DST on promissory notes

A domestic corporation engaged in the business of retail financing was assessed by the BIR for deficiency documentary stamp tax (DST) on the promissory notes executed by the buyers of appliances on installment basis in favor of appliance dealers, and also, on the subsequent assignment of the same promissory notes in favor of the company.

The BIR contends that the finance company is subject to DST on the issuance of promissory notes as the transferee that “accepted” the promissory notes from the appliance dealer. In the decision of the CTA en banc, it held that the person “using” the promissory note is one of the persons who can be held liable to pay the DST under Section 42 of Regulations No. 26, and considering that the promissory notes do not bear DST, the financing company can be held liable for DST.

As for the assignment of promissory notes, the CTA en banc held that each and every transaction involving promissory notes is subject to DST under Section 173 of the 1986 Tax Code. Hence, the financing company is likewise liable to DST as the transferee and assignee of the promissory notes.

The Supreme Court (SC) held that the financing company is not liable to DST both on the issuance and assignment of promissory notes. As regards the issuance of the promissory notes, the SC explained that under Section 173 of the Tax Code, the persons liable for the payment of the DST are the persons making, signing, issuing, accepting or transferring the taxable documents, instruments or papers. Should these parties be exempted from paying tax, the SC further explained that the other party who is not exempt would then be liable.

According to the SC, the financing company did not make, sign, issue, accept or transfer the promissory notes. Instead, the buyers of the appliances made, signed and issued the documents subject to tax, while the appliance dealer transferred the documents to the financing company, which likewise indisputably “received” or “accepted” the promissory notes.

The SC held that “acceptance” is an act that is not applicable to promissory notes but only to bills of exchange. As further clarified by the SC, the financing company cannot be made primarily liable for the DST on issuance of promissory notes just because it had “accepted” the promissory notes in the plain and ordinary meaning. On the other hand, the SC held that Section 42 of Regulations No. 26, which provides that the person transferring or using a promissory note can be held responsible for the DST, cannot be interpreted to mean that anyone who “uses” the document regardless of whether such person is a party to the transaction, should be liable, as this reading would go beyond Section 173 of the Tax Code.

Moreover, the SC held that the proviso of Section 173 of the Tax Code, which provides that should any parties be exempt, the other party to the transaction would become liable to DST, cannot likewise be extended to persons who are not the parties named in the taxable document or instrument and are merely using or benefiting from it, against the clear intention of the legislature.

The financing company is also not liable to DST on the assignment of promissory notes since the transaction is not taxed under the law. The SC held that while there are provisions in the Tax Code that specifically impose the DST on the transfer and/or assignment of documents evidencing particular transactions, the assignment of transfer becomes taxable only in connection with mortgages, leases, and policies of insurance. Under Section 198 of the Tax Code, the list of transferred or assigned documents that are subject to DST does not include the assignment of transfer of evidences of indebtedness. Rather, it is the renewal of evidences of indebtedness that is taxable.

Considering that the case does not involve a renewal, but mere transfer or assignment of the evidences of indebtedness or promissory notes, the assignment of promissory note is not liable to DST.

(Philacor Credit Corporation v. Commissioner of Internal Revenue, G.R. No. 169899, February 6, 2013)

Tax Brief – March 2013

Punongbayan and Araullo