Electronic negotiable instrument: Does it exist?

A number of businesses here and abroad are concluding transactions through electronic means. It has allowed the buying and selling of goods and services from one company to another across borders. In this age, commerce is no longer limited to the physical purchase and payment.  Transactions can now be electronically done.

Recently, the Supreme Court held that instructions by investor-clients from abroad to debit their local or foreign currency accounts with a Philippine bank and to pay the purchase price of their investments in shares of stocks in domestic corporations through SWIFT, “Society for Worldwide Interbank Financial Telecommunications”, are not subject to documentary stamp tax (DST).  In purchasing shares of stock and other investment in securities, the investor-clients would send electronic messages from abroad instructing its Philippine bank to debit their local or foreign currency accounts and to pay the purchase price.

Section 181 of the Tax Code provides that “any bill of exchange or order for the payment of money purporting to be drawn in a foreign country but payable in the Philippines shall be subject to DST at P0.30 on each P200 or a fractional part thereof, of the face value of any such bill of exchange or order”.  On Aug. 23, 1999, the Bureau of Internal Revenue (BIR), through Commissioner Beethoven L. Rualo, issued BIR Ruling No. 132-99 and ruled  that instructions or advises from abroad on the management of funds located in the Philippines which do not involve transfer of funds from abroad are not subject to DST under Section 181 of the Tax Code.   Consequently, the Philippine bank filed an administrative claim for refund and subsequently was brought to the Court of Tax Appeals (CTA). 

The CTA ordered the partial refund or the issue of a tax credit certificate in favor of the Philippine bank saying that the instruction made through an electronic message by a non-resident investor-client, which is to debit his local or foreign currency account in the Philippines and pay a certain named recipient also residing in the Philippines is not the transaction contemplated in Section 181 of the Tax Code.  The CTA further held that the transaction is made in cash and is parallel to an automatic bank transfer of local funds from a savings account to a checking account maintained by a depositor in one bank. Moreover, the instructions are not considered negotiable instruments as they lack the feature of negotiability, which is the ability to be transferred. Besides, these instructions are considered as mere memoranda and entered as such in the books of account of the local bank, and the actual debiting of the payor’s local or foreign currency account in the Philippines is the actual transaction that should be properly entered as such. Upon appeal, the Court of appeals reversed the said CTA decision.

The Supreme Court upheld the decision of the CTA.  In addition, it specifically identified characteristics of a negotiable instrument which is not present in the electronic messages of investor-clients to the Philippine bank.  First, electronic messages are not signed. While electronic signatures may be incorporated in electronic documents/messages to authenticate said documents, the framers of 103 years-old Negotiable Instruments law could not have envisioned this to include electronically indorsed negotiable instruments.

Secondly, they do not contain unconditional order to pay a sum certain in money. Despite the fact that the instructions are actually order to pay a sum certain in money, these are not unconditional. The payment is based on the fact that the investor-clients have local or foreign account with the said Philippine Bank and the funds to be used in paying will come from said funds. Lastly, they are not payable to order or bearer which defeats the very purpose of negotiability, that is, to be able to be passed on from one person to another as a substitute for money. 

It may be further noted that Section 181 specifically pertains to the acceptance of a bill of exchange. Consequently, there could have been no acceptance or payment that will trigger the imposition of the DST. Also, the Supreme Court said that there can be no acceptance as there was no presentment of the bill of exchange. Presentment for acceptance is the production or exhibition of the bill of exchange to the drawee for the purpose of obtaining his acceptance. Thus, the electronic message cannot be considered as “acceptance” as there was no presentment either for acceptance or for payment. Finally, the Supreme Court held that this kind of transaction cannot be equated with drawings from abroad rather similar to an automatic bank transfer.

By subjecting these transactions to DST under Section 181 of the Tax Code, the BIR could have thought of the existence of electronic negotiable instruments, where negotiable instruments are indorsed or transferred electronically. Today, promissory notes and bills of exchange are no longer commonly used in commercial transactions, with the exception of checks. Will this open to a new level of executing and indorsing negotiable instruments?

Jamie Andrea Mae Y. Arlos-Martinez is an Assistant Manager from the Tax Group of R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or RGM&Co. For comments or inquiries, please email [email protected] or [email protected].

For more information on KPMG in the Philippines, you may visit www.kpmg.com.ph.