A Comprehensive Legal Article

I. Introduction

When a Philippine corporation issues shares of stock for the first time—whether upon incorporation or through subsequent increases in capital—it generally triggers Documentary Stamp Tax (DST) on the original issue of shares.

DST is a form of transaction tax imposed under the National Internal Revenue Code (NIRC), as amended. For shares of stock, the original issuance of equity is one of the classic DST events, separate and distinct from DST on the sale or transfer of already-issued shares.

This article explains, in the Philippine legal context, the rules, scope, computations, timing, exemptions, and common problem areas relating to DST on original share issuance.

II. Legal Basis

DST on original share issuances is governed primarily by the NIRC, as amended by subsequent tax reform laws (e.g., RA 8424 and later amendments such as TRAIN and CREATE).

Key points from the statute and its implementing rules:

DST is imposed on “every original issue” of shares of stock The law imposes a DST on:
- Every original issue of shares of stock by any corporation,
- Whether on organization, reorganization, or for any lawful purpose.
Original issue vs. transfer
- Original issue: shares coming into existence for the first time (subscription or original issuance by the corporation).
- Transfer: sale or assignment of existing shares between persons (separate DST provision).
Nature of DST
- DST is a tax on the transaction/document, not on income or net worth.
- For shares, the “document” may be the share certificate or the corporate records evidencing the original issuance.

III. Taxable Event: What Is an “Original Issue”?

An original issue arises when the corporation creates and issues new shares in favor of a shareholder for consideration (or as a stock dividend). Typical scenarios:

Incorporation or formation
- Issuance of shares to the original subscribers in the Articles of Incorporation.
- DST is due on the original issuance of those subscribed shares (to the extent validly issued and paid in, depending on the rules then applicable).
Increase in authorized capital stock (ACS)
- DST is not triggered merely by increasing authorized capital at the SEC.
- DST arises when the newly authorized shares are actually issued (subscribed and issued to shareholders).
Subsequent original issuances
- New share issuances for cash, property, or services.
- Capital raising by issuing primary shares is subject to DST on the original issue.
Stock dividends
- When retained earnings are capitalized and distributed as stock dividends (issuing additional shares to existing shareholders), DST on original issue generally applies, because new shares come into existence.
Debt-to-equity conversion
- When a corporation issues shares in exchange for cancellation of a debt owed to a creditor, this is an original share issuance subject to DST.
Share-for-share exchange (e.g., merger, reorganization)
- When one corporation issues new shares to acquire shares or assets of another company (e.g., in a merger, quasi-reorganization, or share swap), the issuance is an original issue potentially subject to DST, unless an exemption applies.

IV. Person Liable to Pay DST

As a matter of practice and BIR expectation:

The corporation issuing the shares is the person primarily liable for DST on original share issuance.
The tax is usually treated as a corporate cost of capital raising and is not withheld from the subscriber (though parties can contract among themselves on who shoulders it).

By law, both parties to the taxable transaction may be solidarily liable, but the corporation is typically the one dealing directly with the BIR and reflecting the tax in its books.

V. Tax Base and Rate

Important: Peso amounts and details may be adjusted by later law. Always check the current text of the NIRC and its amendments for the latest rates.

1. Par-value shares

For par-value shares, the NIRC traditionally pegs DST on original issue to the par value (and/or the value represented by the certificate) at a fixed amount per peso bracket (e.g., per ₱200 or fraction thereof).

Conceptually:

Tax base: aggregate par value of shares originally issued (subject to the statutory formula).
Rate: fixed amount per bracket (e.g., “X pesos on each ₱200, or fractional part thereof, of the par value of such shares”).

Illustrative example (structure only):

Corporation issues 10,000 common shares at par value of ₱100 per share.
Total par value = 10,000 × ₱100 = ₱1,000,000.
Taxable base for DST = ₱1,000,000.
If the rate is, say, ₱2 per ₱200 of par value (hypothetical; confirm current law), computation is:
1. ₱1,000,000 ÷ ₱200 = 5,000 units
2. DST = 5,000 × ₱2 = ₱10,000

The actual numerical rate must always be verified in the current NIRC; the structure above is how DST is computed.

2. Shares without par value

For no-par value shares, the law generally provides that the DST on original issue is based on the actual consideration (issue price) for which the shares are issued.

Tax base: the total consideration or value received by the corporation from the subscriber(s) for those no-par shares (including any amount credited to additional paid-in capital).
The same “per ₱X or fractional part thereof” formula applies, but now to the issue price, not to “par value” (since there is none).

Example structure:

Corp issues 1,000 no-par shares at ₱1,000 per share.
Total consideration = 1,000 × ₱1,000 = ₱1,000,000.
Apply the statutory rate to this base.

