BIR Ruling [DA-002-05]

January 6, 2005 BIR RULING [DA-002-05] R.A. 9182; RR 4-04 Filipinas Daewoo Industries Corporation Governor's Drive, Paliparan Dasmarias, Cavite, Philippines Attention: Mr. Ronaldo G. David Treasurer Gentlemen : This refers to your letter dated October 20, 2004 requesting for confirmation of your opinion that the dacion en pago to be made by your firm of its properties in favor of its creditor banks and financial institutions is exempt from internal revenue taxes such as the creditable withholding tax, capital gains tax, documentary stamp tax, value added tax, as well as from the donor's' tax pursuant to the pertinent provisions of Revenue Regulations (Rev. Regs.) No. 6-2004, implementing Republic Act No. 9182, otherwise known as the Special Purpose Vehicle Act of 2002. It is represented that your firm, a domestic corporation engaged in the manufacture of passenger buses, is at present indebted to a number of creditors in the aggregate amount of P703,606,189.12, interest and other charges included; that the principal of these loans have been past due as of June 30, 2002; that in order to avoid the accumulation of interest and other penalties incident to default in the payment of past due obligations, your firm has proposed, which your creditors accepted, to tender certain properties by way of dacion en pago collectively in favor of the creditors in partial settlement of the obligations, as follows: Obligation Outstanding To be Settled Bank of Commerce P96,010,050.89 P56,192,350.35 ICC Leasing and Finance Corporation 6,305,138.74 3,676,113.57 Land Bank of the Philippines 57,811,325.00 34,267,750.53 LBP Leasing Corporation 12,962,248.25 9,026,626.14 PCCI Finance Corporation 15,149,676.17 11,754,677.32 PCCI Capital Corporation 126,427,475.00 74,409,085.84 PCCI Leasing and Finance, Inc. 248,592,805.59 123,526,660.42 First e-Bank 50,329,207.00 29,425,865.97 Metropolitan Bank and Trust Company 18,172,581.69 10,598,916.07 United Coconut Planters Bank 66,138,889.00 38,795,143.82 UCPB Leasing and Finance Corporation 5,706,791.79 2,959,609.98 Totals P703,606,189.12 P394,632,800.00; that the properties subject of the dacion en pago consist of land and improvements, with the following information, thus TCT No. Location Area (sq. m.) 950111 Dasmarias, Cavite 62,541.00 950112 416.00 950113 730.00 950114 15,168.00 237404 Dimasalang, Manila 381.70 237405 150.00 237406 307.90 that the dation value was, arrived at eighty percent (80%) of the banks' appraisal of the properties. In support of your claim, you submitted a copy of the Deed of Dacion dated December 20, 2004 and other relevant documents. In reply, please be informed that under Section 7 (a)(3) of Rev. Regs. No. 6-2004, implementing Section 15 of Republic Act No. 9178, otherwise known as the Special Purpose Vehicle Act of 2002, the dation in payment ( dacion en pago ) of a Non-Performing Loan (NPL) by a borrower to a Financial Institution (FI), subject to certain conditions, shall be covered by the tax exemptions provided in Section 7(d) of said regulations, to wit 1. Documentary stamp tax (DST) on any document evidencing the transfer or dation in payment as may be imposed under Title VII of the NIRC of 1997, the last phrase of Section 173 of the same Code notwithstanding; 2. Capital gains tax (CGT) imposed on the transfer of land and/or building treated as capital asset in the hands of the transferor, as defined under Section 39(A)(1) of the NIRC of 1997; 3. Creditable withholding taxes imposed on the transfer of land and/or building treated as ordinary assets in the hands of the transferor pursuant to Revenue Regulations No. 2-98, as amended, and 4. Value-added tax as may be imposed under Title IV of the NIRC of 1997: Provided , that in case of VAT-exemption and if the property being transferred is a capital good used in the trade or business of a VAT-registered person, the input tax on the said property shall be allocated as follows: the depreciated book value of the property over its acquisition cost, multiplied by the input tax directly attributed to the said property shall not be allowed as input tax to the transferor's other VAT-taxable activities. An NPL refers to loans or receivables, such as mortgage loans, unsecured loans, consumption loans, trade receivables, lease receivables, credit card receivables and all registered and unregistered security and collateral instruments, including but not limited to, real estate mortgages, chattel mortgages, pledges and antichresis whose principal and/or interest has remained unpaid for at least one hundred eighty (180) days after they have become past due or any of the events of default under the loan agreement has occurred, as of June 30, 2002, as certified by the Appropriate Regulatory Authority [Sec. 3(g), RR 6-2004]. Sec. 7 (C)(2) of the said SPV regulations provide that in order for the dation to be entitled to tax exemption, the transaction must have occurred within the period from March 19, 2003 to March 19, 2005. cDTIAC Such being the case and considering your representations that the foregoing obligations are NPLs, the dation in payment thereof executed December 20, 2004 in favor of the abovementioned creditors shall be exempt from the above-enumerated internal revenue taxes. This will therefore serve as the authority and guide for Revenue District Offices No. 32 (Sampaloc, Manila) and 54 (Trece Martirez City, Cavite) to issue the corresponding Certificate Authorizing Registration (CAR) and/or Tax Clearance Certificate (TCL) on the aforementioned transaction. This ruling is being issued based on the foregoing representations. If it will be discovered after an investigation that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection