G.R. No.

166018               June 4, 2014

THE HONGKONG AND SHANGHAI BANKING CORPORATION LIMITED-PHILIPPINE

BRANCHES, Petitioner,
vs.
COMMISSIONER OF INTERNAL REVENUE, Respondent;

Facts: HSBC custodies investor-clients' passive Philippine investments, primarily domestic

stock investments. HSBC collects/pays as a custodian bank.

HSBC manages investor-client Philippine peso and foreign currency accounts via electronic
messaging. SWIFT, the "Society for Worldwide Interbank Financial Telecommunication,"
standardizes the instructions.

According to investor-client electronic messages, HSBC acquired and paid Documentary

Stamp Tax (DST) from September to December 1997 and January to December 1998, totaling
P19,572,992.10 and P32,904,437.30.

BIR's then-Commissioner issued BIR Ruling that foreign instructions or advice on Philippine
fund management that do not include foreign fund transfers are not subject to DST. Any
foreign-drawn bill of exchange or order for payment receivable in the Philippines must pay a
documentary stamp tax.

a. The payor keeps a local and foreign currency account in the Philippines to draw money to
pay a named recipient while living abroad. Electronic messages will issue payment orders.

Thus, the payee need not sign or issue a negotiable document.

b. The non-resident payor's electronic instructions do not move funds from overseas or from
the place where the instruction originates, thus they are not transactions.

The Documentary Stamp Tax Law exempts the withdrawal of money from a bank deposit,
local or foreign currency account, unless the account is a current or checking account, in
which case the check or bank draft is subject to DST.

c. The receipt of funds from another Philippine bank for deposit to the payee's account and
the non-resident depositor-payor's electronic instruction to debit his account and pay a
named recipient are also exempt from documentary stamp tax.

Using the foregoing BIR Ruling, HSBC filed an administrative claim for the BIR to reimburse
allegedly erroneously paid DST.
The CTA sided with HSBC and ordered a return or tax credit after the BIR failed to act on its
refund claims.

The CA overruled the CTA and ruled that DST applies to HSBC investor-clients' electronic
messages.

a. DST is charged on persons who exercise certain privileges provided by law to create, revise,
or terminate particular legal relationships by the execution of specific instruments, regardless
of the legal status of the transactions giving rise thereto.

ISSUE: Whether or not the electronic messages are considered transactions  pertaining to

negotiable instruments that warrant the payment of DST.

HELD:  NO.

The Court agrees with the CTA that the DST under Section 181 of the Tax Code is levied on the
acceptance or payment of “a bill of exchange purporting to be drawn in a foreign country but
payable in the Philippines” and that “a bill of exchange is an unconditional order in writing
addressed by one person to another, signed by the person giving it, requiring the person to
whom it is addressed to pay on demand or at a fixed or determinable future time a sum
certain in money to order or to bearer.”

The Court further agrees with the CTA that the electronic messages of HSBC’s investor-clients
containing instructions to debit their respective local or foreign currency accounts in the
Philippines and pay a certain named recipient also residing in the Philippines is not the
transaction contemplated under Section 181 of the Tax Code as such instructions are
“parallel to an automatic bank transfer of local funds from a savings account to a checking
account maintained by a depositor in one bank.” The Court favorably adopts the finding of
the CTA that the electronic messages “cannot be considered negotiable instruments as
they lack the feature of negotiability, which, is the ability to be transferred” and that
the said electronic messages are “mere memoranda” of the transaction consisting of the
“actual debiting of the [investor-client-payor’s] local or foreign currency account in the
Philippines” and “entered as such in the books of account of the local bank,” HSBC.

The instructions given through electronic messages that are subjected to DST in these cases
are not negotiable instruments as they do not comply with the requisites of negotiability
under Section 1 of the Negotiable Instruments Law.
The electronic messages are not signed by the investor-clients as supposed drawers of a bill
of exchange; they do not contain an unconditional order to pay a sum certain in money as the
payment is supposed to come from a specific fund or account of the investor-clients; and,
they are not payable to order or bearer but to a specifically designated third party. Thus, the
electronic messages are not bills of exchange. As there was no bill of exchange or order for
the payment drawn abroad and made payable here in the Philippines, there could have been
no acceptance or payment that will trigger the imposition of the DST under Section 181 of the
Tax Code.