[G.R. No. 146749.
June 10, 2003] The Ruling of the Court of Tax Appeals
CHINA BANKING CORPORATION, petitioner, vs. COURT OF APPEALS, COURT OF TAX
APPEALS, and COMMISSIONER OF INTERNAL REVENUE, respondents.
[G.R. No. 147938. June 10, 2003]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. CHINA BANKING
CORPORATION, respondent.
DECISION
CARPIO, J.:
The Case
Before the Court are the consolidated petitions for review[1] assailing the
Decisions[2] of 16 October 2000 and 15 November 2000, and the Resolutions of 25
April 2001 and 8 January 2001 of the Court of Appeals in CA-G.R. SP No. 50790 and
in CA-G.R. SP No. 50839, respectively. The Court of Appeals affirmed the
Decision[3] of 30 September 1998 and the Resolution of 15 January 1999 of the
Court of Tax Appeals in CTA Case No. 5405. The Court of Tax Appeals granted China
Banking Corporation (CBC) a tax refund or credit of P123,278.73 but denied due to
insufficiency of evidence the remainder of CBCs claim for P1,140,623.82.
Antecedent Facts
CBC is a universal banking corporation organized and existing under Philippine
law. On 20 July 1994, CBC paid P12,354,933.00 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 Revenue[4] ruled that the 20% final withholding tax on a
banks 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 P1,140,623.82 from
the P12,354,933.00 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 P1,140,623.82 - on the sums withheld by the Bangko Sentral ng
Pilipinas as final withholding tax on CBCs passive interest income[7] in 1994.
Disputing CBCs claim, the Commissioner asserted that CBC paid the gross receipts
tax pursuant to Section 119 (now Section 121) of the National Internal Revenue
Code (Tax Code) and pertinent Bureau of Internal Revenue (BIR) regulations. The
Commissioner argued that the final withholding tax on a banks 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.
The Court of Tax Appeals ruled in favor of CBC and held that the 20% final
withholding tax on interest income does not form part of CBCs taxable gross
receipts. The tax court based its decision mainly on its earlier ruling in Asian
Bank[9] 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.(Underscoring supplied)
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 % 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 % 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 % commission. As it did not
at that time contemplate the 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. (The Commissioner of Internal Revenue vs. Manila Jockey Club, Inc.,
G.R. Nos. L-13890 & L-13887, June 30, 1960)
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]
Thus, the Court of Tax Appeals granted CBC a partial refund of P123,778.73 since
the tax court found that the evidence of CBC was sufficient only to support the
payment of the gross receipts tax on its medium term investments. The dispositive
portion of the tax courts Decision of 30 September 1998 states as follows:
WHEREFORE, in view of the foregoing, judgment is hereby rendered ordering the
respondent to REFUND or ISSUE a tax credit certificate in the reduced amount
of P123,778.73 representing the overpaid GRT payments for the second quarter of
1994. The remaining amount claimed by petitioner is DENIED for insufficiency of
evidence.
SO ORDERED.[11]
However, Associate Judge Amancio Q. Saga dissented to the exclusion of the final
withholding tax from the banks taxable gross receipts.He opined that: (1) Section
4(e) of Revenue Regulations No. 12-80 did not prescribe the manner of computing
the tax base for the gross receipts tax but merely authorized the cash basis as the
method of accounting in reporting the interest income; (2) the exclusion was
effectively an exemption from tax, and there is no specific provision of law clearly
granting such exemption; (3) no law or regulation specifically earmarked the final
withholding tax for some other person than CBC, thus the Supreme Court decisions
cited in Asian Bank are not applicable; and (4) there is no double taxation if the law
imposes different taxes on the same income.
Both CBC and the Commissioner filed motions for reconsideration from the tax
courts decision. CBC argued that the tax court should have given proper weight to
the testimony of the witnesses that CBC presented on the computation and
payment of its gross receipts tax.CBC pointed out that the Commissioner did not
controvert such testimony. On the other hand, the Commissioner maintained that
the final withholding tax forms part of the taxable gross receipts. However, the tax
court dismissed both motions in its Resolution of 15 January 1999.[12]
The CBC and the Commissioner both filed petitions for review under Rule 43 of the
Rules of Court, appealing the tax courts decision and resolution to the Court of
Appeals.
The Ruling of the Court of Appeals
The Court of Appeals did not consolidate the petitions for review filed by CBC and
the Commissioner. The parties apparently failed to move for the consolidation of
the two petitions. The 14th Division of the Court of Appeals, in its Decision of 15
November 2000[13] in CA-G.R. SP No. 50839, affirmed the tax courts ruling on the
ground that substantial evidence supported the factual findings of the tax
court. The 13thDivision of the Court of Appeals, in its Decision of 16 October
2000[14] in CA-G.R. SP No. 50790, also affirmed the tax courts ruling on the ground
that the 20% final withholding tax does not form part of CBCs taxable gross
receipts.
The 14th Division of the appellate court denied CBCs subsequent motion for
reconsideration in its Resolution of 8 January 2001.[15]Likewise, the 13th Division of
the appellate court denied the Commissioners 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 CBCs full claim for the refund of P1,140,623.82. 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 P1,140,623.82 overpayment.
On 25 June 2001, the Commissioner filed with the Court a petition for review
questioning the decision of the Court of Appeals in CA-G.R. SP No. 50790, and
prayed that the Court deny CBCs claim for refund. The Commissioner pointed out
that the Court of Appeals had already reversed the Asian Bank decision of the
Court of Tax Appeals in Commissioner of Internal Revenue v. Asian Bank
Corporation,[17]promulgated by the Court of Appeals earlier on 22 November
1999. The Commissioner further manifested that the Court of Tax Appeals
subsequently rendered two decisions reversing its ruling in Asian Bank. In Far East
Bank and Trust Co. v. Commissioner of Internal Revenue[18] and Standard Chartered
Bank v. Commissioner of Internal Revenue,[19] the tax court ruled[20] that the 20%
final withholding tax on a banks interest income forms part of its gross receipts in
computing the gross receipts tax.
During the oral arguments of this case on 21 April 2003, the Court ordered the
consolidation[21] of the petition filed by CBC in G.R. No. 146749 and the petition
filed by the Commissioner in G.R. No. 147938.
The Issues
The consolidated petitions raise the following issues:
1. Whether the 20% final withholding tax on interest income should form part of
CBCs gross receipts in computing the gross receipts tax on banks;
2. Whether CBC has established by sufficient evidence its right to claim the full
refund of P1,140,623.82 representing alleged overpayment of the gross receipts
tax.
The Ruling of the Court
We rule that the amount of interest income withheld in payment of the 20% final
withholding tax forms part of CBCs gross receipts in computing the gross receipts
tax on banks.
Section 121[22] 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 249[23] 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 banks 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 banks 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
receivedby 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 banks 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.
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 Appeals[30] 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
banks 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 P239,678.41 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. As explained by the Supreme Court of Pennsylvania
in Commonwealth of Pennsylvania v. Koppers Company, Inc.,[32] -
Highly refined and technical tax concepts have been developed by the accountant
and legal technician primarily because of the impact of federal income tax
legislation. However, this in no way should affect or control the normal usage of
words in the construction of our statutes; and we see nothing that would require
us not to include the proceeds here in question in the gross receipts allocation
unless statutorily such inclusion is prohibited. Under the ordinary basic methods of
handling accounts, the term gross receipts, in the absence of any statutory
definition of the term, must be taken to include the whole total gross receipts
without any deductions. x x x. [Citations omitted] (Emphasis supplied)
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. (Emphasis supplied)
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. [34] The Supreme
Court of Hawaii held in Bishop Trust Company v. Burns[35] that -
x x x It is fundamental that in construing or interpreting a statute, in order to
ascertain the intent of the legislature, the language used therein is to be taken in
the generally accepted and usual sense. Courts will presume that the words in a
statute were used to express their meaning in common usage. This principle is
equally applicable to a tax statute. [Citations omitted] (Emphasis supplied)
The Tax Code does not also define the term gross receipts for purposes of the
common carriers tax,[36] the international carriers tax,[37]the tax on radio and
television franchises,[38] and the tax on finance companies.[39] All these business
taxes under Title V of the Tax Code are based on gross receipts. Despite the
absence of a statutory definition, these taxes have been collected in this country
for over half a century on the general and common understanding that they are
based on all receipts without any deduction.
Since 1 October 1946 when RA No. 39 first imposed the gross receipts tax on banks
under Section 249 of the Tax Code, the legislature has re-enacted several times this
section of the Tax Code. On 24 December 1972, Presidential Decree No. 69, which
enacted into law the Omnibus Tax Bill of 1972, re-enacted Section 249 of the Tax
Code. Then on 11 June 1977, Presidential Decree No. 1158, otherwise known as
the National Internal Revenue Code of 1977, re-enacted Section 249 as Section 119
of the Tax Code. Finally on 11 December 1997, Republic Act No. 8424, otherwise
known as the Tax Reform Act of 1997, re-enacted Section 119 as the present
Section 121 of the Tax Code. Throughout these re-enactments, the legislature has
not provided a statutory definition of the term gross receipts for purposes of the
gross receipts tax on banks, common carriers, international carriers, radio and
television operators, and finance companies.
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 BIRs
interpretation, following the principle of legislative approval by re-
enactment. In Inte-provincial Autobus Co., Inc. v. Collector of Internal
Revenue,[41]the Court declared:
Another reason for sustaining the validity of the regulation may be found in the
principle of legislative approval by re-enactment. The regulations were approved
on September 16, 1924. When the National Internal Revenue Code was approved
on February 18, 1939, the same provisions on stamp tax, bills of lading and receipts
were reenacted. There is a presumption that the Legislature reenacted the law on
the tax with full knowledge of the contents of the regulations then in force
regarding bills of lading and receipts, and that it approved or confirmed them
because they carry out the legislative purpose.
The presumption is that the legislature is familiar with the contemporaneous
interpretation of a statute given by the administrative agency tasked to enforce the
statute.[42] The subsequent re-enactments of the present Section 121 of the Tax
Code, without changes on the term interpreted by the BIR, confirm that the BIRs
interpretation carries out the legislative purpose.
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 banks taxable gross
receipts. The amount of the creditable withholding tax is indubitably part of the
banks 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 banks rental income and its payment extinguishes the banks 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 banks tax liability. The amount deducted and remitted as
creditable withholding tax patently comes from the banks rental income, and
correctly forms part of the banks gross receipts.
In the same manner, the amount of the final withholding tax on interest income
should not be deducted from the banks 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 banks income and is money the bank owns that is
used to pay the banks 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 banks revenues or
receipts, and certainly not from the governments coffers.
CBCs 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 banks
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 banks gross receipts for purposes of the gross receipts tax on banks. This is the
same treatment given to the banks 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 banks gross income for purposes of the corporate income
tax. Section 121, however, expressly includes such interest income as part of the
banks 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 Club[48] as authority that
the final withholding tax on interest income does not form part of a banks gross
receipts because the final tax is earmarked by regulation for the government. CBCs
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 as follows:
87 1/2% as dividends to holders of winning tickets; 12 % as commission of the
Manila Jockey Club, of which % was assigned to the Board of Races and 5% was
distributed as prizes for owners of winning horses and authorized bonuses for
jockeys.[49]
A subsequent law, Republic Act No. 1933 (RA No. 1933), amended the sharing by
ordering the distribution of the bets as follows:
Sec. 19. Distribution of receipts. The total wager funds or gross receipts from the
sale of pari-mutuel tickets shall be apportioned as follows: eighty-seven and one-
half per centum shall be distributed in the form of dividends among the holders of
win, place and show horses, as the case may be, in the regular races; six and one-
half per centum shall be set aside as the commission of the person, racetrack,
racing club, or any other entity conducting the races; five and one-half per centum
shall be set aside for the payment of stakes or prizes for win, place and show
horses and authorized bonuses for jockeys; and one-half per centum shall be paid
to a special fund to be used by the Games and Amusements Board to cover its
expenses and such other purposes authorized under this Act. x x x. (Emphasis
supplied)
Under the distribution of receipts expressly mandated in Section 19 of RA No. 1933,
the gross receipts apportioned to Manila Jockey Club referred only to its own 6 %
commission. There is no dispute that the 51/2% share of the horse-owners and
jockeys, and the % share of the Games and Amusement Board, do not form part of
Manila Jockey Clubs gross receipts. RA No. 1933 took effect on 22 June 1957, three
years before the Court decided Manila Jockey Club on 30 June 1960.
Even under the earlier law, Manila Jockey Club did not own the entire 12 %
commission. Manila Jockey Club owned, and could keep and use, only 7% of the
total bets. Manila Jockey Club merely held in trust the balance of 5 % for the
benefit of the Board of Races and the winning horse owners and jockeys, the real
owners of the 5 % share.
The Court in Manila Jockey Club quoted with approval the following Opinion of the
Secretary of Justice made prior to RA No. 1933:
There is no question that the Manila Jockey Club, Inc. owns only 7-1/2% [sic] of the
total bets registered by the Totalizer. This portion represents its share or
commission in the total amount of money it handles and goes to the funds thereof
as its own property which it may legally disburse for its own purposes. The 5% [sic]
does not belong to the club. It is merely held in trust for distribution as prizes to the
owners of winning horses. It is destined for no other object than the payment of
prizes and the club cannot otherwise appropriate this portion without incurring
liability to the owners of winning horses. It can not be considered as an item of
expense because the sum used for the payment of prizes is not taken from the
funds of the club but from a certain portion of the total bets especially earmarked
for that purpose.[50] (Emphasis supplied)
Consequently, the Court ruled that the 5 % balance of the commission, not being
owned by Manila Jockey Club, did not form part of its gross receipts for purposes of
the amusement tax. Manila Jockey Club correctly paid the amusement tax based
only on its own 7% commission under RA No. 309 and Executive Order No. 320.
Manila Jockey Club does not support CBCs contention but rather the
Commissioners position. The Court ruled in Manila Jockey Clubthat receipts not
owned by the Manila Jockey Club but merely held by it in trust did not form part of
Manila Jockey Clubs 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.
In Commissioner v. Tours Specialists, Inc.,[51] the Court excluded from gross receipts
money entrusted by foreign tour operators to Tours Specialists to pay the hotel
accommodation of tourists booked in various local hotels. The Court declared that
Tours Specialists did not own such entrusted funds and thus the funds were not
subject to the 3% contractors tax payable by Tours Specialists. The Court held:
x x x [G]ross receipts subject to tax under the Tax Code do not include monies or
receipts entrusted to the taxpayer which do not belong to them and do not
redound to the taxpayers benefit; and it is not necessary that there must be a law
or regulation which would exempt such monies and receipts within the meaning of
gross receipts under the Tax Code.
x x x [T]he room charges entrusted by the foreign travel agencies to the private
respondent do not form part of its gross receipts within the definition of the Tax
Code. The said receipts never belonged to the private respondent. The private
respondent never benefited from their payment to the local hotels. x x x [T]his
arrangement was only to accommodate the foreign travel agencies. (Emphasis
supplied)
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 lenders 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 banks gross receipts.
To illustrate, assume that the gross amount of the interest income is P100. The
lending bank owns this entire P100 since this is the amount the depository bank
pays the lending bank for use of the lenders money. In its books the depository
bank records an interest expense of P100 and claims a deduction for interest
expense of P100. The 20% final withholding tax[52] on this interest income is P20,
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 P20. The final tax is the legal
liability of the lending bank as recipient of the interest income. The payment of
the P20 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 P80,
the net receipt after deducting the P20 final tax. Still, the interest income that
forms part of the lending banks gross receipts for purposes of the gross receipts tax
is P100 because the total amount earned by the lending bank from its passive
investment is P100, not P80.
Stated differently, the lending bank paid P20 as final tax which is 20% of the
interest income it received. Logically, the lending banks interest income is P100 to
arrive at a P20 final withholding tax. Since what the law includes in gross receipts is
the interest income, then it is P100 and not P80 which forms part of the lending
banks gross receipts. If the lending banks interest income is only P80, then its 20%
final withholding tax should only be P16.
CBC also relies on the Tax Courts ruling in Asian Bank that Section 4(e) of Revenue
Regulations No. 12-80 authorizes the exclusion of the final tax from the banks
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 taxpayers 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 banks 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
depositors/investors 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 lenders money. The amount of the final tax plainly
comes from the interest earned and is consequently part of the banks taxable gross
receipts.
In PLDT v. Collector of Internal Revenue,[55] the Court ruled that PLDTs 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 PLDTs 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 banks 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 banks 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 banks 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 interpretation[58] 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 122[60] 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.
CBCs 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, CBCs 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 % 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 %
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 Clubs 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. 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 Leon[65] -
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 106[66] 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 CBCs gross
receipts in computing the gross receipts tax. There being no legal basis for CBCs
claim for a tax refund or credit, the second issue raised in this petition is now moot.
WHEREFORE, the Petition for Review filed by China Banking Corporation in G.R. No.
146749 is DENIED for lack of merit. The Petition for Review filed by the
Commissioner of Internal Revenue in G.R. No. 147938 is GRANTED. The assailed
decisions and resolutions of the Court of Tax Appeals in CTA Case No. 5405 and
those of the Court of Appeals in CA-G.R. SP No. 50839 and CA-G.R. SP No. 50790
are SET ASIDE.
SO ORDERED.
REPUBLIC OF THE PHILIPPINES, G.R. No. 158085 The Facts
Represented by the COMMISSIONER
OF INTERNAL REVENUE, Present: The antecedents, as narrated by the CA, are as follows:
Petitioner, Sun Life is a mutual life insurance company organized and existing under the laws
Panganiban, J., of Canada. It is registered and authorized by the Securities and Exchange
Chairman, Commission and the Insurance Commission to engage in business in the Philippines
Sandoval-Gutierrez as a mutual life insurance company with principal office at Paseo de Roxas, Legaspi
- versus - Corona, Village, Makati City.
Carpio Morales, and
Garcia, JJ On October 20, 1997, Sun Life filed with the [Commissioner of Internal Revenue]
SUNLIFE ASSURANCE Promulgated: (CIR) its insurance premium tax return for the third quarter of 1997 and paid the
COMPANY OF CANADA, premium tax in the amount of P31,485,834.51. For the period covering August 21
Respondent. October 14, 2005 to December 18, 1997, petitioner filed with the CIR its [documentary stamp tax
(DST)] declaration returns and paid the total amount of P30,000,000.00.
x -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- -- x
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
DECISION 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
PANGANIBAN, J.: 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
H aving satisfactorily proven to the Court of Tax Appeals, to the Court of aforestated tax periods.
Appeals and to this Court that it is a bona fide cooperative, respondent is entitled
to exemption from the payment of taxes on life insurance premiums and For failure of the CIR to act upon the administrative claim for tax credit and with
documentary stamps. Not being governed by the Cooperative Code of the the 2-year period to file a claim for tax credit or refund dwindling away and about
Philippines, it is not required to be registered with the Cooperative Development to expire, Sun Life filed with the CTA a petition for review on August 23, 1999. In its
Authority in order to avail itself of the tax exemptions. Significantly, neither the Tax petition, it prayed for the issuance of a tax credit certificate in the amount
Code nor the Insurance Code mandates this administrative registration. of P61,485,834.51 representing P31,485,834.51 of erroneously paid premium tax
for the third quarter of 1997 and P30,000[,000].00 of DST on policies of insurance
The Case 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
Before us is a Petition for Review[1] under Rule 45 of the Rules of Court, seeking to elements of a cooperative company or association as defined in [S]ection 121 of
nullify the January 23, 2003 Decision[2] and the April 21, 2003 Resolution[3] of the the Tax Code. Primarily, the management and affairs of Sun Life were conducted by
Court of Appeals (CA) in CA-GR SP No. 69125. The dispositive portion of the its members; secondly, it is operated with money collected from its members; and,
Decision reads as follows: lastly, it has for its purpose the mutual protection of its members and not for profit
or gain.
WHEREFORE, the petition for review is hereby DENIED.[4]
In its answer, the CIR, then respondent, raised as special and affirmative defenses
the following:
7. Petitioners (Sun Lifes) alleged claim for refund is subject to administrative
routinary investigation/examination by respondents (CIRs) Bureau.
8. Petitioner must prove that it falls under the exception provided for under Section
121 (now 123) of the Tax Code to be exempted from premium tax and be entitled
to the refund sought.
9. Claims for tax refund/credit are construed strictly against the claimants thereof
as they are in the nature of exemption from payment of tax.
10. In an action for tax credit/refund, the burden is upon the taxpayer to establish
its right thereto, and failure to sustain this burden is fatal to said claim x x x.
11. It is incumbent upon petitioner to show that it has complied with the provisions
of Section 204[,] in relation to Section 229, both in the 1997 Tax Code.
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.
xxxxxxxxx
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 legislatures recognition that these companies must be
earning profits.
Notwithstanding these arguments, the CTA denied the CIRs 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]
Ruling of the Court of Appeals
In upholding the CTA, the CA reasoned that 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.
For having satisfactorily shown with substantial evidence that it had erroneously
paid and seasonably filed its claim for premium and documentary stamp taxes,
respondent was entitled to a refund, the CA ruled.
Hence, this Petition.[6]

