BIR Ruling [UN-242-95]

July 3, 1995 BIR RULING [UN-242-95] MEMORANDUM FOR The Commissioner This refers to the internal revenue tax case of Aguirre Loan Co., Inc., involving proposed deficiency assessments, as follows: 1988 1989 Def. VAT P2,883,498.54 P3,627,361.19 Def. Doc. Stamp Tax 128,721.75 155,598.31 Def. Gross Receipts Tax 653,968.89 632,825.12 TOTAL: P3,666,189.18 P4,415,784.62 =========== =========== Subject-taxpayer had executed a Waiver of Statute of Limitations under the National Internal Revenue Code waiving the running of the prescriptive period and consented to the assessment of taxes due from it until December 31, 1995. The antecedent facts of the case, as reported in the memorandum report dated July 30, 1992 of the revenue enforcement officer are as follows: 1. Taxpayer is a domestic corporation incorporated in 1975 to engage in the business of lending investor and wholly-owned by the Aguirre Family under a paid-up capital of P18,000,000.00; 2. As a lending investor, taxpayer accepted as collateral for money advanced and/or loaned either real, personal tangible or intangible properties; 3. That those pledges were supposedly to be returned to the pledgors upon payment of the total obligations on specified maturity dates but in case of failure on the part of the pledgors to settle their obligations, the pledgee-taxpayer has the right to auction said collaterals in a public bidding to be conducted after four (4) months from maturity dates; 4. That for every loan granted by the taxpayer, promissory notes were issued to support the transaction; 5. That the taxpayer failed to pay the corresponding value-added tax on the auctioned pledged articles as well as the documentary stamp tax on the promissory notes issued to support the transaction during the years 1988 and 1989; 6. That the interest income which the taxpayer reported in its income tax returns during the aforementioned years appears to the insignificant in amounts when compared to the amounts of loans granted. ISSUES 1. Whether or not subject-taxpayer is subject to the value-added tax on its sale at public auction of forfeited or foreclosed articles; 2. Whether or not the "Promissory Notes" issued by Aguirre Loan Co., Inc., to substantiate the loans granted by it are subject to the documentary stamp tax imposed by Section 195 of the Tax Code. Anent the first issue, this Office had ruled that a lending investor is exempt from the value-added tax pursuant to Section 103(j) of the Tax Code but its gross income is subject to the 5% percentage tax imposed by Section 116 of the same Code. (BIR Ruling No. 086-88 dated March 8, 1988). On the other hand, the VAT Review Committee had also issued VAT Rulings Nos. 022-90, 99-022-90-067-90 and 226-90 to the effect that the sale at public auction of forfeited or foreclosed pawned articles is not subject to VAT. While the aforesaid VAT Rulings were specifically addressed to pawnbrokers/pawnshops, the same may be applied equally to lending investors because the pawnshop business is akin to lending investor's business activity which is lending money at interest by any person, whether natural or juridical. Like a pawnshop, the amount realized by herein taxpayer on its sale at public auction of forfeited/unredeemed collaterals is not a VAT taxable activity as contemplated in Section 100 of the Tax Code. The said proceeds is merely incidental to the business of subject-taxpayer and forms of its gross income as defined in Section 28 of the Tax Code. Coming to the second issue, we are of the opinion that the contention of our revenue enforcement officer to the effect that the Promissory Notes issued by the taxpayer (Samples of which may be found in pp. 269-273 and 318 of the docket) are subject to the documentary stamp tax imposed by Section 195 of the Tax Code, as amended, is meritorious. The aforesaid section expressly provides that on every mortgage or pledge of lands, estates or property, real or personal . . . where the same shall be made as security for the payment of any definite and certain sum of money lent at the time or previously due and owing or foreborne to be paid or payable . . . there shall be collected documentary stamp tax at the rates prescribed therein. In other words, a document evidencing a mortgage or pledge of real or personal property which is made as a security for payment of a loan is subject to the documentary stamp tax. This implies that under the document subject to tax, the mortgagor/pledgor is indebted to the mortgage/pledgee and, therefore, the former has mortgaged/pledged real/personal property to secure payment of the debt. Clearly then, Section 195 of the Tax Code applies to the promissory notes issued by herein taxpayer because the same (promissory notes) were (i) pledge or mortgage (ii) made as security for the payment (iii) of money lent. BIR Ruling No. 325-88 which ruled that pawnshop ticket is not subject to the documentary stamp tax cannot be invoked by herein taxpayer because unlike a promissory note, a pawn ticket is a pawn broker's receipt for pawn and the same is neither a security nor a printed evidence of indebtedness (Section 3, P. D. 114, Pawnshop Regulatory Act). At any rate, BIR Ruling no. 325-88 has been revoked by BIR Ruling No. 221-91 dated October 30, 1991 which ruled that "since pawnshop ticket virtually evidence the pledge, it is the logical document subject to the documentary stamp tax under Section 195 of the Tax Code". There is no doubt however, that herein taxpayer is subject to the 5% gross receipts tax on its interest income during the years 1988 and 1989. But the issue here is factual and not legal. According to the revenue enforcement officer, she "recomputed the interest income supposedly earned on the loans extended by subject-taxpayer by imposing the 2% per month interest rate, as per specified in the Promissory Notes, on all collected receivables due to the inavailability of supporting documents showing how the interest income was arrived at which the taxpayer alleged to have actually generated and declared as earnings during the years under audit. . . ." And since the taxpayer allegedly failed to present the supporting documents showing that the amounts declared as interest income were the actual amounts earned, the revenue enforcement officer candidly admitted using the best evidence available in arriving at the conclusion that the total collections on outstanding loans (by the taxpayer) amounted to P46,853,125.83 and P53,607,004.33 during the years 1988 and 1989, respectively, the deficiency 5% tax on which amounted to P653,968.89 and P632,825.12. On the other hand, the taxpayer contended that all documents which the revenue enforcement officer requested were presented to her during the whole time of her lengthy examination. Taxpayer also maintains that "we can prove anytime the correctness of the figures appearing in our income tax return for the years 1988 and 1989". In fairness to the taxpayer, we should give it a chance to rebut the presumption regarding the correctness and validity of the proposed deficiency assessments against it as a lending investor. This is consistent with the doctrine that an assessment must be based on actual facts and not on mere presumptions no matter how reasonable or logical said presumptions may be. (Benipayo vs. Coll. of Int. Rev., L-13658, January 31, 1962). In view of the foregoing, it is respectfully recommended that 1. The proposed deficiency value-added tax assessments against Aguirre Loan Co., Inc. for the years 1988 and 1989 in the respective amounts of P2,883,498.54, P3,627,361.19 be not pursued for lack of legal basis; 2. Assessment Notices be issued against subject-taxpayer for payment of the amounts of P128,721.75 and P155,598.31 as deficiency documentary stamp taxes, exclusively of 25% surcharge also for the years 1988 and 1989. An assessment for documentary stamp tax may be issued covering ten (10) years which correspond to the prescriptive period of assessment counted from the discovery of the omission to file a return, as in the instant case; and 3. The Revenue Enforcement Officer concerned should be instructed to conduct a reinvestigation of the case with a view to ascertaining the actual interest income earned by subject-taxpayer during the years in question in order that the correct deficiency gross receipts tax due from it may be imposed and collected. Respectfully submitted: MILAGROS V. REGALADO Chief, Law Division (Officer-In-Charge) I CONCUR: ALICIA P. CLEMENO Acting Assistant Commissioner (Legal Service) APPROVED: LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue