not subject
to documentary stamp tax, to wit:
On the matter of whether or not the inter-office memo covering the advances
granted by an affiliate company is subject to documentary stamp tax, it is
informed that nothing in Regulations No. 26 (Documentary Stamp Tax
Regulations) and Revenue Regulations No. 9-94 states that the same is subject
to documentary stamp tax. Such being the case, said inter-office memo
evidencing the lendings or borrowings which is neither a form of promissory
note nor a certificate of indebtedness issued by the corporation-affiliate or a
certificate of obligation, which are, more or less, categorized as 'securities', is
not subject to documentary stamp tax imposed under Section 180, 174 and 175
of the Tax Code of 1997, respectively. Rather, the inter-office memo is being
prepared for accounting purposes only in order to avoid the co-mingling of
funds of the corporate affiliates.1avvphi1

COURT:

On the other hand, insofar as documentary stamp taxes on loan agreements and
promissory notes are concerned, Section 180 of the NIRC provides follows:

Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of
exchange, drafts, instruments and securities issued by the government or any of
its instrumentalities, certificates of deposit bearing interest and others not
payable on sight or demand. – On all loan agreements signed abroad wherein
the object of the contract is located or used in the Philippines; bill of exchange
(between points within the Philippines), drafts, instruments and securities
issued by the Government or any of its instrumentalities or certificates of
deposits drawing interest, or orders for the payment of any sum of money
otherwise than at sight or on demand, or on all promissory notes, whether
negotiable or non-negotiable, except bank notes issued for circulation, and on
each renewal of any such note, there shall be collected a documentary stamp tax
of Thirty centavos (₱0.30) on each two hundred pesos, or fractional part
thereof, of the face value of any such agreement, bill of exchange, draft,
certificate of deposit or note: Provided, That only one documentary stamp tax
shall be imposed on either loan agreement, or promissory notes issued to secure
such loan, whichever will yield a higher tax: Provided however, That loan
agreements or promissory notes the aggregate of which does not exceed Two
hundred fifty thousand pesos (₱250,000.00) executed by an individual for his
purchase on installment for his personal use or that of his family and not for
business, resale, barter or hire of a house, lot, motor vehicle, appliance or
furniture shall be exempt from the payment of documentary stamp tax provided
under this Section.

When read in conjunction with Section 173 of the 1993 NIRC,63 the foregoing
provision concededly applies to "(a)ll loan agreements, whether made or signed
in the Philippines, or abroad when the obligation or right arises from Philippine
sources or the property or object of the contract is located or used in the
Philippines." Correlatively, Section 3 (b) and Section 6 of Revenue Regulations
No. 9-94 provide as follows:

Section 3. Definition of Terms. – For purposes of these Regulations, the

following term shall mean:

(b) 'Loan agreement' – refers to a contract in writing where one of the parties
delivers to another money or other consumable thing, upon the condition that
the same amount of the same kind and quality shall be paid. The term shall
include credit facilities, which may be evidenced by credit memo, advice or
drawings.

The terms 'Loan Agreement" under Section 180 and "Mortgage' under Section
195, both of the Tax Code, as amended, generally refer to distinct and separate
instruments. A loan agreement shall be taxed under Section 180, while a deed
of mortgage shall be taxed under Section 195."

"Section 6. Stamp on all Loan Agreements. – All loan agreements whether

made or signed in the Philippines, or abroad when the obligation or right arises
from Philippine sources or the property or object of the contract is located in
the Philippines shall be subject to the documentary stamp tax of thirty centavos
(₱0.30) on each two hundred pesos, or fractional part thereof, of the face value
of any such agreements, pursuant to Section 180 in relation to Section 173 of
the Tax Code.