G.R. No. 205261 - Philippine Veterans Bank vs. Commissioner of Internal Revenue

Case Summary (G.R. No. 205261)

Factual Background

In 1994 to 1996, petitioner offered three financial products to its clients: (i) Special Savings Account, (ii) Special Savings Deposit (Government), and (iii) Golden V (Private) (collectively, the Special Savings Accounts). These accounts generated interest income in favor of petitioner’s clients. The accounts were withdrawable by the depositor at any time by presenting a passbook. The deposit amounts were usually in the millions, and the deposit attracted a special rate of interest. The accounts allowed additional deposits, partial and multiple withdrawals, and had no fixed maturity. The bank deposits under these accounts could not be negotiated or assigned, and they could not be pre-terminated because there was no fixed maturity.

On December 9, 1999, the respondent issued a Final Notice of Assessment for deficiency DST relating to the Special Savings Accounts for taxable years 1994 and 1995, in the total amount of P22,092,035.21. Petitioner received the notice and responded on December 13, 1999 through Atty. Florencio Z. Sioson. In that reply, petitioner requested that the demand be held in abeyance pending the resolution of other issues.

Following conference hearings before the BIR Appellate Division, respondent issued a Formal Letter of Demand dated December 4, 2000, and corresponding Audit Results/Assessment Notices, requiring payment of deficiency GRT for 1996 of P5,009,876.88, and deficiency DST for 1996 of P28,180,746.63. For purposes of computing GRT, respondent included the final withholding taxes on petitioner’s gross interest income. For DST, respondent imposed DST on the Special Savings Accounts.

Petitioner received these assessments and protested in a letter dated January 10, 2001, again reiterating its request to hold enforcement in abeyance. Subsequently, on August 8, 2002, respondent issued an August 8, 2002 CIR Decision, denying petitioner’s request for deferment and ordering payment of the total deficiency P55,282,658.72 for DST and GRT for taxable years 1994, 1995, and 1996, plus interest that might have accrued.

Trial Court Proceedings Before the CTA Division and CTA En Banc

After receipt of the Commissioner’s decision, petitioner filed a petition for review with the CTA Division. The CTA Division issued its decision on October 8, 2010. The CTA Division partially granted the petition. It cancelled and withdrew certain assessments relating to documentary stamp tax on increase in capitalization for taxable years 1995 and 1996 due to respondent’s Termination Letter dated June 7, 2010, concerning petitioner’s availment of an Abatement Program under Revenue Regulations No. 15-2006, as amended by Revenue Regulations No. 03-07, in relation to Sections 204 and 244 of the NIRC of 1997, as amended. The CTA Division, however, affirmed with modification the assessments for DST on the Special Savings Accounts, Special Savings Deposits, and Golden Vs for 1994, 1995, and 1996, and it affirmed with modification the assessments for GRT for 1996. It ordered petitioner to pay the respondent the modified DST amount of P25,707,090.66, plus interest at twenty percent (20%) per annum under the cited provisions of the NIRC of 1977, and it ordered petitioner to pay P3,499,320.78 for the modified GRT assessment, plus interest and delinquency interest at twenty percent (20%) per annum under the cited provisions of the NIRC of 1997.

Petitioner then elevated the adverse portions to the CTA En Banc. On December 20, 2012, the CTA En Banc dismissed the petition for review for lack of merit, affirming the CTA Division’s ruling.

Petitioner subsequently filed the present Petition for Review on Certiorari under Rule 45 before the Supreme Court, assailing the December 20, 2012 CTA En Banc decision.

The Issues Presented

The petition raised two principal issues: first, whether the Special Savings Accounts were subject to documentary stamp tax; and second, whether final withholding taxes on the gross interest income of petitioner were deductible from gross receipts for purposes of determining the bank’s gross receipts tax.

The Parties’ Contentions

On the DST issue, petitioner argued that its Special Savings Accounts were not subject to DST because Section 180 of the NIRC of 1997, prior to amendment by Republic Act No. 9243, imposed DST only on “certificates of deposits drawing interest, orders for the payment of any sum of money otherwise than at sight or on demand,” and not on instruments payable at sight or on demand. Petitioner maintained that the Special Savings Accounts were payable at sight or on demand because they were withdrawable at any time through presentation of a passbook. Thus, petitioner claimed DST exemption.

