Commissioner of Internal Revenue v.

Philippine National Bank

July 11, 2016
GR No.
195147
FACTS:
On March 23, 2000, the petitioner issued Letter of Authority No. 00058992 in
relation to PNBs internal revenue taxes for taxable year 1997, which PNB received
on March 28, 2000.
On May 12, 2003, PNB received the preliminary assessment notice with
details of discrepancies dated March 31, 2003, which indicated that PNB had
deficiency payments of documentary stamp taxes (DST), withholding taxes on
compensation, and expanded withholding taxes for taxable year 1997.
On May 26, 2003 CIR issued a formal assessment notice, with formal letter of
demand and details of discrepancies, requiring PNB to pay deficiency taxes with a
total of P 41, 724, 935.75.
PNB immediately paid on May 30, 2003 but filed protest against the
assessment. CIR denied. CTA (First Division) rendered judgment cancelling the
assessment for deficiency documentary stamp taxes on PNBs Interbank Call Loans
for taxable year 1997 but affirming the assessment for deficiency documentary
stamp tax on PNBs Special Savings Account on the same taxable year. CTA in
Division denied motion for partial reconsideration. On September 21, 2010, CTA En
Banc decided that PNB does not need to pay for the deficiency documentary stamp
taxes on Interbank Call Loans.
CIR claimed that while interbank call loans were not considered as deposit
substitute debt instruments, PNB' s interbank call loans, which had a maturity of
more than five days, were included in the concept of loan agreements; hence, the
interbank call loans were subject to DST.

ISSUE:
Whether or not PNBs interbank call loans transacted in 1997 were subject to
documentary stamp taxes.

RULING: NO.
The maturity of PNB' s interbank call loans was irrelevant in determining its
DST liability for taxable year 1997. Under Sec. 22 (y) of the National Internal
Revenue Code of 1997, debt instruments issued for interbank call loans with

maturity of not more than five (5) days to cover deficiency in reserves against
deposit liabilities, including those between or among banks and quasi-banks, shall
not be considered as deposit substitute debt instruments.
The provisions of the 1997 NIRC cannot be given retrospective effect to the
prejudice of PNB. This is because tax laws are prospective in application, unless
their retroactive application is expressly provided.
PNB 's interbank call loans are not taxable under Section 180 of the 1977
NIRC, only the following are specifically enumerated: loan agreements; bills of
exchange, drafts, instruments and securities issued by the Government or any of its
instrumentalities o r 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 nonnegotiable, except bank notes issued
for circulation, and on each renewal of any such note.
The Supreme Court agreed with the claim of PNB that interbank call loans feel
under the definition of a loan agreement in Sec. 3 (b) of Revenue Regulations No. 994. Under BSP Circular No. 512, an interbank call loan refers to the cost of
borrowings from other resident banks and non-bank financial institutions with quasibanking authority that is payable on call or demand. It is transacted primarily to
correct a bank's reserve requirements.
An interbank call loan is considered as a deposit substitute transaction by a
bank performing quasi-banking functions to cover reserve deficiencies. It does not
fall under the definition of a loan agreement. Even if it does, the DST liability under
Section 180, will only attach if the loan agreement was signed abroad but the object
of the contract is located or used in the Philippines, which was not the case in
regard to PNB' s interbank call loans.
The Supreme Court made a clarification that that for taxation purposes
interbank call loans are not considered as deposit substitutes by express provision
of Section 20(y) of the 1977 NIRC which states that only debt instruments issued
for inter-bank call loans to cover deficiency in reserves against deposit liabilities
including those between or among banks and quasi-banks shall not be considered
as deposit substitute debt instruments.