Banco Filipino

March 2, 2007 BIR RULING [DA-129-07] R.A. Nos. 9182 & 9343; R.R. 6-04; DA-021-2005 dtd 1/20/05 Banco Filipino Savings & Mortgage Bank 101 Paseo de Roxas, Makati City Attention: Maxy S. Abad Executive Vice-President Gentlemen : This refers to your letter dated July 5, 2005, seeking the opinion of this Office on whether or not there is a need to present the Certificate Authorizing Registration (CAR) and proof of payment of the Capital Gains Tax/Creditable Withholding Tax (CGT/CWT) and Documentary Stamp Tax (DST) on an "assumed sale" between the third party and the borrower pursuant to Republic Act 9182 (Special Purpose Vehicle Law). It is represented that on January 3, 2005, Manila Bankers Life Insurance Corporation (MBLIC) and Manila Newtown Development Corporation (MNDC) executed a Dacion en Pago Agreement transferring certain properties situated in Benguet by way of dation in payment for the loans of Messrs. Eric Tagle and Alexander Tantoco with Banco Filipino Savings and Mortgage Bank (Banco Filipino for short); that the said Dacion en Pago was granted a Certificate of Eligibility (COE) by the Bangko Sentral ng Pilipinas (BSP 041214-00001) inasmuch as it is covered by Section 7 (a) (4) of Revenue Regulations 6-2004; that the dacion documents and COE were submitted to the Revenue District Office #9, (La Trinidad, Benguet) on February 1, 2005 for the issuance of the Certificate Authorizing Registration (CAR); that the initial finding was that the third party dacion was actually a donation requiring the payment of donor's taxes but inasmuch as the transaction is the first of its kind in Benguet, more time to study was needed; that a copy of BIR Revenue Regulations No. 06-2004 was submitted to the Revenue District Officer (RDO) for his guidance; that the RDO is taking the position that there is an assumed sale from the Third Party to the Borrowers before the dacion en pago to the Financial Institution; that this extreme position has no basis in fact since there is no such transfer from the Third Party to the Borrowers since the transfer was directly from the Third Party to the Financial Institution; that the tax exemption privilege is expressly allowed by RA 9182, its implementing Rules and Regulations to wit: BIR Revenue Regulations (RR) No. 6-2004, as amended; that the only requirement for the said transfer from the Third Party to the Financial Institution is the Certificate of Eligibility (COE) duly issued by the Bangko Sentral ng Pilipinas (BSP) that shall serve as a prima facie proof of an NPL/ROPOA being an NPA within the purview of the Act and its implementing rules and regulations without the need of a prior BIR determination/ruling; that the RDO based its assessment of creditable withholding tax and documentary stamp tax on assumed sale between the Third Party and the Borrower upon the provision of Section 7 (c) (10) of Revenue Regulations 6-2003; that it is your position that the aforesaid provision does not imply that there is an assumed sale between the Third Party and the Borrower and that the purpose of the SPV law is to ease the burden of non-performing loans (NPL) of banks by facilitating the liquidation of NPLs and encouraging the transfer of assets through the grant of tax exemption privileges; that further, you advance the idea that the assumption of sale transaction between the Third Party and the Borrower where there is none, defeats the purpose for which the SPV law was enacted in the first place; that in the same vein, requiring the submission of a CAR for such assumed sale, where there is none, impedes if not defeats the purpose for which the SPV law was passed. 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, 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. ESDcIA However, with the enactment of R.A. No. 9182 (SPV Law), as implemented by Revenue Regulations No. 6-2004, and Rev. Regs. No. 9-2005, and further amended by RA 9343 as circularized by Revenue Memorandum Circular No. 44-2006, transactions involving transfers of property by way of dacion en pago, as well as those transfers qualified under the SPV law have been granted tax exemptions. Section 7 (a) (4) of Rev. Regs. No. 6-2004, as amended by Rev. Regs. No. 9-2005, specifies 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, although subject to certain conditions. Section 2 of RA 9343, amending Sec. 15, RA 9182, and as circularized by RMC No. 44-2006 provides, viz: "SEC. 15. Tax Exemptions and Fee Privileges . Any existing law to the contrary notwithstanding, the transfer of NPAs from the FI to an SPV, and from an SPV to a third party or dation in payment ( dacion en pago ) by the borrower or by a third party in favor of an FI or in favor of an SPV shall be exempt from the following taxes: "(a) Documentary stamp tax on the abovementioned transfer of NPAs and dation in payment ( dacion en pago ) as may be imposed under Title VII of the National Internal Revenue Code of 1997. "(b) Capital gains tax imposed on the transfer of lands and/or other assets treated as capital assets as defined under Section 39(A)(1) of the National Internal Revenue Code of 1997; "(c) Creditable withholding income taxes imposed on the transfer of land and/or buildings treated as ordinary assets pursuant to Revenue Regulation No. 2-98, as amended; "(d) Value-added tax on the transfer of NPAs as may be imposed under Title IV of the National Internal Revenue Code of 1997 or gross receipts tax under Title V of the same Code, whichever is applicable." 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), Rev. Regs. No. 6-2004, as amended by Rev. Regs. No. 9-2005 ]. Sec. 7(C) (2) of the said SPV regulations provides that in order for the dation to be entitled to tax exemption, the transaction must have occurred within the period from April 12, 2003 to April 12, 2005. Such being the case and considering your representations that the foregoing obligations are NPLs, the dation in payment thereof executed on January 3, 2005, in favor of Banco Filipino Savings & Mortgage Bank is exempt from the above-enumerated internal revenue taxes to the extent of the NPL being settled. However, since the FMV of the properties is higher than the NPL, the difference is subject to CGT and DST, pursuant to Section 7 (C) (7) and (10) and Section 7 (e) (Example 5) in relation to Section 13 of Rev. Regs. 6-2004, as amended. Note that in the case at bar there is a difference between the FMV and NPL amounting to P53,922.42, derived by subtracting the NPL balance from the appraised FMV of the property. Likewise, the third party is liable for donor's tax to the extent of the amount of the NPL. This will therefore serve as the authority and guide for Revenue Region No. 9, La Trinidad, Benguet, to issue the corresponding Certificate Authorizing Registration (CAR) and/or Tax Clearance (TCL) on the aforementioned transaction upon compliance with the requirement/payment of all the taxes due, in line with the procedures provided in Section 13 of the said Regulations. The CAR on the dacion en pago transaction is required to be issued in order that the title of the property can be transferred in the name of the new owner pursuant to Section 56 of the Tax Code of 1997. This ruling is 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. Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue