BIR Ruling [DA-710-06]

December 14, 2006 BIR RULING [DA-710-06] 98; 27 (D) (1); DA-006-2005; DA-551-2003 Daiichi Properties and Development, Inc . Penthouse Taipan Place, F. Ortigas Jr. Road Ortigas Center, Pasig City Attention: Ms. Charmaine C. Uy Gentlemen : This refers to your letter dated November 16, 2006 requesting for a ruling that the loan accommodation extended by Arco Metal Products Co., Inc. ("ARCO") in favor of its sister company Daiichi Properties & Development, Inc. ("DAIICHI"), is not subject to donor's tax. It is represented that on April 11, 2005, ARCO and DAIICHI executed a Memorandum of Agreement wherein ARCO applied for and was granted a credit line with Metrobank for purposes of accommodating the financial requirements of its sister company DAIICHI; that DAIICHI then actually availed of the credit line granted by Metrobank to ARCO; that the proceeds of the loan was forwarded by ARCO to DAIICHI with no interest charged since the former and the latter corporation are owned by the same stockholders; that it was also agreed that DAIICHI will pay Metrobank by way of Dacion en Pago in favor of Metrobank consisting of four parcels of land registered in the name of DAIICHI; and that consequently, on April 12, 2005, ARCO as borrower, DAIICHI as mortgagor and Metrobank, executed a Deed of Dacion en Pago wherein DAIICHI offered and assigned its four parcels of land in favor of Metrobank as payment for the loan applied for by ARCO. In reply, please be informed that the transaction entered into by ARCO in lending its name or credit line to DAIICHI, is in effect a surety ( Philippine Bank of Commerce vs. Aruego, 102 SCRA 530 ). There is surety when a guarantor binds himself solidarily with the debtor. ( Art. 2058, New Civil Code ). In such case, the condition in guaranty that the guarantor cannot be compelled to pay the creditor unless the latter has exhausted all the property of the debtor, and has resorted to all the legal remedies against the debtor, shall not apply. Suretyship is a contractual relation resulting from an agreement whereby one person, the surety, engages to be liable for the debt, default or miscarriage of another, known as the principal. The surety's obligation is not an original and direct one for the performance of his own act, but merely an accessory or collateral to the obligation contracted by the principal. Nevertheless, although the contract of a surety is in essence secondary only to a valid principal obligation, the liability of the surety to the creditor or promise of the principal is said to be direct, primary and absolute. The surety is directly and equally bound with the principal. The surety therefore becomes liable for the debt or duty of another although he possesses no direct or personal interest over the obligation nor does he receive any benefit therefrom. The obligation of the principal becomes the obligation of the surety. ( Antonio Garcia, Jr. vs. Court of Appeals, Lasal Development Corporation, November 20, 1990 ) It is further stated that a surety is considered in law as being the same party as the debtor in relation to whatever is adjudged touching the obligation of the latter, and their liabilities are interwoven as to be inseparable. ( Government of the Philippines vs. Tizon, 20 SCRA 1187 ) In applying the foregoing discussions in the instant case, ARCO, as surety, is primarily liable as original debtor/borrower and thereby bound immediately to pay the creditor-bank, Metrobank, the amount representing the outstanding obligation. Furthermore, since ARCO and DAIICHI are owned by the same stockholders, they are in effect, considered as one debtor/borrower in the eyes of the creditor-bank. Since the obligation entered into by ARCO and DAIICHI with the creditor-bank is joint and several, the security in the form of real properties given by DAIICHI to fulfill the loan obligation of ARCO, as the Borrower is not gratuitous. It is also well-settled in our jurisprudence that the essential elements of a valid donation are: (1) the reduction of the patrimony of the donor, (2) the increase in the patrimony of the donee; and (3) the intent to do an act of liberality ( animus donandi ). Clearly, there is no intention on the part of ARCO to donate to DAIICHI anything of value since the transaction is purely a loan accommodation and for legitimate business purpose in supporting its sister company. Thus, the aforesaid transaction will not be subject to donor's tax since there is no intention to donate, and the transaction is effected solely for business reasons. ACcEHI The foregoing being considered, the imposition of donor's tax in the present case is untenable. The act of ARCO in lending its credit line to DAIICHI shall not be considered as transfer of property by gift because ARCO has no intention to donate anything of value to DAIICHI and in the event that DAIICHI fails to pay the loan obligation, ARCO has the right to be indemnified by DAIICHI. ( BIR Ruling No. DA-006-2005 dated January 11, 2005 ) It should be noted however, that the payment of debt or loan obligation through dacion en pago is subject to the capital gains tax presumed to have been realized from the transfer of the property, taking into consideration the outstanding balance of the loan as the selling price before title thereto can be consolidated and issued in the name of Metrobank. ( BIR Ruling No. DA-049-2000 dated January 21, 2000 ) Furthermore, the deed of Dacion En Pago is likewise subject to the documentary stamp tax based on the consideration or value received or paid for the property or the selling price, whichever is higher, pursuant to Section 196 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service