Agro Filipino, Incorporated

August 17, 2009 BIR RULING [DA-(C-176) 459-09] 076-89; DA-378-08; DA-419-04; 146-95; DA-381-98 Agro Filipino, Incorporated 382 MacArthur Highway Tukukan, Guiguinto Bulacan Attention : Mr. Jose Michael B. Gonzales President Gentlemen : This refers to your letter dated June 10, 2009 stating that Agro Filipino, Incorporated (AFI) is a corporation organized and existing under the laws of the Philippines; that as of its taxable year ended December 31, 2007, AFI reflected a capital deficit position; that the liabilities of the company include an obligation to Cameron Granville Asset Management (SPV-AMC) (CGAM) incurred since February 17, 2005; that at the onset of taxable year 2008, such obligation to CGAM amounted to P97,514,578.00 consisting of the remaining balance of the principal loan and the accumulated interest; that on June 5, 2008, AFI and CGAM agreed to settle the subject obligation, and executed a Supplemental Agreement to effect the same; that under the terms and conditions of the said Settlement Agreement, AFI paid CGAM the amount of P5,750,000.00 out of the recorded P97,514,578.00 obligation, resulting in the condonation of the amount of P91,764,578.00; and that despite the partial condonation of the subject obligation, AFI remains in a capital deficit position for taxable year 2008 in the amount of P440,094,459.00. Based on the foregoing representations, you now request confirmation of your opinion that 1. The condonation of AFI's debt by its creditor, CGAM, will not subject AFI to income tax and CGAM to donor's tax; and 2. The execution of a Settlement Agreement to effect the terms and conditions of the said condonation is not subject to documentary stamp tax. cEDIAa In reply thereto, please be informed that the write-off should not be considered as income of AFI subject to the regular income tax. A transaction whereby nothing or exchangeable value comes to or received by the taxpayer does not give rise to or create taxable income. Taxable income is not acquired by a transaction which does not result in the taxpayer getting or having anything the taxpayer did not have before (BIR Ruling No. 076-89 and BIR Ruling No. DA-419-04, citing Dallas Transfer, supra, BIR Ruling No. DA-206-97, citing Comm. V. Rail Joint Co. [C. CA.] 61 f 2D 751; Bowers, vs. Kerbough Empire Co., 271 US 170) . Accordingly, AFI did not derive any income as a result of the write-off of the portion of the obligations from CGAM in the amount of P91,764,578.00 and as such, it should not be subject to income tax. This is so because its net asset position, as represented, will not improve from negative to positive as a result of the write-off. Moreover, the write-off of the accounts receivable should not be considered as donation subject to donor's tax since there is no donative intent on the part of CGAM. The write-off is purely for business consideration since AFI has no more sufficient assets to cover its payables to CGAM. The above principle is not without authority. This Office in BIR Ruling No. DA-593-06 justified its stance by the following ratiocination: "Cancellation and forgiveness of indebtedness may amount to a payment of income, to a gift, or to a capital transaction, dependent upon the circumstances. If for example, an individual performs services for a creditor who, in consideration thereof cancels the debt, income to that amount is realized by the debtor as compensation for his services. If, however, a creditor merely desires to benefit a debtor and without any consideration therefor cancels the debt, the amount of the debt is a gift from the creditor to the debtor and need not be included in the latter's gross income. If a corporation to which a stockholder is indebted forgives the debt, the transaction has the effect of the payment of a dividend. (Sec. 50, Revenue Regulations No. 2) The waiver of interest by the banks on non-trade and trade related indebtedness of GMPI is not subject to income tax considering that the deduction of said interest as expense in prior years did not offset nor reduce the taxable income of GMPI since it was in a financial loss position even without the deduction. (see Barnhart-Marrow Consolidated v. Commissioner of Internal Revenue, 47 BTA 590) Moreover, when a creditor cancels a debt as part of a business transaction, the debtor is enriched or its net assets has been increased and, therefore, he realized taxable income ( Philippine Fiber Processing Co. v. CIR, CTA Case No. 1407 Dec. 29, 1966). However, a transaction whereby nothing of exchangeable value comes to or is received by a taxpayer does not give rise to or create taxable income. ( see Dallas Transfer and Terminal Warehouse Co. v. Commissioner of Internal Revenue 5 Cir. 70 F 2d 95, 13 AFTR 930) Accordingly, the condonation of GMPI's indebtedness by GM-US is not subject to income tax since before and after the condonation GMPI remains insolvent, i.e., in a capital deficiency position. The condonation is likewise not subject to gift tax since there is no donative intent on the part of GM-US but solely for business consideration since Isuzu will only acquire the GMPI shares from GM-US if GMPI has a "clean" balance sheet with no outstanding liabilities except those to Isuzu ." aIcCTA Finally, the execution of the Settlement Agreement to implement the terms of the condonation is not subject to the documentary stamp tax imposed under Section 179 of the Tax Code of 1997, as amended, which provides that "SEC. 179. Stamp Tax on all Debt Instruments. On every original issue debt instruments, there shall be collected a documentary stamp tax of One Peso (P1.00) on each two hundred pesos (P200), or a fraction thereof, of the issue price of any such debt instruments: Provided, that for such debt instruments with terms of less than one (1) year, the documentary stamp tax to be collected shall be of a proportional amount in accordance with the ratio of its terms in number of days to three hundred sixty five (365) days: Provided, further, that only one documentary stamp tax shall be imposed on either loan agreement, or promissory notes issued to secure such loan." In stressing the rationale of the above-cited provisions, this Office in BIR Ruling No. DA-378-08 dated June 24, 2008, ruled as follows: "[In this case], the compromise agreement is not in the nature of a loan agreement, but is executed precisely to effect the payment of terms embodied in a loan agreement. Since POPI [referring to the 'Borrower'] did not execute any document that may be considered as a loan agreement to which the tax under Section 179 of the Tax Code, as amended, is imposed, and since a compromise agreement is not one among those instruments falling under any of the documents enumerated under the Tax Code that are subject to a specific DST, then the said compromise agreement which provides for the new terms and conditions of payment of an original loan, shall not be subject to documentary stamp tax (BIR Ruling No. 146-95 dated September 19, 1995; BIR Ruling No. DA-381-08-24-98 dated August 24, 1998) aHESCT Accordingly, the execution of a compromise agreement to document and effect the terms of a previously agreed upon condonation of a loan by [the Borrower] from one of its creditors, is not subject to the documentary stamp tax." Such being the case, the execution of the Settlement Agreement to document and effect the terms of a previously agreed upon condonation of a loan between AFI and CGAM is not subject to the documentary stamp tax prescribed in Section 179 of the Tax Code of 1997, as amended. WHEREFORE, in view of the foregoing, this Office hereby confirms your opinion that 1. The condonation of AFI's debt by its creditor, CGAM, will not subject AFI to income tax and CGAM to donor's tax; and 2. The execution of a Settlement Agreement to effect the terms and conditions of the said condonation is not subject to the documentary stamp tax prescribed in Section 179 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, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service