BPI vs CIR (G.R. No. 137002 July 27, 2006)

Bank of the Philippine Islands vs Commissioner of Internal Revenue
G.R. No. 137002 July 27, 2006

Facts: From 28 February 1986 to 8 October 1986, petitioner Bank of the Philippine Islands (BPI) sold to the Central Bank of the Philippines (now Bangko Sentral ng Pilipinas) U.S. dollars for P 1,608,541,900.00. BPI instructed, by cable, its correspondent bank in New York to transfer U.S. dollars deposited in BPI’s account therein to the Federal Reserve Bank in New York for credit to the Central Bank’s account therein. Thereafter, the Federal Reserve Bank sent to the Central Bank confirmation that such funds had been credited to its account and the Central Bank promptly transferred to the petitioner’s account in the Philippines the corresponding amount in Philippine pesos. In 1988, respondent CIR ordered an investigation to be made on BPI’s sale of foreign currency. As a result thereof, the CIR issued a pre-assessment notice informing BPI that in accordance with Section 195 (now Section 182) of the NIRC, BPI was liable for documentary stamp tax at the rate of P 0.30 per P Total tax liability was assessed at P 200.00 on all foreign exchange sold to the Central Bank. 3,016,316.06, which consists of a documentary stamp tax liability of P2,412,812.85, a 25% surcharge of P 603,203.21, and a compromise penalty of P 300.00.

Issue: Whether or not the transactions covered is a bill of exchange liable for DST.

Held: Yes. A definition of a “bill of exchange” is provided by Section 39 of Regulations No. 26, the rules governing documentary taxes promulgated by the Bureau of Internal Revenue (BIR) in 1924:

Sec. 39. Definition of “bill of exchange”. The term bill of exchange denotes checks, drafts, and all other kinds of orders for the payment of money, payable at sight, or on demand or after a specific period after sight or from a stated date.

Section 126 of The Negotiable Instruments Law (Act No. 2031) reiterates that it is an “order for the payment of money” and specifies the particular requisites that make it negotiable.

Sec. 126. Bill of exchange defined. – A bill of exchange is an unconditional order in writing addressed by one person to another, signed by the person giving it, requiring the person to whom it is addressed to pay on demand or at fixed or determinable future time a sum certain in money to order or to bearer.

Section 129 of the same law classifies bills of exchange as inland and foreign, the distinction is laid down by where the bills are drawn and paid. Thus, a “foreign bill of exchange” may be drawn outside the Philippines, payable outside the Philippines, or both drawn and payable outside of the Philippines.

Sec. 129. Inland and foreign bills of exchange. — An inland bill of exchange is a bill which is, or on its face purports to be, both drawn and payable within the Philippines. Any other bill is a foreign bill.

A bill of exchange and a letter of credit may differ as to their negotiability, and as to who owns the funds used for the payment at the time payment is made. However, in both bills of exchange and letters of credit, a person orders another to pay money to a third person.

Section 195 (now Section 182) of the NIRC covers foreign bills of exchange, letters of credit, and orders of payment for money, drawn in Philippines, but payable outside the Philippines. From this enumeration, two common elements need to be present: (1) drawing the instrument or ordering a drawee, within the Philippines; and (2) ordering that drawee to pay another person a specified amount of money outside the Philippines. What is being taxed is the facility that allows a party to draw the draft or make the order to pay within the Philippines and have the payment made in another country.

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