CTA Case No. 4361 (Decision)

Republic o� the Philippines COURT OF TAX APPEALS Quezon Cit y CHINA BANKING CORPORAT ION, Petitioner, - versus - C.T.A. CASE NO. 4361 THE COMMISSIONER OF INTERNAL REVENUE, Respondent. X ------------------------ X In this appeal, petitioner prays for the Court to declare the nullity of respondent's assessment for 1986 deficiency documentary stamp tax in the amount of P523,851.53. The material facts of the case are simple . Petitioner is a commercial banking .I corpora �t.ion duly organized and existing in accordance with the laws of the Philippines. On November 28, 1988, the petitioner received from the respondent a letter assessment dated November 28, 1988, together with an Income Tax Assessment Notice demanding fo r the full payment of petitioner' s alleged Deficiency Documentary Stamp Tax for 1986 on Sales of Foreign Bills of Exchange to the Central Bank in the total amount of P523,851.53, itemized as follows:

- DEC I S I 0 N- C.T.A. Case No. 4361 -2- DEFICIENCY DOCUftENTARY STAftP TAX <Sec. 195 of NLRC as amended) Sale of Fo r eign Bills of ?279,387,470.00 Exchange to Central Bank p 410,081.22 Tax due thereon: P104,770.31 ?279,387,470.00 x P0.30 P200.00 --------- p 523, 851. 53 Add: 25% surcharge -- ----- --- --- Total amount due and collectible =============== On December 7, 1988, petitioner requested for a reconsideration/reinvestigation of the afores a id deficiency documentary stamp tax assessments. On March 31, 1989, petitioner received from the respondent a letter dated March 10, 1989 conveying its final decision denying in whole the protest of the petitioner and reiterating its demand for the payment of its assessment mentioned above. Hence, the petitioner was constrained to file this petition for review in accordance with Section 270 of the National Internal Revenue Code.

- DEC I S I 0 N- C.T.A. Case No. 4361 -3- In its petition, Ch i na Banking Corporation's counsel alleges , among other s, the following arguments: ~ ... Petitioner alleged that he has duly paid the propel' documentary stamp taxes required by law on all i s transac ions i nvolving sales of foreign bills of exchange t o t he Central Bank of the Philippines, f or which it should not be taxed again: When the peti oner sells foreign exchange through telegraphic transfers to the Central Bank of t he Ph 'lippines, the latter, as the buyer, is directly l ' able for the docume ntary stamp tax pursuan to Section 173 <formerly Section 186> in relation o Section 182 <formerly Section 195> of the Tax Code. Pe t ion r a so asserts, that the tax and dut y exem p ion p 'vilege enjoyed by the Central Bank of the Phili ppines has been expressly withdrawn and revoked under Presidential Decrees Nos. 1177 (July 30, 1977> and 1931 (June 11 , 1984> for which reason it is d irectly liable for documentary stamp tax on the� sales of foreign bil ls of exchange made by .I petitioner to it in the year 1986 ; Unless it can

- DECI S I 0 N- C~ T .A. Case No. 4361 -4- be shown that the exemption privilege of the Central Bank of the Philippines has been subsequently restored upon the recommendation o~ ' the Fiscal Incentives Review Board, the petitioner cannot be liable on the alleged documentary stamp tax on the sale of foreign bills of exchange to the Central Bank of the Philippines for the year 1986 ; Under Section 182 (formerly Section 195) of the National Internal Revenue Code, petitioner � maintained that respondent's reliance on said law as its legal basis on the questioned assessments, has no applicabi lity to the transaction sought to Le taxed. <Section 182 of the NIRC is herein quoted to wit: wsection 182. Sta�p tax on foreign bills of exchange and letter of credit. On all foreign billa of exchange and le ers of credit <including orders, by eleg aph'c or otherwise for the payment of money issued by express or steamship companies or by any person or persons> drawn in but payable out of the Philippines in a set of three or more according to the custom of merchants and bankers, there shall be collected a documentary s amp tax of thirty centavos on each two hundred pesos, or fractional part thereof, of the face value of any such bi of exchange or letter of credit, o he Philippine equivalent of such face value, if expressed in foreign currency". <A s amended by P.D. 1457 and P.O. 959> 12bb

- DECI S I 0 N- C.T.A. Case No. ~361 -5- Fu r thermore , pe titioner added that the issu a nce by responde n t of t he letter- a s sessment and ass essment n o tice, deprived the petitioner o~ i ts c ons titutional right t o due process, in the sense that - pe titioner' s return or records were n e ver fo r mally e x amined or i nspected by the respondent or any of his authorized, su bordinate office r s determining pe titioner's alle ge d deficiency documentary stamp tax; petit i oner wa s n e ver forma l ly a ppr ised of the s ources and how t he a mounts i nd i cated in the assessment wer e arrived at; no pre - a ssessment notic e was ever i ssued to th e pe titioner in violation of Se c tion 22 9 of the Tax Code thus de priving the peti tioner of the op portunity to resolve the ma tter f a �t.hw'th, and; n o h ri ngs , f o r mal or informal , what soever was eve r h eld i n co nn ection with ss e ss me n t r d es p ite peti t ioner's reque st fo r einvestiga tion . On the o h er h and res p onden t ma intained that petitioner's Te l e x Ord e r to t h e c orrespondent bank ) abroa d to pa y or d e posit f oreign exchange sold for t he account of va r iou s co mmercial ba nks a re bills of e x c h a ng e su b ject t o docu mentar y s tamp ta x .

- DEC I S I 0 N- C.T. h. Case No. 4361 -6- Respondent further argued t hat the subject tax assessment likewise finds support i n Section 51 of Reve nue Regulations No. 26. Mo reover , respondent contended that Sec . 186 of P. D. 1944, as amended, c ea ly states t hat " whenever the party to the ta xab l e do cu ment enjoys exe mptions fr o m the tax herein imp se he o her par y thereto who is not exempt s h all be the on ctly liable to tax. The only ~ ~ ~ to be reso ved in th is case is whether o n o � p t'> i � oner is liable for deficienc y documentary s tamp tax in t h e amount of ?523,850.53. Under Sec ion 195 <N ow Sec tion 182) of the Tax Code, the one bo und to pay the stamp tax is the party - ma king, signing, issuing, accept ing or tr ansferring the same and thi s would be referring to the time the act �s d one or transaction is had. Section 195 of the Tax Code provides that: "SEC. 195. Stamp tax on foreign bills of exchange and letters of credit. -- On all foreign bills of exchange and l ette rs of credit <i ncluding orders, by telegraph or otherwise, for the payme nt of money issued by express or stea mship companies or by any person or pe rsons> drawn in but payable out of the Philippines in a set of three or more according to the c us tom of merchants and bankers, there shall be collected a documentary stamp tax of thirty centavos o n each two hundred pesos, or fractional part thereof, of the face value of such bill of exc hange or letter of credit , or the Philippine equivalent of such face value, if expressed in foreign country. "

- DEC I S I 0 N- C.T.h. Case No. 4361 -7- In t his case, it is the petitioner that shou l d be held liable to pay the documentary stamp tax, because herein p eti tioner was the one who ~-,. trans:fered or sold such foreign~ bills o:f exchange and such l iab'lity is well supported by Sec. 51 o:f Rev. Reg. No. 26 which reads: Sect on t - Wh at naybe Considered as 1' 1 graphic Transfer - If a �local bank cables to a certain bank said l ocal bank h as a cred't and directs that foreign bank to pay another bank or person n h e sa me locality a certain sum of money, the documents for and in respect o such ransac tions will be regarded as a telegraphic t r ansfer , t axa ble unde he provisions of sub - sect ion 144 a <i> of the adminis trative code (n o w Section 195 of the NIRC>. A documentary stam p tax is in the nat~re of an excise tax. It is not 'imposed upon the business transacted but is an excise upon the privilege, opportunity or facilities use d in the transaction ( Comm. Internal Revenue v. He ald Lumber Co. G. R. No. L - 16340, Feb. 29; 1964) At this juncture, definition o:f terms would be helpful, thus: A foreign bill of exchange is one o f which the drawer and drawee are residents of countries foreign to each other. <Bevier's Law Dictionary, Vol. I, p.250>

- DE C I S I 0 N- C.T.A. Case No. 4361 -8- A bill of exchange drawn by a citizen of one state on a firm in another state, and payable in the latter state, is a foreign bill of exchange. <Vol. 17 , P� 284, Words and Phrases> ~ " Since the petitioner cannot show exemption from the payment of the tax in question nor payment of the same, it follows that it cannot escape liability thereof by simply passing the burden to the Central Bank. It mu st state in clear and express terms that it is exempt from payment of documentary stamp tax before it can be entitled to it. "Under settled jurisprudence, " exemption from tax at1on i~ nat �av ored and ft~Ver p r~s umed, so that if granted it must be strictly construed against the taxpayer. Affirmately put, the law frowns on exemption from taxation, hence, an exempting provision should be construed strictissimi juris." <Manila Electric Co. vs. Vera, L -29987, Oct. 22,. 1975, 67 SCRA 351, Caltex <Phils. > Inc. vs. Comm. .I of Internal Revenue, CTA Case No. 2871, January 29, 1986 Besides, upon proper investigation of Revenue Examiner Sarah B. Mopia, it was ascertained that China Banking Corporation had engaged in the sale

