PHILIPPINE BANKING CORPORATION (NOW: GLOBAL BUSINESS BANK, INC.), PETITIONER, VS. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Philippine Banking Corporation versus Commissioner of Internal Revenue

The Case

This is a petition for review filed by the Philippine Banking Corporation, now Global Business Bank, Inc., against the Commissioner of Internal Revenue, questioning the decision of the Court of Tax Appeals En Banc that ordered the bank to pay deficiency documentary stamp taxes on its bank product called the Special or Super Savings Deposit Account for the taxable years 1996 and 1997. The bank insists that its product is an ordinary savings deposit evidenced by a passbook and therefore outside the reach of the documentary stamp tax, while the Commissioner treats it as a certificate of deposit drawing interest. The case matters because it fixes the test for when a deposit product is a taxable certificate of deposit, and it teaches that substance, not the label or the form of the instrument, controls in documentary stamp taxation.

Procedural History

The Commissioner issued a Final Assessment Notice on 10 January 2000, assessing deficiency documentary stamp taxes on the outstanding balances of the bank's Special or Super Savings Deposit Accounts, in the total sum of 17,595,488 pesos and 75 centavos for 1996 and 47,767,756 pesos and 24 centavos for 1997. The bank disputed the assessment, and the case reached the Second Division of the Court of Tax Appeals, which ruled against the bank. On appeal, the Court of Tax Appeals En Banc affirmed the Division in its decision dated 23 November 2005, denying the petition for lack of merit and ordering the bank to pay the deficiency taxes, plus a 25 percent surcharge for late payment and 20 percent annual delinquency interest from 20 January 2002 until fully paid. The bank then elevated the matter to the Supreme Court by petition for review.

Facts

The bank is a domestic corporation licensed as a banking institution. For the taxable years 1996 and 1997, it offered its depositors the Special or Super Savings Deposit Account. This account is a form of savings deposit evidenced by a passbook, but it earns a higher interest rate than a regular savings account. It is designed for depositors who maintain a substantial average daily balance, and the higher rate is the incentive for keeping that balance for a required holding period.

The bank believed the account was not subject to documentary stamp tax under Section 180 of the 1977 National Internal Revenue Code, because that provision does not list deposits evidenced by a passbook among the instruments it taxes. The Commissioner took the opposite view, and on 10 January 2000 issued the Final Assessment Notice based on the outstanding balances of the accounts appearing in the schedule attached to the bank's audited financial statements.

Before the courts, the bank argued that the account shares the features of a regular savings account: both are evidenced by a passbook, both allow deposits and withdrawals anytime without penalty, and both may carry an automatic transfer agreement with a current or checking account. The Commissioner countered that the account is substantially a time deposit in the guise of a savings account, since a minimum deposit must be maintained for a required period to earn the higher rate. The Court of Tax Appeals agreed with the Commissioner, and the bank appealed to the Supreme Court.

Issues

• Whether or not the bank's Special or Super Savings Deposit Account is a certificate of deposit drawing interest under Section 180 of the 1977 National Internal Revenue Code, and therefore subject to documentary stamp tax for the taxable years 1996 and 1997 prior to the passage of Republic Act Number 9243.

Applicable Provisions

Section 180 of the 1977 National Internal Revenue Code, as amended, provides:

Sec. 180. Stamp tax on all loan agreements, promissory notes, bills of exchange, drafts, instruments and securities issued by the government or any of its instrumentalities, certificates of deposit bearing interest and others not payable on sight or demand. — On all loan agreements signed abroad wherein the object of the contract is located or used in the Philippines; bills of exchange (between points within the Philippines), drafts, instruments and securities issued by the Government or any of its instrumentalities or certificates of deposits drawing interest, or orders for the payment of any sum of money otherwise than at the sight or on demand, or on all promissory notes, whether negotiable or non-negotiable, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of Thirty centavos (P0.30) on each Two hundred pesos, or fractional part thereof, of the face value of any such agreement, bill of exchange, draft, certificate of deposit, or note: provided, that only one documentary stamp tax shall be imposed on either loan agreement, or promissory note issued to secure such loan, whichever will yield a higher tax: provided, however, that loan agreements or promissory notes the aggregate of which does not exceed Two hundred fifty thousand pesos (P250,000) executed by an individual for his purchase on installment for his personal use or that of his family and not for business, resale, barter or hire of a house, lot, motor vehicle, appliance or furniture shall be exempt from the payment of the documentary stamp tax provided under this section.

This is the taxing provision the Court construes, and the whole case turns on whether the bank's product falls within the phrase certificates of deposits drawing interest.

