Implementing Rules and Regulations of Executive Order No. 256

SECOND DIVISION [C.T.A. CASE NO. 7993. August 18, 2011.] I-REMIT, INC. (for itself and on behalf of JPSA Global Services, Co., JTKC Equities, Inc. and Surewell Equities, Inc.) , petitioner , vs . COMMISSIONER OF INTERNAL REVENUE , respondent . RESOLUTION CASANOVA , J p : For resolution is petitioner's Motion for Reconsideration (of Decision dated 23 May 2011) filed on June 10, 2011, seeking reconsideration of this Court's Decision promulgated on May 23, 2011. Petitioner seeks to reconsider the Decision dated May 23, 2011 on the following grounds/arguments: a) the law and the rules do not require petitioner to prove that it is a closely-held corporation before it can be entitled to the refund of the overpaid initial public offering (IPO) tax; b) the failure of respondent to properly raise the issue of petitioner's status in her Answer and in the Joint Stipulation constitutes judicial admission that petitioner is a closely-held corporation; and c) indubitably, petitioner I-Remit is a closely-held corporation. On the other hand, respondent counter-argues that: a) before petitioner may be considered to have erroneously or excessively paid its percentage tax for shares listed and traded on the Philippine Stock Exchange (PSE), it must first be established that it is indeed a closely-held corporation; and b) there must be a showing that it has complied with the requirements provided under Section 127 (B) of the 1997 Tax Code, as amended, and Section 6 of Revenue Regulations (RR) No. 6-2008. Petitioner is of the view that Section 127 (B) of the 1997 Tax Code, as amended, does not require petitioner to prove that it is a closely-held corporation and that, the mere payment of the IPO tax, which is levied only on a closely-held corporations, shows a definite, certain and unequivocal proof that petitioner is a closely-held corporation. Section 127 (B) of the 1997 Tax Code, as amended, provides the following: "SEC. 127. Tax on Sale, Barter or Exchange of Shares of Stock Listed and Traded through the Local Stock Exchange or through Initial Public Offering. SECAHa xxx xxx xxx (B) Tax on Shares of Stocks Sold or Exchanged through Initial Public Offering. There shall be levied, assessed and collected on every sale, barter, exchange or other disposition through initial public offering of shares of stock in closely held corporations, as defined herein, a tax at the rates provided hereunder based on the gross selling price or gross value in money of the shares of stock sold, bartered, exchanged or otherwise disposed in accordance with the proportion of shares of stock sold, bartered, exchanged or otherwise disposed to the total outstanding shares of stock after the listing in the local stock exchange: Up to twenty-five percent (25%) 4% Over twenty-five percent (25%) but not over thirty-three and one third percent (33 1/3%) 2% Over thirty-three and one third percent (33 1/3%) 1% The tax herein imposed shall be paid by the issuing corporation in primary offering or by the seller in secondary offering. For purposes of this Section, the term 'closely held corporation' means any corporation at least fifty percent (50%) in value of the outstanding capital stock or at least fifty percent (50%) of the total combined voting power of all classes of stock entitled to vote is owned directly or indirectly by or for not more than twenty (20) individuals. For purposes of determining whether the corporation is a closely held corporation, insofar as such determination is based on stock ownership, the following rules shall be applied: (1) Stock Not Owned by Individuals. Stock owned directly or indirectly by or for a corporation, partnership, estate or trust shall be considered as being owned proportionately by its shareholders, partners or beneficiaries." (underscoring supplied) After taking a second hard look on the arguments raised by petitioner in its Motion for Reconsideration, this Court is now constrained to reconsider its earlier position that "it is imperative for the corporation issuing its shares of stock in an IPO to prove that it is a closely-held corporation before it can qualify under Section 127 (B) of the 1997 Tax Code." Section 127 (B) of the 1997 Tax Code, as amended, simply states that "there shall be levied, assessed and collected on every sale, barter, exchange or other disposition through initial public offering of shares of stock in closely-held corporations, as defined