The Issues
Petitioner raises the following issues for our consideration:
I.
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.
II.
Whether or not registration with the Cooperative Development Authority is a sine
qua non requirement to be entitled to tax exemption.
III.
Whether or not respondent is exempted from payment of tax on life insurance
premiums and documentary stamp tax.[7]
We shall tackle the issues seriatim.
The Courts Ruling
The Petition has no merit.
First Issue:
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.[10] Respondent
has been mutualized or converted from a stock life insurance company to a
nonstock mutual life insurance corporation[11] pursuant to Section 266 of the
Insurance Code of 1978.[12] 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.[15]
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 premiums[19] 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 Canadas
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
share[30] and participate alike[31] 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 nature[42] 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]
Second Issue:
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.
Second, the provisions of the Cooperative Code of the Philippines[48] do not apply.
Let us trace the Codes development in our history.
As early as 1917, a cooperative company or association was already defined as
one conducted by the members thereof with money collected from among
themselves and solely for their own protection and not profit.[49] In 1990, it was
further defined by the Cooperative Code as a duly registered association of
persons, with a common bond of interest, who have voluntarily joined together to
achieve a lawful common social or economic end, making equitable 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]
The Cooperative Code was actually an offshoot of the old law on cooperatives. 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 one of
the major programs of the New Society under his administration. It sought to
improve the countrys trade and commerce by enhancing agricultural production,
cottage industries, community development, and agrarian reform through
cooperatives.[52]
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 enterprise[63] 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 use[65] 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.
Having been seasonably filed and amply substantiated, the claim for exemption in
the amount of P61,485,834.51, representing percentage taxes on insurance
premiums and documentary stamp taxes on policies of insurance or annuities that
were paid by respondent in 1997, is in order. Thus, the grant of a tax credit
certificate to respondent as ordered by the appellate court was correct.
WHEREFORE, the Petition is hereby DENIED, and the assailed Decision and
Resolution are AFFIRMED. No pronouncement as to costs.

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]

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.

Third Issue:
Whether Respondent Is Exempted
from Premium Taxes and DST

Having determined that respondent is a cooperative that does not have to be

registered with the CDA, we hold that it is entitled to exemption from both
premium taxes and documentary stamp taxes (DST).
The Tax Code is clear. On the one hand, Section 121 of the Code exempts
cooperative companies from the 5 percent percentage tax on insurance premiums.
On the other hand, Section 199 also exempts from the DST, policies of insurance or
annuities made or granted by cooperative companies. Being a cooperative,
respondent is thus exempt from both types of taxes.

