Case Summary (G.R. No. 227121)
Key Dates and Documentary Milestones
July 22, 2008 — Incorporation of GPAP‑Phils. Inc. and transfer of Merchant Acquiring Business (MAB) assets in exchange for shares.
July 24, 2008 — Share Sale and Purchase Agreement between HSBC and GPAP‑Singapore for the transfer of GPAP‑Phils. shares.
September 3, 2008 — Deed of Assignment transferring GPAP‑Phils. shares to GPAP‑Singapore.
September 5, 2008 — Documentary Stamp Tax paid (P52,365.75).
September 22, 2008 — Application and joint certification filed with CIR seeking ruling under Section 40(C)(2).
September 28, 2008 — Capital Gains Tax (CGT) payment of P89,929,292.10 in relation to the Deed of Assignment.
January 23, 2009 — CIR issuance of Certification/Ruling No. SN:018‑2009 certifying the transfer/exchange as not subject to tax under Section 40(C)(2).
January–July 2011 — Preliminary Assessment Notice (PAN, Jan 7, 2011), Protest, FAN dated June 28, 2011 (deficiency income tax P318,781,625.17).
January 18, 2012 — Final Decision on Disputed Assessment (FDDA).
February 16, 2012 — Petition filed with Court of Tax Appeals (CTA).
October 13, 2014 — CTA Division judgment cancelling the FAN and FDDA.
May 17, 2016 — CTA en banc affirmed the CTA Division.
December 9, 2020 — Supreme Court decision affirming CTA en banc.
Factual Background — Transactions at Issue
HSBC, through its Philippine branch (respondent), restructured its Merchant Acquiring Business (MAB) in the Philippines by (1) transferring POS terminals, merchant agreements and related IT assets to GPAP‑Phils. Inc. in exchange for GPAP‑Phils. shares, and (2) subsequently assigning/selling those GPAP‑Phils. shares to GPAP‑Singapore. The first transfer was treated as a tax‑free exchange under Section 40(C)(2) of the NIRC (with substituted basis), and the CIR issued a certification to that effect. The second transaction involved a Share Sale and Purchase Agreement and a Deed of Assignment reflecting an aggregate consideration of Php 899,342,921.00, with a stated value allocated to “goodwill” of Php 885,378,821.00. Respondent paid CGT of Php 89,929,292.10 in relation to the assignment.
CIR’s Assessment and Contentions
The CIR issued a PAN, FAN and ultimately a FDDA asserting that the transaction constituted a sale of the “goodwill” of the MAB and thus was subject to regular corporate income tax (35% under Section 27(A) of the NIRC) rather than capital gains tax. The CIR calculated taxable income on the amount attributed to goodwill (Php 885,378,821.00), applied the 35% rate, credited earlier CGT payments, and assessed a deficiency income tax (including interest) of Php 318,781,625.17. CIR argued that the structure was a scheme to avoid income tax by cloaking a sale of assets/goodwill as a share sale.
CTA Division and CTA en banc Holdings
The CTA Division (and subsequently the CTA en banc) concluded that: (a) the first transaction qualified as a tax‑free exchange under Section 40(C)(2) because the transferee was a corporation, the transferee issued shares for the transferor’s property, the transferors were within the allowed number, and the transferor gained control (HSBC obtained 99.99% of GPAP‑Phils. after subscription); (b) the subsequent disposition of the GPAP‑Phils. shares to GPAP‑Singapore was a sale of shares of a domestic corporation not listed on the stock exchange and therefore subject to CGT under Section 27(D)(2) and RR No. 6‑2008 rather than to regular corporate income tax; and (c) “goodwill” is an intangible inseparable from the business, transferred with the MAB to GPAP‑Phils. in the tax‑free exchange and thus was not separately sold to GPAP‑Singapore apart from the shares.