herein." Nowhere can it be seen from the entire provision of the said section of the Code that there is a need to show proof that it is a closely-held corporation before it can be entitled to the refund of the overpaid IPO tax. Furthermore, the ratio decidendi in the case of Wholesale Commodity and Exchange, Inc. vs. CIR 1 (although it involves a claim for the refund of the 10% corporate development tax under Section 24 (e) of the 1977 Tax Code) may, likewise, be adopted to justify the change in the stand of the Court, to wit: ". . . For the respondent, it was absolutely necessary for petitioner to present in evidence such documents as the duly registered Articles of Incorporation, corporate books and other pertinent records to prove that it is a 'closely-held corporation'. xxx xxx xxx The petitioner had complied with what it believed bona fide to be its duty by computing the tax it is liable for and paying the same. This act of acceptance and compliance with duty is sufficient enough to overwhelm the need, as alleged by respondent, to present evidence to the effect that petitioner is actually a 'closely-held corporation' as defined by Section 24(e). Considering that internal revenue taxes ( e.g. , income tax) impose the burden on the taxpayer of supplying by the return, the information upon which an assessment would be based, thus the willingness on the part of the taxpayer to be bound by the exaction no matter the inconvenience which impresses devotion to duty, it would not be improper for respondent to deny the qualification of petitioner as a 'closely-held corporation'. Respondent denies facts to suit his convenience, yet would accept benefits from the acts arising from the erroneous belief of petitioner if not for this claim for refund or credit. The pronouncement in a United States case ( Newport v. Ringo , 37 Ky. 635, 636; 10 S.W. 2) cited by our Supreme Court in Gonzalo Puyat & Sons, Inc. v. City of Manila (L-17447, April 30, 1963, 7 SCRA 970, 974-975), is analogously related to this controversy. ScTaEA '. . . The taxpayer has no voice in the imposition of the burden. He has the right to presume that the taxing power has been lawfully exercised. He should not be required to know more than those in authority over him, nor should he suffer loss by complying with what he bona fide believes to be his duty as a good citizen. Upon the contrary, he should be promoted to its ready performance by refunding to him any legal exaction paid by him in ignorance of its illegality; and, certainly, in such a case, if be subject to penalty for nonpayment, his compliance under belief of its legality, and without awaiting a resort to judicial proceedings should not be regarded in law as so far voluntary as to affect his right of recovery." Lastly, assuming that petitioner is not a closely-held corporation and cannot prove that it is, the more reason it has the right to claim for refund, not only for the amount of P13,160,534.06 but for the whole tax payment of P26,321,069.00, on the sole ground that Section 127 (B) of the 1997 Tax Code, as amended, does not apply to it. Notwithstanding, petitioner still attached to its Motion for Reconsideration its certification of stock ownership issued by its Corporate Secretary and First Metro Investment Corporation (sole issue manager and lead underwriter of the IPO), and General Information Sheets of Star Equities, Inc., JTKC Equities, Inc. and petitioner itself. 2 Examination of the foregoing documents shows that more than 50% of its shares of stock are owned by the following individuals: Indirect Indirect Ownership thru Ownership thru Total Name of Shareholder JTKC (%) Star Equities (%) (%) 1. Ben C. Tiu 3.452 4.286 7.738 2. Ruben C. Tiu 3.452 4.286 7.738 3. Jerry C. Tiu 3.452 4.286 7.738 4. Dexter Tiu 3.452 4.286 7.738 5. Alexander Y. Tiu 3.452 4.286 7.738 6. John Y. Tiu, Jr. 3.452 4.286 7.738 7. Grace Y. Tiu 2.159 2.681 4.840 8. Rosalinda T. Yap 1.724 2.141 3.865 9. Evelyn T. Lim 1.724 2.141 3.865 10. Manuela T. Lee 1.724 2.141 3.865 TOTAL 28.043 34.820 62.863 ====== ====== ====== Based from the foregoing, it was established that petitioner is indeed a closely-held corporation. Having resolved the same, the Court finds no justifiable reason to further address the other issues raised by both parties as they all boil down to the issue on whether or not there is a need to prove that petitioner is a closely-held corporation. Having finally determined that petitioner is a closely-held corporation, this