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 -- domestic[68] and foreign[69] -- the provisions of Section 121
and 199 remain unchanged.[70]
[G.R. No. 150947. July 15, 2003]
COMMISSIONER OF INTERNAL REVENUE, petitioner, vs. MICHEL J. LHUILLIER
PAWNSHOP, INC., respondent.
DECISION
DAVIDE, JR., C.J.:
Are pawnshops included in the term lending investors for the purpose of imposing
the 5% percentage tax under then Section 116 of the National Internal Revenue
Code (NIRC) of 1977, as amended by Executive Order No. 273?
Petitioner Commissioner of Internal Revenue (CIR) filed the instant petition for
review to set aside the decision[1] of 20 November 2001 of the Court of Appeals in
CA G.R. SP No. 62463, which affirmed the decision of 13 December 2000 of the
Court of Tax Appeals (CTA) in CTA Case No. 5690 cancelling the assessment issued
against respondent Michel J. Lhuillier Pawnshop, Inc. (hereafter Lhuillier) in the
amount of P3,360,335.11 as deficiency percentage tax for 1994, inclusive of
interest and surcharges.
The facts are as follows:
On 11 March 1991, CIR Jose U. Ong issued Revenue Memorandum Order (RMO)
No. 15-91 imposing a 5% lending investors 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 investors 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 investors 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 investors 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 investors 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 Lhuilliers 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 Appealsinvoking Section 228 of Republic Act No. 8424,
otherwise known as the Tax Reform Act of 1997, which provides:
Section 228. Protesting of Assessment.
If the protest is denied in whole or in part, or is not acted upon within one
hundred eighty (180) days from submission of documents, the taxpayer adversely
affected by the decision or inaction may appeal to the Court of Tax Appeals within
thirty (30) days from receipt of the said decision, or from the lapse of the one
hundred eighty (180)-day period; otherwise, the decision shall become final,
executory and demandable.
The case was docketed as CTA Case No. 5690.
On 19 November 1998, the CIR filed with the CTA a motion to dismiss Lhuilliers
petition on the ground that it did not state a cause of action, as there was no action
yet on the protest.
Lhuillier opposed the motion to dismiss and moved for the issuance of a writ of
preliminary injunction praying that the BIR be enjoined from enforcing the warrant
of distraint and levy.
For Lhuilliers failure to appear on the scheduled date of hearing, the CTA denied
the motion for the issuance of a writ of preliminary injunction. However, on
Lhuilliers motion for reconsideration, said denial was set aside and a hearing on the
motion for the issuance of a writ of preliminary injunction was set.
On 30 June 1999, after due hearing, the CTA denied the CIRs motion to dismiss and
granted Lhuilliers motion for the issuance of a writ of preliminary injunction.
On 13 December 2000, the CTA rendered a decision declaring (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]
Dissatisfied, the CIR filed a petition for review with the Court of Appeals praying
that the aforesaid decision be reversed and set aside and another one be rendered
ordering Lhuillier to pay the 5% lending investors tax for 1994 with interests and
surcharges.
Upon due consideration of the issues presented by the parties in their respective
memoranda, the Court of Appeals affirmed the CTA decision on 20 November
2001.
The CIR is now before this Court via this petition for review on certiorari, alleging
that the Court of Appeals erred in holding that pawnshops are not subject to the
5% lending investors tax. 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 investors 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 investors
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.
We are therefore called upon to resolve the issue of whether pawnshops are
subject to the 5% lending investors tax. Corollary to this issue are the following
questions: (1) Are RMO No. 15-91 and RMC No. 43-91 valid? (2) Were they issued
to implement Section 116 of the NIRC of 1977, as amended? (3) Are pawnshops
considered lending investors for the purpose of the imposition of the lending
investors tax? (4) Is publication necessary for the validity of RMO No. 15-91 and
RMC No. 43-91.
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:
. Bill No. 11197 in 1994. Section 13 thereof reads:
(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.
. DEALERS AND/OR MONEY CHANGERS shall pay a tax equivalent to Five (5%)
(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 175[8] 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
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
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. 7716[11]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 RMO No. 15-91 and RMC No. 43-91 cannot be viewed simply as implementing rules
after its complete publication in the Official Gazette or in at least two (2) national or corrective measures revoking in the process the previous rulings of past
newspapers of general circulation whichever comes earlier. R.A. No. 7716 was Commissioners. Specifically, they would have been amendatory provisions
published in the Official Gazette on 1 August 1994[12]; in the Journal and Malaya applicable to pawnshops. Without these disputed CIR issuances, pawnshops would
newspapers, on 12 May 1994; and in the Manila Bulletin, on 5 June 1994. Thus, R.A. not be liable to pay the 5% percentage tax, considering that they were not
No. 7716 is deemed effective on 27 May 1994. specifically included in Section 116 of the NIRC of 1977, as amended. In so doing,
Since Section 116 of the NIRC of 1977, which breathed life on the questioned the CIR did not simply interpret the law. The due observance of the requirements
administrative issuances, had already been repealed, RMO 15-91 and RMC 43-91, of notice, hearing, and publication should not have been ignored.
which depended upon it, are deemed automatically repealed. Hence, even granting There is no need for us to discuss the ruling in CA-G.R. SP No. 59282
that pawnshops are included within the term lending investors, the assessment entitled Commissioner of Internal Revenue v. Agencia Exquisite of Bohol Inc., which
from 27 May 1994 onward would have no leg to stand on. upheld the validity of RMO No. 15-91 and RMC No. 43-91. Suffice it to say that the
Adding to the invalidity of the RMC No. 43-91 and RMO No. 15-91 is the absence of judgment in that case cannot be binding upon the Supreme Court because it is only
publication. While the rule-making authority of the CIR is not doubted, like any a decision of the Court of Appeals. The Supreme Court, by tradition and in our
other government agency, the CIR may not disregard legal requirements or system of judicial administration, has the last word on what the law is; it is the final
applicable principles in the exercise of quasi-legislative powers. arbiter of any justifiable controversy. There is only one Supreme Court from whose
Let us first distinguish between two kinds of administrative issuances: decisions all other courts should take their bearings.[16]
the legislative rule and the interpretative rule. A legislative rule is in the nature of In view of the foregoing, RMO No. 15-91 and RMC No. 43-91 are hereby declared
subordinate legislation, designed to implement a primary legislation by providing null and void. Consequently, Lhuillier is not liable to pay the 5% lending investors
the details thereof. An interpretative rule, on the other hand, is designed to tax.
provide guidelines to the law which the administrative agency is in charge of WHEREFORE, the petition is hereby DISMISSED for lack of merit. The decision of the
enforcing.[13] Court of Appeals of 20 November 2001 in CA-G.R. SP No. 62463 is AFFIRMED.
In Misamis Oriental Association of Coco Traders, Inc. vs. Department of Finance SO ORDERED.
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]
 FIRST PLANTERS G.R. No. 174134 Petitioner then filed a petition for review with the Court of Tax Appeals (CTA).[6] In a Decision
PAWNSHOP, INC., dated May 9, 2005, the 2nd Division of the CTA upheld the deficiency assessment.[7] Petitioner
Petitioner, Present: filed a motion for reconsideration[8] which was denied in a Resolution dated October 7, 2005.[9]

YNARES-SANTIAGO, J., Petitioner appealed to the CTA En Banc which rendered a Decision dated June 7, 2006,
Chairperson, the dispositive portion of which reads as follows:
- versus - AUSTRIA-MARTINEZ,
CHICO-NAZARIO, WHEREFORE, premises considered, the Petition for Review is hereby DENIED for lack of
NACHURA, and merit. The assailed Decision dated May 9, 2005 and Resolution dated October 7, 2005 are
REYES, JJ. hereby AFFIRMED.
COMMISSIONER OF
INTERNAL REVENUE, Promulgated: SO ORDERED.[10]
Respondent. July 30, 2008
x----------------------------------------------x Petitioner sought reconsideration but this was denied by the CTA En Banc per Resolution
dated August 14, 2006.[11]
DECISION
Hence, the present petition for review under Rule 45 of the Rules of Court based on the
AUSTRIA-MARTINEZ, J.: following grounds:

First Planters Pawnshop, Inc. (petitioner) contests the deficiency value-added and documentary
stamp taxes imposed upon it by the Bureau of Internal Revenue (BIR) for the year 2000. 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.
The 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 P541,102.79 for VAT and P23,646.33 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 P541,102.79 and DST deficiency in the amount
of P24,747.13, 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]
I
THE HONORABLE COURT OF TAX APPEALS EN BANC GRAVELY ERRED IN FINDING PETITIONER
LIABLE FOR VAT.
II
THE HONORABLE COURT OF TAX APPEALS EN BANC GRAVELY ERRED IN RULING THAT
PETITIONER IS LIABLE FOR DST ON PAWN TICKETS.[12]
The determination of petitioner's tax liability depends on the tax treatment of a pawnshop
business. Oddly, there has not been any definitive declaration in this regard despite the fact that
pawnshops have long been in existence. All that has been stated is what pawnshops are not, but
not what pawnshops are.
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 investors 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 P550,000.00 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 Revenue[16] 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-bankFinancial 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 P550,000.00 or 3%
percentage tax for gross annual sales/receipts not exceeding P550,000.00 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 1997[26] 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. -
(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.
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.[32]
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. RegsNo. 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.
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 VAT system on non-bank financial intermediaries starting January 1,
2003, 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.
Lastly, petitioner is liable for documentary stamp taxes.
The Court has settled this issue in Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal
Revenue,[35] in which it was ruled that 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, thus
x x x the subject of a DST is not limited to the document embodying the enumerated
transactions. A DST is an excise tax on the exercise of a right or privilege to transfer obligations,
rights or properties incident thereto. In Philippine Home Assurance Corporation v. Court of
Appeals, it was held that:
xxxx
Pledge is among the privileges, the exercise of which is subject to DST. A pledge may be defined
as an accessory, real and unilateral contract by virtue of which the debtor or a third person
delivers to the creditor or to a third person movable property as security for the performance of
the principal obligation, upon the fulfillment of which the thing pledged, with all its accessions
and accessories, shall be returned to the debtor or to the third person. This is essentially the
business of pawnshops which are defined under Section 3 of Presidential Decree No. 114, or
the Pawnshop Regulation Act, as persons or entities engaged in lending money on personal
property delivered as security for loans.
Section 12 of the Pawnshop Regulation Act and Section 21 of the Rules and Regulations For
Pawnshops issued by the Central Bank to implement the Act, require every pawnshop or
pawnbroker to issue, at the time of every such loan or pledge, a memorandum or ticket signed
by the pawnbroker and containing the following details: (1) name and residence of the pawner;
(2) date the loan is granted; (3) amount of principal loan; (4) interest rate in percent; (5) period of
maturity; (6) description of pawn; (7) signature of pawnbroker or his authorized agent; (8)
signature or thumb mark of pawner or his authorized agent; and (9) such other terms and
conditions as may be agreed upon between the pawnbroker and the pawner. In addition,
Central Bank Circular No. 445, prescribed a standard form of pawn tickets with entries for the
required details on its face and the mandated terms and conditions of the pledge at the dorsal
portion thereof.
Section 3 of the Pawnshop Regulation Act defines a pawn ticket as follows:
xxxx
True, the law does not consider said ticket as an evidence of security or indebtedness. However,
for purposes of taxation, the same pawn ticket is proof of an exercise of a taxable privilege of
concluding a contract of pledge. At any rate, it is not said ticket that creates the pawnshops
obligation to pay DST but the exercise of the privilege to enter into a contract of pledge. There is
therefore no basis in petitioners assertion that a DST is literally a tax on a document and that no
tax may be imposed on a pawn ticket.
The settled rule is that tax laws must be construed in favor of the taxpayer and strictly against
the government; and that a tax cannot be imposed without clear and express words for that
purpose. Taking our bearing from the foregoing doctrines, we scrutinized Section 195 of the
NIRC, but there is no way that said provision may be interpreted in favor of petitioner. Section
195 unqualifiedly subjects all pledges to DST. It states that [o]n every x x x pledge x x x there shall
be collected a documentary stamp tax x x x. It is clear, categorical, and needs no further
interpretation or construction. The explicit tenor thereof requires hardly anything than a simple
application.
xxxx
In the instant case, there is no law specifically and expressly exempting pledges entered into by
pawnshops from the payment of DST. Section 199 of the NIRC enumerated certain documents
which are not subject to stamp tax; but a pawnshop ticket is not one of them. Hence, petitioners
nebulous claim that it is not subject to DST is without merit. It cannot be over-emphasized that
tax exemption represents a loss of revenue to the government and must, therefore, not rest on
vague inference. Exemption from taxation is never presumed. For tax exemption to
be recognized, the grant must be clear and express; it cannot be made to rest on doubtful
implications.
Under the principle of stare decisis et non quieta movere (follow past precedents and do not
disturb what has been settled), once a case has been decided one way, any other case involving
exactly the same point at issue, as in the case at bar, should be decided in the same manner.[36]
WHEREFORE, the petition is PARTIALLY GRANTED. The Decision dated June 7, 2006 and
Resolution dated August 14, 2006 of the Court of Tax Appeals En Banc is MODIFIED to the effect
that the Bureau of Internal Revenue assessment for VAT deficiency in the amount
of P541,102.79 for the year 2000 is REVERSED and SET ASIDE, while its assessment for DST
deficiency in the amount of P24,747.13, inclusive of surcharge and interest, is UPHELD.
SO ORDERED.
 PHILIPPINE BANKING G.R. No. 170574 subject to Documentary Stamp Tax (DST) under Section 180 of the 1977 National
CORPORATION (NOW: GLOBAL Internal Revenue Code (NIRC), as amended.[4]
BUSINESS BANK, INC.), Present:
Petitioner, On 10 January 2000, the Commissioner of Internal Revenue (respondent) sent
CARPIO, J., petitioner a Final Assessment Notice assessing deficiency DST based on the
Acting Chairperson,* outstanding balances of its SSDA, including increments, in the total sum
AUSTRIA-MARTINEZ,** of P17,595,488.75 for 1996 and P47,767,756.24 for 1997. These assessments were
CORONA, based on the outstanding balances of the SSDA appearing in the schedule attached
- versus - CARPIO MORALES,*** and to petitioners audited financial statements for the taxable years 1996 and 1997.[5]
LEONARDO-DE CASTRO, JJ.
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;

