CTA Case No. 5711 (Decision)

REPUBLIC OF THE PHILIPPINES COURT OF TAX APPEALS QUEZON CITY BANK OF THE PHILIPPINE ISLANDS, C.T.A. CASE NO. 5711 (Successor-in-interest of CITYTRUST Promulgated: BANKING CORPORATION), Petitioner, -versus- COMMISSIONER OF INTERNAL REVENUE, Respondent. x---------------------------------- ---- ------------------ ---x DECISION This case involves the 1985 deficiency documentary stamp tax assessment issued by Respondent Commissioner of Internal Revenue, against the Bank of the Philippine Islands (BPI) as successor-in-interest of Citytrust Banking Corporation (CBC) in the amount ofP1,259,884.50. The facts of the case as found in the records are as follows: On June 16, 1989, Petitione received from the Respondent Bureau of Internal .' :~� ? �, ' . �. ~ .: . .' ~ Revenue (BIR) an assessment notice a~d d~mand letter (Exhibits 1 and 1-a, respectively), � , .j both dated May 19, 1989 with No. FAS-5-85-89-000988, for the alleged 1985 deficiency documentary stamp tax in the amount of P1,259,884.50, fOmputed as follows: 255

DECISION- CTA CASE NO. 5711 PAGE2 1985 --Deficiency Documentary Stamp Tax Foreign Bills of Exchange P839,723,000 .00 Tax Due thereon P839,723_,QQO.OO x P.30 (Sec. 182, 1994 NIR\..:) p 1,259,584.50 P200 .00 Add: Suggested Compromise Penalty 300.00 TOTAL AMOUNT DUE P I.259.884.50 On June 26, 1989, Petitioner duly filed its protest (Exhibit 2) against the subject assessment with the BIR. On December 3, 1998 (TSN, p. 6, May 18, 1999), Petitioner, through former counsel, SGV and Co. received a letter dated August 4, 1998 from herein Respondent, denying with finality the protest of Petitioner (Exhibit 3). Thus, on January 4, 1999, Petitioner filed a Peti~ion for Review with this Court, praying that the subject assessment be declared null and void. On March 9, 1999, Respondent filed his Answer, raising thereon the following Special and Affirmative defenses, to wit: (a) The assessments in question were made and issued in accordance with existing laws, rules and regulations; (b) All presumptions ~f~ i~ f.~vor of the correctness of the tax assessment . (Interprovincial A~!p,bl_ls. Ipc. vs. CIR, 98 Phil. 290). I' . ..,�. ' ~ .I ' . I ;t'� ' During the heari'ng conducted on May 18, 1999, R~spondent questioned the Court' ~ jurisdiction to entertain the instant Petition as more than thirty (30) days had elapsed from the time the Petitioner's protest was denied with finality up to the time of the filing of this Petition. In ruling otherwise, this Court in its Resolution dated July 29, 1999, held that ~' )

q i DECISION- CTA CASE NO. 5711 PAGE3 the Petition was timely filed considering that the assessment was only received by the Petitioner on December 3, 1998. Since January 3, 1999 fell on a Sunday then January 4, 1999 is the reasonable date to file the Petition in observance of the thirty-day prescriptive period to appeal. Thus, this Court ruled that jurisdiction over the case was properly acquired (see pages 60 to 63, CTA records). The case was then set for hearing for the reception of Petitioner's evidence. However, counsel for the Petitioner manifested that he will no longer present any evidence but would merely rely on the admissions of tt1e parties. Considering that the issue involved is purely legal, Petitioner submitted his case for decision. Respondent, for his part, submitted the following evidence in order to prove the validity of the assessment it issued: Exhibits Description Assessment No. FAS-5-85-89-00988 dated May 5, 1989 1-a Petitioner's demand letter dated May 19, 1989 2 Protest letter dated June 23, 1989 � 3 Respondent's l ~. ~ ti e. r q.ated August 4, 1998 denying Petitioner's , .; protest . .' The deficiency ass~ssmem for DST ori ginated from the results of the investigation. ' .. conducted by Revenue Examiner, Myrna R. de Ocampo which revealed among others that Petitioner sold foreign bills of exchange to the Bangko Sentral ng Pilipinas (BSP) and other commercial banks. It is the theory of Ms. de Ocampo that the buying and