Court will now determine whether petitioner is entitled to the refund of P13,160,534.06, allegedly representing excess percentage tax erroneously paid on petitioner's sale of shares of stock through IPO in the taxable year 2007. But in resolving the same, We have to discuss first whether or not the percentage tax on IPO of shares should be computed based on the aggregate number of shares issued during the IPO. Section 6 (c) of Revenue Regulations No. 006-08 plainly illustrates how the tax on sale of shares of stock through an IPO and secondary offering should be computed, to wit: ATcaEH "(c) Determination of the Persons Liable to Pay the Tax. (c.1) Primary Offering. The tax herein imposed shall be paid by the issuer corporation with respect to the Shares of Stock corresponding to the Primary Offering. (c.2) Secondary Offering. The tax herein imposed shall be paid by the selling shareholder(s) with respect to the Shares of Stock corresponding to the Secondary Offering. (c.3) Illustration. RFB Corporation, a closely-held corporation, has an authorized capital stock of 100,000,000 shares with par value of Php1.00/share as of January 1, 2008. Of the 100,000,000 authorized shares, 25,000,000 thereof is subscribed and fully paid up by the following stockholders: Mr. Estoy B. Zabala 5,000,000 Mrs. Rowena V. Posadas 5,000,000 Mr. Conrado G. Cruz 5,000,000 Mr. Benedict O. Sison 5,000,000 Mrs. Linda O. Evangelista 5,000,000 Total Shares Outstanding 25,000,000 ======== RFB Corporation finally decides to conduct an IPO and initially offers 25,000,000 of its unissued shares to the investing public. After the IPO in March 2008, RFB Corporation's total issued shares increased from 25,000,000 to 50,000,000 shares. At the IPO, one of the existing stockholders, Mrs. Linda O. Evangelista, has likewise decided to sell her entire 5,000,000 shares to the public. Thus, 25,000,000 shares have been offered in the primary offering and 5,000,000 shares in the secondary offering. Computation of the percentage to be used. (i) Total Number of Shares Outstanding Number of Shares issued by RFB prior to IPO 25,000,000 shares Add: Number of Additional Shares Through Primary Offering for IPO 25,000,000 shares Total Shares Outstanding after Listing at the Stock Exchange or IPO 50,000,000 shares ============= (ii) Computation of Percentage Ratio to the Total Outstanding Shares (ii.a) For Primary Offering: Number of Shares offered by RFB Corporation to the public 25,000,000 shares Divide by the number of shares outstanding after the Listing at the Stock Exchange shares 50,000,000 Ratio of Percentage 50% ======== Percentage Ratio is 50% which is over 33 1/3% so the Rate of Tax to be used for Primary Offering (IPO) of shares is 1%. (ii.b) For Secondary Offering: Number of Shares offered by existing Stockholder of RFB Corporation to the public shares 5,000,000 Divide by the number of shares outstanding after the Listing at the Stock Exchange shares 50,000,000 Ratio of Percentage 10% ======== Percentage Ratio is 10% which is under 25% so the Rate of Tax to be used for Secondary Offering (IPO) of shares is 4%. (iii) Computation of the Tax (iii.a) RFB Corporation newly issued shares (25,000,000 shares x Php1.50/share x 1%) = Php375,000 (iii.b) Mrs. Linda O. Evangelista's shares (5,000,000 shares x Php1.50/share x 4%) = Php300,000 If in June 2008, RFB Corporation again decides to increase capitalization by offering another 30,000,000 of unissued shares to the public at Php2.00/share consequently bringing the total issued shares to 80,000,000 shares, such follow-on/follow-through sale which are shares issued subsequent to IPO shall no longer be taxed pursuant to Section 6 hereof. The transaction, however, is subject to Documentary Stamp Tax similar to the transaction covered by Primary Offering as well as Secondary Offering of shares of stock. AEaSTC Nonetheless, in case another existing shareholder decides to offer his existing shares to the public subsequent to IPO, as in the above illustration, if Mr. Benedict O. Sison ever decides to sell his 5,000,000 shares to the public at Php2.00 per share (for the Php10,000,000 he received as consideration for the shares he sold), he shall be taxed pursuant to Section 127 (A) of the Tax Code as implemented by Sec. 5 of these Regulations which is 1/2 of 1% of the gross selling price or Php50,000 ( i.e. , 5,000,000 shares x Php2.00/share = Php10,000,000 x 1/2 of 1%)." In the case at bar, the Court deems it proper to apply