Advent Capital & Finance Corporation

July 2, 2008 BIR RULING [DA-(C-002) 004-08] R.A. #9182; RR #6-04; DA-129-2007 dtd. 3/2/07 Advent Capital & Finance Corporation 6/F SSHG Law Centre 105 Paseo de Roxas, Makati City Attention: Divinia L. Ador Dionisio President Gentlemen : This refers to your letter dated May 28, 2007, requesting a Certificate of Tax Exemption on the transfer of your non-performing assets you have acquired as payment to you by way of dacion en pago by Fil-Estate Group of Companies pursuant to the Special Purpose Vehicle (SPV) Law of 2002. CAIHTE It could be ascertained from the documents submitted that Fil-Estate Land, Inc. (FELI), and its group of companies obtained various loan accommodations from Advent Capital and Finance Corporation (ADVENT, for short), (formerly All Asia Capital and Trust Corporation). Said loans were declared by ADVENT in default on March 1, 2000 and have been booked as non-performing loans (NPLs) in ADVENT'S portfolio since June 30, 2000, or at least 180 days after becoming past due. As of March 31, 2002, the said NPLs have an outstanding aggregate unpaid balance of P308,821,286.11, inclusive of interest and gross receipts tax, but excluding penalties and default charges. Efforts between ADVENT and FELI to restructure the loans proved to be futile, prompting FELI instead to agree settling the entire loan obligations by way of dacion of real properties located in various provinces in favor of ADVENT. For this reason, two Memorandum of Agreement (MOA-1 and MOA-2, respectively), both dated April 14, 2003, were executed by the parties in which FELI ceded real properties to fully settle its obligations with ADVENT. MOA-1 has a dacion price of P200,623,674.00 covering various TCTs and club shares and MOA-2 has a dacion price of P108,197,612.11 covering Buenavista and Puerto Real properties. In connection therewith, a draft template for separate Deeds of Conveyance was attached thereto as Annex "D" in order to individually transfer the real properties in the name of ADVENT. On March 7, 2003, or within 18 months from the date of approval of the Act, ADVENT, as a Financing Company, applied with the Securities and Exchange Commission, the latter being its regulatory agency, for the issuance of Certificate of Eligibility (COE) in order to avail itself of the tax exemption and other privileges under R.A. 9182 otherwise known as the Special Purpose Vehicle Law. Pursuant to the said application, ADVENT submitted among others, to the SEC the following documents: i. Certification duly signed by its President that the assets transferred are NPAs as defined under the SPV Act of 2002; that the proposed transfer is a true sale; that the notification requirement to the borrowers has been complied with; that the maximum 90-day period for negotiation and restructuring requirement has been complied with; ii. Audit Report of an independent auditor acceptable to the Commission. After having complied with the documentary requirements of the SEC, the COE dated May 16, 2007 was finally issued with respect to the properties covered by MOA-1 valued at P200,623,674.00. However, MOA-2 remained the subject of SEC evaluation to date since FELI has not yet submitted complete documents to comply with the conditions in MOA-2. Thus the case at bar deals only with MOA-1 with a dacion price of P200,623,674.00. MOA-1 does not aim to cover the whole NPL of P308,821,286.11. Sec. 4 of MOA-1 specifically provides that FELI shall be released and discharged of its obligation to ADVENT under the Loan Facilities to the extent of the dacion price only. A separate agreement will be entered into by the parties with respect to the outstanding balance under the Loan Facilities, which is already the subject matter of MOA-2, which up to now is under SEC evaluation. CTHDcS The dacion value of P200,623,674.00 is consistent with the value of the properties transferred as payment to ADVENT. The tax exemption being applied by ADVENT of P167,473,674.00 covers only the value of the real properties which have not been transferred in its name. The P33,150,000.00 difference involves the transfer to ADVENT by FELI of shares of stocks in Fairways and Bluewater that has been effected as early as the date of execution of MOA-1 (see Certification issued by FELI's Finance Officer, Roberto Roco, and the cancelled FELI Stock Certificates as well as photocopies of the Fairways and Bluewater shares of stocks in the name of ADVENT evidencing the transfer to ADVENT's name of such shares of stocks by FELI). As such, there is no more practical need to apply for COE (tax exemption) on the transfer of these shares of stocks. Please note that the certification issued by FELI to SEC regarding the transfer made to ADVENT of these shares of stocks included its corresponding payment of taxes relevant to such transfer. As explained above, the dacion value is still P200,623,674.00 since ADVENT received as payment the same value of properties (real estate and shares of stocks). What is being sought to be exempted from payment are those real properties that FELI has not or was not able to transfer in the name of ADVENT because of its inability to shoulder the transfer taxes due thereon. The Certificate of Eligibility issued by SEC, as the regulatory authority, expressly declares that ADVENT's NPL's comply with the requirements of the SPV Act. Note that SEC required ADVENT to issue certification (see Certification of ADVENT's President, Atty. Severino Sumulong) on the status of the NPL pursuant to implementing rules of SPV Act, Rule XII (B). In addition, SEC also required, an independent auditor to verify