BIR Ruling [DA-006-05]

January 11, 2005 BIR RULING [DA-006-05] 98; 24 (D) (1); DA-049-2000; 114-99 Equitable PCI Bank P.O. Box 3616 Manila Attention: Atty. Jessie A. Matibag Vice-President Gentlemen : This refers to your letter dated November 24, 2004 requesting for a ruling on whether a third party who acted as surety for the loan of a borrower and subsequently offered to partially pay the loan obligation of the latter through dacion en pago shall be liable for donor's tax. It is represented that Spouses Alejandro Dy Juanco and Marciana Cu ("Surety") acted as surety and executed a Surety Agreement in favor of Equitable PCI Bank to secure the loan obligations of VH Manufacturing and Universal Mill Supply, Inc. ("Borrower"), and that the said Surety Agreement stated that the Surety shall be liable jointly and severally among themselves and with the Borrower in the prompt payment at maturity of any and all notes and credit accommodations of every kind for which the Borrower may now be indebted or may hereafter be indebted to the Bank including all payments, extension of payments, renewals, re-grants, increase, novation of obligations and other obligations of whatever kind and nature, whether such obligations have been contracted before, during or after the execution of the Surety Agreement, provided that the liability of the Surety shall not exceed at any one time the principal sum of P500,000,000.00 plus interest and service/handling charges thereon at such rates as may be fixed by the Bank and/or the Central Bank from time to time, attorney's fees equivalent to twenty percent (20%) of the total indebtedness due which in no case shall be less than P1,000.00 and such costs, expenses as may be incurred by the Bank in the collection of said obligations. In reply, please be informed that by guaranty, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so ( Art. 2047, New Civil Code ). However, when the guarantor binds himself solidarily with the debtor, there is already a suretyship ( Art. 2058, New Civil Code ). In such case, the condition in guaranty that the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor, shall not apply. DACIHc Suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be liable for the debt, default or miscarriage of another, known as the principal. The surety's obligation is not an original and direct one for the performance of his own act, but merely an accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, the liability of the surety to the creditor or promise of the principal is said to be direct, primary and absolute. The surety is directly and equally bound with the principal. The surety therefore becomes liable for the debt or duty of another although he possesses no direct or personal interest over the obligation nor does he receive any benefit therefrom. The obligation of the principal becomes the obligation of the surety. ( Antonio Garcia, Jr. vs. Court of Appeals, Lasal Development Corporation, November 20, 1990 ) It is further stated that a surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. ( Government of the Philippines vs. Tizon, 20 SCRA 1187 ) In applying the foregoing discussions in the instant case, the Spouses Dy Juanco and Marcian Cu, as sureties, are primarily liable as original promissors or debtors and thereby bound immediately to pay the creditor-bank, Equitable PCI Bank, the amount representing the outstanding obligation. A guaranty is generally gratuitous, unless there is a stipulation to the contrary. ( Art. 2048, New Civil Code ) Since, the obligation entered into by the Surety and the Borrower with the creditor-bank is jointly and severally, the security given by the Surety to fulfill the obligation of the Borrower is not gratuitous. The guarantor must be indemnified by the principal debtor in case the former pays for the debt. The indemnity includes the total amount of the debt. ( Art. 2066, New Civil Code ) The foregoing being considered, the imposition of donor's tax in the present case is untenable. The payment by the Surety of the principal obligation through dacion en pago shall not be considered as transfer of property by gift because the Surety has the right to be indemnified by the Borrower. It should be noted however, that the payment of debt or loan obligation through dacion en pago is subject to the capital gains tax presumed to have been realized from the transfer of the property, taking into consideration the outstanding balance of the loan as the selling price before title thereto can be consolidated and issued in the name of Equitable PCI Bank. ( BIR Ruling No. DA-049-2000 dated January 21, 2000 ) Furthermore, the deed of Dacion En Pago is likewise subject to the documentary stamp tax based on the consideration or value received or paid for the property or the selling price, whichever is higher, pursuant to Section 196 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. AaCTID Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group