3. Share premium / additional paid-in capital

Issues arise where par-value shares are issued at a premium (price above par):

Accounting view:
- Par value → Share capital
- Excess over par → Additional Paid-In Capital (APIC) / Share premium
DST view:
- The law text for par-value shares traditionally refers to par value, but BIR rulings have, in certain contexts, given emphasis to the total consideration/value represented, especially in more recent interpretations.

Because of this tension, many practitioners adopt a conservative approach and treat the entire amount actually received (par + premium) as potentially subject to DST, unless there is clear authority limiting the base to par alone. Others compute strictly on par and rely on the literal wording of the law.

In practice, it is prudent to:

Check current BIR regulations and rulings; and
If in doubt, seek formal BIR ruling or competent professional advice for high-value transactions.

4. Stock dividends and capitalization of retained earnings

When a corporation issues shares as stock dividends (capitalizing retained earnings), DST is generally computed on:

The par value or value of the shares issued representing the amount of earnings capitalized, using the same rate and base rules applicable to original issues.

VI. Timing of DST Liability, Filing, and Payment

DST is imposed when the taxable document/transaction comes into existence, which for original share issuance is generally:

The date the original issue is perfected—commonly aligned with:
- Date of issuance of the shares / recording in the stock and transfer book; or
- Date indicated on the corporate resolution or document evidencing the issuance.

Payment deadline

Under the NIRC, DST is generally required to be remitted to the BIR shortly after the close of the month in which the taxable document was made or transaction occurred (specific number of days depends on the latest amendments and regulations).

Key practical points:

Corporations must monitor all share issuances during a month.
Aggregate transactions can be reported and paid via monthly DST returns (BIR form specifically for DST).
For large or complex issuances (e.g., multiple tranches, cross-border deals), parties often prepare the DST computation and returns as part of the closing/implementation package.

Failure to pay on time accrues surcharges, interest, and penalties, discussed below.

VII. Compliance Mechanics: Stamping and eDST

Historically, DST compliance involved physical documentary stamps affixed to share certificates. Over time, the BIR has moved toward electronic Documentary Stamp Tax (eDST) systems.

Key compliance features:

eDST Registration
- Corporations may be required to enroll in the BIR’s eDST system if they regularly enter into taxable transactions.
- eDST allows electronic imprinting or referencing of DST payments, instead of physical stamps.
Returns and Payment
- Use the appropriate DST return form (e.g., BIR Form 2000-series) filed monthly.
- Payment through authorized agent banks, revenue collection officers, or electronic channels, as allowed.
Proof of DST Payment
- Attach BIR-stamped DST returns or eDST reports to:
  - Corporate records (Board resolutions, Subscription Agreements),
  - Share certificates or electronic registry, if any.
- Proof of payment is often needed in:
  - BIR audits;
  - SEC corporate actions (e.g., capital increases);
  - Due diligence / M&A transactions.

VIII. Typical Transactions and DST Treatment

1. Incorporation

Original subscribers agree to subscribe to shares upon filing the Articles.
Once the corporation is formed and share issuances are recorded, DST on the original issue is due based on the value of issued shares.
Often processed around the same time as initial BIR registration.

2. Increase in Authorized Capital Stock (IACS)

Step 1: SEC approval of increase in ACS (no DST yet merely on authorization).
Step 2: Issuance of new shares to subscribers
- DST becomes due when shares are actually issued, not when they merely become authorized.

3. Issuance for Property or Services (Non-cash Subscription)

If shares are issued in exchange for property (e.g., land, equipment, shares of another company) or services:
- The fair value / agreed consideration for the issuance becomes the tax base for DST (especially relevant for no-par shares, and often influential even for par shares with high premium).
- Supporting documents (valuation reports, contracts) may be relevant in case of BIR query.

4. Debt-to-Equity Conversion

When existing debt is converted to equity:
- The issuance of shares in satisfaction of the debt is a taxable original share issuance.
- The amount of debt extinguished (or agreed valuation) is the basis for DST.

5. Stock Dividends

When retained earnings are capitalized and issued as stock dividends:
- New shares are created and issued to existing shareholders.
- DST is computed based on the value of the shares issued as stock dividends.

6. Employee Stock Plans (ESOP/ESPP)

When a corporation issues new primary shares to employees under ESOP/ESPP:
- The issuance is generally subject to DST on original issue (as with any primary issuance), based on the applicable base and rate.
- Secondary sales (existing shares of current shareholders sold to employees) fall under DST on transfer, not original issue.

