The Supreme Court ruled that Philacor Credit Corporation, as an assignee of promissory notes, is not liable for documentary stamp tax (DST) on either the issuance or the assignment of those notes. This decision clarifies that the liability for DST primarily falls on those who make, sign, issue, or transfer the taxable documents. The ruling emphasizes that tax laws should be construed strictly against the state and liberally in favor of the taxpayer, ensuring that tax burdens are not extended beyond what the law expressly states. This outcome has significant implications for financing companies and other entities involved in similar transactions, potentially reducing their tax liabilities.

Navigating the Tax Maze: Who’s Responsible When Promissory Notes Change Hands?

The case revolves around Philacor Credit Corporation, a retail financing business that purchases promissory notes from appliance dealers. The Commissioner of Internal Revenue (CIR) assessed Philacor for deficiency documentary stamp taxes (DST) on both the issuance and assignment of these promissory notes for the fiscal year ended 1993. Philacor contested this assessment, arguing that the appliance dealers were initially responsible for affixing the documentary stamps. The central legal question is whether Philacor, as the assignee of these notes, is liable for DST on these transactions.

The 1986 Tax Code, specifically Section 180, clearly imposes a stamp tax on promissory notes. The key issue, however, is determining who is liable for this tax. Section 173 of the 1997 National Internal Revenue Code (NIRC) identifies those primarily liable for the DST: the person making, signing, issuing, accepting, or transferring the taxable documents. The provision further clarifies that if these parties are exempt from the tax, the non-exempt party becomes liable.

Philacor argued that it did not make, sign, issue, accept, or transfer the promissory notes in the initial transaction. The buyers of the appliances made, signed, and issued the notes, while the appliance dealers transferred them to Philacor. The Supreme Court agreed, noting that the act of “acceptance,” as it relates to DST liability, applies specifically to bills of exchange, not promissory notes. This distinction is crucial because under Section 132 of the Negotiable Instruments Law, acceptance binds the drawee of a bill, making them a party to the instrument.

The word “accepting” appearing in Section 210 of the National Internal Revenue Code has reference to incoming foreign bills of exchange which are accepted in the Philippines by the drawees thereof.  Accordingly, the documentary stamp tax on freight receipts is due at the time the receipts are issued and from the transportation company issuing the same.  The fact that the transportation contractor issuing the freight receipts shifts the burden of the tax to the shipper does not make the latter primarily liable to the payment of the tax.

This interpretation clarifies that merely receiving or “accepting” a document in the ordinary sense does not automatically make a party primarily liable for the DST. The court emphasized that the liability for DST must be determined from the document itself, based on its form and face, and cannot be affected by external facts.

The CIR’s reliance on Section 42 of Regulations No. 26, which states that anyone “using” a promissory note can be held responsible for the DST, was also addressed. The Supreme Court clarified that the term “can” in the regulation is permissive, not mandatory. Therefore, a person using a promissory note can only be held liable if they are among those enumerated in the law (maker, issuer, signer, acceptor, or transferor) or if the primarily liable parties are exempt.

Section 42. Responsibility for payment of tax on promissory notes. – The person who signs or issues a promissory note and any person transferring or using a promissory note can be held responsible for the payment of the documentary stamp tax.

The court further reasoned that implementing rules and regulations cannot expand upon the law they seek to interpret. Allowing Regulations No. 26 to extend DST liability to persons not mentioned in the Tax Code would be a breach of the principle that a statute is superior to its implementing regulations. The Court also contrasted the Philippine law with the US Internal Revenue Code, which places DST liability on a wider set of taxpayers, including those who benefit from or have an interest in the transaction.

The Supreme Court highlighted that even though Philacor benefits from the promissory notes, the Philippine legislature has consistently limited DST liability to specific parties directly involved in making, signing, issuing, accepting, or transferring the instrument. Expanding this liability would require legislative action, not judicial interpretation. The Court stated:

[T]hese are matters that are within the prerogatives of Congress so that any interference from the Court, no matter how well-meaning, would constitute judicial legislation. At best, we can only air our views in the hope that Congress would take notice.

Regarding the assignment of promissory notes, the Court held that Philacor, as an assignee or transferee, is not liable for DST because this transaction is not specifically taxed under the law. Several provisions in the NIRC impose DST on the transfer or assignment of certain documents, such as shares of stock (Section 176) and mortgages (Section 198). However, no such provision exists for the assignment of promissory notes.

The court cited BIR Ruling No. 139-97 and Revenue Regulations No. 13-2004, which confirm that the DST on debt instruments, including promissory notes, is imposed only on the original issue. Subsequent sales or assignments in the secondary market are not subject to DST. These rulings are applicable because they interpret the same rule imposing DST on promissory notes, and the relevant provisions of Section 180 of the 1986 Tax Code remained unchanged in this aspect.

Section 198.  Stamp tax on assignments and renewals of certain instruments. – Upon each and every assignment or transfer of any mortgage, lease or policy of insurance, or the renewal or continuance of any agreement, contract, charter, or any evidence of obligation or indebtedness by altering or otherwise, there shall be levied, collected and paid a documentary stamp tax, at the same rate as that imposed on the original instrument.

The Supreme Court reiterated the principle that tax laws must be construed strictly against the state and liberally in favor of the taxpayer. This principle ensures that tax burdens are not presumed to extend beyond what the law expressly and clearly declares.

FAQs

What was the key issue in this case?	The key issue was whether Philacor, as an assignee of promissory notes, is liable for documentary stamp tax (DST) on the issuance and assignment of those notes. The Supreme Court ultimately ruled that Philacor was not liable.
Who is primarily liable for DST on promissory notes?	The persons primarily liable are those who make, sign, issue, accept (in the case of bills of exchange), or transfer the taxable documents. If these parties are exempt, the non-exempt party to the transaction becomes liable.
Does “acceptance” apply to promissory notes for DST liability?	No, the act of “acceptance” relates specifically to bills of exchange, not promissory notes. It refers to the drawee’s agreement to the order of the drawer, binding them to the instrument.
Can implementing regulations expand the scope of DST liability?	No, implementing rules and regulations cannot amend or expand the law they seek to interpret. They must remain consistent with the provisions of the statute.
Is the assignment of promissory notes subject to DST?	No, the assignment or transfer of promissory notes is not specifically taxed under the law. DST is imposed only on the original issuance and renewals of promissory notes.
What is the rule of construction for tax laws?	Tax laws must be construed strictly against the state and liberally in favor of the taxpayer. This means any ambiguity or doubt in the law should be resolved in favor of the taxpayer.
What was the basis for the CIR’s assessment against Philacor?	The CIR argued that Philacor, as the assignee, was liable for DST on both the issuance and assignment of the promissory notes. The CIR relied on a broad interpretation of regulations and the idea that every transaction should be taxed.
How did the Supreme Court interpret the term “using” in relation to DST liability?	The Court interpreted “using” permissively, meaning a person using a promissory note can only be liable if they are among those explicitly listed in the law or if the primarily liable parties are exempt.

In conclusion, the Supreme Court’s decision in the Philacor case clarifies the limits of documentary stamp tax liability, particularly concerning promissory notes. The ruling emphasizes the importance of adhering to the strict wording of tax laws and the principle that implementing regulations cannot expand upon statutory provisions. This decision provides valuable guidance for businesses involved in financing and similar transactions.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: PHILACOR CREDIT CORPORATION vs. COMMISSIONER OF INTERNAL REVENUE, G.R. No. 169899, February 06, 2013