DECISION- CTA CASE NO. 5711 PAGE4 selling of foreign currency with the BSP and other commercial banks is subject to the payment of DST. According to her report, Ms. de Ocampo opined that what is being subjected to DST under Section 231 of the Tax Code is the order by the drawer to the drawee (foreign correspondent bank of the drawee) which could be in the form of a telex or telegraph. She further theorized that on purchases am.J sales of foreign currency of this nature to the BSP, it is the seller (referring to Petitioner) who is liable to pay DST based on the following reasoning embodied in her report, thus: "x x x On purchases and sales of foreign currency of this nature with commercial banks, it is a matter of practi ce that the buyer shoulders the payment of the documentary stamp tax. However on the sale of the foreign currency to the Central Bank, the documentary stamp taxes were not paid as it was alleged that the Central Bank is the buyer and is an exempt entity. It may be stated in _this connection that the taxes could be collected instead from the seller-bank as provided for by Sec. 222 of the Tax Code of 1997 (now Section 186), and to quote: "Sec. 222. STAMP TAX UPCN DOCUMENTS, INSTRUMENTS, AND PAPERS. Upon documents, instruments, and papers, and upon acceptances, assignments, sales and transfers of the obligation, right, or property incident thereto, there shall be levied, collected and paid, for and in respect of the transaction so had . 9r ... accomplished, the corresponding documentary stamp t~~e~� pr~scribed in the following section of this Title, by the per&'ph.Iilakfng, signing, issuing, accepting or transferring the same, '�.' ~nd " flt the time such act is done or transaction had." Y_, :- � � �:: From the ~bove~ii4med prov~~ions of the applicable law, documentary stamp taxes are � pay~ble'� by 'either the person making, signing, issuing,... ��.-~ accepting or transferring the document, instrument or paper. It is now well settled that where one party to the instrument is exempt from said taxes, the other party who is not tax exempt should be liabl ~ (RULING, BIR, May 30, 1977)."

DECISION- CTA CASE NO. 5711 PAGES Respondent fully supported the conclusions embodied in the aforementioned report of Ms. de Ocampo and further strengthened the legal basis of the assessment by citing the following BIR Rulings which in substance state: 1. BIR U1mumbered Ruling dated May 30, 1977. "x x x Documentary stamp taxes are payable by either the person, signing, issuing, accepting, or transferring the instrument, document, or paper. It is now well-settled that where one party to the instrument is exempt from said taxes, the other party who is not exempt should be liable." 2. BIR Ruling No. 144-84 dated September 3, 1984- "x x x Thus, where one party to the contract is exempt from said tax, the other party who is not exempt, shall be liable therefore. Accordingly, since A.J.L. Construction Corporation the other p~rty to the contract and the one assuming the payment of the expenses incidental to the registration in the vendee's name ofthe property sold, is not exempt from said tax, then it is the one liable therefore, pursuant to Sec. 24 (now Sec. 196), in relation to Sec. 222 (now Sec. 173), both of the Tax of 1977, as amended." On the other hand, Petitioner in challenging the validity of the assessment advances the following arguments: 1. DST is an indirect tax which is susceptible of being shifted and thus it can be paid indifferently,.by ~ither party, depending on their agreement (citing the case of Sta. d.lara Lumber vs. Aranas, CTA Case No. 502); �.'"'<\ \ ( hH~t~~s~ 2. It is� a recognized practice that .the buyer of the foreign currency �pays for the 'bST as formali zed by the market convention of the Bankers Association of the Philippines; 3. It is to be noted that CBC was already assessed by the BIR on Swap Transaction covering taxable years 1982 to 1986 under Assessment No. FAS-1-82-86-89-0008900. The subject 1985 DST is already covered by the said Swap Transaction which in effect, CBC is being taxed twice for the same transaction. 25[)