retroactively the afore-quoted Revenue Regulations 3 in the resolution of this petition, pursuant to the principle laid down in the cases of Commissioner of Internal Revenue vs. Azucena T. Reyes and Azucena T. Reyes vs. Commissioner of Internal Revenue, 4 to wit: "The general rule is that statutes are prospective. However, statutes that are remedial, or that do not create new or take away vested rights, do not fall under the general rule against the retroactive operation of statutes. . . . xxx xxx xxx A tax regulation is promulgated by the finance secretary to implement the provisions of the Tax Code. While it is desirable for the government authority or administrative agency to have one immediately issued after a law is passed, the absence of the regulation does not automatically mean that the law itself would become inoperative. xxx xxx xxx Moreover, an administrative rule interpretive of a statute, and not declarative of certain rights and corresponding obligations, is given retroactive effect as of the date of the effectivity of the statute. " (emphasis supplied) Hence, being interpretive of Section 127 (among others) of the 1997 Tax Code, as amended (even if it was issued only on April 22, 2008), RR 006-08 may be given retroactive effect. It, therefore, retroacts to January 1, 1998 which is the effectivity of the 1997 Tax Code, as amended. As admitted by both parties in their Joint Stipulation of Facts and Issues filed on March 19, 2010, petitioner paid on November 19, 2007, the percentage tax for the sale of shares of stock through an IPO in the amount of P26,321,069.00. In fine, petitioner's and JPSA Global Services Co., JTKC Equities, Inc. and Surewell Equities' ratio of percentage of their respective shares of stock sold are 19.10% and 5.90%, computed as follows: For Primary Offering: Number of Shares offered by petitioner to the public 107,417,000 shares Divide by the number of shares outstanding after the Listing at the Stock Exchange 562,367,000 shares Ratio of Percentage 19.10% ============== Percentage Ratio is 19.10% which is under 25% so the Rate of Tax to be used for Primary Offering (IPO) of shares is 4%. For Secondary Offering: Number of Shares offered by JPSA, JTKC and Surewell Equities to the public 33,187,000 shares Divide by the number of shares outstanding after the Listing at the Stock Exchange 562,367,000 shares Ratio of Percentage 5.90% ============== Percentage Ratio is 10% which is under 25% so the Rate of Tax to be used for Secondary Offering (IPO) of shares is 4%. Consequently, percentage tax due is computed thus: THEDCA Petitioner's newly issued shares: (107,417,000 shares x Php4.68/share x 4%) = P20,108,462.40 JPSA, JTKC and Surewell Equities' shares: (33,187,000 shares x Php4.68/share x 4%) = P6,212,606.40 TOTAL P26,321,068.80 ============ In the case at bar, petitioner seeks to refund its alleged excess/overpaid percentage tax/IPO tax in the amount of P13,160,534.06, which according to petitioner, was the result of its erroneous use of the percentage tax rate of 4% instead of 2% in computing the IPO tax under Section 127 (B) of the 1997 Tax Code, as amended. However, applying RR 006-08, which interprets among others, the said section of the Code, the correct percentage tax rate for the computation of petitioner's sale of shares of stock through IPO is 4%. Thus, applying the above computation, petitioner correctly paid the amount of P26,321,069.00 on November 19, 2007, and that there is no cause for respondent to refund the amount of P13,160,534.06. To stress, the laws granting tax exemption are construed strictissimi juris against the taxpayer and liberally in favor of the taxing authority. Taxation is the rule and exemption is the exception. The law does not look with favor on tax exemptions and he who thus seeks to be privileged must justify it by words too plain to be mistaken and too categorical to be misinterpreted. 5 WHEREFORE , premises considered, the Motion for Reconsideration is hereby DENIED for lack of merit. SO ORDERED. (SGD.) CAESAR A. CASANOVA Associate Justice Juanito C. Castaeda, Jr. and Cielito N. Mindaro-Grulla, JJ., concur. Footnotes 1. CTA Case 3984, May 7, 1990. 2. Annexes "A", "B", "C", "D" and "E". 3. Section 6 (c) of Revenue Regulations No. 006-08 took effect in the year 2008, while the subject of the refund in the Petition pertains to taxable year 2007. 4. G.R. Nos. 159694 and 163581, January 27, 2006. 5. Sea-Land Services, Inc. vs. Court of Appeals , 223 SCRA 316.