Case Summary (G.R. No. 166018)
Petitioner — Role and Transactions
HSBC provided custodial services and acted as collection/payment agent for dividends and other income on passive investments (notably shares of domestic corporations). Investor-clients maintained peso and/or foreign currency accounts with HSBC in the Philippines and transmitted purchase/payment instructions by electronic messages (SWIFT MT series) from abroad instructing HSBC to debit those Philippine accounts and pay designated recipients upon receipt of securities.
Respondent — Position and Assessment
The Commissioner of Internal Revenue assessed and collected Documentary Stamp Tax (DST) on HSBC’s debits/payments pursuant to electronic instructions, treating HSBC’s acceptance/payment in response to those electronic messages as subject to DST under the stamp tax provisions (Sections 230 of the 1977 Code and Section 181 of the 1997 Tax Code).
Key Dates and Amounts
- Documentary Stamp Tax paid by HSBC: P19,572,992.10 (September–December 1997) and P32,904,437.30 (January–December 1998), with monthly breakdowns as set out in the record.
- BIR Ruling No. 132-99 issued August 23, 1999 (held electronic instructions that do not involve transfer of funds from abroad are not subject to DST).
- HSBC administrative claims for refund filed October 8, 1999 (1997 payments) and January 31, 2000 (1998 payments).
- CTA Decisions favorable to HSBC: May 2, 2002 (CTA Case No. 6009) and December 18, 2002 (CTA Case No. 5951).
- CA reversed the CTA (Decisions and Resolutions in 2004).
- Supreme Court decision reinstated CTA rulings (disposition in the present opinion).
Applicable Law and Constitutional Basis
Primary statutory provisions: Section 181 of the 1997 National Internal Revenue Code (NIRC) (stamp tax on acceptance or payment of bills of exchange/orders for payment purporting to be drawn in a foreign country but payable in the Philippines); the equivalent Section 230 of the 1977 Tax Code governing the 1997 refund claim period; Sections of the Negotiable Instruments Law (notably the statutory form and definition of negotiable instruments and acceptance provisions). Constitutional basis applicable to the decision: the 1987 Philippine Constitution (decision date post-1990).
Factual Background Leading to Litigation
Pursuant to SWIFT instructions from investor-clients abroad, HSBC debited clients’ Philippine accounts and paid purchase prices upon receipt of securities. HSBC paid DST for transactions in the stated periods. BIR Ruling No. 132-99, issued in response to an industry inquiry, held that electronic instructions from abroad to debit Philippine accounts without transfer of funds from abroad are not subject to DST under Section 181. Relying on that ruling, HSBC filed administrative refund claims; when the BIR did not act, HSBC filed petitions with the CTA. The CTA ordered partial refunds/tax credits; the CA reversed and held electronic messages subject to DST; HSBC elevated the matter to the Supreme Court.
Procedural Posture and Relief Sought
HSBC sought refund (or issuance of tax credit certificates) for sums representing alleged erroneously paid DST for 1997 and 1998. The CTA granted partial relief in both cases. The CA reversed the CTA, sustaining the BIR’s imposition of DST. HSBC filed petitions for certiorari under Rule 45 to challenge the CA rulings.
Issues Presented
- Whether the electronic SWIFT instructions from investor-clients to HSBC constitute a “bill of exchange” or “order for the payment of money” drawn abroad but payable in the Philippines, thereby triggering DST under Section 181 (or the parallel Section 230 for earlier period).
- Whether HSBC’s debiting of client accounts and payments pursuant to those electronic instructions constitute “acceptance” or “payment” of such bills/orders for purposes of DST.
- Whether presentment for acceptance or payment — a precondition for imposition of the DST as interpreted in the statutory and regulatory framework — occurred.
Supreme Court Ruling — Disposition
The Supreme Court granted HSBC’s petitions, reinstated the CTA decisions, and held that HSBC was entitled to the tax refunds/tax credit certificates in the reduced amounts previously determined by the CTA (P30,360,570.75 for 1998 and P16,436,395.83 for September–December 1997). The CA decisions and resolutions were set aside.
