DST on intercompany loans and advances

Transferring money from one pocket to another, evidenced by mere instructional letters, journals, cash vouchers, or memos, is a customary practice between a parent company and its subsidiaries or affiliates, and vice versa. In this article, I am writing about the recent case of San Miguel Corporation v. Commissioner of Internal Revenue, promulgated on 12 April 2023.

To recall, the Supreme Court ruled in the 2011 case of CIR v. Filinvest Development Corporation (Filinvest case) that intercompany loans and advances, even if covered by mere office memos, instructional letters, and/or cash and journal vouchers, qualify as loan agreements subject to documentary stamp tax or DST. Thereafter, the Bureau of Internal Revenue issued Revenue Memorandum Circular No. 48-2011 dated 6 October 2011, which disseminated relevant portions of the Filinvest decision and enjoined all internal revenue officers to assess deficiency DST on intercompany loans and advances.

On 14 May 2014, SMC received a preliminary assessment notice for deficiency DST, among others, based on SMC’s advances to related parties. SMC protested the PAN, claiming that the BIR had no right to assess because the Filinvest case should not be given a retroactive application since it would be prejudicial to taxpayers. Nevertheless, SMC paid a total amount of around P30 million. On 20 April 2016, SMC filed a claim for a refund of the amount paid. When the claim for refund was not acted upon by the BIR, a Petition for Review for the claim for refund was filed before the Court of Tax Appeals or CTA.

On 3 May 2019, the CTA division partially granted SMC’s claim for refund and considered its good faith reliance on the previous interpretation of the BIR on the non-loan character of inter-office memos, journals, vouchers, and the like. Both the CIR and SMC appealed the case to the CTA en banc, which ruled, among other things, that the Filinvest case may be applied retroactively as the interpretation made by the SC over Section 179 of the Tax Code (DST on Debt Instruments) was deemed part of the National Internal Revenue Code as of the date of its enactment.

In the decision penned by Associate Justice Maria Filomena D. Singh, the SC upheld the ruling of the CTA en banc that the retroactive application of the Filinvest case was not prejudicial to taxpayers, as the same was merely an interpretation of Section 179 of the Tax Code, which had been in effect since 23 December 1993. The SC further ruled that the CTA en banc was correct in adopting the doctrine laid down in Visayas Geothermal Power Company v. CIR, where the SC held that “[t]he interpretation placed upon a law by a competent court establishes the contemporaneous legislative intent of the law.

Thus, such interpretation constitutes a part of the law as of the date the statute was enacted. It is only when a prior ruling of the Court is overruled, and a different view adopted, that the new doctrine may have to be applied prospectively in favor of parties who have relied on the old doctrine and have acted in good faith.”

In this case, SMC failed to establish the existence of a ruling prior to the Filinvest case, which declared that intercompany loans and advances through memos and vouchers do not constitute debt instruments subject to DST under Section 179 of the Tax Code. Thus, the SC allowed the retroactive application of the Filinvest case and considered it not prejudicial to taxpayers since it did not overturn a prior doctrine of the SC.

The SC reiterated that mere interpretation of a statute only establishes the contemporaneous legislative intent that the interpreted law carried into effect. Hence, judicial interpretation becomes part of the law as of the date the law was originally passed.


For more of Dean Nilo Divina’s legal tidbits, please visit www.divinalaw.com. For comments and questions, please send an email to cabdo@divinalaw.com

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