In an October 9, 2012 resolution (which was
issued by the Court after the Teves respondents filed motions for reconsideration of the main decision), the Supreme Court went further. The Court ruled that where the law requires a minimum percentage of Philippine ownership for purposes of participation in a wholly or partly nationalised activity, such mini- mum percentage applies to and must be present for each class of shares, whether common, preferred non- voting, preferred voting or any other class of shares. The Court noted that “outstanding capital stock” under the Philippine Corporation Code includes all classes of stock and is not limited to shares classified as voting shares. In addition, the Court noted that even if preferred non-voting shares are denied the right to vote or elect directors under a corporation’s articles of incorporation, such shares are nonetheless entitled to vote on certain fundamental corporate matters under the Philippine Corporation Code. Accordingly, the Supreme Court concluded that the 60%-40% Filipino-alien equity ratio/requirement must apply not only to shares with voting rights but also to shares without voting rights, and each class of shares must comply with the 60%-40% requirement.
Increasing authorised capital stock As a consequence of Teves, corporations which are engaged in partly nationalised activities and are structured in such a way that its foreign corporate stockholders hold more than the allowable percent- age of any class of share (even if owning not more than 40% of the total capital stock) would now be compelled to restructure to comply with this latest interpretation of the term ‘capital’. For this pur- pose, such corporations may, on the one hand, opt to issue to Philippine stockholders any unissued shares (in each class) in order to increase Philippine shareholdings. If there are no longer unissued shares in each class (because the company’s capital stock in each class is fully subscribed), or the amount of unissued shares in each class is insuffi- cient, however, a corporation may instead opt to increase its authorised capital stock and issue new shares to Philippine stockholders. In effecting an increase of its authorised capital
stock, a corporation has several options, which include using deposits for future subscriptions, and converting stockholders’ advances into equity. In Commissioner of Internal Revenue v First Express
Pawnshop (judgment on June 16 2009), the Supreme Court defined a deposit for future subscription as an
amount of money which a company receives with the view of applying it as payment for subscription to any future increase of authorised capital stock. That deci- sion also ruled that deposits for future subscription are not subject to the payment of documentary stamp taxes, which it described as “[taxes] on docu- ments, instruments, loan agreements, and papers evi- dencing acceptance, assignment, sale or transfer of an obligation, right or property incident thereto”. In essence, a documentary stamp tax is a tax imposed on the transaction rather than on the document. In essence, a documentary stamp tax is a tax imposed on the transaction rather than on the document. Accordingly, documentary stamp taxes may be
imposed upon amounts given as deposits for future subscription only when the actual subscription to capital stock has been made. Mere receipt by a cor- poration of an amount which it has identified as a “deposit for future subscription” does not by itself trigger the application of the tax. In fact, First Express Pawnshop appears to require at least a sub- scription agreement for unissued shares in order to trigger the imposition of documentary stamp taxes. This pronouncement acknowledged that even when a deposit for future subscription is made, “[t]he person making a deposit on stock subscrip- tion does not have the standing of a stockholder and he is not entitled to dividends, voting rights or other prerogatives and attributes of a stockholder. …[T]here is yet no subscription that creates rights and obligations between the subscriber and the corporation.” First Express Pawnshop reiterated Ruling No. 15-
2003 of the Bureau of Internal Revenue (BIR), issued on November 17 2003. There, the BIR indicated that before documentary stamp taxes may be imposed upon the amounts deposited as future sub- scription, actual issuance of stocks must first be made. To facilitate this issuance, the appropriate gov- ernment authority (the SEC) must have approved the increase of the capital stock and a subscription agree- ment between the depositor-stockholder and the cor- poration should have been executed. Without these conditions, no issuance of shares can actually be made and, accordingly, documentary stamp taxes are not due. On the other hand, advances made by stockhold-
ers to a corporation for the latter’s use may be treated as loans and thus may be subject to documentary stamp taxes. Section 173 of the National Internal Revenue Code of the Philippines imposes documen-
tary stamp taxes upon loan agreements. Section 3(b) of Revenue Regulations No. 9-94 issued by the BIR defines “loan agreements” as “a contract in writing where one of the parties delivers to another money or other consumable thing, upon the condition that the same amount of the same kind and quality shall be paid. The term shall include credit facilities which may be evidences by credit memo, advice or draw- ings.” In Commissioner of Internal Revenue v Filinvest Development Corporation (judgment on July 19 2011), the Supreme Court held that inter-company advances evidenced by instructional letters and jour- nal and cash vouchers “qualified as loan advances upon which documentary stamp taxes may be imposed.” The Supreme Court partly relied on Section 6 of the BIR’s Revenue Regulations No. 9-94 which provides that “in cases where no formal agree- ments or promissory notes have been executed to cover credit facilities, the documentary stamp tax shall be based on the amount of drawings or availment of the facilities, which may be evidenced by credit/debit memo, advice or drawings by any form of cheque or withdrawal slip, under Section 180 of the Tax Code.” The BIR issued Revenue Memorandum Circular No. 48-2011 to direct all BIR officials and employees to assess documentary stamp taxes, when warranted under the circumstances described in Filinvest, in their audit of taxpayers. While the Filinvest case specifically dealt with inter-company advances, there appears to be no reason why the ruling therein would not apply to individual shareholders as the basis for the conclu- sion – sections 3(b) and 6 of Revenue Regulation No. 9-94 do not distinguish between individual and juridical persons. Despite the Filinvest decision, many questions
seem to be left unanswered, particularly in determin- ing the exact date or time of that loan agreement. This is significant because the payment of documen- tary stamp taxes must be made on or before the fifth day from the close of the month when the document was executed or entered into. Under Articles 1316 and 1933 of the Civil
Code, a loan agreement is considered a real con- tract, which means the delivery of the loan amount is necessary for its perfection. The precise date of perfection of a loan-shareholder advance could be doubtful if a shareholder remits money to the bank account of the company without any prior agree- ment with, or even prior notice (such as by way of an inter-company memo). As mentioned, the Supreme Court has relied on Revenue Regulation
About the author Norma Margarita B Patacsil (Norge) is a partner at Caguioa & Gatmaytan. She handles both corporate and litigation matters. Norge advises on share and property acquisitions and conducts-related due
diligence. She deals with and is versed in various investment, capital market, competition law, contract-based, land acquisition, mining, and regulatory issues. She recently assisted a large business group acquire the Philippines’ leading importer of premium dairy products and handled the acquisition of a savings bank. Her litigation experience encompasses contract disputes, corporate
restructuring and rehabilitation, debt recovery, infrastructure disputes, intra-corporate controversies, local-government imposed taxes, mining and real property claims, public utilities and torts.
Norge graduated from the University of the Philippines in 1994 (BS Economics, magna cum laude) and 1998
(Bachelor of Laws, cum laude and salutatorian). She was admitted to the Philippine Bar in 1999, placing second in the 1998 Bar examinations.
030 IFLR|FOREIGN DIRECT INVESTMENT Contact information
Norma Margarita B Patacsil Caguioa & Gatmaytan
30/F 88 Corporate Center Sedeño cor. Valero Streets Salcedo Village, Makati City 1227, Philippines T: +632 894 0377 F: +632 552 1978 W:
www.cagatlaw.com
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