DECISION- CTA CASE NO. 5711 PAGE6 The lone issue to be resolved in the case a( bar is WHETHER OR NOT PETITIONER BPI, AS THE SELLER OF FOREIGN CURRENCY IN 1985, SHOULD BE HELD LIABLE TO PAY THE AMOUNT OF P1,259,884.50 AS DEFICIENCY DOCUMENTARY STAMP TAX, INSTEAD OF THE BUYER, BANGKO SENTRAL NG PILIPINAS WHICH IS A TAX-EXEMPT ENTITY. For easy reference, we will quote hereunder the applicable provisions of law that primarily governs the issue in the case at bar involving the 1985 Documentary Stamp Tax on Foreign bills of exchange, to wit: NATIONAL INTERNAL REVENUE CODE OF 1984 Section 222. Stamp taxes upon documents, instruments and papers. - Upon documents, instruments, and papers, and upon acceptances, assignments, sales, and transfers of the obligation, right, 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 section of this Title, by the person making, signing, issuing, accepting, or transferring the same, and at the time such act is done or transaction had. Section 231. Stamp tax on foreign bills of exchange and letters of credit. - On all foreign bills of exchange and letters of credit (including orders, by telegraph or otherwise, for the payment of money issued by express or steamship companj,�.~ pr...J:?y any persm. or persons) drawn in but payable out of the Philippin(;~ hi �~� ~et of three or more according to the custom of merchants and batlk�r~;-:Jhere shall be collected a documentary stamp tax of twenty centavo~. dn � ~~di two hundred pesos, or fractional part thereof, of the face value of any~ sucll bill of exchange or letter of credit, or the Philippine equivalent of such face value, if expressed in foreign currency. (219) (As amended by PD 1457) REVENUE REGULATIONS NO . 26 2c n ~tit' ~.c��� t ' I_

DECISION- CTA CASE NO. 5711 PAGE 7 Section 51. What maybe considered as Telegraphic Transfer. - If tt local bank cables to a certain bank said local bank has a credit and directs that foreign bank to pay another bank or person in the same locality a certain sum of money, the documents for and in respect of such transactions will b: regarded as telegraphic transfer, taxable under the provisions of sub-section 144a(I) of the Administrative Code (now Section 1')5 of the NIRC) . Judging from the tenor of the aforequoted codal provisions, it would seem that the law does not expressly provide in a categorical manner who between the parties in the document, instrument or paper subject to the documentary stamp tax is liable for the payment thereof. The fact remains that where there is a document, instrument or paper subject to the DST which is made by two or more persons or parties, the burden of paying the tax is shouldered by said persons or patiies. As simply put, the provision leaves the tax to be paid indifferently by either party depending on their contractual agreement or to any legal or lawful provision which may apply. It is the contention of Respondent that the obligation to pay the DST (on the transaction to transfer fund from one foreign bank to another by telex or telegraphic transfer) should be shouldered by herein Petitioner since the alleged buyer who is the "-'" ........... .;;.::�~ Bangko Sentral ng Pilipinas is a t~~:~xe{ript entity. Respondent, in saying so, draws 'it J ...;� . - . ,. " ~-' ~ ' �� ruli._g legal anchor on Section 222 and 2~ l efth~ 'i 984 NIRC and the BIR Unnumbered ' .. ' ~ :: :,_ ,- :> ~ i � .. : ; dated May 30, 1977 and BIR Ruling No.l44-84 dated September 3, 1984. We do not subscribe to the contention of the Respcindent. Nowhere from the wordings of Section 222 and 231 of the 1984 Tax Code could sufficiently support the assertion of Respondent that when one party to the transaction is exempt , the other who is not exempt, is liable to the payment of the DST. It is only upon 26 1

