BIR Ruling [DA-021-05]

January 20, 2005 BIR RULING [DA-021-05] R.A. 9182; R.R. 4-04; DA-545-2004; DA-002-2005 Philippine National Bank 7/f PNB Financial Center, Pres. Diosdado Macapagal Blvd. 1305 Pasay City Attention: Mr. Orlando B. Montecillo Vice President Gentlemen : This refers to your letters dated March 9, October 15 and November 17, 2005 requesting exemption from capital gains tax and documentary stamp tax on the real properties acquired by PNB thru dacion en pago in partial settlement of Shemberg's Non-Performing Loans (NPLs). It is represented that in partial settlement of its NPLs aggregating P212,471,761.59, Shemberg Marketing Corporation (Shemberg) conveyed by way of dacion en pago the following real properties in favor of the Philippine National Bank (PNB) pursuant to Republic Act No. 9182, otherwise known as the "Special Purpose Vehicle Act of 2002" (SPV Law), to wit: Fair TCT Tax Location Class Area ZV/Sq.m. Zonal Market No. Declaration Value (ZV) Value No. (TD) (FMV) per TD 2001-015 26084 023309 Nat'l. Hi-way Ind. 11,224 6,000 67,344.00 5,387,520 25646 02317 -do- Ind. 1,040 6,000 6,240,000 603,200 25647 02306 -do- Ind. 1,861 6,000 11,166,000 1,079,380 25648 02304 -do- Ind. 888 6,000 5,328,000 515,040 Total 90,078,000 7,585,140 that the aforementioned dacioned properties were valued at Thirty Million Pesos (P30,000,000);that PNB is a qualified financial institution and has been issued BSP Certificate of Eligibility (COE) Number BSP040915-00015; and that in support of its representation, PNB has submitted a copy of the Dacion En Pago Agreement dated December 30, 2003 and the aforementioned COE. aIcTCS In reply, please be informed that pursuant to Section 27(D)(5) of the Tax Code of 1997, acquisition of real property treated as capital asset is subject to capital gains tax on the gains presumed to have been realized from said transfer. Consistent with previous BIR rulings, 1 real property treated as capital asset acquired by way of "dation in payment" is deemed subject to capital gains tax or, in case of dation in payment involving ordinary asset, to the creditable withholding tax. However, with the enactment of R.A. No. 9182 (SPV Law), as implemented by Rev. Regs. No. 6-2004, transactions involving transfer of property by way of dacion en pago , as well those transfers qualified under the SPV law 2 have been granted tax exemptions. In fine, Section 7(a)(3) of Rev. Regs. No. 6-2004 specify dation in payment ( dacion en pago ) of a Non-Performing Loan (NPL) by a borrower to a Financial Institution (FI) as among those transactions covered by the SPV law. Thus, subject to certain conditions, the transaction is exempt from the following taxes as provided under Section 7(d) of Rev. Regs. No. 6-2003, 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. Furthermore, 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. Such being the case and considering your representations that the foregoing obligations are NPLs, the dation in payment thereof executed December 30, 2003 in favor of PNB shall be exempt from the above-enumerated internal revenue taxes. This will therefore serve as the authority and guide for Revenue Region No. 13 Cebu City 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 Group Footnotes 1. BIR Ruling Nos. DA-459-88 dated September 19, 1988 and DA-049-00 dated January 21, 2000, both citing BIR Ruling No. 123-86 dated July 23, 1986. 2. Sec. 15 of R.A. No. 9178.