COMMISSIONER OF Promulgated:
INTERNAL REVENUE,
Respondent. January 30, 2009
x--------------------------------------------------x
DECISION
CARPIO, J.:
The Case
The Philippine Banking Corporation, now, Global Business Bank, Inc., (petitioner)
filed this Petition for Review[1] to reverse the Court of Tax Appeals Decision[2] dated
23 November 2005 in CTA EB No. 63 (C.T.A. Case No. 6395). In the assailed
decision, the Court of Tax Appeals En Banc ordered petitioner to
pay P17,595,488.75 and P47,767,756.24 as deficiency documentary stamp taxes for
the taxable years 1996 and 1997, respectively, on its bank product called
Special/Super Savings Deposit Account (SSDA).
The 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
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 depositors
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 petitioners 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 what the law specifically states. Petitioner points out the differences between the
such note, there shall be collected a documentary stamp tax of Thirty centavos SSDA and time deposits:[12]
(P0.30) 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: TIME DEPOSITS SSDA
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 1. The holding period is fixed 1. The holding period floats at the
higher tax: provided, however, that loan agreements or promissory notes the beforehand. option of the depositor. It can be 30,
aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000) 60, 90 or 120 days or more and as an
executed by an individual for his purchase on installment for his personal use or incentive for maintaining a longer
that of his family and not for business, resale, barter or hire of a house, lot, motor holding period, the depositor earns
vehicle, appliance or furniture shall be exempt from the payment of the higher interest.
documentary stamp tax provided under this section. (Boldfacing supplied) 2. There is pre-termination because 2. No pre-termination and the
there is no partial withdrawal of a passbook account is simply reverted to
Petitioner insists that the SSDA, being issued in the form of a passbook, cannot be certificate. Pre-termination results in an ordinary savings status in case of
construed as a certificate of deposit subject to DST under Section 180 of the 1977 the surrender and cancellation of the early or partial withdrawal or if the
NIRC. Petitioner explains that the SSDA is a necessary offshoot of the deregulated certificate of deposit. required holding period is not met.
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
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. 9243[15] (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 P50,000 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 P20,000
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. Petitioners 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]
The Ruling of the Court of Tax Appeals
On 23 November 2005, the Court of Tax Appeals En Banc (CTA) affirmed the
Decision and Resolution of the CTAs Second Division. The dispositive portion reads:
WHEREFORE, the instant petition is DENIED for lack of merit. Accordingly, the
petitioner is hereby ORDERED to PAY the amounts of P17,595,488.75
and P47,767,756.24 as deficiency documentary stamp taxes for the taxable years
1996 and 1997, plus 25% surcharge for late payment and 20% annual delinquency
interest for late payment from January 20, 2002 until fully paid pursuant to
Sections 248 and 249 of the Tax Code.[23]
The CTA ruled that a deposit account with the same features as a time deposit, i.e.,
a fixed term in order to earn a higher interest rate, is subject to DST imposed in
Section 180 of the 1977 NIRC.[24] It is clear that certificates of deposit drawing
interest are subject to DST. The CTA, citing Far East Bank and Trust Company v.
Querimit,[25] 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 some other
person or his order, whereby the relation of debtor and creditor between the bank
and the depositor is created.[26]
The CTA pointed out that this Court neither referred to a particular form of deposit
nor limited the coverage to time deposits only. This Court used the term written
acknowledgment which means that for as long as there is some written
memorandum of the fact that the bank accepted a deposit of a sum of money from
a depositor, the writing constitutes a certificate of deposit. The CTA held that a
passbook representing an interest-earning deposit account issued by a bank
qualifies as a certificate of deposit drawing interest.[27]
The CTA emphasized that Section 180 of the 1977 NIRC imposes DST on
documents, whether the documents are negotiable or non-negotiable.[28] The CTA
held that petitioners argument that Section 180 of the 1977 NIRC imposes the DST
only on negotiable certificates of deposit as implied from the old tax provision is
erroneous.[29] Section 217 of Commonwealth Act No. 466, as amended (old NIRC)
reads:
Sec. 217. Stamp tax on negotiable promissory notes, bills of exchange, drafts,
certificate of deposit bearing interest and others not payable on sight or demand. -
On all bills of exchange (between points within the Philippines), drafts or
certificates of deposit drawing interest, or orders for the payment of any sum of
money otherwise than at sight or on demand, or all negotiable promissory notes,
except bank notes issued for circulation, and on each renewal of any such note,
there shall be collected a documentary stamp tax of four centavos on each two
hundred pesos, or fractional part thereof, of the face value of any such bill of
exchange, draft, certificate of deposit, or note. (As amended by Sec. 6, Republic Act
No. 40)[30] (Emphasis in the original)
The CTA observed that the requirement of negotiability pertains to promissory
notes only. Such intention is disclosed by the fact that the word negotiable was
written before promissory notes followed by a comma, hence, the
word negotiable modifies promissory notes only. Therefore, with respect to all
other documents mentioned in Section 217 of the old NIRC, the attribute of
negotiability is not required.[31] The CTA added that the applicable provision is
Section 180 of the 1977 NIRC and not Section 217 of the old NIRC.[32] Section 180 of
the 1977 NIRC provides that the following are subject to DST, to wit: (1) Loan
Agreements; (2) Bills of Exchange; (3) Drafts; (4) Instruments and Securities issued
by the Government or any of its instrumentalities; (5) Certificates of Deposits
drawing interest; (6) Orders for the payment of any sum of money otherwise than
at sight or on demand; and (7) Promissory Notes, whether negotiable or non-
negotiable. Therefore, the DST is imposed on all certificates of deposit drawing
interest without any qualification.[33]
The CTA held that a certificate of time deposit, a type of a certificate of deposit
drawing interest, is subject to DST. The CTA observed that the SSDA has the same
nature and characteristics as a time deposit.[34] The CTA discussed the similarities of
a time deposit account with an SSDA:
In order for the depositor to earn the agreed higher interest rate in a Special/Super
Savings Account, the required minimum amount of deposit must not only be met
but should also be maintained for a definite period. Thus, the Special/Super Savings
Account is a deposit with a fixed term. Withdrawal before the expiration of said
fixed term results to the reduction of the interest rate. The fixed term and
reduction of interest rate in case of pre-termination are essentially the features of a
time deposit. Hence, this Court concurs with the conclusion reached in the assailed
Decision that petitioners Special/Super Savings Deposits and certificates of time
deposit are substantially the same, if not one and the same product, and therefore
both are subject to the DST on certificates of deposit.[35]
The CTA stated that the fact that the SSDA is evidenced by a passbook is immaterial
because in determining whether certain instruments are subject to DST, substance
would control over form and labels.[36]
On 14 December 2005, petitioner appealed to this Court the CTA decision.[37]
The Issue
Petitioner submits this sole issue for our consideration: whether petitioners
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.[38]
The Ruling of the Court
The issue in the present case is whether petitioners 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
(P0.30) 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 (P250,000)
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 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 Banks[41] 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--vis the
SSDA to determine if the SSDA is a certificate of deposit drawing interest referred floats at the option of the depositor at 30, 60, 90, 120 days or more and for
to in Section 180 of the 1977 NIRC. A comparison of a savings account, time deposit maintaining a longer holding period, the depositor earns higher interest rates.
account, and SSDA is shown in the table below: 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
Savings Account Time Deposit SSDA required holding period is not met. Based on the foregoing, the SSDA has all of the
distinct features of a certificate of deposit.
Interest rate Regular savings Higher interest Higher interest
interest rate rate Petitioner argues that a deposit account evidenced by a passbook cannot be
Period None Fixed Term Fixed Term 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
Evidenced by: Passbook Certificate of Passbook Court categorically ruled that a passbook representing an interest earning deposit
Time Deposit account issued by a bank qualifies as a certificate of deposit drawing interest and
Pre-termination None With penalty With penalty 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
Holding Period None Yes Yes memorandum that the bank accepted a deposit of a sum of money from a
Withdrawal Allowed Withdrawal Allowed provided depositor.[48]
amounts to pre- the minimum
termination amount to earn Petitioner also argues that prior to the passage of RA 9243, there was no law
the higher interest subjecting SSDA to DST. In International Exchange Bank v. Commissioner of Internal
rate is maintained, Revenue,[49] the Court held that the amendment to include other evidences of
otherwise, the deposits that are drawing interest significantly higher than the regular savings
regular savings deposit was intended to eliminate the ambiguity. The Court explained:
interest rate will
apply. If at all, the further amendment was intended to eliminate precisely the scheme
used by banks of issuing passbooks to cloak its time deposits as regular savings
deposits. This is reflected from the following exchanges between Mr. Miguel
Based on the definition and comparison, it is clear that a certificate of deposit Andaya of the Bankers Association of the Philippines and Senator Ralph Recto,
drawing interest as used in Section 180 of the 1977 NIRC refers to a time deposit Senate Chairman of the Committee on Ways and Means, during the deliberations
account. As the Bureau of Internal Revenue (BIR) explained in Revenue on Senate Bill No. 2518 which eventually became RA 9243:
Memorandum Circular No. 16-2003,[46] the distinct features of a certificate of
deposit from a technical point of view are as follows: MR. MIGUEL ANDAYA (Bankers Association of the Philippines). Just to
clarify. Savings deposit at the present is not subject to DST.
a. Minimum deposit requirement;
b. Stated maturity period; THE CHAIRMAN. Thats right.
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- MR. ANDAYA. Time deposit is subject. I agree with you in principle that if we are
termination, prior notice is required; and going to encourage deposits, whether savings or time...
e. Early withdrawal penalty in the form of partial loss or total loss of interest in case
of pre-termination. THE CHAIRMAN. Uh-huh.

The SSDA is for depositors who maintain savings deposits with substantial average MR. ANDAYA. ...its questionable whether we should tax it with DST at all, even the
daily balance and which earn higher interest rates. The holding period of an SSDA question of imposing final withholding tax has been raised as an issue.