DECISION- CTA CASE NO. 57 II PAGES the enactment and effectivity of PD 1994 wherein the vacuum in the law is filled up as to the shifting of liability in case one of the party is exempt. What is peculiar in the instant case is the fact that the DST assessed upon the Petitioner involves calendar year 1985. While it is true that in a litany of cases decided by this Court, We impute liability to the Petitioner-Bank(seller) to pay the DST if the other part) is exempt, this doctrine applies only to assessments covering taxable year 1986 onwards.(See China Banking Corp. vs. CIR, CTA Case No. 4361, December 22, 1993 as affirmed by the Court of Appeals in China Banking Corp. vs. CJR, CA-G.R. Sp No. 33651, September 23, 1994 and Consolidated Bank and Trust Co. vs. CJR, CTA Case No. 4647, November 21, 1994 as affirmed by the Court ofAppeals in Consolidated Bank and Trust Co. vs. CJR and CTA, CA-G.R. Sp No. 35950, March 31, 1995 with affirming Resolution issued by the Supreme Court dated November 20, 1995). It is to be noted that in the aforesaid cases, the Court relied entirely on the provision of Section 32 of PD 1994 which amended Section 222 of the 1984 Tax Code which reads as follows: "SEC. 32. Section 2~~ of, t~e National Internal Revenue Code 1s .. hereby renumbered and amen(.ieq to �re!ld as follows: ".~.~::...... ~-- -r � �� ( Section 186. ~(amp taxes it.pon documents, instruments and papers. , ~ Upj~ ?~c~~en~, instruments, and ~apers, and "" �.. upon acceptance$'; I:. ass1gnments, sales, and transiers of the obligation, right,'�o~ property incident thereto, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the corresponding d >Ctunentary stamp taxes prescribed in the following sections of this Title, by the person making, signing, issuing, accepting, or transferring the same, and at the same time such act is done or transaction had: 2F2

DECISION- CTA CASE NO. 5711 PAGE9 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 di rectl y liable for the tax." (underscoring supplied) However, this law could not be relied upon in the instant case. It is worthy to stress that Section 49 of PD 1994 expressly provides that this bw shall take effect on January I , 1986. The case of Philippine Commercial International Bank (as successor-in- interest of Insular Bank of Asia and America) vs. CIR, CTA Case No. 4883, April 11, 1996, even points out that the date of publication of PD No. 1994 for purposes of its effectivity was June 18, 1986, the day the Official Gazette on which it was published was released for publication citing Bank of the Philippine Islands vs. CIR, CTA Case No. 4481, May 31, 1994. It is undeniably clear that PD 1994 finds no application to the instant case considering that the assessed DST involved covers calendar year 1985. Therefore, it is erroneous for Respondent to maintairi.. that since Central Bank is tax exempt, it is the other party (herein Petitioner) who is liable for the DST. This being so, Respondent in passing the liability to herein Petitioner, takes refuge in the BIR rulings which in gist is ~i111il~r to Section 32 of PD 1994. Said BIR rulings c� ,"'~ � ._ � ' ~ f cannot be given force and effect by fhi~ ~P,Hr~. True enough, BIR rulings are not binding ~ ~ ~: \�~ . �~� " in this Court especially if it iqvolves a rulfng in another case (Shell Refining Co. vs~ I�~ �~ . : .,� : '" �: � � . �, �' . ,' ~1',. .: ' Lingad, CTA Case No: 1394, October ti;.1966). by An administrative ruling issued the BIR to a taxpayer's query in one case does no t necessarily apply to another case. As reiterated by the Supreme Court, "Although courts might uphold admini strative rul ings especially wherein there is no showing that they are contrary to law yet it should be noted 2 �)1. - - - - -" - -