Legal Reasoning — Nature of the DST and the Statutory Prerequisites
The Court reiterated that Section 181 (and its historical equivalents) imposes DST upon the acceptance or payment of a bill of exchange or an order for payment of money purporting to be drawn in a foreign country but payable in the Philippines. Historically and textually, the provision taxes either (a) acceptance (a concept that legally applies to bills of exchange) or (b) payment, and has consistently required a bill/order drawn abroad but payable in the Philippines. DST is characterized as an excise tax imposed on the exercise of a privilege (the privilege of acceptance/payment of such instruments).
Legal Reasoning — Negotiable Instruments and Acceptance Requirements
Referencing the Negotiable Instruments Law, the Court emphasized the formal requisites for a negotiable instrument: it must be in writing and signed by the maker/drawer; contain an unconditional promise or order to pay a sum certain; be payable on demand or at a fixed/determinable future time; be payable to order or to bearer; and, where addressed to a drawee, name or otherwise indicate the drawee with reasonable certainty. The Court held the electronic messages did not meet these requisites: they were not signed by the investor-clients as drawers; did not contain an unconditional order to pay a sum certain (payment depended on funds in a specified account); and were directed to pay a specifically named third party rather than being payable to order or bearer. Consequently, the messages were not “bills of exchange” or comparable negotiable instruments.
Legal Reasoning — Presentment and Written Acceptance
Acceptance under Section 132 of the Negotiable Instruments Law requires a written and signed signification by the drawee manifesting assent to the drawer’s order and constituting an engagement to pay. Presentment (either for acceptance or for payment) is the production of the instrument to the drawee/acceptor and is a
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Procedural History
- Two separate petitions for review on certiorari were docketed before the Supreme Court under Rule 45: G.R. No. 166018 and G.R. No. 167728, both decided June 4, 2014.
- The petitions assail Court of Appeals Decisions and corresponding Resolutions: in CA-G.R. SP No. 77580 (Decision dated July 8, 2004; Resolution dated October 25, 2004) and in CA-G.R. SP No. 70814 (Decision dated September 2, 2004; Resolution dated April 4, 2005).
- The Court of Appeals had reversed and set aside the decisions of the Court of Tax Appeals (CTA) in CTA Case Nos. 5951 and 6009 and dismissed petitioner HSBC’s petitions; motions for reconsideration before the Court of Appeals were denied.
- HSBC had taken previous administrative steps: filed administrative claims for refund with the BIR (October 8, 1999 and January 31, 2000) for DST allegedly erroneously paid for specified periods in 1997 and 1998; when the BIR did not act, HSBC brought petitions to the CTA, which rendered favorable Decisions.
- The CTA Decisions (May 2, 2002 in CTA Case No. 6009; December 18, 2002 in CTA Case No. 5951) ordered respondent Commissioner of Internal Revenue to refund or issue tax credit certificates in reduced amounts found sufficiently substantiated.
- The Commissioner of Internal Revenue appealed to the Court of Appeals, which reversed; HSBC then filed petitions in the Supreme Court, which reinstated the CTA rulings and granted the petitions.
Facts — HSBC’s Business Practices and Transactions
- HSBC (The Hongkong and Shanghai Banking Corporation Limited — Philippine Branches) performs custodial services for investor-clients (corporate and individual, resident or non-resident of the Philippines) with respect to passive investments in the Philippines, particularly shares of stocks in domestic corporations.
- As a custodian bank, HSBC acts as the collection/payment agent for dividends and other income from its investor-clients’ passive investments.
- HSBC’s investor-clients maintain Philippine peso and/or foreign currency accounts with HSBC, which HSBC manages pursuant to instructions transmitted by electronic messages.
- The standard form of electronic instructions used in the banking industry are SWIFT messages (referred to in the source as SWIFT MT 100, MT 202, and MT 521).
- In purchasing securities, investor-clients abroad send electronic messages to HSBC instructing HSBC to debit their local or foreign currency accounts and to pay the purchase price upon receipt of the securities.
