BIR Ruling [DA-278-97]

August 18, 1997 BIR RULING [DA-278-97] The Law Offices of King Capuchino Tan & Associates 2nd Floor, Belman II Building Quezon Avenue corner Cordillera Street Quezon City Attention: Atty. Bayani L. Chua Gentlemen : This refers to your letter dated July 10, 1997 stating that your client, Marcopper Mining Corporation (Marcopper), was forced to stop its operations since March 24, 1996, due to the accidental spillage of mine tailings into the Boac River in Marinduque; that thereafter, the Department of Environment & Natural Resources (DENR) cancelled Marcopper's Environmental Compliance Certificate (ECC), a pre-requisite to its operations, and such order has not been lifted up to the moment; that in fact, any order lifting the cancellation of the ECC appears very remote even for the next remaining months of the current year, thereby making any resumption of operations by Marcopper within the near future to be highly improbable; that for the year ending December 31, 1996, the company sustained a staggering loss of P337,453,346.00 due to its cessation of operations, resulting in Marcopper's default in the payment of all its loans with its various creditor banks; that in its desire to settle some of its maturing loans, particularly with that of Rizal Commercial Banking Corporation (RCBC), Marcopper had proposed a partial payment of its obligations with the latter by way of dacion en pago over the real property situated in Forbes Park Makati, covered by TCT No. 321269, and actually the subject matter of a real estate mortgage to secure the loan obligation with said bank; that after negotiations, RCBC finally agreed and accepted the Forbes Park Property as partial payment by Marcopper of its loan, by way of dacion en pago, in the agreed amount of P235,000,000.00; that no actual payment was made in this transaction but mere crediting of the amount to Marcopper's loan with RCBC; that in view of the worsening financial condition, Marcopper had likewise implemented a retrenchment of all of its employees due to the absence of operations, as a further cost-cutting measure, however, the company would be needing approximately P26.0 Million for the settlement of separation pays of the laid-off employees, which amount is still to be sourced by the company probably by way of loan availments with other creditors who may still be willing to extend credit facility; that the company is obviously cash-strapped due to non-operation for more than a year now, and it would surely be another loss for the year ending 1997; that this gloomy forecast is inevitable even assuming that the ECC would be restored by the DENR within the current month, for the reason that it would take at least 3 months before the company could start actual operations, and there is no way for the company to make a turn-around in just 2-3 months of operations; that another creditor bank, Solidbank, had already instituted a civil complaint with the Regional Trial Court of Manila, Branch 26, for the collection of the sum of US$2,000,000.00 against Marcopper due to the latter's default, and as of May 7, 1997, the court had ruled against Marcopper; that the assignment or transfer of the Forbes Park property under TCT No. 321269 to RCBC by way of dacion en pago constitutes a sale of real property which under existing rules, is subject to a withholding tax of 7.5% of the gross selling price or agreed consideration of P235.0M, or a tax impact of P17,625,000.00, which amount is undoubtedly beyond the financial capacity of Marcopper; that the 7.5% is a creditable withholding tax against any income tax of the company, but which is patently a foregone conclusion in the light of huge losses that Marcopper had so far sustained (January-June 1997) in the estimated amount of P211,693,054.00 as of June 30, 1997; that there is no way that the present transaction could change the negative position of the company even if they consider the entire P235.0M as income for the current year; and that to compel the remittance of the 7.5% withholding tax on this transaction, just to be refunded much later in view of the negative financial position of the company, would be a further drain on the cash flow of the company and consequently delay the payment of the much needed benefits to its separated employees at this critical moments. Based on the foregoing facts, Marcopper is not in a position to remit the withholding tax on the proposed assignment or transfer of the property under TCT No. 321269 in favor of RCBC, and for this reason, you now request for the abatement, cancellation or waiver of the actual remittance thereof, and to allow the registration of the assignment or sale of the property in favor of RCBC. In reply, please be informed that Section 3 of Revenue Regulations No. 12-94 amending Section 4 of Revenue Regulations No. 6-85, otherwise known as the "Expanded Withholding Tax Regulations" provides, viz. : "SEC. 3. Section 4 of Revenue Regulations No. 6-85 is hereby amended to read as follows: "Section 4. Exemption from Withholding. The withholding of tax prescribed in these regulations shall not apply to income payments in the following cases: xxx xxx xxx (d) In the case of a payee who suffered net operating losses during the immediately preceding two (2) tax years; IHcTDA xxx xxx xxx." While it is true that Marcopper has not complied with the minimum requirement of net operating losses during the immediately preceding two (2) tax years in order to qualify for exemption under the aforementioned provision, yet it is of public knowledge that Marcopper is suffering from financial reverses due to its forced/sudden closure of operation since March 24, 1996 and will continue to incur further losses until it is fully rehabilitated. In view of the foregoing facts and documents presented, and finding the reasons to be meritorious, this Office accepts your client's request for the waiver of the 7.5% creditable withholding tax on the conveyance of the aforementioned parcel of land in favor of RCBC by way of dacion en pago. 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.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue