MANILA, Philippines – The Philippine Court of Tax Appeals (CTA) acquitted Nobel laureate Maria Ressa and Rappler Holdings Corporation, of four counts of tax violations, giving the embattled news organization some breathing space with still three court charges left to face, including a pending closure order.

A unanimous ruling by the 1st Division of the tax court disputed the Duterte government’s charge that Rappler evaded taxes when it raised capital for the company through the often-used financial instrument called Philippine Depositary Receipts or PDRs.

Rappler’s lawyers said it is the first time in at least 20 years that the Bureau of Internal Revenue (BIR) interpreted PDRs as taxable income, and the first time that a media company is being charged of tax evasion over PDRs which other prominent media companies like ABS-CBN and GMA Network also use.

The CTA’s ruling is 81 pages long, penned by Associate Justice Catherine Manahan with concurrences from Associate Justices Jean Marie Bacorro-Villena and Marian Ivy Reyes-Fajardo.

Dealer in securities?

The Duterte-time BIR, and eventually the Department of Justice (DOJ), said that when Rappler issued the PDRs to foreign investors North Base Media and Omidyar Network, the news company:

1. Acted as a dealer in securities
2. Gained taxable income as a result
3. Did not pay the due taxes and VAT

The company being charged is Rappler Holdings Corporation (RHC), the holding company of the subsidiary, Rappler Inc., which is the news organization.

The CTA said that RHC did not act as a dealer in securities because the tax code defines a dealer in securities as one regularly engaged in such activity.

“The evidence on record shows that accused RHC was not habitually or regularly engaged in the purchase and re-sale of securities,” said the CTA.

The CTA added: “The issuance of PDRs by RHC was done pursuant to a legitimate business purpose, i.e., to raise capital for its subsidiary Rappler Inc., which is consistent with one of the purposes of RHC as a holding company.”

Taxable income?

Is the issuance of a PDR taxable event?

The CTA first defined PDRs as an instrument that does not make the holder – in this case the foreign investors – an owner of a share of stock. Instead, the PDR “grants the holder the right to the delivery of sale of the underlying share.”

“They are not statements nor are they certificates of ownership of a corporation,” said the CTA.

In short, a PDR gives the holder the option to buy the underlying share on the condition that it is allowed to. But media companies must be 100% Filipino owned.

Upon examination of the CTA, it found that foreign investors North Base Media (NBM) and Omidyar Network (ON) did not avail of the option to buy underlying shares.

“The process whereby the PDRs were issued to NBM and ON reveals that it did not involve a sale of shares of stock but were investment transactions,” said the CTA.

The PDRs remained an investment tool, and remained an option for the foreign investors to buy underlying shares “once Philippine law allows.”

“This is the rationale of placing the underlying shares with an escrow agent in the meantime, as described in the PDR instrument, because the holders thereof may not exercise the option of owning the shares and just remain as investors,” said the CTA.

The tax court further said that “it is not repugnant to the nature of a holding company to engage in financial activities to raise capital for its subsidiaries.”

Because the tax court found that “there is nothing in the wordings of the PDR instruments and the PDR subscription agreements that would show that the foreign entitties NBM and ON will become owners of the shares of stock of Rappler Inc. upon the issuance of the PDRs,” the justices ruled that there was therefore no sale, and therefore, no taxable income.

The tax court said, “RHC did not earn any trading income from the issuance of PDRs to foreign entities.”

“Having determined the non-taxability of the issuance of PDRs to NBM and ON, the Court concludes that the aforementioned elements of the crime charged under [the tax code] are not present….As discussed, no gain or income was realized by accused in the subject transactions,” said the tax court.

Rappler’s lawyer Francis Lim, former president of the Philippine Stock Exchange, said that the judgment in favor of Rappler benefits all businesses which legally raise capital, and in trickle, the economy.

“We do need investments here in the country to help the country emerge from the pandemic, and a contrary decision that they could have written would have negative implications not only on the freedom of the press but the economy,” said Lim.

Ressa and Rappler still face a closure order by the quasi-judicial agency Securities and Exchange Commission (SEC) which is undergoing new rounds of appeals at the Court of Appeals. Ressa’s cyber libel conviction which has potential prisontime of at least six years is being appealed at the Supreme Court.

– Rappler.com