HSBC v.

CIR
June 4, 2014 | Leonardo-de Castro, J. | Bills of Exchange; DST
Digester: Fausto, Jaime Manuel A.

SUMMARY: HSBC performs custodial services on behalf of its

investor-clients. It received electronic messages from its foreign
clients, with instructions on the management of their local and
foreign accounts with HSBC in the Philippines.
DST is imposed on any bill of exchange or order for payment
purporting to be drawn in a foreign country but payable in the
Philippines.
HSBC paid DST for the electronic messages. Then CIR Rualo
issued a Ruling where he held that the electronic instructions do
not involve the transfer of funds from abroad and are thus not
subject to DST. The electronic messages were only instructions as
there can be no negotiable instrument to be made, signed or
issued in this case. CTA affirmed adding that electronic messages
lack the feature of negotiability, which is the ability to be
transferred. CA reversed ruling that the DST is imposed on the
acceptance or payment of the bill or order and DST should be
imposed because HSBC accepted their clients electronic orders to
pay. The SC reversed the CA ruling and affirmed the BIR Ruling
and CTA, reiterating their arguments in concluding that Sec. 181
of the Tax Code, which imposes the DST, does not contemplate the
electronic messages in this case.
DOCTRINE: Under the Tax Code, DST is imposed on any bill of
exchange or order for payment purporting to be drawn in a foreign
country but payable in the Philippines. Electronic message
instructions cannot be considered negotiable instruments [bills of
exchange] as they lack the feature of negotiability, which, is the
ability to be transferred.
Note: Ponente copy-pasted the BIR, CTA and CA rulings. I included
them all but in a summarized form, as they contain reiterations of
the relevant Nego doctrines.
FACTS:
HSBC performs custodial services on behalf of its investorclients, corporate and individual, resident or nonresident of the
Philippines, with respect to their passive investments in the
Philippines, particularly investments in shares of stocks in
domestic corporations. It serves as the collection agent with

respect to dividends and income from the investors passive

investments.
The investor-clients maintain Philippine peso and/or foreign
currency accounts, which are managed by HSBC through
instructions given through electronic messages known as
SWIFT,1 where they purchase shares of stock and then they
would send electronic messages from abroad instructing HSBC
to debit their accounts and to pay the purchase price upon
receipt of the securities.
Pursuant to the electronic messages of its investor clients,
HSBC purchased and paid Documentary Stamp Tax (DST) for
1997 and 1998.
Then CIR Rualo issued BIR Ruling 132-99, which basically
resolved the issue of WON these electronic instructions are
subject to DST, ruled that instructions from abroad on the
management of funds in the Philippines that do not involve
transfer of funds from abroad are not subject to DST. The
Ruling contained several doctrines (IMPORTANT!):
The electronic messages do not involve the actual
transaction of funds since the funds are already in
Philippine accounts, hence not subject to DST under Sec.
181 of the 1997 Tax Code;2
Note that Sec. 181 provides DST shall be imposed on any
bill of exchange or order for payment purporting to be
drawn in a foreign country but payable in the Philippines.
In HSBCs case, however, the payor abroad only made
instructions in the form of electronic messages regarding is
account in the Philippines. There is no negotiable
instrument to be made, signed or issued by the payee.
The electronic messages cannot be considered transactions
per se as there is no transfer of funds from abroad. The
instructions via the electronic messages could only be
considered as a memorandum, hence NO DST.

1 Society for Worldwide Interbank Financial Telecommunication.

2 SEC. 181. Stamp Tax Upon Acceptance of Bills of Exchange and Others.
Upon any acceptance or payment of any bill of exchange or order for the
payment of money purporting to be drawn in a foreign country but
payable in the Philippines, there shall be collected a documentary stamp
tax of Thirty centavos (P0.30) on each Two hundred pesos (P200), or
fractional part thereof, of the face value of any such bill of exchange, or
order, or Philippine equivalent of such value, if expressed in foreign
currency.