Legal Analysis — Tax‑Free Exchange and Subsequent Taxation of Shares
The Court reiterated the statutory rule in Section 40(C)(2): no gain or loss is recognized where property is transferred to a corporation in exchange for stock and the transferor gains control of the transferee, subject to the exceptions. The tax‑free exchange defers recognition of gain; therefore, disposition of shares received in such exchange is taxable when sold. The subsequent sale/assignment of GPAP‑Phils. shares to GPAP‑Singapore was properly characterized as a sale of shares and thus subject to the CGT regime (final tax on net capital gains realized on non‑listed shares), consistent with Revenue Regulations No. 6‑2008 and jurisprudence cited in the decision.
Goodwill: Nature and Allocation in This Transaction
The Court relied on the long‑established characterization of goodwill as an intangible asset inherently tied to the business and not transferable apart from the business itself. Because the goodwill of the MAB was transferred to GPAP‑Phils. as part of the tax‑free exchange (recognized and valued in the Share Sale and Purchase Agreement but not sold apart from the shares and the business), the subsequent assignment of shares did not constitute a separate sale of goodwill producing ordinary income. The goodwill remained an attribute of GPAP‑Phils.; GPAP‑Singapore’s acquisition of the shares simply changed the shareholder, not the substantive ownership of the business or the separate corporate personality of GPAP‑Phils.
CIR’s Tax Evasion Allegation and the Distinction Between Avoidance and Evasion
The Court recognized the taxpayer’s right to arrange its affairs to minimize taxes within the law (tax avoidance), distinguishing this from tax evasion, which requires fraud, bad faith, willfulness and an unlawful course of action. To assert evasion, CIR must prove the elements of fraud or bad faith by clear and co
Case Syllabus (G.R. No. 227121)
Procedural Posture and Relief Sought
- Petition for Review on Certiorari under Rule 45 of the Rules of Court filed by petitioner Commissioner of Internal Revenue (CIR) seeking reversal of the Court of Tax Appeals en banc (CTA EB) Decision dated May 17, 2016 and Resolution dated September 9, 2016 in CTA EB Case No. 1257.
- The CTA EB had affirmed the CTA Third Division Decision dated October 13, 2014 and Resolution dated December 10, 2014 in CTA Case No. 8428 which granted respondent Hongkong and Shanghai Banking Corporation Limited — Philippine Branch (HSBC/respondent) relief and cancelled the Final Decision on Disputed Assessment (FDDA) dated January 18, 2012 and Final Assessment Notice (FAN) dated June 28, 2011.
- The CIR sought reconsideration of the CTA EB decision, which was denied in the CTA EB Resolution dated September 9, 2016, prompting the present petition to the Supreme Court.
Facts
- Respondent is the duly licensed Philippine branch of The Hongkong and Shanghai Banking Corporation Limited (HSBC).
- Prior to July 2008 HSBC operated a Merchant Acquiring Business (MAB) in the Asia Pacific Region, including the Philippines, under Merchant Agreements and with deployed Point-of-Sale (POS) terminals.
- HSBC, through the respondent, created Global Payments Asia Pacific-Phils., Inc. (GPAP-Phils.) to transfer its MAB in the Philippines.
- GPAP-Phils. was incorporated on July 22, 2008, and shares were issued to respondent in exchange for the fair-market value of POS terminals, Merchant Agreements, and the transfer of the MAB.
- On July 24, 2008, HSBC executed a Share Sale and Purchase Agreement with Global Payment Asia Pacific (Singapore Holdings) Private Limited (GPAP-Singapore) for transfer of said shares.
- On September 3, 2008, HSBC executed a Deed of Assignment assigning its GPAP-Phils. shares to GPAP-Singapore.
- Documentary Stamp Tax of P52,365.75 was paid on September 5, 2008 based on par value of shares.
- On September 22, 2008, respondent filed an Application and Joint Certification with CIR to secure a ruling on tax treatment under Section 40(C)(2) of the 1997 National Internal Revenue Code (1997 NIRC), as amended, for the transfer of POS terminals and MAB.
- On September 28, 2008, Capital Gains Tax (CGT) in the amount of P89,929,292.10 was paid in relation to the Deed of Assignment dated September 3, 2008.
