Bahay Financial Services, Inc.

March 19, 2008 BIR RULING [DA-174-08] Rev. Regs. 4-99; BIR Ruling 75-96 dtd 7/11/96 Bahay Financial Services, Inc. 24th Floor, BPI Buendia Center, Sen. Gil Puyat Ave., Makati City Attention: Mr. Federico Y. Cadiz President Gentlemen : This refers to your letter dated March 6, 2008 requesting on behalf of your client, Balikatan Property Holdings, Inc. (BPHI), confirmation of your opinion that upon expiration of the redemption period without redemption having occurred, the highest bidder at the foreclosure sale will be required to pay only the capital gains tax and documentary stamp tax provided under Revenue Regulations No. 4-99 and will not be held liable for any capital gains tax and/or documentary stamp tax arising from any sale of the mortgaged property (from Original Borrower to a third party) prior to the foreclosure. It is represented that Balikatan Housing Finance, Inc. (BHFI) is a financing company organized and existing under the laws of the Republic of the Philippines with principal offices located at the 24th Floor, BPI Buendia Centre, Sen. Gil J. Puyat Avenue, Makati City. BPHI, on the other hand, is a corporation duly organized under Philippine laws, with principal offices located at the 24th Floor, BPI Buendia Centre, Sen. Gil J. Puyat Avenue, Makati City. In 2004, the National Home Mortgage and Finance Corporation (NHMFC) assigned a portfolio of mortgage loan receivables in favor of BHFI and, in the ordinary course of its business, BHFI regularly initiates extra-judicial foreclosure proceedings against borrowers who default on their loan obligations. BPHI regularly participates in the public auction of properties foreclosed by BHFI. The mortgage loan receivables are embodied in Loan and Mortgages Agreements ("LMA") executed by the borrower (the "Original Borrower") with the Originating Institution, which is the property developer or a financing institution that originally provided funding for the Original Borrower's purchase of the property. Under the Unified Home Lending Program of the government, NHMFC took out the loans from the Originating Institutions to enable the latter to generate or fund more socialized housing projects. Hence, the LMAs were assigned by the Originating Institutions to NHMFC and the latter acquired the mortgage loan receivables which, as mentioned above, it subsequently assigned to BHFI. aDTSHc The LMAs uniformly contain the following provision: "The BORROWER hereby secures the loan and other obligations stipulated herein, by first mortgage on real property (ies) . . . in favor of the ORIGINATING INSTITUTION or its assignee/transferee xxx xxx xxx In the event the mortgaged property is sold, disposed of or otherwise transferred in whole or in part by the BORROWER, the BORROWER shall cause the transferee to assume this mortgage and the obligations secured thereby of the BORROWER and furthermore the BORROWER shall not be released from its liability but shall be liable jointly and severally with the transferee unless expressly released there from in writing . . ." The LMA is duly annotated on the title to the mortgaged property. In some of the cases, the Original Borrower is unable to meet its obligations under the LMA and identifies a third party who is willing to assume the mortgage loan (the "Assumer"). The Original Borrower executes a Deed of Sale with Assumption of Mortgage or like instrument in favor of the Assumer for the purpose of allowing the Assumer to take title to the mortgaged property in case he is able to fully pay the mortgage loan to the creditor. Pursuant to the above-quoted provision of the LMA, the Original Borrower and the Assumer become co-debtors or solidary debtors with respect to the mortgage loan obligation. The Assumer does not have the Deed of Sale with Assumption of Mortgage annotated on the title to the mortgaged property nor does said Assumer cause the transfer of title to the mortgaged property, which remains in the name of the Original Borrower. Upon default of the co-debtors ( i.e. the Original Borrower and Assumer) on the mortgage loan obligation, the creditor-mortgagee exercises its right to extra-judicially foreclose upon the mortgaged property. The purchaser or highest bidder at the foreclosure sale (the "Highest Bidder") could be BPHI or a third party bidder. The redemption period expires without the foreclosed property having been redeemed. The Highest Bidder then secures a Certificate Authorizing Registration (CAR) to enable it to cause transfer of title from the Original Borrower to said highest bidder. SDTIaE Based on the foregoing, it is your opinion that BPHI, as highest bidder in a foreclosure sale, shall be liable only for capital gains tax and documentary stamp tax provided under Revenue Regulations No. 4-99 and will