Commissioner of Internal Revenue v. Hongkong Shanghai Banking Corporation
REITERATIONFacts
The Antecedents: The Hongkong and Shanghai Banking Corporation Limited – Philippine Branch (HSBC) transferred its Merchant Acquiring Business (MAB) in the Philippines to Global Payments Asia Pacific-Phils., Inc. (GPAP-Phils. Inc.), a newly created subsidiary, in exchange for shares. Subsequently, HSBC assigned its GPAP-Phils. Inc. shares to Global Payment Asia Pacific (Singapore Holdings) Private Limited (GPAP-Singapore) through a Deed of Assignment. Documentary Stamp Tax was paid on the transfer of shares, and Capital Gains Tax (CGT) was paid on the Deed of Assignment, based on the par value of the shares and the consideration for the assignment, respectively. The Bureau of Internal Revenue (BIR) initially issued a certification ruling that the transfer of assets for shares was tax-free under Section 40(C)(2) of the 1997 National Internal Revenue Code (NIRC). Later, the Commissioner of Internal Revenue (CIR) issued a Preliminary Assessment Notice (PAN) and subsequently a Final Assessment Notice (FAN) for deficiency Income Tax, asserting that the transaction, particularly the goodwill of the MAB, was subject to regular corporate income tax under Section 27(A) of the NIRC, not CGT. Procedural History: The respondent HSBC protested the FAN and the subsequent Final Decision on Disputed Assessment (FDDA). Upon denial of its protest, HSBC filed a Petition for Review with the Court of Tax Appeals (CTA) Third Division. The CTA Division granted the Petition, cancelling the FDDA and FAN, ruling that the transaction was a sale of a capital asset subject to CGT, not ordinary income tax. The CIR's motion for reconsideration was denied. The CIR appealed to the CTA En Banc, which affirmed the CTA Division's decision. The CIR then filed a Petition for Review on Certiorari with the Supreme Court. The Petition: The CIR assailed the decision of the CTA En Banc, arguing that it erred in cancelling the deficiency income tax assessment against HSBC on the alleged sale of "Goodwill" of its MAB for taxable year 2008.
Issue(s)
Whether the CTA En Banc erred in cancelling the deficiency income tax assessment against respondent on the alleged sale of "Goodwill" of its MAB for taxable year 2008. Whether the transaction involving the transfer of HSBC's MAB assets in exchange for shares and the subsequent sale of those shares to GPAP-Singapore constitutes a sale of capital asset subject to Capital Gains Tax or a sale of ordinary asset subject to regular corporate income tax.
Ruling
The Petition is denied. The Decision dated May 17, 2016 and Resolution dated September 9, 2016 of the Court of Tax Appeals En Banc in CTA EB Case No. 1257 are affirmed.
Ratio Decidendi
On the issue of whether the CTA En Banc erred in cancelling the deficiency income tax assessment against respondent on the alleged sale of "Goodwill" of its MAB for taxable year 2008: The Court ruled that the CIR erred in assessing deficiency income tax. The transaction involved two parts: first, the transfer of MAB assets in exchange for GPAP-Phils. Inc. shares, which qualified as a tax-free exchange under Section 40(C)(2) of the 1997 NIRC. In this exchange, no gain or loss was recognized. Second, the subsequent sale of these GPAP-Phils. Inc. shares by HSBC to GPAP-Singapore. This second transaction, involving the disposition of shares of stock not traded in the stock exchange, is subject to Capital Gains Tax (CGT) under Section 27(D)(2) of the 1997 NIRC, not regular corporate income tax. The CIR's assessment was based on the premise that the "goodwill" was sold as an ordinary asset, which the Court found to be incorrect. The Court agreed with the CTA that the transaction was a sale of a capital asset, and the payment of CGT was appropriate. On whether the transaction constitutes a sale of capital asset subject to CGT or a sale of ordinary asset subject to regular corporate income tax: The Court affirmed the findings of the CTA that the transaction was a sale of a capital asset. The Share Sale and Purchase Agreement and the Deed of Assignment clearly indicated that the object of the transaction between HSBC and GPAP-Singapore was the "Philippine Subsidiary Shares" (GPAP-Phils. Inc. shares). While the "goodwill" of the MAB was valued in the Share Sale and Purchase Agreement, it was transferred as part of the MAB assets to GPAP-Phils. Inc. in the first transaction. Goodwill is an intangible asset that cannot exist independently or be transferred separately from the business to which it is attached. Therefore, when HSBC sold its shares in GPAP-Phils. Inc., it was selling a capital asset, and the gain derived therefrom is subject to CGT. The CIR's attempt to reclassify the transaction as a sale of "Goodwill" as an ordinary asset to impose regular corporate income tax was without legal and factual basis. The Court reiterated that the gain realized from the sale of shares of stock not listed in the stock exchange is subject to CGT, which is in lieu of the regular corporate income tax. The CIR failed to present clear and convincing proof of fraud to support a claim of tax evasion.
Main Doctrine
The sale of shares of stock of a corporation, even if it includes the valuation of goodwill of a business transferred to the corporation in exchange for shares, is subject to Capital Gains Tax (CGT) and not regular corporate income tax, provided the transaction qualifies as a sale of capital asset and not an ordinary asset. Goodwill, as an intangible asset, cannot be sold or transferred independently of the business to which it is attached.