BIR Ruling [DA-242-05]

June 3, 2005 BIR RULING [DA-242-05] R.A. 9182; Rev. Regs. 6-2004; DA-021-2005 Bank of the Philippine Islands BPI Bldg., Ayala Ave. cor. Paseo de Roxas Makati City Attention: Miguel L. Sibang Senior Manager Property Management & Sales Gentlemen : This refers to your letter dated April 27, 2005 requesting for tax exemption pursuant to Rule 15 of Republic Act No. 9182, otherwise known as the "Special Purpose Vehicle (SPV) Act of 2002". It is represented that BPI Unibank sold one of its real properties (ROPOA) located at #65 Manhattan St.,Provident Village, Marikina City covered by TCT No. 408883 of the Register of Deeds of Marikina City to Sps. Jose R. Chanyungco and Conchita T. Chanyungco; that as evidenced by a Deed of Absolute Sale dated March 9, 2005, the Spouses paid the sum of Three Million Three Hundred Thousand Pesos (P3,300,000.00) to BPI Unibank; that the corresponding Certificate of Eligibility (COE) No. BSP050404-00001 was issued by the Bangko Sentral ng Pilipinas on April 4, 2005; that the transfer/sale appears to be in the nature of a "true sale" in accordance with R.A. 9182 and its implementing Rules and Regulations; and that in support of its request, necessary documents were filed/submitted to the Law Division, this Bureau. In reply, please be informed that pursuant to Section 27(A) in relation to Section 39, both of the Tax Code of 1997, an income tax of thirty two percent (32%) is imposed upon the taxable income derived during the taxable year from all sources within and without the Philippines by every corporation, as defined in Section 22(B) of the same Code, and taxable as such. The negative definition of the term "capital asset" under Section 39 of the Tax Code effectively pertains to "ordinary asset." On the basis thereof, this Office has consistently ruled that real properties consisting of lands and/or buildings, other than those used for banking purposes or held in the investment portfolio, acquired through foreclosure of collaterals of client-borrowers who were unable to pay their loans (generally called "ROPOA"), are treated as ordinary assets and therefore, the gain derived by the bank in the event of sale, exchange or disposition of such properties will be included in the bank's net taxable income during the year, pursuant to the aforesaid Sec. 27(A) and consequently to creditable withholding tax (CWT) prescribed under Sec. 52 of the Tax Code. However, with the enactment of R.A. 9182 (SPV Law), as implemented by Revenue Regulations (Rev. Regs.) No. 6-2004, transactions involving transfer of a ROPOA by a Financial Institution (FI), to an individual, as well as those transfers qualified under SPV Law have been granted tax exemptions. In fine, Sec. 7(a)(6) of Rev. Regs. No. 6-2004 specifies the transfer of a ROPOA by an individual 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. 6-2004, to wit: 1. Documentary stamp tax (DST) on any documents 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 ordinary 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 the 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. For purposes of SPV Law, ROPOA shall refer to real and other properties owned or acquired by an FI in settlement of its loans and receivables, including, but not limited to real properties, shares of stock, and chattel formerly constituting collateral for secured loans, by way of dation in payment ( dacion en pago ), judicial or extra-judicial foreclosure, or execution of judgment, as of June 30, 2002; and to such real and other properties acquired by an FI after June 30, 2002, through the same modes in settlement of a loan or receivable classified as NPL as of June 30, 2002; in either case as certified by the Appropriate Regulatory Authority. Further, Section 7(C)(1) of Rev. Regs. No. 6-2004 provides that the transfer must be in the nature of, and approved by the Appropriate Regulatory Authority, as a "true sale" pursuant to the Act and its implementing rules and regulations provided that, if the ROPOA is transferred to an individual for less than an adequate and full consideration in money's worth the amount by which the fair market value of the ROPOA exceeded the value of the consideration shall not be considered as gift under Title III, Chapter 2 of the NIRC of 1997. Furthermore, subparagraph (2) of said Sec. 7(C) requires that the transaction must have occurred within the period from March 19, 2003 to March 19, 2005. Thereafter, the tax exemptions abovementioned shall no longer apply. Further still, the foregoing exemption shall apply if the following conditions are met, if applicable, to wit: 1. All applicable taxes on the previous transfer of the ROPOA to the FI have been duly paid when taxes became due or are paid thereafter but subject to appropriate increments and penalties. (Sec. 7(C)(5), Rev. Regs. No. 6-2004) 2. The transaction shall be limited to a single family residential unit ROPOA. Provided, however, that the tax exemptions shall apply only to the acquisition of Non-Performing Asset (NPA), (in this case, the single family residential unit ROPOA) by an individual and to the subsequent transfer of the same NPA. (Sec. 7(C)(8), Rev. Regs. 6-2004) 3. The above exemption shall not apply to the transfer of any property in exchange for such ROPOA, unless the same is exempted under a pertinent provision of an existing law. cAHIST Since the property sold was part of BPI's ROPOA and qualified to avail of the incentives provided under SPV Law, the transfer thereof to Spouses Jose R. Chanyungco and Conchita T. Chanyungco, as evidenced by a Deed of Absolute Sale on March 9, 2005, shall be exempt from internal revenue taxes enumerated in Section 7(a)(6) of Rev. Regs. No. 6-2004. This will therefore serve as the authority and guide for Revenue District Office No. 45 to issue the corresponding Certificate Authorizing Registration (CAR) and/or Tax Clearance Certificate (TCL) on the aforementioned transaction. 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.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group