THE CHAIRMAN. If I had it my way, I'll cut it by half.
MR. ANDAYA. Yeah, but I guess concerning the constraint of government revenue,
even the industry itself right now is not pushing in that direction, but in the long
term, when most of us in this room are gone, we hope that DST will disappear from
the face of this earth, no.
Now, I think the move of the DOF to expand the coverage of or to add that phrase,
Other evidence of indebtedness, it just removed ambiguity. When we testified
earlier in the House on this very same bill, we did not interpose any objections if
only for the sake of avoiding further ambiguity in the implementation of DST on
deposits. Because of what has happened so far is, we don't know whether the
examiner is gonna come in and say, This savings deposit is not savings but its time
deposit. So, I think what DOF has done is to eliminate any confusion. They said that
a deposit that has a maturity...
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. ...which is time, in effect, regardless of what form it takes should be
subject to DST.
THE CHAIRMAN. Would you include savings deposit now?
MR. ANDAYA. So that if we cloaked a deposit as savings deposit but it has got a
fixed maturity...
THE CHAIRMAN. Uh-huh.
MR. ANDAYA. ..that would fall under the purview. (Italics in the original)
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 P0.30 on each P200 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]
Petitioners 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 P50,000. This amount is even larger than what is needed to
open a time deposit which is P20,000. 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 P50,000, 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.
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 CTAs 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)
Availment of the Tax Amnesty Program
On 24 May 2007, during the pendency of this case before this Court, Republic Act
No. 9480 or An Act Enhancing Revenue Administration and Collection by Granting
an Amnesty on All Unpaid Internal Revenue Taxes Imposed by the National
Government for Taxable Year 2005 and Prior Years (RA 9480), lapsed into law.
The pertinent provisions of RA 9480 are:
Section 1. Coverage. There is hereby authorized and granted a tax amnesty which
shall cover all national internal revenue taxes for the taxable year 2005 and prior
years, with or without assessments duly issued therefor, that have remained
unpaid as of December 31, 2005: Provided, however, That the amnesty hereby
authorized and granted shall not cover persons or cases enumerated under Section
8 hereof.
xxx
Sec. 6. Immunities and Privileges. Those who availed themselves of the tax amnesty
under Section 5 hereof, and have fully complied with all its conditions shall be
entitled to the following immunities and privileges:
1. The taxpayer shall be immune from the payment of taxes, as well as
addition thereto, and the appurtenant civil, criminal or administrative penalties
under the National Internal Revenue Code of 1997, as amended, arising from the
failure to pay any and all internal revenue taxes for taxable year 2005 and prior
years.
xxx
Sec. 8. Exceptions. The tax amnesty provided in Section 5 hereof shall not extend to
the following persons or cases existing as of the effectivity of this Act:
1. Withholding agents with respect to their withholding tax liabilities;
2. Those with pending cases falling under the jurisdiction of the
Presidential Commission on Good Government;
3. Those with pending cases involving unexplained or unlawfully acquired
wealth or under the Anti-Graft and Corrupt Practices Act;
4. Those with pending cases filed in court involving violation of the Anti-
Money Laundering Law;
5. Those with pending criminal cases for tax evasion and other criminal
offenses under Chapter II of Title X of the National Internal Revenue Code of 1997,
as amended, and the felonies of frauds, illegal exactions and transactions, and
malversation of public funds and property under Chapters III and IV of Title VII of
the Revised Penal Code; and
6. Tax cases subject of final and executory judgment by the
courts. (Emphasis supplied)
The Department of Finance (DOF) issued DOF Department Order No. 29-07 (DO 29-
07).[57] Section 6 of DO 29-07 provides:
SEC. 6. Method of Availment of Tax Amnesty. -
1. Forms/Documents to be filed. - To avail of the general tax amnesty,
concerned taxpayers shall file the following documents/requirements:
a. Notice of Availment in such form as may be prescribed by the BIR;
b. Statements of Assets, Liabilities and Networth (SALN) as of December 31, 2005 in
such form, as may be prescribed by the BIR;
c. Tax Amnesty Return in such form as may be prescribed by the BIR.
xxx
The Acceptance of Payment Form, the Notice of Availment, the SALN, and the Tax
Amnesty Return shall be submitted to the RDO, which shall be received only after
complete payment. The completion of these requirements shall be deemed full
compliance with the provisions of RA 9480. (Emphasis supplied)
The BIR issued Revenue Memorandum Circular No. 19-2008 (RMC 19-2008).[58] The
pertinent provisions are:
Who may avail of the amnesty?
The following taxpayers may avail of the Tax Amnesty Program:
P Individuals
P Estates and Trusts
P Corporations
P Cooperatives and tax-exempt entities that have become taxable as of December
31, 2005
P Other juridical entities including partnerships.
Fiscal year taxpayers may likewise avail of the tax amnesty using their Financial
Statement ending in any month of 2005.
EXCEPT:
Q Withholding agents with respect to their withholding tax liabilities
Q Those with pending cases:
Q Under the jurisdiction of the PCGG
Q Involving violations of the Anti-Graft and Corrupt Practices Act
Q Involving violations of the Anti-Money Laundering Law
Q For tax evasion and other criminal offenses under the NIRC and/or the RPC
Q Issues and cases which were ruled by any court (even without finality) in favor of
the BIR prior to amnesty availment of the taxpayer. (e.g. Taxpayers who have failed
to observe or follow BOI and/or PEZA rules on entitlement to Income Tax Holiday
Incentives and other incentives)
Q Cases involving issues ruled with finality by the Supreme Court prior to the
effectivity of RA 9480 (e.g. DST on Special Savings Account)
Q Taxes passed on and collected from customers for remittance to the BIR
Q Delinquent Accounts/Accounts Receivable considered as assets of the
BIR/Government, including self-assessed tax. (Emphasis supplied)
The BIR also issued Revenue Memorandum Circular No. 69-2007 (RMC 69-
2007).[59] The pertinent portion provides:
Q-32 May surviving or new corporations avail of the tax amnesty in behalf of the
corporations absorbed or dissolved pursuant to a merger or consolidation that took
effect prior to Taxable Year 2005? Can they avail of the Tax Amnesty?
A-32 Yes, these companies can avail of the tax amnesty for purposes of obtaining
tax clearances for the dissolved or absorbed corporations. (Emphasis supplied)
On 21 September 2007, Metropolitan Bank and Trust Company (Metrobank), the
surviving entity that absorbed petitioners banking business, filed a Tax Amnesty
Return,[60] paid the amnesty tax and fully complied with all the requirements[61] of
the Tax Amnesty Program under RA 9480. Petitioner alleges that by virtue of this
availment, petitioner is now deemed immune from the payment of taxes as well as
additions thereto, and is statutorily discharged from paying all internal revenue tax
liabilities for the taxable year 2005 and prior years. Petitioner contends that the
availment includes all deficiency tax assessments of the BIR subject of this petition.
A tax amnesty is a general pardon or the intentional overlooking by the State of its
authority to impose penalties on persons otherwise guilty of violation of a tax law.
It partakes of an absolute waiver by the government of its right to collect what is
due it and to give tax evaders who wish to relent a chance to start with a clean
slate. A tax amnesty, much like a tax exemption, is never favored nor presumed in
law. The grant of a tax amnesty, similar to a tax exemption, must be construed
strictly against the taxpayer and liberally in favor of the taxing authority.[62]
The DST is one of the taxes covered by the Tax Amnesty Program under RA
9480.[63] As discussed above, petitioner is clearly liable to pay the DST on its SSDA
for the years 1996 and 1997. However, petitioner, as the absorbed corporation, can
avail of the tax amnesty benefits granted to Metrobank.
Records show that Metrobank, a qualified tax amnesty applicant,[64] has duly
complied with the requirements enumerated in RA 9480, as implemented by DO
29-07 and RMC 19-2008.[65] Considering that the completion of these requirements
shall be deemed full compliance with the tax amnesty program,[66] the law
mandates that the taxpayer shall thereafter be immune from the payment of taxes,
and additions thereto, as well as the appurtenant civil, criminal or administrative
penalties under the NIRC of 1997, as amended, arising from the failure to pay any
and all internal revenue taxes for taxable year 2005 and prior years.[67]
The BIRs inclusion of issues and cases which were ruled by any court (even without
finality) in favor of the BIR prior to amnesty availment of the taxpayer as one of the
exceptions in RMC 19-2008 is misplaced. RA 9480 is specifically clear that the
exceptions to the tax amnesty program include tax cases subject of final and
executory judgment by the courts. The present case has not become final and
executory when Metrobank availed of the tax amnesty program.
WHEREFORE, we GRANT the petition, and SET ASIDE the Court of Tax Appeals
Decision dated 23 November 2005 in CTA EB No. 63 solely in view of petitioners
availment of the Tax Amnesty Program.
SO ORDERED.
JAKA INVESTMENTS CORPORATION, G.R. No. 147629 out of the increase in the authorized capital stock of JEC through a tax-free
Petitioner, 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
Present: Agreement and Deed of Assignment of Property in Payment of Subscription. Under
this Agreement, as payment for its subscription, petitioner will assign and transfer
CORONA, C.J., to JEC the following shares of stock:
- versus - Chairperson,
VELASCO, JR., (a) 154,208,404 shares in Republic Glass Holdings Corporation (RGHC),
LEONARDO-DE CASTRO, (b) 2,822,500 shares in Philippine Global Communications, Inc. (PGCI),
DEL CASTILLO, and (c) 7,495,488 shares in United Coconut Planters Bank (UCPB), and
PEREZ, JJ. (d) 1,313,176 shares in Far East Bank and Trust Company (FEBTC).[3]
COMMISSIONER OF INTERNAL REVENUE, Promulgated:
Respondent. The intended IPO and listing of shares of JEC did not materialize. However, JEC still
July 28, 2010 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 Agreement[4] 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
(P370,766,000.00) was paid for in cash by petitioner to JEC.
x----------------------------------------------------x
On October 14, 1994, petitioner paid One Million Three Thousand Eight Hundred
Ninety-Five Pesos and Sixty-Five Centavos (P1,003,895.65) for basic documentary
DECISION stamp tax inclusive of the 25% surcharge for late payment on the Amended
Subscription Agreement, broken down as follows:

LEONARDO-DE CASTRO, J.: Documentary Stamp Tax - P803,116.72

25% Surcharge - 200,778.93
Before the Court is a petition for review of the Decision[1] of the Court of Appeals Total P1,003,895.65[5]
dated August 22, 2000 sustaining the Court of Tax Appeals in denying petitioners
(JAKA Investments Corporations) claim for refund of its alleged overpayment of
documentary stamp tax and surcharges, as well as the Resolution[2] dated March On October 17, 1994, Revenue District Officer (RDO) Atty. Sixto S. Esquivias IV (RDO
27, 2001 likewise denying petitioners Motion for Reconsideration. Esquivias) issued three Certifications,[6] as follows:

The antecedent facts are undisputed. Cert. No. Shares of Stock Documentary Stamps