DECISION- CTA CASE NO. 5711 PAGE 10 that they are not binding on the Courts (Commissionet� vs. Ledesma, L-17509, January 30, 1970). This is because rulings which merely embody administrative opinions on queries submitted do not have the force and effect of laws (Howden vs. Collector, ) supra)" but merely advisory in nature-sort of an information service to the taxpayer. Petitioner likewise made mention of the Rules and Regulations of the Bankers Association of the Philippines (BAP) where it was expressly agreed upon that the DST on trading from transaction shall be for the account of the buyer-bank. Consequently, this Court upholds the validity of this recognized business practice formalized by the market convention of the BAP, which by agreement shifts the liability to pay the DST to the buyer of the Foreign Currency. As We held in Sta. Clara Lumber vs Aranas case (CTA Case No.502, June 12,1959), "x x x One of the natural characteristics of indirect taxes is that they are susceptible of being shifted from the person upon whom in the first instance the duty of payment is laid. (American Express Co. vs Maynard ex rel Moore, 177 U.S. 404,413-414,44 L. Ed. 823, 827). There is nothing in the provisions of Section 210 (Now Section 222) of the Tax Code which, in case of documents, instruments or papers required to be stamped, can be construed as expressly forbidding the � person upon which tl}~, stamp taxes are imposed from shifting the payment of the stanip t.~x to Petitioner, the other party in the Agreement, Annex a�... Tl1~ contractual shifting of the burden of paying the stamp t~~ jp .question does not contravene any public policy. x x x". ,.:~�� :: However, considering tl1~ ~tat~!S of. the Central Bank as a tax-exempt entity, s~ld . !~l � :: .:~ ~ : ' � : 1 - .. rules and regulations of the BAP which shifts the liabi~ity to pay the DST to the b~ye.r '� '"; bank appears to be inapplicable. It is important to note that this Court recognizes the status of Central Bank as a tax-exempt entity. From the period of June 1J, 1984 until

DECISION- CTA CASE NO. 5711 PAGE II March 9, 1987, Central Bank has been given tax exemption privilege by virtue of Resolution No. 35-85 of the Fiscal Incentive Review Board dated March 3, 1985. This being the case, liability for the payment of DST should likewise not be shouldered by the buyer Central Bank who is proven to he tax-exempt. Premised on the facts that no express stipulation w' as entered upon by the parties, that Central Bank the buyer in the transaction is exempt from the payment of taxes and that PD 1994 which shifted the liability to the non-exempt person, cannot be given retro'!_ctive effect as it would be prejudicial to the taxpayer, it could be concluded that neither th ~titioner nor the Central Bank could be held liable for the payment of the DST for the former's 1985 sale of foreign currencies to the latter (Bani{ of the Philippine Islands. vs. CIR, CTA Case No. 5555, Februar-y 2, 1999). It also bears stressing that the Court's conclusion in invalidating the assessment rests largely on the fact that the taxable year involved is 1985, a period when PD 1994 amending Section 222 of the 1984 Tax Code had not yet taken effect. Upon its effectivity however on January 1, 128~ 1 the:conclusion will altogether be different as said '�;;�'.'�� '� � : ...� ' > provision passes on the liability to p~y the p ST on the other party who is not exempt, in t_':\�� . this case, the seller of foreig11 c~q~pcy, il1 a situation where the buyer is a tax-exemp! . ; , ... : � I �!, : ~ e11tity such as the BSP. s . ~ ~ � .-: . :; - �.;: l:.\~ :.' ':' ~l : ... .. ::~ ~:�. \!~HEREFORE, ip viqw pf the foregoing, the Court finds the instant Petitio11 to::; Review MERITORIOUS. Respondent is hereby ORpERED to CANCEL the 1985 deficiency documentary stamp tax assessment issued to Bank of the Philippine Islands (as

DECISION- CTA CASE NO. 57 II PAGE12 successor-in-interest of Citytrust banking Corporation) in the amount of P1,259,884.50 covered by Assessment No. FAS-5-85-89-000988. SO ORDERED ~--ts:>-~ ERNESTO D. ACOSTA Presiding Judge CONCURRING: DISSENTING: RAMON 0. DE VEYRA Associate Judge . CERTIFICATION I hereby ce.rtify that the abqy~ qeci &.. I~Q. n was reached after due consultation with the .. ~ members of the Court of Tax J\.ppeals iri ~ccordance with Section 13, Article VIII of tlL .� . .�� ~ l� . Constitution. L--&1- Q_~ ERNESTO D. ACOSTA Presiding Judge 1' � .