the correctness of such certification (see SGV Audit Report on NPLs of ADVENT). In reply, please be informed that pursuant to Section 27 (D) (5) of the Tax Code of 1997, acquisition of real property treated as capital asset is subject to capital gains tax on the gains presumed to have been realized from said transfer. Consistent with previous BIR rulings, real property treated as capital asset acquired by way of " dation in payment" is deemed subject to capital gains tax or, in case of dation in payment involving ordinary asset, to the creditable withholding tax. However, with the enactment of R.A. No. 9182 (SPV Law), as implemented by Revenue Regulations No. 6-2004, as amended by Rev. Regs. No. 7-2005, and further amended by R.A. 9343 as implemented by Revenue Memorandum Circular No. 44-2006, transactions involving transfers of property by way of dacion en pago, as well as those transfers qualified under the SPV law have been granted tax exemptions. HCEISc In fine, Section 7 (a) (4) of Rev. Regs. No. 6-2004, as amended by Rev. Regs. No. 9-2005, specifies dation in payment (dacion en pago) of a Non-Performing Loan (NPL) by a borrower to a Financial Institution (FI) as among those transactions covered by the SPV law subject to certain conditions. Section 2 of R.A. 9343, amending Sec. 15, R.A. 9182, as implemented by RMC No. 44-2006 provides, viz. : "SEC. 15. Tax Exemptions and Fee Privileges . Any existing law to the contrary notwithstanding, the transfer of NPAs from the FI to an SPV, and from an SPV to a third party or dation in payment (dacion en pago) by the borrower or by a third party in favor of an FI or in favor of an SPV shall be exempt from the following taxes: "(a) Documentary stamp tax on the abovementioned transfer of NPAs and dation in payment (dacion en pago) as may be imposed under Title VII of the National Internal Revenue Code of 1997. "(b) Capital gains tax imposed on the transfer of lands and/or other assets treated as capital assets as defined under Section 39(A)(I) of the National Internal Revenue Code of 1997; "(c) Creditable withholding income taxes imposed on the transfer of land and/or buildings treated as ordinary assets pursuant to Revenue Regulations No. 2-98, as amended; "(d) Value-added tax on the transfer of NPAs as may be imposed under Title IV of the National Internal Revenue Code of 1997 or gross receipts tax under Title V of the same Code, whichever is applicable." SDHacT Furthermore, an NPL refers to loans or receivables, such as mortgage loans, unsecured loans, consumption loans, trade receivables, lease receivables, credit card receivables and all registered and unregistered security and collateral instruments, including but not limited to, real estate mortgages, chattel mortgages, pledges and antichresis whose principal and/or interest has remained unpaid for at least one hundred eighty (180) days after they have become past due or any of the events of default under the loan agreement has occurred, as of June 30, 2002, as certified by the Appropriate Regulatory Authority [Sec. 3 (g), Rev. Regs. No. 6-2004, as amended by Rev. Regs. No. 9-2005] . Inasmuch as the foregoing obligations are NPLs and considering that there are two (2) MOAs covering the whole amount of the NPL, P308,821,286.11, and MOA-1 with a dacion price of P200,623,674.00 having been issued a COE by the SEC, the dation in payment thereof involving various properties listed in the Summary of Real Properties ceded by Fil-Estate Group of Companies attached hereto as part of this ruling, is exempt from the above-enumerated internal revenue taxes to the extent of the NPL, vis-a-vis the dacion price of P200,623,674.00. The remaining balance of the NPL which is not covered by the dacion price in MOA-1, is the subject matter of MOA-2, which is still pending evaluation with the SEC. The MOA-1 and MOA-2 intend to fully settle FELI's obligation to ADVENT. In the meantime that MOA-2 is still pending approval of the SEC, FELI's NPL to ADVENT is not yet fully settled. And in the event that MOA-2 is approved, another ruling will be issued correspondingly. Thus, under Section 7 (C) (7) of Rev. Regs. No. 6-2004, as amended, the tax exemptions provided in paragraph (d) of said Section shall apply only to the extent of the value of the property tendered as payment, which is equivalent to the representation (MOA-1 & MOA-2) that the dacion intends to fully settle FELI's obligations with ADVENT. The value of the property being transferred as payment is the Fair Market Value (FMV) as determined in accordance with Section 6 (E) of the NIRC of 1997, whereas the consideration for such transfer shall be the value of the NPL including interests and other charges, if any, as stated in the Deed of Dacion. This will therefore serve as the authority and guide for BIR Revenue Regions concerned to issue the corresponding Certificate Authorizing Registration (CAR) and/or Tax Clearance (TCL) covering the ceded properties under MOA-1 listed in the Summary of Real Properties ceded by Fil-Estate Group of Companies and attached hereto as part of this ruling. However, the issuance of the CAR should only be done upon compliance with the requirement/payment of taxes due, in line with the procedures provided in Section 13 of Rev. Regs. No. 6-2004. The CAR on the subject dacion en pago transaction is required to be issued in order that the title of the property can be transferred in the name of the new owner pursuant to Section 56 of the Tax Code of 1997. This ruling is 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. STaCcA Very truly yours, (SGD.) GREGORIO V. CABANTAC Deputy Commissioner