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 (P185,000,000.00) to Two
Billion Pesos (P2,000,000,000.00). Petitioner proposed to subscribe to Five Hundred
Eight Million Eight Hundred Six Thousand Two Hundred Pesos (P508,806,200.00)
94-10-17-07 7,495,488 UCPB shares P 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
P593,528.15
Petitioner, after seeing the RDOs 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 (P410,367.00), 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-request[7] to the BIR dated October 10, 1996.
On October 11, 1996, petitioner filed a petition for refund before the Court of Tax
Appeals, docketed as C.T.A. Case No. 5428, which was denied in a Decision[8] dated
January 19, 1999. The Court of Tax Appeals likewise denied petitioners Motion for
Reconsideration in its Resolution[9] dated March 1, 1999.
Petitioner appealed to the Court of Appeals by way of petition for review. The
Court of Appeals sustained the Court of Tax Appeals in its Decision on CA-G.R. SP
No. 51834 dated August 22, 2000 as well as in its Resolution dated March 27, 2001
of petitioners Motion for Reconsideration.
Hence, petitioner is now before this Court to seek the reversal of the questioned
Decision and Resolution of the Court of Appeals.
Petitioners 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 176of 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 (P370,766,000.00) 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 (P593,528.15), asindicated
in the certifications issued by RDO Esquivias. Petitioner alleges that it is entitled to
a refund for the overpayment, which is the difference in the amount it had actually
paid (P1,003,895.65) and the amount of documentary stamp tax due on the
transfer of said shares (P593,528.15), or a total of Four Hundred Ten Thousand
Three Hundred Sixty-Seven Pesos (P410,367.00).
Petitioner contends that both the Court of Appeals and the Court of Tax Appeals
erroneously relied on respondents (Commissioner of Internal Revenues) 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 Revenues (BIRs) 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 petitioners 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.
Lastly, petitioner alleges that it is entitled to refund under the NIRC.[11]
In his Comment (To Petition for Review),[12] respondent avers that the lower courts
did not err in denying petitioners claim for refund, and that petitioner is raising
issues in this petition which were not raised in the lower courts.
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 P508,806,200.00 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 P593,528.15, while the basic documentary stamp tax
for the entire subscription of P508,806,200.00 was computed by respondents
revenue officers to the tune of P803,116.72, exclusive of the penalties, leaving a
balance of P209,588.57, 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 stockholders 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 P17,880,000.00.
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 JECs 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 Respondents 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 P508,806,200.00
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 P2.00 for every P200
under Section 175 of the Tax Code, then the documentary stamp tax on petitioners
subscription to JEC shares should amount to P5,088,062.00, which is much higher
than the P803,116.72 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.
The sole issue to be resolved is 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.
In claims for refund, the burden of proof is on the taxpayer to prove entitlement to
such refund. As we held in Compagnie Financiere Sucres Et Denrees v.
Commissioner of Internal Revenue[18] -
Along with police power and eminent domain, taxation is one of the three basic
and necessary attributes of sovereignty. Thus, the State cannot be deprived of this
most essential power and attribute of sovereignty by vague implications of
law. Rather, being derogatory of sovereignty, the governing principle is that tax
exemptions are to be construed in strictissimi juris against the taxpayer and
liberally in favor of the taxing authority; and he who claims an exemption must be
able to justify his claim by the clearest grant of statute.
x x x Tax refunds are a derogation of the State's taxing power. Hence, like tax
exemptions, they are construed strictly against the taxpayer and liberally in favor of
the State. Consequently, he who claims a refund or exemption from taxes has the
burden of justifying the exemption by words too plain to be mistaken and too
categorical to be misinterpreted. x x x.
It was thus incumbent upon petitioner to show clearly its basis for claiming that it is
entitled to a tax refund. This, to our mind, the petitioner failed to do.
The Court of Tax Appeals construed the claim for exemption strictly against
petitioner and held that:
The focal issue which is presented for our consideration is whether or not the
transfer of the 1,313,176 FEBTC shares under the Amended Subscription
Agreement and Deed of Assignment of Property in Payment of Subscription should
be excluded in the taxable base for the computation of DST, thus entitling
petitioner to the refund of the amount of P410,367.00.
We find nothing ambiguous nor obscure in the language of Section 173, taken in
relation to Section 175 of the 1994 Tax Code x x x insofar as the same is brought to
bear upon the circumstances in the instant case. These provisions furnish the best
means of their own exposition that a documentary stamp tax (DST) is due and
payable on documents, instruments, loan agreements and papers, acceptances,
assignments, sales and transfers which evidenced the transaction agreed upon by
the parties and should be paid by the person making, signing, issuing, accepting or
transferring the property, right or obligation.
Sec. 173. Stamp taxes upon documents, instruments, and papers. Upon documents,
instruments, and papers, and upon acceptances, assignments, sales, and transfers
of the obligation, or property incident thereto, there shall be levied, collected and
paid for, and in respect of the transaction so had or accomplished, the
corresponding documentary stamp taxes prescribed in the following sections of
this Title, by the person making, signing, issuing, accepting, or transferring the
same, whenever the document is made, signed, issued, accepted or transferred
when the obligation or right arises from Philippine sources or the property is
situated in the Philippines, and at the same time such act is done or transaction
had: Provided, That whenever one party to the taxable document enjoys exemption
from the tax herein imposed, the other party thereto who is not exempt shall be
the one directly liable for the tax. (as amended by R.A. No. 7660)
xxxx
Understood to mean what it plainly expressed, the DST imposition is essentially
addressed and directly brought to bear upon the DOCUMENT evidencing the
transaction of the parties which establishes its rights and obligations.
In the case at bar, the rights and obligations between petitioner JAKA Investments
Corporation and JAKA Equities Corporation are established and enforceable at the
time the Amended Subscription Agreement and Deed of Assignment of Property in
Payment of Subscription were signed by the parties and their witness, so is the
right of the state to tax the aforestated document evidencing the transaction. DST
is a tax on the document itself and therefore the rate of tax must be determined on
the basis of what is written or indicated on the instrument itself independent of
any adjustment which the parties may agree on in the future x x x. The DST upon
the taxable document should be paid at the time the contract is executed or at the
time the transaction is accomplished. The overriding purpose of the law is the
collection of taxes. So that when it paid in cash the amount of P370,766,000.00 in
substitution for, or replacement of the 1,313,176 FEBTC shares, its payment
of P1,003,835.65 documentary stamps tax pursuant to Section 175 of NIRC is in
order.
Thus, applying the settled rule in this jurisdiction that, a claim for refund is in the
nature of a claim for exemption, thus, should be construed in strictissimi
juris against the taxpayer (Commissioner of Internal Revenue vs. Tokyo Shipping
Co., Ltd., 244 SCRA 332) and since the petitioner failed to adduce evidence that will
show that it is exempt from DST under Section 199 or other provision of the tax
code, We rule the focal issue in the negative.[19] (Emphases ours.)
In the questioned Decision, the Court of Appeals concurred with the findings of the
Court of Tax Appeals and we quote with approval the relevant portions below:
Petitioner alleges, though, that considering that the assessment of payment of
documentary stamp tax was made payable only to the aforesaid issuances of
certificates of [stock] exclusive of that of FEBTC shares of stock which were paid in
cash, and that it has paid a total of Php1,003,895.65 inclusive of surcharges for late
payment, the petitioner is entitled to a refund of Php410,367.00. This argument
does not hold water. As discussed earlier, a documentary stamp is levied upon the
privilege, the opportunity and the facility offered at exchanges for the transaction
of the business. This being the case, and as correctly found by the tax court, the
documentary stamp tax imposition is essentially addressed and directly brought to
bear upon the document evidencing the transaction of the parties which
establishes its rights and obligations, which in the case at bar, was established and
enforceable upon the execution of the Amended Subscription Agreement and Deed
of Assignment of Property in Payment of Subscription.
Moreover, the documentary stamp tax is imposed on the entire subscription
(i.e., subscribed capital stock) which is the amount of the capital stock subscribed
whether fully paid or not. It connotes an original subscription contract for the
acquisition by a subscriber of unissued shares in a corporation, which in this case is
equivalent to a total par value of Php508,806,200.00.
Besides, a tax cannot be imposed unless it is supported by the clear and express
language of a statute; on the other hand, once the tax is unquestionably imposed, a
claim of exemption from tax payments must be clearly shown and based on
language in the law too plain to be mistaken. And since a claim for refund is in the
nature of a claim for exemption the same is likewise construed in strictissimi
juris against the taxpayer. Furthermore, it is a basic rule in taxation that the factual
findings of the Court of Tax Appeals, when supported by substantial evidence, will
not be disturbed on appeal unless it [is] shown that the said court committed gross
error in the appreciation of facts. In this case, the tax court did not deviate from
this rule.
We find no error in the above pronouncements of the Court of Appeals.
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
(P1.00) 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 (P1.50) 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 petitioners 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. 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 petitioners 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]
WHEREFORE, premises considered, the petition is hereby DISMISSED.
SO ORDERED.
COMMISSIONER OF INTERNAL G. R. No. 163653 x----------------------------------------------------------------------------------------------- x
REVENUE,
Petitioner, DECISION

PEREZ, J.:

-versus- Assailed in these twin petitions for review on certiorari filed pursuant to Rule 45 of
the 1997 Rules of Civil Procedure are the decisions rendered by the Court of
Appeals (CA) in the following cases: (a) Decision dated 16 December 2003 of the
then Special Fifth Division in CA-G.R. SP No. 72992;[1] and, (b) Decision dated 26
January 2005 of the then Fourteenth Division in CA-G.R. SP No. 74510.[2]
FILINVEST DEVELOPMENT
CORPORATION, The Facts
Respondent.
The owner of 80% of the outstanding shares of respondent Filinvest Alabang, Inc.
(FAI), respondent Filinvest Development Corporation (FDC) is a holding company
x-------------------------------------x G. R. No. 167689 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
COMMISSIONER OF INTERNAL Present: the former both transferred in favor of the latter parcels of land appraised
REVENUE, at P4,306,777,000.00. In exchange for said parcels which were intended to facilitate
Petitioner, CORONA, C.J., development of medium-rise residential and commercial buildings, 463,094,301
CARPIO, shares of stock of FLI were issued to FDC and FAI.[3] As a result of the exchange, FLIs
VELASCO, JR., ownership structure was changed to the extent reflected in the following
LEONARDO-DE CASTRO, tabular prcis, viz.:
BRION,
-versus- PERALTA, Stockholder Number and Number of Number and
BERSAMIN, Percentage of Shares Additional Percentage of Shares
DEL CASTILLO, Held Prior to the Shares Held After the
ABAD, Exchange Issued Exchange
FILINVEST DEVELOPMENT VILLARAMA, JR.,
CORPORATION, PEREZ, FDC 2,537,358,000 67.42% 42,217,000 2,579,575,000 61.03%
Respondent. MENDOZA, and
SERENO,* JJ. FAI 00 420,877,000 420,877,000 9.96%

OTHERS 1,226,177,000 32.58% 0 1,226,177,000 29.01%

----------------- ----------- -------------- ---------------

Promulgated: 3,763,535,000 100% 463,094,301 4,226,629,000 (100%)