IX. Exemptions and Preferential Treatment

The NIRC and various special laws grant DST exemptions to specific entities or transactions. Some typical categories:

Certain government entities / GOCCs / special institutions
- Some government institutions may be exempt from all taxes, including DST, under their special charters (unless otherwise withdrawn by later law).
- In those cases, issuance of their shares might be exempt.
Cooperatives
- Registered cooperatives enjoy broad tax exemptions under the Cooperative Code and related laws, subject to conditions.
- If a cooperative’s equity instruments/“shares” fall within those exemptions, DST may be exempted for qualifying transactions.
Incentivized/Registered Enterprises
- PEZA, BOI, or other investment promotion agencies may grant indirect tax incentives.
- However, DST is not always automatically exempt, so explicit coverage in the incentive package or law is crucial.
Reorganizations covered by specific exemption rules
- Certain types of mergers, consolidations, or reorganizations may be granted DST exemption by specific provisions, BIR rulings, or special law, if conditions are strictly complied with.

Because exemptions are strictly construed, the burden is on the taxpayer to prove entitlement, which often means:

Ensuring the exemption is clearly anchored in statute or a BIR ruling; and
Securing and keeping documentary proof (e.g., certificate of tax exemption, IPA registration, BIR ruling).

X. Relationship with Other Taxes

DST on original share issuance interacts with, but is distinct from, other taxes:

Income Tax / Corporate Tax
- Issuance of shares to raise capital is typically a capital transaction, not income, for the issuing corporation.
- Proceeds received by the company in exchange for its own shares are generally not taxable income for income tax purposes.
- DST is a separate transaction tax.
Capital Gains Tax / Stock Transaction Tax
- These apply to sales of shares by shareholders, not to the corporation’s original issue.
- Example:
  - A shareholder sells shares in a private corporation → subject to capital gains tax and DST on transfer (not original issue).
  - A listed share sale through the stock exchange → stock transaction tax, not DST original issue.
Local Taxes
- Some local governments impose local business taxes on certain transactions or gross receipts, but DST itself is a national internal revenue tax.

XI. Penalties for Non-Compliance

Failure to properly pay DST can result in:

Surcharge
- A percentage of the basic tax due (e.g., for late filing or filing with intent to evade).
Interest
- Imposed on unpaid basic tax (and sometimes on surcharge) at the statutory rate per annum, computed from the original due date until full payment.
Compromise penalties
- Administrative penalties the BIR may impose under a compromise schedule for certain violations.
Criminal Liability
- Willful failure to pay or falsification/understatement can lead to criminal charges under the NIRC.
Indirect Consequences
- BIR disallowance or questioning during audit;
- SEC processing delays (e.g., when DST proof is required for capital increases);
- Issues during due diligence in M&A or financing, potentially affecting transaction pricing and warranties.

XII. Practical Compliance Tips

Integrate DST planning into corporate actions
- When planning capital raises, stock dividends, or restructuring, factor DST cost into the transaction model.
Document the valuation and consideration
- Maintain clear records of:
  - Subscription agreements;
  - Board and stockholder approvals;
  - Valuation reports for property-for-shares swaps;
  - Debt instruments for debt-to-equity conversions.
Coordinate with advisors early
- Tax counsel and accountants should review planned issuances to:
  - Confirm whether DST applies;
  - Identify possible exemptions;
  - Ensure correct computation and timing.
Align accounting and tax records
- Ensure that share capital, share premium, and retained earnings entries in the books match the documentary trail used for DST computations.
Keep proof of DST payment easily accessible
- For future audits, SEC filings, or investor due diligence, maintain:
  - Copies of DST returns;
  - BIR payment confirmations;
  - eDST logs or certificates.

XIII. Summary

Documentary Stamp Tax (DST) on original share issuance is a national tax under the NIRC imposed on every original issue of shares of stock, whether upon incorporation or subsequent capital-raising events.
The issuing corporation is typically the one liable and responsible for compliance.
The tax base is generally the par value of par shares (and, in some constructions, possibly the total consideration) and the actual consideration for no-par shares, subject to the bracketed statutory rate.
DST is due shortly after the close of the month when the issuance occurs and must be paid using the appropriate DST return, increasingly via eDST.
Original share issuance DST is distinct from DST on transfers of shares, and from income tax or capital gains tax.
There are targeted exemptions and special regimes, but these must be clearly supported by law, rulings, or incentive registrations.
Proper planning, documentation, and timely payment help avoid penalties, audit issues, and transactional complications.

If you’d like, a follow-on piece can focus on sample computations (with hypothetical numbers) for various scenarios—par vs no-par shares, share premium, stock dividends, and debt-to-equity conversions—purely as worked examples.