Under the Documentary Stamp Tax Law, the mere

withdrawal of money from a bank deposit, local or
foreign currency account, is not subject to DST, unless
the account so maintained is a current or checking account,
in which case, the issuance of the check or bank drafts is
subject to the documentary stamp tax imposed under
Section 179 of the 1997 Tax Code (NOTE: IF CASH AND
NOT BoE, NO DST!)
I this case, it is physically impossible for the payor to
prepare and sign an instrument to pay an obligation, so the
withdrawal and payment shall be made in cash, hence
no DST.
Based on this Ruling, HSBC filed an administrative claim for
refund representing the erroneously paid DST to the BIR for
1997 and 1998. BIR did not act.
CTA favored HSBC. It ordered CIR to refund or issue a tax
credit certificate in favor of HSBC (ALSO IMPORTANT!):
It ruled that the Sec. 180-181 of the Tax Code do not do not
contemplate electronic message instructions.
Payments and withdrawals in this case are not through
negotiable instruments but through cash, and it is
tantamount to an automatic bank transfer of local funds
from a savings to a checking account in one bank.
These electronic message instructions cannot be
considered negotiable instruments as they lack the
feature of negotiability, which, is the ability to be
transferred (Words and Phrases).
CA - reversed the CTA and ruled that the electronic messages
are subject to DST.
It held that HSBC admitted that the electronic messages
were orders to pay the purchases made by their clientinvestors. Hence, HSBCs acceptance of the electronic
messages required it to pay DST.
CA took the view that Sec. 181 of the Tax Code did not
impose the DST on the bill of exchange or order of
payment, but on the acceptance or payment of the bill
or order.
It based this on the nature of the tax. DST is levied on the
exercise by persons of certain privileges conferred by law
for the creation, revision, or termination of specific legal
relationships through the execution of specific instruments,
independently of the legal status of the transactions giving

rise thereto. It is an excise tax upon the privilege or facility

offered at exchanges for the transaction of a business.
The DST was exacted on HSBCs exercise of its privilege
under its draweedrawer relationship with its clientinvestor
through the execution of a specific instrument which, in the
case at bar, is the acceptance of the order for payment of
money.

RULING: Petition granted (in favor of HSBC). BIR ruling and CTA
affirmed. CA reversed.
Whether the electronic messages are considered bills of
exchange and are therefore subject to DST NO.
The DST under Section 181 of the Tax Code is levied on the
acceptance or payment of a bill of exchange purporting to be
drawn in a foreign country but payable in the Philippines.
A bill of exchange is an unconditional order in writing
addressed by one person to another, signed by the person
giving it, requiring the person to whom it is addressed to pay
on demand or at a fixed or determinable future time a sum
certain in money to order or to bearer.
The electronic messages of HSBCs investorclients containing
instructions to debit their respective local or foreign currency
accounts in the Philippines and pay a certain named recipient
also residing in the Philippines is not the transaction
contemplated under Section 181 of the Tax Code as such
instructions are parallel to an automatic bank transfer of local
funds from a savings to a checking account in the same bank.
Electronic messages are NOT bills of exchange. They mere
memoranda of the transaction and cannot be considered
negotiable instruments as they lack the feature of
negotiability, which is the ability to be transferred.
Electronic messages do not comply with Sec. 1, NIL:
They are not signed by the investor-clients as supposed
drawers of a BoE;
They do not contain an unconditional order to pay a sum
certain I money; and
They are not payable to order or bearer, but to a specifically
designated third party.
On Acceptance:
Sec 181 of the 1997 Tax Code [on the DST] contains the phrase
Upon any acceptance or payment of any bill of exchange or

order for the payment of money purporting to be drawn in a

foreign country but payable in the Philippines xxx, which was
unchanged from the past tax codes. The law imposes DST as
an excice tax on the privilege of either acceptance or
payment of a foreign bill of exchange or order for the
payment of money that was drawn abroad but payable in
the Philippines.
Under Section 173 of the 1997 Tax Code, the persons primarily
liable for the payment of the DST are those (1) making, (2)
signing, (3) issuing, (4) accepting, or (5) transferring the
taxable documents, instruments or papers.
Acceptance only applies to bills of exchange as found in Sec.
132, NIL. What is accepted is a bill of exchange, and the
acceptance of a bill of exchange is both the manifestation of
the drawees consent to the drawers order to pay money and
the expression of the drawees promise to pay.
Acceptance is made upon the presentment of the bill of
exchange, or within 24 hours after such presentment.
Presentment for acceptance is the production or exhibition of
the bill of exchange to the drawee for the purpose of obtaining
his acceptance. Presentment for payment is the presentation of

the instrument to the person primarily liable for the purpose of

demanding and obtaining payment thereof.
Thus, whether it be presentment for acceptance or
presentment for payment, the negotiable instrument has to be
produced and shown to the drawee for acceptance or to the
acceptor for payment.
DST applies only after acceptance or payment done after
presentment for acceptance or presentment for payment,
respectively.
As applied, the electronic messages do not qualify as
presentment of acceptance or payment, thus no DST. This
further bolsters the argument that there was no bill of
exchange in this case.
In conclusion, HSBC could not have been held liable for DST
under Section 230 of the 1977 Tax Code, as amended, and
Section 181 of the 1997 Tax Code as it is not a person making,
signing, issuing, accepting, or, transferring the taxable
instruments under the said provision.