Section 217 of Commonwealth Act Number 466, as amended, the old National Internal Revenue Code, provides:

Sec. 217. Stamp tax on negotiable promissory notes, bills of exchange, drafts, certificate of deposit bearing interest and others not payable on sight or demand. - On all bills of exchange (between points within the Philippines), drafts or certificates of deposit drawing interest, or orders for the payment of any sum of money otherwise than at sight or on demand, or all negotiable promissory notes, except bank notes issued for circulation, and on each renewal of any such note, there shall be collected a documentary stamp tax of four centavos on each two hundred pesos, or fractional part thereof, of the face value of any such bill of exchange, draft, certificate of deposit, or note.

The Court of Tax Appeals used this old provision to show that the word negotiable modifies promissory notes only, so negotiability is not required of a certificate of deposit.

Ruling

The Court denied the petition and held that the Special or Super Savings Deposit Account is a certificate of deposit drawing interest under Section 180, and is therefore subject to documentary stamp tax. The Court began by defining a certificate of deposit, following its earlier ruling in Far East Bank and Trust Company versus Querimit, as a written acknowledgment by a bank of the receipt of a sum of money on deposit which the bank promises to pay to the depositor, to the order of the depositor, or to some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created. It is also a receipt issued by a bank for an interest-bearing time deposit coming due at a specified future date.

The Court then compared the regular savings account, the time deposit, and the Special or Super Savings Deposit Account. The regular savings account carries the regular interest rate, has no fixed period, is evidenced by a passbook, and allows withdrawal without penalty. The time deposit carries a higher rate, has a fixed term, is evidenced by a certificate of time deposit, and imposes a penalty on pre-termination. The Special or Super Savings Deposit Account carries a higher rate, has a fixed term, is evidenced by a passbook, and imposes a penalty on pre-termination in the sense that the account reverts to ordinary savings status and loses the higher rate if the required holding period is not met.

On that comparison, the Court concluded that a certificate of deposit drawing interest under Section 180 refers to a time deposit account. It relied on the distinct features of a certificate of deposit listed in Revenue Memorandum Circular Number 16-2003: a minimum deposit requirement, a stated maturity period, an interest rate higher than the ordinary savings account, an amount not payable on sight or demand but upon maturity or, in case of pre-termination, after prior notice, and an early withdrawal penalty in the form of partial or total loss of interest. The Court found that the Special or Super Savings Deposit Account has all of these features.

On the bank's argument that a passbook cannot be a certificate of deposit, the Court answered that in International Exchange Bank versus Commissioner of Internal Revenue it had categorically ruled that a passbook representing an interest-earning deposit account issued by a bank qualifies as a certificate of deposit drawing interest, and that a document to be deemed a certificate of deposit requires no specific form as long as there is some written memorandum that the bank accepted a deposit of a sum of money from a depositor. On the argument that no law taxed the product before Republic Act Number 9243, the Court explained that the amendment was intended to eliminate the scheme of issuing passbooks to cloak time deposits as regular savings deposits, and that the ambiguity it removed did not mean the product had been untaxed before.

Doctrine

A certificate of deposit drawing interest under Section 180 of the 1977 National Internal Revenue Code refers to a time deposit account, and it is subject to documentary stamp tax. Its distinct features are a minimum deposit requirement, a stated maturity period, an interest rate higher than the ordinary savings account, an amount not payable on sight or demand but upon maturity or after prior notice in case of pre-termination, and an early withdrawal penalty in the form of partial or total loss of interest.

No specific form is required. A passbook representing an interest-earning deposit account issued by a bank qualifies as a certificate of deposit drawing interest, because a document is a certificate of deposit as long as there is some written memorandum that the bank accepted a deposit of a sum of money from a depositor. Negotiability is not required, since Section 180 taxes certificates of deposit drawing interest without qualification.

In determining whether an instrument is subject to documentary stamp tax, substance controls over form and labels. A bank product that carries the features of a time deposit is taxed as one, whatever name the bank gives it and whatever document evidences it.

Disposition

The Supreme Court denied the petition and affirmed the decision of the Court of Tax Appeals En Banc, so the bank lost and was ordered to pay the deficiency documentary stamp taxes for 1996 and 1997, plus the surcharge and delinquency interest.

Remember This

Memorize the line that a passbook representing an interest-earning deposit account qualifies as a certificate of deposit drawing interest, because substance controls over form and labels. Examiners use this case to test the documentary stamp tax on bank deposit products, the definition of a certificate of deposit, and the rule that a tax cannot be escaped by cloaking a time deposit as a savings account.