Written by Leonard Vinz O. Ignacio, 15 March 2007
Prior to the issuance of Republic Act (RA) No. 9243 otherwise known as the “Act Rationalizing The Provisions On The Documentary Stamp Tax of the NIRC”, (took effect on March 20, 2004), certificates of deposit drawing interest were subject to documentary stamp tax (DST). Thus, traditionally, ordinary savings accounts which are withdrawable on demand and are evidenced by mere passbooks had been treated by banks as not falling under this classification and as such were not being subjected to DST. Time deposits which usually earn higher interest rates and provide for a specific maturity date were subjected to DST since said transactions were traditionally covered by certificates of deposit and not by passbooks.
In the case of Far East Bank and Trust Company vs. Querimit, G.R. No. 148582, January 16, 2002, the Supreme Court (SC) defined a “certificate of deposit” as a written acknowledgment by a bank or banker of the receipt of a sum of money on deposit which the bank or banker promises to pay to the depositor, to the order of the depositor, or some other person or his order, whereby the relation of debtor and creditor between the bank and the depositor is created.
In the succeeding cases of Philippine Banking Corporation vs. Commissioner of Internal Revenue, CTA E.B. No. 63, November 23, 2005 and East West Banking Corporation vs. Commissioner of Internal Revenue, C.T.A. Case No. 6845, March 2, 2006, the SC and the Court of Tax Appeals, respectively, held that the definition of a certificate of deposit neither referred to a particular form of deposit nor limited the coverage thereof to time deposits only. They used the term “written acknowledgment” which means that for as long as there is some written memorandum of the fact that the bank accepted a deposit of a sum of money from a depositor, the writing constitutes a certificate of deposit. Any written acknowledgment by a bank of the receipt of money as deposit which a bank promises to pay to the depositor is a genus of a certificate of deposit. Although these decisions were rendered after the effectivity of RA No. 9243, the cases involved transactions that took effect prior to said law.
The above-mentioned court decisions were adopted by the SC in the recent case of Banco de Oro Universal Bank vs. Commissioner of Internal Revenue, G.R. No. 173602, January 15, 2007 which similarly involved transactions before RA No. 9243.
The principal issue now is whether the court decisions on what constitutes a certificate of deposit for purposes of imposing the DST would apply to transactions taking effect after RA No. 9243.
RA No. 9243 provides that “certificates or other evidences of deposits that are either drawing interest significantly higher than the regular savings deposit taking into consideration the size of the deposit and the risks involved or drawing interest and having a specific maturity date” are subject to DST. Thus, based on this provision, deposit transactions subject to DST consist of deposits which are covered by certificates or other evidences of deposit that are either (1) earning high-yield interest whether for a fixed term or not or (2) earning interest with a specific term or maturity date. Consequently therefore, exempted from the DST are ordinary demand and savings deposits which can be withdrawn anytime upon demand and are earning interest based on prevailing market rates, irrespective of the amount of deposit.
Under Revenue Regulations No. 13-2004 implementing RA No. 9243, it was further clarified that the DST shall apply to all qualifying deposit transactions irrespective of nomenclature and whether covered by a certificate, passbook or any other evidence of deposit. In other words, for purposes of determining whether a particular deposit transaction is subject to DST, the document evidencing said deposit transaction is irrelevant for as long as the transaction has any of the above-mentioned features, i.e., the deposit earns significantly higher interest or the deposit is for a specific period. RR No. 9243 further provides that a deposit bearing interest shall be considered with a maturity date if :
- there is a predetermined or defined specific maturity or end date to the deposit as agreed to by the depositor; or
- absent a specific maturity date, there is a defined program or enjoyment of higher interest rate or enjoyment or a privilege or other benefit (either monetary or in kind) to be extended the bank or financial institution if the said deposit is to be maintained by the depositor for a defined period of time.
Effectively therefore, the term “certificate of deposit” was given a broader meaning under RA No. 9243 and RR No. 13-2004 and which in essence is similar to the principle applied in the above-mentioned court decisions. Thus, applying the principle of substance over form, whether a deposit transaction is covered or evidenced by a mere passbook or written acknowledgement of receipt of deposit or certificate or evidence of deposit is of no moment as the DST shall apply for as long as the deposit transaction earns high-yield interest rates or has a specific maturity date as determined under RR No. 13-2004.
The definition of a what constitutes a “certificate of deposit” under the RA No. 9243 and RR No. 13-2004 and the above-mentioned court decisions is now causing problems in the banking industry as many banks are currently faced with assessments for deficiency DST on deposit transactions that are covered by mere passbooks but are either earning high interest rates or are effectively with a specific maturity date/period. Apparently, certain banks have taken the position that a deposit transaction covered by a passbook is exempt from DST since a passbook is not considered a “certificate of deposit”. On the surface, the argument appears to be literally valid. However, based on the current law and rules and regulations and jurisprudence on the matter, it would be difficult to argue along this line if a strict scrutiny of the terms and conditions of the deposit would show that the same earns high-yield interest or are considered to be with a specific maturity date.
In light of the foregoing, there is no issue that ordinary saving deposits that are withdrawal upon demand are exempt from DST regardless of the document covering the transaction. However, in the case of deposit transactions which intrinsically provide for higher interest rates or are for a fixed term or maturity period although not covered by a “certificate of deposit”, it would be prudent for banks to take a conservative position and apply the DST on said deposits to avoid unnecessary tax risks.
