70. First Planters Pawnshop Inc. v.

CIR
GR No. 174134 | 30 July 2008 | Austria-Martinez, J.
APOLINARIO | Topic: Tax on other non-bank financial intermediaries performing quasi-banking
functions
Doctrine: Pawnshops are entities engaged in the business of lending money on personal property delivered
as security for loans. It is classified as Other Non-Bank Financial Intermediaries, subject to 0-5% percentage
tax, as the case may be.

Facts:
1. Petitioner First Planters Pawnshop Inc. received a Formal Assessment Notice directing the payment of
VAT and DST deficiency for the year 2000. It filed a protest but was denied by Acting Regional Director
Adriano.
2. First Planters then filed a petition for review with CTA.
a. CTA 2nd Division upheld the assessment. CTA En Banc affirmed.
3. First Planters filed the present petition for review under Rule 45 arguing that it is not a lending investor
under Sec. 108(A) NIRC, thus, is not subject to VAT.
a. It also contends that a pawn ticket is not subject to DST because it is not proof of the pledge
transaction. Even assuming that it is so, the pawnshop is still not subject to DST since the same
is levied on the document issued and not on the transaction.

Issue/s and Holding:

W/N Petitioner is subject to VAT? – NO.
SC discussed the various legislations and revenue regulations and memorandums issued in relation to the tax
treatment of a pawnshop business. It noted that BIR itself had an ambivalent stance on this issue.
● Summary: Prior to the EVAT Law, pawnshops were treated as lending investors subject to lending
investor’s tax. Subsequently, with the SC decision in Lhuillier case, pawnshops were then treated as
VAT-able enterprises. RA 9238 then finally classified pawnshops as Other Non-Bank Financial
Intermediaries.

● RMO 15-91 [March 11, 1991] – pawnshop business was considered akin to lending investor’s business
activity and subject to 5% percentage tax, beginning Jan. 1, 1991, under Sec. 116 Tax Code 1997.
● RA 7716 (EVAT Law in 1994) – Upon its passage, BIR abandoned its earlier position and maintained
that pawnshops are subject to 10% VAT, as implemented by RR 7-95.
○ The BIR position was complemented by RMC 45-01, which provided that:
■ Pawnshop operators are liable to 10% VAT on gross receipts beginning Jan. 1,
1996.
■ Pawnshops with gross annual receipts that do NOT exceed P550,000 are liable for
percentage tax, pursuant to Sec. 109(z) of the Tax Code 1997.
○ CTA decisions affirmed BIR’s position that pawnshops are subject to VAT:
■ H. Tambunting Pawnshop v. CIR: Petitioner herein was subject to 10% VAT. Services
rendered by pawnshops fall under the general definition of “sale or exchange of
services” under Sec. 108(A) Tax Code 1997
● On July 15, 2003, SC decided the case of CIR v. Michel J. Lhuillier Pawnshop Inc.––while
pawnshops are engaged in the business of lending money, they are not considered lending investors
for the purpose of imposing percentage taxes, because:
(1) In 1997 Tax Code, pawnshops and lending investors are treated differently.
(2) Congress never intended pawnshops to be treated the same way as lending investors.
(3) Sec. 116 NIRC 1977 subjects dealers of securities and lending investors only to percentage tax
(4) BIR has ruled several times that pawnshops were not subject to the 5% percentage tax on
lending investors.
● In view of the SC decision, BIR issued RMC 36-2004 dated June 16, 2004, cancelling the previous
lending investor’s 5% percentage tax assessments on pawnshops.
 ○ On the same date, RMC 37-2004 was issued which allowed pawnshop businesses to settle
their VAT liabilities for the tax years 1996-2002 pursuant to a MOA between CIR and the
Chambers of Pawnbrokers of the PH, Inc.
■ RMC also instructed all revenue officers to ensure that all VAT due from pawnshops
beginning Jan. 1, 2003, are assessed and collected from pawnshops under its
jurisdiction.
● In the interim, Congress passed RA 9238, which amended the NIRC 1997, by excluding several
services from the coverage of VAT, 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 Jan. 1, 2004.
○ Pending the publication of the RA, BIR issued Bulletin No. 4001-01, advising all banks and non-
bank financial intermediaries that they shall remind liable under the VAT system.
○ When the RA took effect, DFA issued RR 10-2004 which classified pawnshops as Other
Non-Bank Financial Intermediaries.
○ BIR issued RMC 73-2004 prescribing the guidelines and policies on the assessment and
collection of 10% VAT for gross annual sales/receipts exceeding P550,000, OR P3%
percentage tax for gross annual sales/receipts not exceeding P550,000 prior to Jan. 1,
2005.

