DST on Assigned Trade Receivables

This article was published in Business Mirror and http://www.businessmirror.com.ph/ on March 14, 2013.

A recent Supreme Court decision (Philacor Credit Corp. v. Commissioner of Internal Revenue, GR 169899, February 6, 2013) shed light in interpreting the provisions of the National Internal Revenue Code (Tax Code) on documentary stamp tax (DST), particularly on what specific transactions are subject to DST, and who can be made liable for it.

The taxpayer in this case is engaged in retail financing through which a buyer may purchase appliances on installment basis from a dealer. The buyer executes a unilateral promissory note in favor of the appliance dealer, which is pre-approved by the financing company. The appliance dealer then assigns the note to the financing company.

The Bureau of Internal Revenue (BIR) assessed Philacor for deficiency DST on: (1) the issuance of promissory notes by buyers in favor of appliance dealers; and (2) the subsequent assignment of the notes by the dealers to Philacor. The Supreme Court, however, declared that the taxpayer is not liable on both counts.

Under Section 173 of the Tax Code, taxpayers, not otherwise exempt, can be held liable for DST if they are the ones making, signing, issuing, accepting, and transferring the taxable documents, instruments and papers. From that, it would seem that the retail financer’s “acceptance” of the promissory note is taxable, but it is not, according to the High Court.

The Supreme Court ruled that the word “acceptance” has to be taken in its strict sense. Under the negotiable instruments law, “acceptance” is “the signification by the drawee of his assent to the order of the drawer.” This definition can only apply to bills of exchange. Acceptance makes the drawee/acceptor primarily liable. In contrast, “acceptance” of documents in its ordinary sense does not make the person accepting primarily liable on the instrument. The only taxable act of “acceptance” in Section 173 of the Tax Code is one that would make the person accepting a party to the instrument.

One may argue that the financing company should be held liable because it is an active participant in the transaction. The Supreme Court also thought that tax collection would have been more efficient if the financing company, as the one financing the debt instruments, can also be held liable for DST. But since the legislature did not extend the liability to persons who are not parties to the instrument, the rule that only the parties to the issuance of a debt instrument can be held liable for DST stands.

Neither can the subsequent assignment of the notes give rise to DST because according to the Court, such event is not taxable under the law. Section 198 of the Tax Code does not impose DST on transfers of debt instruments. What is subject to DST is the renewal of debt instruments, which is treated as a new issuance.

How do we tell then if a transfer of debt instrument constitutes renewal and not a simple assignment of credit? In a US case (State of Florida Department of Revenue v. Miami National Bank, 1979) cited by the Supreme Court, it was held that a renewal would involve an increase in the amount of indebtedness or an extension of a period, and not the mere change in the person of the payee.

This reminds us of the Civil Code provisions on novation, which is a mode of extinguishing an obligation by the creation of a new one that may involve one of the following: (1) a change in the object or principal conditions; (2) substituting the person of the debtor, and (3) subrogating a third person in the rights of the creditor. (Article 1291,Civil Code) To my mind, “novation” under the Civil Code and “renewal” under the Tax Code have the same underlying concept: the creation of a new obligation in lieu of the one that is extinguished. This may be the reason renewal of debt instruments is tantamount to an original issuance.

While subrogation and assignment of credit may have the same effect, they are not quite the same. When a credit is assigned, the right passes from one person to another, but the obligation subsists. In subrogation, the original obligation terminates and gives way to a new one.

The transactions covered by the Philacor case occurred prior to the effectivity of the 1997 Tax Code, yet the provisions of the old Tax Code from which the ruling was based remained unchanged. The exemption is even further strengthened in the amendment to Section 199, introduced by Republic Act 9243 in 2004, to the effect that even the renewal of debt instrument is not subject to DST if there is no change in the maturity date. Clearly, instruments
evidencing transactions of this kind are not subject to DST.

If the BIR previously succeeded in collecting DST from financing companies for transactions similar to the ones from which the Philacor case originated, we could perhaps expect taxpayers to be chasing the commissioner soon for tax refund. Let’s wait and see.