July 19, 2011

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 BIRs
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 P2,557,213,942.60 in 1996[9] and P3,360,889,677.48 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
FDCs 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 P500.7 million worth of shares in said joint venture
company to RHPLs subscription worth P433.8 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 P500.7 million, FDC eventually reported a net loss
of P190,695,061.00 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 P150,074,066.27 for 1996; (b) Assessment Notice No. SP-DST-96-00020-2000 for
deficiency documentary stamp taxes in the sum of P10,425,487.06 for 1996; (c)
Assessment Notice No. SP-INC-97-00019-2000 for deficiency income taxes in the
sum of P5,716,927.03 for 1997; and (d) Assessment Notice No. SP-DST-97-00021-
2000 for deficiency documentary stamp taxes in the sum of P5,796,699.40 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 arms-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 P1,477,494,638.23 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 extended to its affiliates
were interest free despite the interest bearing loans it 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]
At the pre-trial conference, the parties filed a Stipulation of Facts, Documents and
Issues[22] which was admitted in the 16 February 2001 resolution issued by the CTA.
With the further admission of the Formal Offer of Documentary Evidence
subsequently filed by FDC and FAI[23] and the conclusion of the testimony of Susana
Macabelda anent the cash advances FDC extended in favor of its affiliates,[24] the
CTA went on to render the Decision dated 10 September 2002 which, with the
exception of the deficiency income tax on the interest income FDC supposedly
realized from the advances it extended in favor of its affiliates, cancelled the rest of
deficiency income and documentary stamp taxes assessed against FDC and FAI for
the years 1996 and 1997,[25] thus:
WHEREFORE, in view of all the foregoing, the court finds the instant petition partly
meritorious. Accordingly, Assessment Notice No. SP-INC-96-00018-2000 imposing
deficiency income tax on FDC for taxable year 1996, Assessment Notice No. SP-DST-
96-00020-2000 and SP-DST-97-00021-2000 imposing deficiency documentary
stamp tax on FDC for taxable years 1996 and 1997, respectively and Assessment
Notice No. SP-INC-97-0027-2000 imposing deficiency income tax on FAI for the
taxable year 1997 are hereby CANCELLEDand SET ASIDE. However, [FDC] is
hereby ORDERED to PAY the amount of P5,691,972.03 as deficiency income tax for
taxable year 1997. In addition, petitioner is also ORDERED to PAY 20% delinquency
interest computed from February 16, 2000 until full payment thereof pursuant to
Section 249 (c) (3) of the Tax Code.[26]
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 P5,691,972.03 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 2005[33] 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 Courts Third
Division.
The Issues
In G.R. No. 163653, the CIR urges the grant of its petition on the following ground:
THE COURT OF APPEALS ERRED IN REVERSING THE DECISION OF THE COURT OF
TAX APPEALS AND IN HOLDING THAT THE ADVANCES EXTENDED BY RESPONDENT
TO ITS AFFILIATES ARE NOT SUBJECT TO INCOME TAX.[35]
In G.R. No. 167689, on the other hand, petitioner proffers the following issues for
resolution:
I weight and respect to the findings of the CTA which, as the specialized court
THE HONORABLE COURT OF APPEALS COMMITTED GRAVE ABUSE OF DISCRETION
IN HOLDING THAT THE EXCHANGE OF SHARES OF STOCK FOR PROPERTY AMONG
FILINVEST DEVELOPMENT CORPORATION (FDC), FILINVEST ALABANG,
INCORPORATED (FAI) AND FILINVEST LAND INCORPORATED (FLI) MET ALL THE
REQUIREMENTS FOR THE NON-RECOGNITION OF TAXABLE GAIN UNDER SECTION
34 (c) (2) OF THE OLD NATIONAL INTERNAL REVENUE CODE (NIRC) (NOW SECTION
40 (C) (2) (c) OF THE NIRC.
II
THE HONORABLE COURT OF APPEALS COMMITTED REVERSIBLE ERROR IN HOLDING
THAT THE LETTERS OF INSTRUCTION OR CASH VOUCHERS EXTENDED BY FDC TO ITS
AFFILIATES ARE NOT DEEMED LOAN AGREEMENTS SUBJECT TO DOCUMENTARY
STAMP TAXES UNDER SECTION 180 OF THE NIRC.
III
THE HONORABLE COURT OF APPEALS GRAVELY ERRED IN HOLDING THAT GAIN ON
DILUTION AS A RESULT OF THE INCREASE IN THE VALUE OF FDCS SHAREHOLDINGS
IN FAC IS NOT TAXABLE.[36]
The Courts Ruling
While the petition in G.R. No. 163653 is bereft of merit, we find the CIRs petition in
G.R. No. 167689 impressed with partial merit.
In G.R. No. 163653, the CIR argues that the CA erred in reversing the CTAs finding
that theoretical interests can be imputed on the advances FDC extended to its
affiliates in 1996 and 1997 considering that, for said purpose, FDC resorted to
interest-bearing fund borrowings from commercial banks. Since considerable
interest expenses were deducted by FDC when said funds were borrowed, the CIR
theorizes that interest income should likewise be declared when the same funds
were sourced for the advances FDC extended to its affiliates. Invoking Section 43 of
the 1993 NIRC in relation to Section 179(b) of Revenue Regulation No. 2, the CIR
maintains that it is vested with the power to allocate, distribute or apportion
income or deductions between or among controlled organizations, trades or
businesses even in the absence of fraud, since said power is intended to prevent
evasion of taxes or clearly to reflect the income of any such organizations, trades or
businesses. In addition, the CIR asseverates that the CA should have accorded
dedicated to the study and consideration of tax matters, can take judicial notice of
US income tax laws and regulations.[37]