- Pursuant to these electronic instructions, HSBC purchased and paid Documentary Stamp Tax (DST) for:
- September to December 1997 — Total P19,572,992.10, broken down by month:
- September 1997: P6,981,447.90
- October 1997: P6,209,316.60
- November 1997: P3,978,510.30
- December 1997: P2,403,717.30
- January to December 1998 — Total P32,904,437.30, broken down by month:
- January 1998: P3,328,305.60
- February 1998: P4,566,924.90
- March 1998: P5,371,797.30
- April 1998: P4,197,235.50
- May 1998: P2,519,587.20
- June 1998: P2,301,333.00
- July 1998: P1,586,404.50
- August 1998: P1,787,359.50
- September 1998: P1,231,828.20
- October 1998: P1,303,184.40
- November 1998: P2,026,379.70
- December 1998: P2,684,097.50
- September to December 1997 — Total P19,572,992.10, broken down by month:
BIR Ruling No. 132-99 — Substance and Reasoning
- On August 23, 1999, Commissioner of Internal Revenue Beethoven L. Rualo issued BIR Ruling No. 132-99 responding to a letter (dated July 26, 1999) requesting a ruling on whether electronic instructions sent from abroad involving local or foreign currency accounts are subject to DST under Section 181 of the 1997 Tax Code.
- The ruling described two categories of transactions presented:
- Investment purchase transactions: An overseas client sends an instruction to its bank in the Philippines to (i) debit its local or foreign currency account and pay a named recipient in the Philippines; or (ii) receive funds from another bank in the Philippines for deposit to its account and to pay a named recipient in the Philippines. These are carried out under instruction from abroad and do not involve transfer of funds from abroad since the funds are already in Philippine accounts. The instructions are SWIFT-type electronic messages; payment is against delivery of investments purchased.
- Other transactions: Overseas clients instruct their Philippine bank to debit accounts and pay named recipients in the Philippines or to receive funds from another bank for deposit and subsequent payment; instructions may not refer to any particular transaction.
- BIR Ruling No. 132-99 concluded that:
- Section 181 of the 1997 Tax Code imposes DST on “any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines.” The documentary stamp tax is imposed on the instrument (a bill of exchange or order for payment).
- Electronic instructions by non-resident payor-clients that do not involve transfer of funds from abroad cannot be considered the transaction contemplated by Section 181. Such electronic instructions are considered memoranda for the local bank’s books and the actual debiting of the local account is the actual transaction.
- Under the Documentary Stamp Tax Law, mere withdrawal of money from a bank deposit is not subject to DST, unless it relates to current/checking account instruments (e.g., issuance of checks or bank drafts subject to Section 179).
- The receipt of funds from another local bank for the account of a client is part of regular banking transactions not subject to DST.
- Therefore, instructions made through electronic messages by a non-resident payor-client to debit his local or foreign currency account maintained in the Philippines and to pay a named recipient in the Philippines are not the transaction contemplated under Section 181 and are not subject to DST.
- The ruling was issued based on the represented facts and subject to revocation if facts differed upon investigation.
Administrative Claims, CTA Proceedings and CTA Decisions
- HSBC filed administrative claims for refunds based on BIR Ruling No. 132-99:
- October 8, 1999 — claim for refund of P19,572,992.10 (September–December 1997).
- January 31, 2000 — claim for refund of P32,904,437.30 (January–December 1998).
- When the BIR did not act on these claims, HSBC filed petitions with the Court of Tax Appeals (CTA) to suspend the running of the prescriptive period: CTA Case Nos. 5951 and 6009.
- The CTA Decisions favored HSBC:
- CTA Case No. 6009 (Decision dated May 2, 2002): Ordered respondent to refund or issue a tax credit certificate for the reduced amount of P30,360,570.75 representing erroneously paid DST for taxable year 1998.
- CTA Case No. 5951 (Decision dated December 18, 2002): Ordered respondent to refund or issue a tax credit certificate for the reduced amount of P16,436,395.83 representing erroneously paid DST for September–December 1997.
- The CTA’s reasoning, as summarized in the source, included:
- Sections 180 and 181 of the 1997 Tax Code do not apply to electronic message instructions transmitted by HSBC’s non-resident investor-clients.
- Electronic instructions to debit local or foreign currency accounts and pay named recipients are not the transactions contemplated under Section 181; they are akin to automatic internal transfers and are not negotiable instruments.
- Electronic messages lack negotiability (the ability to be transferred) and are mere memoranda entered in the bank’s books; the actual debiting of the account is the operative transaction.
Court of Appeals Decision — Reversal and Reasoning
- The Court of Appe