Respondent countered that the Special Savings Accounts were subject to DST. Respondent relied on Section 180 of the NIRC of 1977 (the law prevailing during the period covered by the assessment) and posited that the provision imposed DST on certificates of deposits drawing interest at the applicable rate on the face value. Respondent emphasized that such imposition applied even if the deposits were withdrawable through a passbook, and thus the accounts should be treated as certificates of deposits drawing interest.

On the GRT issue, petitioner contended that for purposes of determining its GRT, its “gross receipts” should not include the final withholding tax on its gross interest income. Petitioner argued that it merely acted as an agent of the government in withholding the tax from the income of the payee-taxpayer, and it asserted that equity required the withheld tax to be excluded from gross receipts since the FWT was actually due to the government and simply “passed through” petitioner.

Respondent argued that gross receipts for GRT computation must include the final withholding tax on the bank’s gross interest income. Respondent invoked the established doctrine that had treated the 20% final withholding tax on bank interest income as part of the taxable gross receipts for GRT computation.

Supreme Court’s Ruling

The Supreme Court denied the petition for lack of merit. On the first issue, the Court ruled that the Special Savings Accounts were subject to DST. On the second issue, it ruled that the final withholding taxes on gross interest income were not deductible from gross receipts for purposes of computing the bank’s gross receipts tax.

Legal Basis and Reasoning on Documentary Stamp Tax

The Court held that petitioner’s reliance on its proposed interpretation was misplaced. The Court clarified the governing tax law for DST. It noted that at the time the Special Savings Accounts were offered and perfected during 1994 to 1996, the applicable DST provisions were under the NIRC of 1977 as amended by Republic Act No. 7660, not the later NIRC of 1997 provisions. Accordingly, the Court treated Section 180 of the NIRC of 1977 as the controlling DST provision, rather than the petitioner’s invoked Section 180 of the NIRC of 1997.

The Court described DST as a tax on documents and instruments that evidence specific transactions and creates, revises, or terminates legal relationships through the execution of particular instruments. It explained that in imposing DST, the Court considered not only the document but also the nature and character of the transaction.

The Court then set out how Section 180 of the NIRC of 1977 should be read, including the instruments enumerated for DST, such as certificates of deposits drawing interest and orders for the payment of any sum of money otherwise than at sight or on demand. It adopted the breakdown articulated in prior cases, stressing the controlling nature of the instrument’s character under the provision, rather than its label.

Drawing from its prior rulings, the Court held that a certificate of deposit does not require a particular form. What is controlling is whether there is a written acknowledgment by the bank of the receipt of a deposit, whether evidenced by a passbook, and whether the bank promises to pay the deposit to the depositor or to the order of the depositor or another person, as recognized in jurisprudence. The Court reiterated that the presence or absence of a passbook was not determinative, and that negotiability likewise did not control the imposition of DST for purposes of Section 180.

The Court then addressed the concept of orders for the payment of money “otherwise than at sight or on demand,” explaining that such language implies an obligation with a period or maturity, and it contrasted it with obligations payable at sight or on demand, which were exempt. It emphasized that the payment obligation’s character—whether demandable at any time or not—was material under the text.

The Court further discussed prior jurisprudence on special savings deposit products designed as hybrids between regular savings deposits and time deposits. It observed that such hybrid deposits may be withdrawable any time and evidenced by a passbook, and yet they may attract DST because the law targeted certificates of deposit drawing interest significantly higher than ordinary savings deposits or those with a specific maturity date. The Court recognized that earlier and consistent rulings had rejected schemes that attempted to “cloak” time deposits as regular savings deposits through the use of passbooks.

Applying these principles to the Special Savings Accounts of petitioner, the Court held them subject to DST. It acknowledged that petitioner’s Special Savings Accounts were withdrawable through a passbook and evidenced by a passbook. However, the Court emphasized that withdrawability and passbook evidence did not detract from their character as instruments attracting DST because the accounts had features typical of a hybrid: they paid special interest rates, they required minimum deposits to enjoy preferential interest, and they reverted in character upon early withdrawal in the overall product design described through the Court’s reliance on prior cases’ reas

Case Syllabus (G.R. No. 205261)

The case involved a Petition for Review on Certiorari under Rule 45 of the Rules of Court.
The petitioner sought to set aside a Court of Tax Appeals (CTA) En Banc decision dated December 20, 2012.
The CTA En Banc decision had affirmed a CTA Division decision dated October 8, 2010.
The CTA Division decision affirmed the assessment of deficiency gross receipts tax (GRT) and deficiency documentary stamp tax (DST) for taxable years 1994, 1995, and 1996, plus applicable interest.
The Supreme Court denied the petition for lack of merit and affirmed the CTA En Banc.