- DEC I S I 0 N- C. T .A. Case No. 4 361 -9- of foreign bills of exchange with the Central Bank of the Philippines and other commercial banks. The report of Ms. Sarah B. Mopia is herein ' \ reproduced to wit: April 20, 1987 MEMORANDUM FOR : T H~ Commi s � oner Bur u f Internal R v nu <Th u Ch nnels> SUBJECT: CHINA BANKING CO RPORATION Dasmarinas, Manila <1986 Documentary Stamps Tax) Th 's � e e po t on he original investig on �ond uc ed by the unde signed exa mine on the 1986 docum n � r y mt mp tax li abilities o� the above-named s ubj ect on fo reign bills of exchange under Section 195 <NIRC> pursuant to Letter of Authority No. 0012 26 0 NA issued on February 19, 1987. The investigation disclosed that China Banking Co r poration had engaged in the sale of foreign bills of exchange with the Central Bank of the Philippines and other commercial banks. The correct amount of documentary stamps were properly affixed on its sales made to other co mmercial banks. On the other hand, no documentary stamps were affixed o n its sale made to the Central Bank of the Philippines on the ground that these are tax -exempt entities. It is alleged that it is the practice in the banking

- DEC I S I 0 N- c~T.A. Case No. 4361 - 10 - industry that the buyer assumes the liability �or the documentary stamps, and since the buyers in these instances are tax - exempt entities, the documentary stamps tax were not paid. Presidential Decree 1994, however, amending Section 222 <Now Sec. 186> o� the NIRC, and which took e��ect on January 1, 1986 clearly states: "Whenever one party to the taxable document enjoys exemption �rom the tax herein imposed, the other party thereto who is not exempt shall be the one directly liable to the tax. " In view o� the �oregoing, it is respect�ully recommended by the undersigned examiner that the total amount o� ?523,851.53, including surcharge be assessed against China Banking Corporation representing de�iciency documentary stamp tax on �oreign bills of exchange. Respectfully submitted: SARAH B. MOPIA Examiner It is the practice in the banking industry that the buyer assumes the liability for the documentary stamps, and since the buyers in these instances are tax-exempt entities, the documentary stamp tax were not paid. However, 1 262

- DE C I S I 0 N- C.T~A. Ca se No. 4361 �' I - 11 - Presidential Decree 1994 amending Section 222 <now Sec. 1 e.6 > of the NIR C, wh ic h took effec t on January 1, 1986 clearly stat es : "Whenever one party to the taxable document enjoys exemption from the tax herein imposed, the other party thereto who is not exempt s hall be the one directly liable �to th e ta x. " ( Exh. "ii", p. 1 9 , BIR Records> And more, the passage of E.O. 93 already revoked exe mption previously granted to the CB, other government entities and to petitioner by law, from paym e nt of do c um e nta r y s tamp tax on sale of oreign bills of exchange. There:fore, respondE>n c rrect in assess ng petitioner i n � the amount of PS23 , 851.53 as def iciency documentary stamp tax for 1 986 on sales of foreign bills of exchange to Central Bank. Under Section 195 (now Section 182 of the Tax Code> parties to transacti on on he sale of fo e� n ill of exchange are liable to the tax in question. Any of them or either of th em can be assessed and be made to pay for documen tary stamp tax. The only way to escape l iabi l ity from payment is ~o prove that one is exempt ed or it has al eady paid the tax , wanting in such proof of payment, l iabili y subsists. 1 ') h-: .-

- DEC I S I 0 N- C~T.A. Case No. 4361 - 12 - In fine, petitioner is not correct in passing the buck of responsibility to the Central Bank for payment of documentary stamp tax on the sale of~ foreign bill of exchange. It is a time - honored principle that exemptions from taxation are construed strictissimi juris against the taxpayer and liberally in favor of the toxing au hority. <Philippine Petroleum Corpu .. ation v. Muni cip l:lli y of Pililla, G. R. No s . 90776, June 3 , 1991. l To our min r it �s not just nor equitable to simply pass the ax urden to the other party to the transact'on n say he is liable just because exemption had y be n revoked by operation of law. China Banking which is a party to the transaction is t herefore, legally assessed for deficien c y documentary s .tamp tax on the sale of foreign bill of exchange which it must pay. Tax assessments are presumed correct and made in good faith. Taxpayer has duty to prove o �lherw is e. <Commissioner of Internal Revenue vs. Construction Resources of Asia Inc., 145 SCRA 671>.

- DEC I S I 0 N- C.T.A. Case No. 4361 - 13 - WHEREFORE, premi ses considered, petitioner is here by ordered to pay res pondent, Commissioner of Internal Revenue, t he amount of P523,581.53 a~ deficien c y docum e n tary stamp tax for 1986 plus 20Y. annu al interest fro m November 28, 1988 until fully paid pursuant to Sec. 283 of the Tax Code as amended by P.D. 1994, effective January 11, 1986, wi th costs. SO ORDERED. Quezo n c � y, Me tro 22, GRUBA Judge WE CONCUR: residing Judge zz / l.,_, ~I~~ RAMON 0. Associate J:.r;{g;"' 1 ') f-:.;

- DEC I S I 0 N- C.T.A. Case No. 4361 - 14 - CERTIFICATION I hereby certify that this decision was reached after due co nsultation among the members of the Court of Tax Appeals in accordance with Section 13, Article VIII of the Constitution. c~- ~~ ERNESTO D. ACOSTA Presiding Judge Cour t of Tax Appeals .I