CIR v. Hong Kong Shanghai Banking Corporation Limited
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Rizchelle Sampang-ManaogCIR v. Hong Kong Shanghai Banking Corporation Limited
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Rizchelle Sampang-ManaogCIR
v. Hong Kong Shanghai Banking Corporation Limited – Philippine Branch, G.R. No. 227121, December 9, 2020, Caguioa, J.:
Topic: Sale, Exchange, Disposition of Assets
Doctrine: Section 27(A) of the NIRC of 1997, as amended, provides that except as otherwise provided in this Code, an income tax shall
be imposed on the taxable income derived by domestic corporations. Relevantly, paragraph (D)(2) thereof states that a final tax at the
rates of 5% or 10% shall be imposed on the net capital gains realized during the taxable year from the sale, exchange or other
disposition of shares of stock in a domestic corporation not traded in the stock exchange. Revenue Regulation 6-2008, which
implements the aforesaid provision, echoes Section 27(D) (2) and provides for rules on the determination of gain or loss for the
purpose of the imposition of CGT.
Facts: The Hongkong and Shanghai Banking Corporation Limited – Philippine Branch, is a duly licensed branch of The Hongkong and
Shanghai Banking Corporation Limited (HSBC). HSBC created Global Payments Asia Pacific-Phils., Inc. (GPAP Phils.) to transfer its
Merchant Acquiring Business (MAB) to the same. GPAP Phils. issued shares of stock in exchange for the fair market value of the POS
terminals, Merchant Agreements, and transfer of the MAB. HSBC then assigned its shares in GPAP Phils. to GPAP Singapore in a deed
of assignment.
HSBC secured a ruling on the tax-free exchange. It paid capital gains tax in the amount of Php89,929,292.10 in relation to the deed of
assignment. However, CIR issued assessment for deficiency income tax and claimed that the deed of assignment did not pertain to the
sale of shares but to a sale or transfer of business or “goodwill” which is subject to ordinary income tax and not capital gains tax.
Issue: Whether or not HSBC is liable for ordinary income tax or capital gains tax.
Ruling: HSBC is liable for capital gains tax and not ordinary income tax.
It is beyond dispute that the first transaction qualifies as a tax-free exchange under Section 40, paragraphs (C) (2) and (6)(c) of the
1997 NIRC, as amended. Pursuant to this provision, no gain or loss shall be recognized both to the transferor and transferee corporation
on the transfer or exchange of property provided the following requirements are present: (1) the transferee is a corporation; (2) the
transferee exchanges its shares of stock for property lies of the transferor; (3) the transfer is made by a person, acting alone or together
with others, not exceeding four persons; and, (4) as a result of the exchange the transferor, alone or together with others, not exceeding
four, gains control of the transferee. All the foregoing requirements are present in this case.
It should be emphasized, however, that when the property or shares of stock acquired through a tax-free exchange is subsequently
sold, the said subsequent sale shall now be subject to income tax. This is because, in a tax free exchange, the recognition of gain or loss
arising from the exchange is merely deferred. Thus, the second transaction, wherein HSBC subsequently assigned its GPAP Phils. Inc.
shares to GPAP Singapore, is now subject to capital gains tax, to which respondent paid the total amount of P89,929,292.10.
The CIR, however, insists the second transaction involves an alleged sale of the "goodwill" of the MAB, which makes HSBC liable for
deficiency income taxes. This is error. The Court agrees with the findings of the CTA that the assessment has no legal and factual bases
because the subject transaction is covered by capital gains tax and not regular corporate income tax.
Section 27(A) of the NIRC of 1997, as amended, provides that except as otherwise provided in this Code, an income tax shall
be imposed on the taxable income derived by domestic corporations. Relevantly, paragraph (D)(2) thereof states that a final
tax at the rates of 5% or 10% shall be imposed on the net capital gains realized during the taxable year from the sale, exchange
or other disposition of shares of stock in a domestic corporation not traded in the stock exchange. Revenue Regulation 6-
2008, which implements the aforesaid provision, echoes Section 27(D) (2) and provides for rules on the determination of
gain or loss for the purpose of the imposition of CGT.
Notably, in several rulings issued by the Bureau of Internal Revenue, it was recognized that the gain realized from the sale of shares
acquired through a tax-free exchange transaction is subject to CGT. Therefore, the subsequent disposition of HSBC's GPAP-Phils. Inc.
shares in favor of GPAP-Singapore is subject to CGT and not to regular corporate income tax under Section 27(A), upon which the CIR's
assessment is based.
In this case, when HSBC transferred the assets of its MAB in the Philippines to GPAP-Phils. Inc. in exchange for shares, pursuant to the
tax-free exchange provision under Section 40(C)(2) of the 1997 NIRC, as amended, and subsequently sold such shares to GPAP-
Singapore and paid the corresponding CGT in accordance with Section 27(D)(2) of the same Code, it simply availed of tax saving devices
within the means sanctioned by law. Further, this methodology was adopted by HSBC not merely to reduce taxes but also for a
legitimate business purpose – i.e. the restructuring of the MAB to achieve more efficiency and economies of scale. Consequently, what
was employed to minimize taxes was a tax avoidance scheme.
Petition is denied.
