Court of Tax Appeals rules in favour of holding party accused of violating tax law

By Carina C. Laforteza

May 19, 2023

In People of the Philippines v Rappler Holdings Corporation & Maria A Ressa, the Court of Tax Appeals (CTA) acquitted Maria A Ressa, the President of Rappler Holdings Corporation (RHC), and other accused parties on charges of violating tax laws in connection with RHC's purchase of shares of its subsidiary and its sale of Philippine depositary receipts (PDRs) to foreign entities on the basis that the purchase of shares and the sale of the PDRs did not make RHC a dealer in securities and that RHC did not earn any trading income from the issuance of PDRs to foreign entities.

Facts

RHC and its president, Maria A Ressa, were charged with violating tax laws in connection with RHC's purchase of shares of its subsidiary, Rappler Inc (RI), and its sale of PDRs to foreign entities Omidyar Network (ON) and NBM Rappler LP (NBM). (RI is engaged in mass media and must be owned 100% by Filipinos). A PDR is a financial instrument that represents ownership of another company's shares. It allows foreigners to invest in Philippine companies that have foreign ownership restrictions without violating the limitation on foreign ownership. It is a mechanism used by companies to raise funds by issuing receipts to investors that represent their option to acquire the underlying shares. It also gives the PDR holder the right to receive dividends, capital gains and other benefits from the underlying shares, but not the right to vote on the underlying shares.

The charges were made pursuant to sections 254 and 255 of the National Internal Revenue Code (NIRC), as amended, and include:

• failing to provide correct and accurate information in tax returns;
• attempting to evade or defeat tax; and
• failing to supply accurate information in income tax returns.

The Bureau of Internal Revenue (BIR) argued that RHC was a dealer in securities, and, therefore, liable for value added tax (VAT) under section 108(A) of the NIRC. The BIR further alleged that RHC earned trading income from the sale of PDRs and failed to declare the same in its income tax returns. The accused denied the allegations, stating that the issuance of PDRs was within the nature of RHC as a holding company, and the PDR transactions were investment-raising activities for its subsidiary.

Specifically, the accused argued that the subject PDR transactions were investment-raising activities to enable its subsidiary, RI, to expand its operations. It did not earn any trading income from the issuance of the PDRs, as the issuance of the PDRs did not involve the sale of securities. The accused made a distinction between a PDR and the underlying share of RI, which were different securities. It insisted that it did not sell any RI shares to NBM and ON; rather, it issued PDRs, which were receipts evidencing its option to purchase the underlying shares of the operating company, upon the exercise of certain conditions. The accused asserted that it did not earn any trading income from the issuance of PDRs, as they did not involve the sale of securities.

The issue raised before the CTA was whether RHC and Maria A Ressa could be held criminally and civilly liable for violating the NIRC by failing to supply correct and accurate information in its VAT return and income tax return and attempting to evade or defeat tax by deliberately not declaring its alleged trading income in its income tax return.

Decision

The CTA acquitted the accused of all charges and held that the accused were likewise not civilly liable, because RHC was not a dealer in securities, and because RHC did not earn any trading income from its purchase of RI shares sale of PDRs to ON and NBM.

The CTA held that RHC was not a dealer in securities because it was not regularly engaged in the purchase and resale of securities. The issuance of PDRs was done for a legitimate business purpose, which was to raise capital for its subsidiary, RI. As a holding company, RHC's purpose was to own and use real and personal properties of every kind and description, including but not limited to:

• shares of stock;
• bonds;
• debentures;
• promissory notes; or
• other securities or obligations.

The Philippine Securities and Exchange Commission defines a holding company as a corporation organised to hold stock for another, and one of the four uses of holding companies is to raise large capital for subsidiaries that have limited access to financing.

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Originally published by the International Law Office on Lexology.