Admittedly, Section 43 of the 1993 NIRC[38] provides that, (i)n any case of two or
more organizations, trades or businesses (whether or not incorporated and
whether or not organized in the Philippines) owned or controlled directly or
indirectly by the same interests, the Commissioner of Internal Revenue is
authorized to distribute, apportion or allocate gross income or deductions between
or among such organization, trade or business, if he determines that such
distribution, apportionment or allocation is necessary in order to prevent evasion
of taxes or clearly to reflect the income of any such organization, trade or business.
In amplification of the equivalent provision[39] under Commonwealth Act No.
466,[40] Sec. 179(b) of Revenue Regulation No. 2 states as follows:
Determination of the taxable net income of controlled
taxpayer. (A) DEFINITIONS. When used in this section
(1) The term organization includes any kind, whether it be a sole
proprietorship, a partnership, a trust, an estate, or a corporation or association,
irrespective of the place where organized, where operated, or where its trade or
business is conducted, and regardless of whether domestic or foreign, whether
exempt or taxable, or whether affiliated or not.
(2) The terms trade or business include any trade or business activity of any
kind, regardless of whether or where organized, whether owned individually or
otherwise, and regardless of the place where carried on.
(3) The term controlled includes any kind of control, direct or indirect,
whether legally enforceable, and however exercisable or exercised. It is the reality
of the control which is decisive, not its form or mode of exercise. A presumption of
control arises if income or deductions have been arbitrarily shifted.
(4) The term controlled taxpayer means any one of two or more
organizations, trades, or businesses owned or controlled directly or indirectly by
the same interests.
(5) The term group and group of controlled taxpayers means the
organizations, trades or businesses owned or controlled by the same interests.
(6) The term true net income means, in the case of a controlled taxpayer,
the net income (or as the case may be, any item or element affecting net income)
which would have resulted to the controlled taxpayer, had it in the conduct of its
affairs (or, as the case may be, any item or element affecting net income) which
would have resulted to the controlled taxpayer, had it in the conduct of its affairs
(or, as the case may be, in the particular contract, transaction, arrangement or
other act) dealt with the other members or members of the group at arms
length. It does not mean the income, the deductions, or the item or element of
either, resulting to the controlled taxpayer by reason of the particular contract,
transaction, or arrangement, the controlled taxpayer, or the interest controlling it,
chose to make (even though such contract, transaction, or arrangement be legally
binding upon the parties thereto).
(B) SCOPE AND PURPOSE. - The purpose of Section 44 of the Tax Code is to place a
controlled taxpayer on a tax parity with an uncontrolled taxpayer, by determining,
according to the standard of an uncontrolled taxpayer, the true net income from
the property and business of a controlled taxpayer. The interests controlling a
group of controlled taxpayer are assumed to have complete power to cause each
controlled taxpayer so to conduct its affairs that its transactions and accounting
records truly reflect the net income from the property and business of each of the
controlled taxpayers. If, however, this has not been done and the taxable net
income are thereby understated, the statute contemplates that the Commissioner
of Internal Revenue shall intervene, and, by making such distributions,
apportionments, or allocations as he may deem necessary of gross income or
deductions, or of any item or element affecting net income, between or among the
controlled taxpayers constituting the group, shall determine the true net income of
each controlled taxpayer. The standard to be applied in every case is that of an
uncontrolled taxpayer. Section 44 grants no right to a controlled taxpayer to apply
its provisions at will, nor does it grant any right to compel the Commissioner of
Internal Revenue to apply its provisions.
(C) APPLICATION Transactions between controlled taxpayer and another will be
subjected to special scrutiny to ascertain whether the common control is being
used to reduce, avoid or escape taxes. In determining the true net income of a
controlled taxpayer, the Commissioner of Internal Revenue is not restricted to the
case of improper accounting, to the case of a fraudulent, colorable, or sham
transaction, or to the case of a device designed to reduce or avoid tax by shifting or
distorting income or deductions. The authority to determine true net income
extends to any case in which either by inadvertence or design the taxable net
income in whole or in part, of a controlled taxpayer, is other than it would have
been had the taxpayer in the conduct of his affairs been an uncontrolled taxpayer
dealing at arms length with another uncontrolled taxpayer.[41]
As may be gleaned from the definitions of the terms controlled and "controlled
taxpayer" under paragraphs (a) (3) and (4) of the foregoing provision, it would
appear that FDC and its affiliates come within the purview of Section 43 of the 1993
NIRC. Aside from owning significant portions of the shares of stock of FLI, FAI, DSCC
and FCI, the fact that FDC extended substantial sums of money as cash advances to
its said affiliates for the purpose of providing them financial assistance for their
operational and capital expenditures seemingly indicate that the situation sought
to be addressed by the subject provision exists. From the tenor of paragraph (c) of
Section 179 of Revenue Regulation No. 2, it may also be seen that the CIR's power
to distribute, apportion or allocate gross income or deductions between or among
controlled taxpayers may be likewise exercised whether or not fraud inheres in the
transaction/s under scrutiny. For as long as the controlled taxpayer's taxable
income is not reflective of that which it would have realized had it been dealing at
arm's length with an uncontrolled taxpayer, the CIR can make the necessary
rectifications in order to prevent evasion of taxes.
Despite the broad parameters provided, however, we find that the CIR's powers of
distribution, apportionment or allocation of gross income and deductions under
Section 43 of the 1993 NIRC and Section 179 of Revenue Regulation No. 2 does not
include the power to impute "theoretical interests" to the controlled taxpayer's
transactions. Pursuant to Section 28 of the 1993 NIRC,[42] after all, the term gross
income is understood to mean all income from whatever source derived, including,
but not limited to the following items: compensation for services, including fees,
commissions, and similar items; gross income derived from business; gains derived
from dealings in property; interest; rents; royalties; dividends; annuities; prizes and
winnings; pensions; and partners distributive share of the gross income of general
professional partnership.[43] While it has been held that the phrase "from whatever
source derived" indicates a legislative policy to include all income not expressly
exempted within the class of taxable income under our laws, the term "income"
has been variously interpreted to mean "cash received or its equivalent", "the
amount of money coming to a person within a specific time" or "something distinct
from principal or capital."[44] Otherwise stated, there must be proof of the actual
or, at the very least, probable receipt or realization by the controlled taxpayer of
the item of gross income sought to be distributed, apportioned or allocated by the
CIR.
Our circumspect perusal of the record yielded no evidence of actual or possible
showing that the advances FDC extended to its affiliates had resulted to the
interests subsequently assessed by the CIR. For all its harping upon the supposed
fact that FDC had resorted to borrowings from commercial banks, the CIR had
adduced no concrete proof that said funds were, indeed, the source of the
advances the former provided its affiliates. While admitting that FDC obtained
interest-bearing loans from commercial banks,[45]Susan Macabelda - FDC's Funds
Management Department Manager who was the sole witness presented before the
CTA - clarified that the subject advances were sourced from the corporation's rights
offering in 1995 as well as the sale of its investment in BonifacioLand in
1997.[46] More significantly, said witness testified that said advances: (a) were
extended to give FLI, FAI, DSCC and FCI financial assistance for their operational
and capital expenditures; and, (b) were all temporarily in nature since they were
repaid within the duration of one week to three months and were evidenced by
mere journal entries, cash vouchers and instructional letters.[47]
Even if we were, therefore, to accord precipitate credulity to the CIR's bare
assertion that FDC had deducted substantial interest expense from its gross
income, there would still be no factual basis for the imputation of theoretical
interests on the subject advances and assess deficiency income taxes
thereon. More so, when it is borne in mind that, pursuant to Article 1956 of
the Civil Code of the Philippines, no interest shall be due unless it has been
expressly stipulated in writing. Considering that taxes, being burdens, are not to be
presumed beyond what the applicable statute expressly and clearly declares,[48] the
rule is likewise settled that tax statutes must be construed strictly against the
government and liberally in favor of the taxpayer.[49] Accordingly, the general rule
of requiring adherence to the letter in construing statutes applies with peculiar
strictness to tax laws and the provisions of a taxing act are not to be extended by
implication.[50] While it is true that taxes are the lifeblood of the government, it has
been held that their assessment and collection should be in accordance with law as
any arbitrariness will negate the very reason for government itself.[51]
In G.R. No. 167689, we also find a dearth of merit in the CIR's insistence on the
imposition of deficiency income taxes on the transfer FDC and FAI effected in
exchange for the shares of stock of FLI. With respect to the Deed of Exchange
executed between FDC, FAI and FLI, Section 34 (c) (2) of the 1993 NIRC pertinently
provides as follows:
Sec. 34. Determination of amount of and recognition of gain or loss.-
xxxx
(c) Exception x x x x
No gain or loss shall also be recognized if property is transferred to a corporation by
a person in exchange for shares of stock in such corporation of which as a result of
such exchange said person, alone or together with others, not exceeding four
persons, gains control of said corporation; Provided, That stocks issued for services
shall not be considered as issued in return of property.
As even admitted in the 14 February 2001 Stipulation of Facts submitted by the
parties,[52] the requisites for the non-recognition of gain or loss under the foregoing
provision are as follows: (a) the transferee is a corporation; (b) the transferee
exchanges its shares of stock for property/ies of the transferor; (c) the transfer is
made by a person, acting alone or together with others, not exceeding four
persons; and, (d) as a result of the exchange the transferor, alone or together with
others, not exceeding four, gains control of the transferee.[53] Acting on the 13
January 1997 request filed by FLI, the BIR had, in fact, acknowledged the
concurrence of the foregoing requisites in the Deed of Exchange the former
executed with FDC and FAI by issuing BIR Ruling No. S-34-046-97.[54]With the BIR's
reiteration of said ruling upon the request for clarification filed by FLI,[55] there is
also no dispute that said transferee and transferors subsequently complied with
the requirements provided for the non-recognition of gain or loss from the
exchange of property for tax, as provided under Section 34 (c) (2) of the 1993
NIRC.[56]
Then as now, the CIR argues that taxable gain should be recognized for the
exchange considering that FDC's controlling interest in FLI was actually decreased
as a result thereof. For said purpose, the CIR calls attention to the fact that, prior to
the exchange, FDC owned 2,537,358,000 or 67.42% of FLI's 3,763,535,000
outstanding capital stock. Upon the issuance of 443,094,000 additional FLI shares
as a consequence of the exchange and with only 42,217,000 thereof accruing in
favor of FDC for a total of 2,579,575,000 shares, said corporations controlling
interest was supposedly reduced to 61%.03 when reckoned from the transferee's
aggregate 4,226,629,000 outstanding shares. Without owning a share from FLI's
initial 3,763,535,000 outstanding shares, on the other hand, FAI's acquisition of
420,877,000 FLI shares as a result of the exchange purportedly resulted in its
control of only 9.96% of said transferee corporation's 4,226,629,000 outstanding
shares. On the principle that the transaction did not qualify as a tax-free exchange
under Section 34 (c) (2) of the 1993 NIRC, the CIR asseverates that taxable gain in
the sum of P263,386,921.00 should be recognized on the part of FDC and in the
sum of P3,088,711,367.00 on the part of FAI.[57]
The paucity of merit in the CIR's position is, however, evident from the categorical
language of Section 34 (c) (2) of the 1993 NIRC which provides that gain or loss will
not be recognized in case the exchange of property for stocks results in the control
of the transferee by the transferor, alone or with other transferors not exceeding
four persons. Rather than isolating the same as proposed by the CIR, FDC's
2,579,575,000 shares or 61.03% control of FLI's 4,226,629,000 outstanding shares
should, therefore, be appreciated in combination with the 420,877,000 new shares
issued to FAI which represents 9.96% control of said transferee
corporation.Together FDC's 2,579,575,000 shares (61.03%) and FAI's 420,877,000
shares (9.96%) clearly add up to 3,000,452,000 shares or 70.99% of FLI's
4,226,629,000 shares. Since the term "control" is clearly defined as "ownership of
stocks in a corporation possessing at least fifty-one percent of the total voting
power of classes of stocks entitled to one vote" under Section 34 (c) (6) [c] of the
1993 NIRC, the exchange of property for stocks between FDC FAI and FLI clearly
qualify as a tax-free transaction under paragraph 34 (c) (2) of the same provision.
Against the clear tenor of Section 34(c) (2) of the 1993 NIRC, the CIR cites then
Supreme Court Justice Jose Vitug and CTA Justice Ernesto D. Acosta who, in their
book Tax Law and Jurisprudence, opined that said provision could be inapplicable if
control is already vested in the exchangor prior to exchange.[58] Aside from the fact
that that the 10 September 2002 Decision in CTA Case No. 6182 upholding the tax-
exempt status of the exchange between FDC, FAI and FLI was penned by no less
than Justice Acosta himself,[59] FDC and FAI significantly point out that said authors
have acknowledged that the position taken by the BIR is to the effect that "the law
would apply even when the exchangor already has control of the corporation at the
time of the exchange."[60]This was confirmed when, apprised in FLI's request for
clarification about the change of percentage of ownership of its outstanding capital
stock, the BIR opined as follows:
Please be informed that regardless of the foregoing, the transferors, Filinvest
Development Corp. and Filinvest Alabang, Inc. still gained control of Filinvest Land,
Inc. The term 'control' shall mean ownership of stocks in a corporation by
possessing at least 51% of the total voting power of all classes of stocks entitled to
vote. Control is determined by the amount of stocks received, i.e., total subscribed,
whether for property or for services by the transferor or transferors. In determining
the 51% stock ownership, only those persons who transferred property for stocks
in the same transaction may be counted up to the maximum of five (BIR Ruling No.
547-93 dated December 29, 1993.[61]
At any rate, it also appears that the supposed reduction of FDC's shares in FLI
posited by the CIR is more apparent than real. As the uncontested owner of 80% of
the outstanding shares of FAI, it cannot be gainsaid that FDC ideally controls the
same percentage of the 420,877,000 shares issued to its said co-transferor which,
by itself, represents 7.968% of the outstanding shares of FLI.Considered alongside
FDC's 61.03% control of FLI as a consequence of the 29 November 1996 Deed of
Transfer, said 7.968% add up to an aggregate of 68.998% of said transferee
corporation's outstanding shares of stock which is evidently still greater than the
67.42% FDC initially held prior to the exchange. This much was admitted by the
parties in the 14 February 2001 Stipulation of Facts, Documents and Issues they
submitted to the CTA.[62] Inasmuch as the combined ownership of FDC and FAI of
FLI's outstanding capital stock adds up to a total of 70.99%, it stands to reason that
neither of said transferors can be held liable for deficiency income taxes the CIR
assessed on the supposed gain which resulted from the subject transfer.
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 (P0.30) 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 (P250,000.00) 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 (P0.30)
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.
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.
In its appeal before the CA, the CIR argued that the foregoing ruling was later
modified in BIR Ruling No. 108-99 dated 15 July 1999, which opined that inter-
office memos evidencing lendings or borrowings extended by a corporation to its
affiliates are akin to promissory notes, hence, subject to documentary stamp
taxes.[64] In brushing aside the foregoing argument, however, the CA applied
Section 246 of the 1993 NIRC[65] from which proceeds the settled principle that
rulings, circulars, rules and regulations promulgated by the BIR have no retroactive
application if to so apply them would be prejudicial to the taxpayers.[66] Admittedly,
this rule does not apply: (a) where the taxpayer deliberately misstates or omits
material facts from his return or in any document required of him by the Bureau of
Internal Revenue; (b) where the facts subsequently gathered by the Bureau of
Internal Revenue are materially different from the facts on which the ruling is
based; or (c) where the taxpayer acted in bad faith.[67] Not being the taxpayer who,
in the first instance, sought a ruling from the CIR, however, FDC cannot invoke the
foregoing principle on non-retroactivity of BIR rulings.
Viewed in the light of the foregoing considerations, we find that both the CTA and
the CA erred in invalidating the assessments issued by the CIR for the deficiency
documentary stamp taxes due on the instructional letters as well as the journal and
cash vouchers evidencing the advances FDC extended to its affiliates in 1996 and
1997. In Assessment Notice No. SP-DST-96-00020-2000, the CIR correctly assessed
the sum of P6,400,693.62 for documentary stamp tax, P3,999,793.44 in interests
and P25,000.00 as compromise penalty, for a total of P10,425,487.06. Alongside
the sum of P4,050,599.62 for documentary stamp tax, the CIR similarly
assessed P1,721,099.78 in interests and P25,000.00 as compromise penalty in
Assessment Notice No. SP-DST-97-00021-2000 or a total of P5,796,699.40. The
imposition of deficiency interest is justified under Sec. 249 (a) and (b) of the NIRC
which authorizes the assessment of the same at the rate of twenty percent (20%),
or such higher rate as may be prescribed by regulations, from the date prescribed
for the payment of the unpaid amount of tax until full payment.[68] The imposition
of the compromise penalty is, in turn, warranted under Sec. 250[69] of the NIRC
which prescribes the imposition thereof in case of each failure to file an
information or return, statement or list, or keep any record or supply any
information required on the date prescribed therefor.
To our mind, no reversible error can, finally, be imputed against both the CTA and
the CA for invalidating the Assessment Notice issued by the CIR for the deficiency
income taxes FDC is supposed to have incurred as a consequence of the dilution of
its shares in FAC. Anent FDCs Shareholders Agreement with RHPL, the record shows
that the parties were in agreement about the following factual antecedents
narrated in the 14 February 2001 Stipulation of Facts, Documents and Issues they
submitted before the CTA,[70]viz.:
1.11. On November 15, 1996, FDC entered into a Shareholders Agreement (SA)
with Reco Herrera Pte. Ltd. (RHPL) for the formation of a joint venture company
named Filinvest Asia Corporation (FAC) which is based in Singapore (pars. 1.01 and
6.11, Petition, pars. 1 and 7, Answer).
1.12. FAC, the joint venture company formed by FDC and RHPL, is tasked to develop
and manage the 50% ownership interest of FDC in its PBCom Office Tower Project
(Project) with the Philippine Bank of Communications (par. 6.12, Petition; par. 7,
Answer).
1.13. Pursuant to the SA between FDC and RHPL, the equity participation of FDC
and RHPL in FAC was 60% and 40% respectively.
1.14. In accordance with the terms of the SA, FDC subscribed to P500.7 million
worth of shares of stock representing a 60% equity participation in FAC. In turn,
RHPL subscribed to P433.8 million worth of shares of stock of FAC representing a
40% equity participation in FAC.
1.15. In payment of its subscription in FAC, FDC executed a Deed of Assignment
transferring to FAC a portion of FDCs right and interests in the Project to the extent
of P500.7 million.
1.16. FDC reported a net loss of P190,695,061.00 in its Annual Income Tax Return
for the taxable year 1996.[71]
Alongside the principle that tax revenues are not intended to be liberally
construed,[72] the rule is settled that the findings and conclusions of the CTA are
accorded great respect and are generally upheld by this Court, unless there is a
clear showing of a reversible error or an improvident exercise of
authority.[73] Absent showing of such error here, we find no strong and cogent
reasons to depart from said rule with respect to the CTA's finding that no deficiency
income tax can be assessed on the gain on the supposed dilution and/or increase in
the value of FDC's shareholdings in FAC which the CIR, at any rate, failed to
establish. Bearing in mind the meaning of "gross income" as above discussed, it
cannot be gainsaid, even then, that a mere increase or appreciation in the value of
said shares cannot be considered income for taxation purposes. Since a mere
advance in the value of the property of a person or corporation in no sense
constitute the income specified in the revenue law, it has been held in the early
case of Fisher vs. Trinidad,[74] that it constitutes and can be treated merely as an
increase of capital. Hence, the CIR has no factual and legal basis in assessing
income tax on the increase in the value of FDC's shareholdings in FAC until the
same is actually sold at a profit.
WHEREFORE, premises considered, the CIR's petition for review on certiorari in G.R.
No. 163653 is DENIED for lack of merit and the CAs 16 December 2003 Decision in
G.R. No. 72992 is AFFIRMED in toto. The CIRs petition in G.R. No. 167689
is PARTIALLY GRANTED and the CAs 26 January 2005 Decision in CA-G.R. SP No.
74510 is MODIFIED.

Accordingly, Assessment Notices Nos. SP-DST-96-00020-2000 and SP-DST-97-

00021-2000 issued for deficiency documentary stamp taxes due on the
instructional letters as well as journal and cash vouchers evidencing the advances
FDC extended to its affiliates are declared valid.

The cancellation of Assessment Notices Nos. SP-INC-96-00018-2000, SP-INC-97-

00019-2000 and SP-INC-97-0027-2000 issued for deficiency income assessed on (a)
the arms-length interest from said advances; (b) the gain from FDCs Deed of
Exchange with FAI and FLI; and (c) income from the dilution resulting from FDCs
Shareholders Agreement with RHPL is, however, upheld.
SO ORDERED.