● SC finds that pawnshops should have been treated as non-bank financial intermediaries from the very
beginning, subject to the appropriate taxes as provided by law.
○ NIRC 1977 – Should have been levied the 5% percentage tax on gross receipts imposed on
bank and NBFI
○ RA 7716 or EVAT Law – should have been subjected to 10% VAT imposed on banks and NBFI
and financial institutions
○ RA 8241 – Restated the EVAT Law, but provided that the levy, collection, and assessment of
the 10% VAT on services rendered by banks, NBFI, finance companies, and other financial
intermediaries not performing quasi-banking functions were made effective Jan. 1, 1998. [so
collection and levy of tax was deferred until Jan. 1998]
■ RA 8424 – likewise imposed 10% VAT, but again deferred collection, levy, and
assessment until Dec. 31, 1999.
■ RA 8761 – furthered deferred collection, levy, and assessment until Dec. 31, 2000
■ RA 9010 – further deferred until Dec. 31, 2002
○ With no further deferments given by law, the levy, collection, and assessment of the 10% VAT
was finally made effective beginning Jan. 1, 2003.
○ RA 9238 – the services of banks, NBFI, finance companies, and other financial intermediaries
not performing quasi-banking functions were specifically exempted from VAT, and the 0-5%
percentage tax was reimposed.
● ITCAB, at the time of the disputed assessment, for the year 2000, pawnshops were subject to 10%
VAT not under the general provision on sale or exchange of services, BUT instead due to the specific
nature of its business under the category of non-bank financial intermediaries, as provided by
Sec. 108(A) NIRC. SC discussed the bases for considering pawnshops as NBFI:
○ RA 871 or General Banking Law of 2000 – Banks shall refer to entities engaged in the
lending of funds obtained in the form of deposits.
■ Financial intermediaries, OTOH, were defined as “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”
○ PD 114 governs the business and operations of a pawnshop. It defines pawnshops as “entities
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.”
○ Moreover, pawnshops are under the regulatory supervision of BSP and BSP’s Manual includes
pawnshops in the list of non-bank financial intermediaries.
 ○ RR 10-2004 recognized the legal bases enumerated above. It provided that a pawnshop fall
within the classification of NBFI.
○ Ultimately, as previously mentioned, pawnshops’ classification as NBFI is categorically
confirmed under RA 9238.
● HENCE, since Petitioner is a non-bank financial intermediary, it is subject to 10% VAT for the
years 1998-2002.
○ HOWEVER, with the levy, assessment, and collection of VAT from NBFI being specifically
deferred by law, then Petitioner is NOT liable for VAT during these years.
○ BUT with the full implementation of the VAT system on NBFI starting Jan. 1, 2003, petitioner is
liable for 10% VAT starting the said year.
○ Moreover, beginning 2004 and up to the present, by virtue of RA 9238, Petitioner is NO
LONGER liable for VAT but is subject to percentage tax on gross receipts from 0-5%, as the
case may be.

Ruling: Petition is PARTIALLY GRANTED. VAT deficiency is set aside, while DST deficiency is upheld.

OTHERS
W/N Petitioner is liable for DST? – YES.
● MJ Lhuillier Pawnshop Inc v. CIR: the subject of DST is not limited to the document alone. Pledge,
which is an exercise of a privilege to transfer obligations, rights, or properties incident thereto, is also
subject to DST.
○ It is an excise tax on the exercise of a right or privilege to transfer obligations, rights, or
properties incident thereto.
○ For the purpose of taxation, the pawn ticket is proof of an exercise of a taxable privilege of
concluding a contract of pledge. It is not the said ticket that creates the pawnshop’s obligation to
pay DST, but the exercise of the privilege to enter into a contract of pledge.
○ Thus, there is no basis in saying that DST is literally a tax on a document, and that no tax may
be imposed on a pawn ticket.
○ Sec. 195 NIRC unqualifiedly subjects all pledges to DST; Sec. 199 which enumerates certain
documents that are not subject to DST, does not include a pawnshop ticket.