Tax Articles

Revisiting Documentary Stamp Taxes

By Atty. Fulvio D. Dawilan

Fulvio D. Dawilan Managing Partner   +632 8403 2001 loc.310 This email address is being protected from spambots. You need JavaScript enabled to view it. View Profile

One of the taxes that exist in our tax system is the documentary stamp tax. It was first imposed in the Philippines in 1904 when our Internal Revenue Law was introduced. Since then, it had been part of our tax system, undergoing amendments and revisions a number of times.

Based on its present form, the documentary stamp tax (stamp tax or stamp duty as other countries call it) is a type of tax levied on documents, instruments, loan agreements and papers, and upon acceptances, assignments, sales and transfers of the obligation, right or property incident thereto.

As clarified in a number of Court decisions, DST is an excise tax because it is imposed on the transaction rather than on the document. DST is also levied on the exercise by persons of certain privileges conferred by law for the creation, revision, or termination of specific legal relationships through the execution of specific instruments. In essence, it is not the document that creates the obligation to pay DST but the exercise of the privilege to enter into the taxable transaction. If at all, the document merely serves as a proof that a taxable privilege occurred or had been transacted.

In the case of original issuance of shares of stock for example, the DST accrues at the time the shares are issued. Shares are issued at the point in which the stockholder acquires the attributes of ownership over the stocks. And this contemplates a situation where there is already a subscription agreement, that is, when a subscriber agrees to take a certain number of shares of the capital stock of a corporation, even if the certificate of stock has not been issued. On the other hand, a mere deposit for future stock subscription does not give rise to DST on share issuance. This is because there is yet no subscription that creates rights and obligations between the subscriber and the corporation.

Similarly, the Courts had confirmed a number of times that instructional letters as well as journal and cash vouchers evidencing advances extended to affiliates qualify as loan agreements upon which documentary stamp taxes may be imposed. This is despite the absence of the usual loan agreement or promissory note.

One of the peculiarities of this type of tax is that any of the parties to the transaction can be made liable for its payment. And when one party to the taxable document enjoys exemption from the tax, the other party who is not exempt shall be the one directly liable. Naturally, when one party to the transaction is outside the taxing jurisdiction of the Philippines, the other party shall be the sole party liable for the resulting DST.

How does this apply in a loan transaction where the obligor is a non-resident? In a recent decision of the Court of Tax Appeals (CTA Case No. 10193, May 29, 2023), the issue on the taxability of advances to affiliates again became an issue. This time though, the recipients of the advances are not doing business in the Philippines (non-residents) and the advances are used by these non-resident affiliates outside the Philippines.

In this case, the Court emphasized that all loan agreements, whether made or signed in the Philippines or abroad, when the obligation or right arises from Philippine sources or the property or object of the contract is located in the Philippines, shall be subject to the payment of DST. And in cases where no formal agreements or promissory notes have been executed to cover credit facilities, the documentary stamp tax shall be based on the amount of drawings or availment of the facilities.

Referring to precedents, there is a consensus that the advances are indeed loan agreements. As such, as a rule, the same should be subject to DST even if no formal agreement or promissory note was executed to cover the credit or loan extended by the Philippine obligee.

Note, however, that the imposition of the DST is qualified by the requirement that the obligation or right should arise from the Philippines or the property or the property is located in the Philippines. The majority ruled that the involvement of the oblige, a Philippine resident, made the transaction one that arises from Philippine sources. Thus, even if the obligors are non-residents, advances involve obligation or right arising from Philippine sources.

On this concern, there is a dissent - the loans and advances are not subject to DST for being outside the territorial jurisdiction of the Philippines’ taxing power. Neither does the shifting of liability from an exempt taxpayer to a nonexempt taxpayer apply as that presupposes that the transaction itself is taxable.

I refrain from commenting as this case may still go a long way – instead, there is a need to follow it until its conclusion. It suffices to know that there are different views on the application of the phrase “arising from Philippine sources” on the imposition of DST. And while this case involves loan transactions, it may have impact on other transactions.

The wide range of coverage of this type of tax and the peculiarities in the treatment of each taxable transaction had resulted in a number of disputes between the taxpayer and the tax authorities. Issues include whether this is a tax on the document or transaction, the nature of the tax, the covered documents/transactions, the party liable for its payment, the applicable rates, among many others. Many of these issues had already been settled in previous Court decisions as discussed above. Still, similar controversies appear every so often.

It is therefore time to further rationalize the documentary stamp tax system - such as the reforms included in the proposed Passive Income and Financial Intermediation Taxation Act. Afterall, DST is a nuisance tax which is imposed with no other purpose other than an as a convenient source of revenue to the government.