SGV & Co.

April 20, 2007 BIR RULING [DA-245-07] 005-07 SGV & Co. 6760 Ayala Avenue Makati City Attention: Romulo S. Danao, Jr. Partner, Tax Services Gentlemen : This refers to your letter dated February 27, 2007 stating that your client, CAMERON GRANVILLE ASSET MANAGEMENT (SPV-AMC) INC. (CGAM 1), is a domestic corporation organized as a special purpose vehicle under Republic Act (R.A.) No. 9182, otherwise known as the Special Purpose Vehicle (SPV) Act, the primary purpose of which is to invest in or acquire non-performing assets (NPAs); that it is wholly owned by HVB Asia Limited (HVB Asia), a foreign corporation duly organized under Singaporean Laws; that CGAM 1, in turn, wholly owns Cameron Granville Asset 2 Management Inc. (CGAM 2) and Cameron Granville Asset 3 Management Inc. (CGAM 3), which are both domestic corporations, the primary purposes of which are also to acquire NPAs; that unlike CGAM 1, however, CGAM 2 and CGAM 3 are not organized as special purpose vehicles (SPVs) under the SPV Act; that since CGAM 1 is one hundred percent (100%) owned by a foreign corporation, the Philippine Constitution restricts it from acquiring lands in the Philippines since it is not considered a Philippine national; that consequently, CGAM 2 and CGAM 3, which are in turn 100% owned by CGAM 1, are not qualified to own private lands since they are likewise not considered as Philippine nationals under the Foreign Investment Act of 1991 (R.A. No. 7042, as amended by RA 8179); that their acquisition from financial institutions are limited to NPAs with no land component such as non-performing loans (NPLs); that CGAM 1 and LNC (SPV-AMC) Corp. (LNC 1), another domestic corporation whose voting shares are 60% owned by a domestic corporation and 40% owned by CGAM 1, then formed LCN2, which qualifies as a Philippine national under the FIA, and hence, able to acquire and own land; that LNC 2 was organized as an SPV to acquire NPAs of financial institutions which now include real and other properties owned or acquired (ROPOA) by a financial institution in settlement of loans and receivables, formerly constituting collaterals for secured loans which have been acquired by way of dation in payment, judicial or extrajudicial foreclosure, or execution of judgment; that CGAM 1 and LNC 1 own 40% and 60% of the voting shares of LNC 2, respectively; that in addition to LNC 2, CGAM 1 and LNC 1 formed another corporation, LNC 3, with the same 40%-60% ratio of ownership; and that the primary purpose of LNC 3 is also to acquire NPAs but, unlike LNC 2, it is not organized as an SPV. In connection therewith you now request confirmation of your opinion that CGAM 1 and its subsidiaries, CGAM 2, CGAM 3, LNC 2 and LNC 3 which are all engaged in the business of investing in or acquiring non-performing assets from financial institutions, are non-bank financial intermediaries not performing quasi-banking functions, and are therefore subject to the Gross Receipts Tax (GRT) on their transactions under Section 122 of the Tax Code of 1997, as amended by R.A. No. 9238. STaIHc In reply thereto, please be informed that Section 122 of the Tax Code of 1997, as amended by R.A. No. 9238, provides that "Sec. 122. Tax on Other Non-Bank Financial Intermediaries . There shall be collected a tax of five percent (5%) on the gross receipts derived by other non-bank financial intermediaries doing business in the Philippines, from interest, commissions, discounts and all other items treated as gross income under this Code: Provided, That interest, commissions and discounts from lending activities, as well as income from financial leasing, shall be taxed on the basis of remaining maturities of the instruments from which such receipts are derived, in accordance with the following schedule: Maturity period is five (5) years or less 5% Maturity period is more than five (5) years 1% Provided, however, That in case the maturity period is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction and the correct rate shall be applied accordingly. Provided, finally, That the generally accepted accounting principles as may be prescribed by the Securities and Exchange Commission for other non-bank financial intermediaries shall likewise be the basis for the calculation of gross receipts. Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar financing activities." From the above-cited provision, it is clear that GRT can be imposed on persons, whether natural or juridical, as long as it is performing financing activities similar to a non-bank financial intermediary. The term " Non-bank Financial Intermediaries " refers to persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them or otherwise coursed through them, either for their own account or for the account of others. This includes all entities regularly engaged in the lending of funds or purchasing of receivables or other obligations with funds obtained from the public through the issuance, endorsement or acceptance of debt instruments of any kind for their own account, or through the issuance of certificates of assignment or similar instruments with recourse, trust certificates, or of repurchase agreements, whether any of these means of obtaining funds from the public is done on a regular basis or only occasionally. (Sec. 2.3, Revenue Regulations No. 9-2004) Embraced in the definition of the term "non-bank financial intermediaries" are financing companies which refer to corporations except banks, investments houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivables, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable properties. (Sec. 2.7, Revenue Regulations No. 9-2004 citing R.A. No. 5980, as amended by R.A. No. 8556) As to what is an NBFI, the Manual of Regulations for Non-Bank Financial Institutions, provides that an NBFI includes, among others, a person or entity performing any of the following functions on a regular and recurring basis: a) Receive funds from one (1) group of persons, irrespective of number, through traditional deposits, or issuance of debt or equity securities; and make available/lend these funds to another person or entity, and in the process acquire debt or equity securities; b) Use principally the funds received for acquiring various types of debt or equity securities; c) Borrow against, or lend on, or buy or sell debt or equity securities; d) Hold assets consisting principally of debt or equity securities such as promissory notes, bills of exchange, mortgages, stocks, bonds and commercial papers; e) Realize regular income in the nature of, but need not be limited to, interest, discounts, capital gains, underwriting fees, guarantees, fees, commissions and service fees, principally from transactions in debt or equity securities or by being an intermediary between suppliers and users of funds. Under the same Manual of Regulations, quasi-banking functions consist of the following: a. Borrowing funds for the borrower's own account; b. Twenty (20) or more lenders at any one time; c. Methods of borrowing: issuance, endorsement, or acceptance of debt instruments of any kinds, other than deposit, such as: 1. acceptances; 2. promissory notes; 3. participations; 4. certificates of assignment or similar instruments with recourse; 5. trust certificates; 6. repurchase agreements; and 7. such other instruments as the Monetary Board may determine; d. Purpose: 1. relending; or 2. purchasing receivables or other obligations. Furthermore, the following shall not consist quasi banking: a. Borrowing by commercial, industrial and other non-financial companies, through the means listed in Section 4101Q for the limited purpose of financing their own needs or the needs of their agents or dealers; b. The mere buying and selling without recourse of instruments mentioned in Section 4101Q. Inasmuch as the CGAM Group of Companies perform most, if not all, of the above functions, i.e., they receive funds from one group of persons through issuance of equity securities and entering into credit facilities and use principally the funds for acquiring various types of NPAs, including debt securities as well as buy and sell debt securities, and more importantly, their assets consist of debt securities and they realize regular income in the nature of interest, discounts, capital gains and commissions from transactions in debt securities, their activities are deemed akin to the principal activities of non-bank financial intermediaries, particularly that of investing in or acquiring non-performing assets from financial institutions. TcSAaH WHEREFORE, in view of the foregoing, this Office holds that for tax purposes, CGAM Group of Companies shall be treated as an Other Non-Bank Financial Intermediary performing activities similar to a financing company subject to GRT imposed under Section 122 of the Tax Code of 1997, as amended. 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. HTASIa Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service