Stock subscriptions and documentary stamp tax

IN COMMISSIONER of Internal Revenue vs. First Express Pawnshop, G.R. Nos. 172045-46,  June 16, 2009, the Supreme Court ruled that deposits for future stock subscriptions are not subject to the documentary stamp tax (DST).

The person making a deposit on stock subscription 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.

Hence, the depositors are not liable for the payment of DST on its deposit on subscription for the reason that there is yet no subscription that creates rights and obligations between the subscriber and the corporation.

Moreover, in BIR Ruling No. 015-2003 dated  17 November 2003, the BIR ruled that the one billion pesos deposited by Equitable PCI Bank to its subsidiary company Equitable Strategic Holdings Corporation (ESHC) to be applied for future subscription to an increase in capital is not subject to documentary stamp tax under Section 175 of the Tax Code of 1997.

The BIR, quoting the court of tax appeals (CTA) Case entitled First Southern Philippines Enterprises, Inc. v. Commissioner of Internal Revenue promulgated on 17 January 2002, ruled that deposit on stock subscription is not subject to the payment of documentary stamp tax.

The Bureau of Internal Revenue (BIR) explained that there was no agreement to subscribe to the issuance of stock of ESHC. The BIR further explained in this wise:

Capital stock issued connotes permanence of funds flowing into a corporation which cannot be withdrawn. The phrase ‘issuance of shares of stock’ upon which the documentary stamp tax is to be computed must likewise be viewed as permanent in character.

It is considered as a trust fund for the payment of the debts of the corporation, to which the creditors may look for satisfaction. Consequently, to be so categorized, all conditions and requirements, such as the execution of the subscription agreements, and approval by regulatory authorities must be secured to facilitate the issuance of the shares of stock.

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Viewed from the foregoing, it can be inferred that future subscription to an increase in capital stock is not an original issue of shares of stock nor is it a sale or transfer of shares of stock contemplated under Sections 175 and 176 of the Tax Code of 1997, but it is a standard accounting term which refers to an amount of money transmitted by a stockholder to a corporation on deposit with the possibility of the same being later subscribed in the company’s capital.

Moreover, note also that in BIR Ruling No. DA-560-04 dated 8 November 2004, the BIR ruled that the conversion of deposits for future stock subscriptions to additional paid-up capital without the issuance of shares is not subject to DST.

The BIR averred that “considering the fact that no new shares shall be issued in exchange for the conversion, the same shall not be subject to documentary stamp tax imposed under Section 175 of the Tax Code of 1997. [BIR Ruling No. 015-2003 dated November 17, 2003 and CTA Case No. 5988 entitled First Southern Philippines Enterprises, Inc. vs. Commissioner of Internal Revenue which became final and executory on February 13, 2002].

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