Parties and Procedural Posture

The petitioner was Philippine Veterans Bank, a commercial banking institution organized under special charters, including Republic Act No. 3518 and Republic Act No. 7169.
The respondent was the Commissioner of Internal Revenue.
The respondent issued assessment notices for deficiency DST and GRT covering taxable years 1994 to 1996.
The petitioner received the assessment notices and protested them, requesting deferment or holding of enforcement in abeyance.
The respondent rendered an August 8, 2002 CIR Decision denying the petitioner’s request for deferment and ordering payment within a set period.
The petitioner filed a Petition for Review with the CTA Division after receipt of the August 8, 2002 CIR Decision.
The CTA Division partially granted relief by canceling and withdrawing certain DST assessments related to an Increase in Capitalization and the abatement program.
The CTA Division otherwise affirmed the assessments and modified amounts and interest computations.
The petitioner elevated the matter to the CTA En Banc.
The CTA En Banc dismissed the petition for lack of merit in its December 20, 2012 decision.
The petitioner then filed the present Rule 45 petition before the Supreme Court.

Key Tax Assessments and Amounts

The respondent assessed a total deficiency tax amount of PHP 55,282,658.72.
The assessments covered deficiency GRT and deficiency DST for taxable years 1994, 1995, and 1996.
The Final Notice of Assessment dated December 9, 1999 covered deficiency DST on the Special Savings Accounts for taxable years 1994 and 1995.
The petitioner later received a Formal Letter of Demand dated December 4, 2000, requiring payment of deficiency GRT and deficiency DST for taxable year 1996.
The CTA Division canceled DST assessments on the Increase in Capitalization for taxable years 1995 and 1996 due to the petitioner’s availment of an abatement program.
The CTA Division affirmed and modified assessments on the petitioner’s Special Savings Accounts, and also affirmed and modified deficiency GRT for taxable years noted in the decision.

Issued Facts: Special Savings Accounts

In 1994 to 1996, the petitioner offered Special Savings Account, Special Savings Deposit (Government), and Golden V (Private).
The products were collectively referred to as the Special Savings Accounts.
The accounts earned interest income in favor of the bank’s clients.
The Special Savings Accounts were withdrawable by the depositor at any time through presentation of a passbook.
The deposits typically involved amounts running into millions of pesos.
The deposits were subject to a special rate of interest.
The deposits allowed posting of additional or multiple deposits.
The deposits allowed partial or multiple withdrawals.
The accounts had no fixed maturity.
The deposits could not be negotiated nor assigned.
The deposits could not be pre-terminated because there was no fixed maturity.

Issued Facts: Withholding Tax and GRT

The respondent included in the determination of the bank’s GRT the amounts representing final withholding taxes on the petitioner’s gross interest income.
The petitioner’s contention treated the final withholding tax as a pass-through to the government and argued it should not form part of gross receipts for GRT computation.

Statutory Framework for DST Issue

The Supreme Court identified the applicable DST provision as the National Internal Revenue Code (NIRC) of 1977, specifically Section 180, because the deposit products were offered and perfected during the years covered by the assessments.
The Supreme Court noted that Section 180 of the NIRC of 1977 imposed DST on “certificates of deposits drawing interest” and on “orders for the payment of any sum of money otherwise than at sight or on demand.”
The Court emphasized that DST is a tax on documents and instruments evidencing acceptance, assignment, sale, transfer, or acceptance of obligations, rights, or property incident thereto.
The Court reiterated that in imposing DST, the analysis considers both the document and the nature and character of the transaction.
The Court clarified the proper breakdown of the enumerated instruments subject to DST under Section 180, consistent with China Banking Corp. v. CIR.

Standards for “Certificate of Deposit”

The Court defined a certificate of deposit as a written acknowledgment by a bank or banker of receipt of money on deposit, with a promise to pay.
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