- On January 23, 2009, Assistant Commissioner of Legal Service issued Certification/Ruling No. SN:018-2009 certifying that the transfer of POS terminals and MAB with substituted basis, in exchange for GPAP-Phils. shares, are not subject to tax pursuant to Section 40(C)(2) of the 1997 NIRC, as amended.
- CIR issued a Notice of Informal Conference to respondent on September 8, 2010 (received September 17, 2010).
- CIR issued a Preliminary Assessment Notice (PAN) dated January 7, 2011 for deficiency Income Tax of P296,936,948.59 (inclusive of interest) alleged to be from gain on sale of the MAB; received by respondent on January 18, 2011.
- Respondent filed a Protest to the PAN on February 2, 2011 and a Supplemental Position Paper on March 10, 2011.
- CIR referred the matter to the Legal and Inspection Group on March 14, 2011; respondent executed and filed a Waiver of the Statute of Limitations on March 15, 2011.
- CIR issued a Final Assessment Notice (FAN) on June 28, 2011 for deficiency Income Tax in the amount of P318,781,625.17 (inclusive of interest), characterizing the sale as sale of “Goodwill” pursuant to Section 27(A) of the 1997 NIRC, as amended; received by respondent on July 11, 2011.
- Respondent filed Administrative Protest on July 26, 2011; CIR issued Final Decision on Disputed Assessment on January 18, 2012 (received January 24, 2012).
- Respondent filed Petition for Review with the CTA Division on February 16, 2012.
CIR’s Position (as pleaded and in assessment)
- CIR contended that the Deed of Assignment did not pertain to sale of shares but to sale or transfer of business or “Goodwill,” which is subject to ordinary income tax and not capital gains tax.
- CIR based its FAN on valuation of “goodwill” in the Share Sale and Purchase Agreement amounting to P885,378,821.00 and computed income tax at 35% under Section 27(A), resulting in an assessed income tax deficiency and interest totaling P318,781,625.17.
- CIR viewed the corporate restructuring and formation of GPAP-Phils. as a scheme to evade income tax by recharacterizing the transaction as a share sale rather than an asset sale including goodwill.
CTA Third Division Ruling (Decision dated October 13, 2014)
- CTA Division granted respondent’s petition and cancelled the FDDA and FAN.
- The CTA Division found the transaction to be a sale of a capital asset (shares), not of an ordinary asset; relied on documentary facts: creation of GPAP-Phils. to transfer MAB by additional paid-in capital, subscription of 139,640 shares in exchange for POS terminals, subscription of common shares in exchange for Merchant Agreements, and assignment of total shares (139,641) to GPAP-Singapore.
- CTA Division recognized payment of P89,929,292.10 as CGT on the transfer of shares.
- CTA Division ruled that “Goodwill” is connected to the business and cannot be allocated separately from the business; CIR cannot treat separate the alleged sale of “Goodwill” from transfer of the MAB and reclassify it as sale of ordinary asset subject to income tax.
- CTA Division denied CIR’s motion for reconsideration in Resolution dated December 10, 2014.
CTA En Banc Ruling (Decision dated May 17, 2016; Resolution September 9, 2016)
- CTA EB affirmed the CTA Division’s findings and cancellation of the FDDA and FAN.
- CTA EB emphasized that goodwill is an intangible asset that cannot exist independently of the business nor be sold independently without transferring the business as a whole.
- CTA EB agreed that the sale of HSBC’s GPAP-Phils. shares to GPAP-Singapore at a premium, recognizing and valuing the goodwill in the Share Sale and Purchase Agreement, constitutes a sale of capital asset subject to CGT and not regular corporate income tax.
- CIR’s motion for reconsideration before the CTA EB was denied in the September 9, 2016 Resolution.
Issue Presented to the Supreme Court
- Whether the CTA EB erred in cancelling the deficiency income tax assessment against respondent on the alleged sale of “Goodwill” of its Merchant Acquiring Business (MAB) for taxable year 2008.
Relevant Statutory Provisions and Regulations Cited
- Section 40(C)(2) of the 1997 National Internal Revenue Code (1997 NIRC), as amended — tax-free exchange provision for transfer of property in exchange for shares