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Another subtle tilt of the scales

(Article published in the Oct 4, 2006 issue of Manila Standard Today)  

“Motions for reconsideration,” writes  Justice Isagani A. Cruz last Saturday (30 September 2006) in his regular column at the Philippine Daily Inquirer, “are filed usually by rote, or out of earnest belief that the judicial dictum is erroneous and should be corrected, or as a legal requirement for an appeal.  As a rule, they are seldom successful except where the original judgment is blatantly inaccurate, capricious, dilatory, or subject to similar objection.”

Knowing whereof he speaks, Justice Cruz, who was Associate Justice of the Supreme Court from 16 April 1986 to 11 October 1994,  cites “the announced ponente’s pride of authoriship, assuming the decision was actually written by him, who will naturally be reluctant to consign his deathless prose to the trash can” as one of the reasons for the low batting average of motions for reconsideration.

It is thus instructive to analyze what made the Supreme Court grant, albeit only partially, the motion for reconsideration filed by the taxpayer in the case of Michel J. Lhuillier Pawnshop, Inc. v. Commissioner of Internal Revenue, G.R. No. 166786, promulgated 11 September 2006.

           Lhuillier started out as a dispute between the taxpayer and the Bureau of Internal Revenue (BIR) on two questions: first, whether pawnshops are subject to the Value-Added Tax (VAT), and Second, whether the pawn ticket is subject to the documentary stamp tax (DST).  While the case was pending in the Supreme Court, players the pawnshop industry including M.J. Lhuillier Pawnshop, Inc., came to a compromise agreement with the BIR with respect to the issue of the VAT.  Thus, what remained was just the second question.

The checkered history of the case, from the first rung of administrative level at the BIR to the penultimate appellate level at the Court of Appeals, reflects how unsettled the issue  regarding documentary stamp tax on pawn tickets was.  The BIR, by making an assessment, said that pawn tickets are subject to the documentary stamp tax.  At the Court of Tax Appeals, the judges (now called justices under the new law) said, “no.” When the case was elevated to the Court of Appeals, the decision was a “yes”.

Even the Bureau of Internal Revenue in other instances flip-flopped on the issue.  BIR Rulings Nos. 305-87 and 018-88 held that pawn tickets are subject to DST.  But these were revoked later by BIR Ruling No. 325-88. 

Hence, when the case first reached the Supreme Court, the good justices thought it was about time to put the issue at rest once and for all. 

The taxpayer argued, as I glean from the published decision, that, as its name suggests, the documentary stamp tax is a tax on the document.  For a document to be subject to the stamp tax, it has to be among those listed as taxable documents in Title VII of the National Internal Revenue Code of 1997.  Since a pawn ticket is not one of them, then it is not subject to the DST.

         The Supreme Court, however, did not agree that the DST is a tax on the document only.  Instead, in its 03 May 2006 decision, it held, on its reading of Section 173 and 195 and on the authority of a previous decision, Philippine Home Assurance Corporation v. Court of Appeals (361 Phil.368), that “the subject of a DST is not limited to the document embodying the enumerated transactions.  A DST is an excise tax on the exercise of a right or privilege to transfer obligations, rights or properties incident thereto.”

The ability to pledge is among such privileges (specifically mentioned as it is by Section 195) and a pawn ticket, as defined by the Pawnshop Regulation Act (P.D. No. 114, Sec. 3.),  as “the pawnbrokers’ receipt for a pawn.”  Consequently, while it may not be, as Sec. 3 further provides, “an evidence of security or indebtedness, it is nevertheless “proof of an exercise of a taxable privilege of concluding a contract of pledge.”

The taxpayer filed its motion for reconsideration, giving two arguments: first, granting that the DST is on the privilege, still that privilege, in order to be subject, ought to be embodied in and evidenced by a document.”  Since a pawn ticket, as the law defines it is not evidence of indebtedness, it still is not liable for the tax; and second, in any case, the taxpayer acted in good faith and the confusion as to whether it is liable to pay DST is partly attributable to the divergent rulings of the BIR on the matter. 

The Supreme Court did not agree with the first.  In addition to pointing out “that the entries contained in a pawnshop ticket spell out a contract of pledge and that the exercise of the privilege to conclude such a contract is taxable under Section 195 of the NIRC,” it gave several other reasons justifying and amplifying the grounds for its previous ruling.

But the second prayer found some resonance in some previously decided cases and thus merited the agreement of the Court.  Invoking as precedents the cases of Connell Bros. Co. (Phil.) v. Collector of Internal Revenue (119 Phil. 40), Tuason, Jr. v. Lingad, (157 Phil. 159) and Commissioner of Internal Revenue v. Republic Cement Corporation, (124 SCRA 46), the Supreme Court held that “good faith and honest belief that one is not subject to tax on the basis of previous interpretation of government agencies tasked to implement the tax law, are sufficient justification to delete the imposition of surcharges and interest.”

I would get a bit worried by this decision, if I were the President. 

This is not the first time this year that the Supreme Court decided against the BIR because of the latter’s failings.  Actually, the year opened with a humiliating loss for the BIR.  In Azucena T. Reyes cases, namely, Commissioner of Internal Revenue v. Azucena T. Reyes docketed as G.R. No. 15969 and Azucena T. Reyes v. Commissioner of Internal Revenue docketed as G.R. No. 163581, both promulgated, 27 January 2006, the  Supreme Court ruled that the BIR’s assessment for estate taxes against the estate of the late Maria C. Tancinco, amounting to Php 14,912,205.47 was void because the Commissioner did not follow the law.  When he made the assessment, the Commissioner did not give the taxpayer, as required by Section 228 of the National Internal Revenue, the information “in writing of the law and facts on which the assessment is made.” In this Michel J. Lhuillier Pawnshop, the government failed to collect the surcharge and interest because, as pointed out above, the BIR flip-flopped on the issue of the DST on pawn tickets.

The two cases signal, in my view, a wake up call to the tax collection machinery that gone are the days when it could cozily rely on the once impregnable concept, announced long ago in the case of Commissioner of Internal Revenue v. Pineda (21 SCRA 105), that taxes are the lifeblood of government and their prompt collection an imperious need.  The Supreme Court, at least the present Panganiban Court, is more and more projecting itself as guardian of the taxpayer’s basic rights.

           Protection of the taxpayer’s rights, however, could easily transform itself into protection of the citizenry against a capricious government.  Certainly not a welcome development for an administration that appears to be intent on doing whatever it takes to keep itself in power for as long as it can.