Stamp tax on deposit on future subscription

The  Tax Code subjects the original issuance of shares by a Philippine corporation to documentary stamp tax (DST), which must be paid by either the corporation or the stockholder.  If the shares have par value, the DST payable is PhP1 for every PhP200 of par value. Thus, if 1,000,000 shares with a par value of PhP1 each are issued, DST of PhP5,000 is payable. If the DST is not paid on time, the BIR will impose a surcharge of 25% (plus interest).

Shares of stock are usually represented by stock certificates. The stock certificates constitute clear evidence that the shares have been issued (and therefore, that DST is due). On the other hand, there may be instances when the stock certificate has not yet been issued by the corporation, such as the following: (a) the corporation forgot to issue the stock certificates or may have run out of stock certificates; (b) the corporation has not yet issued the stock certificate because the stockholder has not yet fully paid the subscription price for the shares. In these cases, DST is already due even if the stock certificates covering the shares have not yet been issued. The rationale for this is that in situations (a) and (b) above, the person who subscribes to the shares is already a stockholder of the corporation (notwithstanding the non-issuance of the stock certificates) and is entitled to dividends, voting rights or other prerogatives of a stockholder.

In Compagnie Financiere Sucres et Denrees vs. Commissioner of Internal Revenue, G.R. No. 133834, 499 SCRA 664, 669 (2006), the Supreme Court ruled that the transfer or assignment of a deposit on stock subscription is subject to DST.  What if the person made a deposit on future subscription? Is DST due? The Supreme Court faced this issue in Commissioner of Internal Revenue vs. First Express Pawnshop Company, Inc.G.R. Nos. 172045-46, June 16, 2009.

The Supreme Court held in the negative.  According to the Supreme Court:

Sections 175 and 176 [now Section 174 and 175] of the Tax Code contemplate a subscription agreement in order for a taxpayer to be liable to pay the DST. A subscription contract is defined as any contract for the acquisition of unissued stocks in an existing corporation or a corporation still to be formed. A stock subscription is a contract by which the subscriber agrees to take a certain number of shares of the capital stock of a corporation, paying for the same or expressly or impliedly promising to pay for the same.

The Supreme Court noted that the Stockholder’s Equity section of the taxpayer’s balance sheet as of 31 December 1998 showed the following entries:

1998

1997

Authorized Capital Stock P 2,000,000.00 P 2,000,000.00
Paid-up Capital Stock 250,000.00 250,000.00
Deposit on Subscription 800,000.00
Retained Earnings 62,820.34 209,607.20
Net Income (858,498.38) (146,786.86)
TOTAL P 254,321.96 P 312,820.34

On the other hand, the taxpayer’s General Information Sheet (GIS) states:

B. Financial Profile

1. Capital Structure :

AUTHORIZED – P2,000,000.00

SUBSCRIBED – 500,000.00

PAID-UP – 250,000.00

Based on the taxpayer’s audited financial statements and the testimony of its external auditor, the Supreme Court stated that there was no agreement to subscribe to unissued shares, and on this basis, the Supreme Court ruled that no DST was due:

Here, the deposit on stock subscription refers to an amount of money received by the corporation as a deposit with the possibility of applying the same as payment for the future issuance of capital stock . . .

Clearly, the deposit on stock subscription as reflected in respondent’s Balance Sheet as of 1998 is not a subscription agreement subject to the payment of DST. There is no P800,000 worth of subscribed capital stock that is reflected in respondent’s GIS. The deposit on stock subscription is merely an amount of money received by a corporation with a view of applying the same as payment for additional issuance of shares in the future, an event which may or may not happen. 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, respondent is 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.

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