not be held liable for any capital gains tax and/or documentary stamp tax arising from any sale of the mortgaged property (from Original Borrower to the Assumer) prior to the foreclosure, to effect the consolidation of title over the foreclosed properties. In reply, please be informed that the execution of the Deed of Sale with Assumption of Mortgage by the Original Borrower in favor of the Assumer did not result in the transfer of the title over the mortgaged property in favor of Assumer since the property remained registered in the name of the Original Borrower. The Assumer is not deemed by the creditor-mortgagee as the new owner of the mortgaged property but as a co-debtor of the Original Borrower, solidarily liable with the latter for payment of the mortgage loan obligation. Notwithstanding the execution of the Deed of Sale with Assumption of Mortgage, the mortgage continues to attach upon the property. 1 As the mortgage credit is a real right which follows the property, the creditor may demand from any possessor the payment of the credit secured by said property. 2 A recorded real estate mortgage is a right in rem, a lien on the property whoever its owner may be. Because the personality of the owner is immaterial; the mortgage subsists notwithstanding changes of ownership; the last transferee is just as much of a debtor as the first one; and this, independent of whether the transferee knows or not the person of the mortgagee. So it is, that a mortgage lien is inseparable from the property mortgaged. All subsequent purchasers thereof must respect the mortgage, whether the transfer to them be with or without the consent of the mortgagee. 3 Upon foreclosure, the highest bidder at the foreclosure sale acquires the property from the Original Borrower by virtue of the extrajudicial foreclosure of the subsisting mortgage and not by a transfer of property rights from the Assumer. There would, thus, be no basis for the highest bidder, BPHI in this case, to be held liable for any transaction taxes that may have been due from the Original Borrower and/or Assumer with respect to the sale of the property. In extra-judicial foreclosure sales under Act No. 3135 as amended by Act No. 4118, the creditor-financial institution (bank, finance and insurance companies) is the statutory seller representing the owner-mortgagor of the real property. It becomes liable for the payment of the capital gains tax due on such foreclosure sale based on the bid price in the auction sale. (BIR Ruling No. 75-96 dated July 11, 1996) IcCEDA Pursuant to Revenue Regulations No. 4-99, the purchaser at the foreclosure sale will only be liable for capital gains tax and documentary stamp tax based on the bid price of the foreclosed properties which shall be payable within 30 days from the expiration of the one-year redemption period. Sections 3 and 4 of Rev. Reg. 4-99 state: "Section 3. Capital Gains Tax. (1) . . . (2) In case of non-redemption, the capital gains tax on the foreclosure sale imposed under Secs. 24 (D) (1) and 27 (D) (5) of the Tax Code of 1997 shall become due based on the bid price of the highest bidder but only upon the expiration of the one-year period of redemption provided for under Sec. 6 of Act No. 3 13 5, as amended by Act No. 4 11 8, and shall be paid within thirty (30) days from the expiration of the said one-year redemption period. Section 4. Documentary Stamp Tax. (1) . . . (2) In case of non-redemption, the corresponding documentary stamp tax shall be levied, collected and paid by the person making, signing, issuing, accepting or transferring the real property wherever the documents is made, signed, issued, accepted or transferred where the property is situated in the Philippines; . . ." In view of the foregoing, this Office hereby confirms your opinion that BPHI, as highest bidder in a foreclosure sale, cannot be held liable for other taxes that may be due from the Original Borrower on transactions entered into with third parties prior to the foreclosure sale and which are not registered on the title to the mortgaged property, but shall be liable only for capital gains taxes and documentary stamp taxes due on the sale of the foreclosed property based on its bid price and upon expiration of the one-year redemption period. 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. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Bonnevie vs. Court of Appeals, 125 SCRA 122. CASTDI 2. ART. 2129. The creditor may claim from third person in possession of the mortgaged property, the payment of the part of the credit secured by the property which said third person possesses, in the terms and with the formalities which the law established (New Civil Code). 3. Paredes vs. CA, G.R. No. 147074, July 15, 2005 citing PNB vs. Mallorca, 21 SCRA 694. SITCEA