Lapuz-Ureta Ramos Arches Miranda and Cruz Law Offices

August 7, 2008 BIR RULING [DA-(DT-006) 120-08] 98; 27 (D) (5); 196; DA-049-2000 Lapuz-Ureta Ramos Arches Miranda and Cruz Law Offices 7th Floor Yuchengco Tower, RCBC Plaza 6819 Ayala Avenue, Makati City Attention: Attys. Arlene G. Lapuz-Ureta and Elsie S. Ramos Gentlemen : This refers to your letter dated December 4, 2007 requesting for a ruling as to whether or not a third party who acted as surety for the loan of a borrower and subsequently offered to partially pay the loan obligation of the latter through dacion en pago shall be liable to donor's tax. STHAID It appears that sometime in August 1998, Uptown Industrial Sales, Inc. (Uptown) and Power Station Battery Phils., Inc. (Power Station) both obtained loans from RCBC. Uptown obtained a loan in the total amount of Forty Million Eight Hundred Eighty-Five Thousand One Hundred Seventy-Five Pesos and 15/100 (P40,885,175.15), while Power Station obtained a loan in the total amount of Twenty Eight Million Five Hundred Thousand Pesos (P28,500,000.00). To secure Power Station's loan obligation, Uptown, through its authorized officers and representatives executed a Comprehensive Surety Agreement (CSA) on August 31, 1998, wherein Uptown agreed to hold itself jointly and severally liable to answer for Power Station's obligation to RCBC up to P28,500,000.00. The pertinent portion of the August 31, 1998 CSA executed by Uptown reads: "For and in consideration of any existing indebtedness to you of POWER STATION BATTERY PHILS., INC., [a] corporation duly organized and existing under and by virtue of the laws of the Philippines with principal place of business and postal address at EBA Compound, Camarin Street, Camarin I, Novaliches (hereinafter called the Borrower) and/or in order to induce you, in your discretion at any time hereafter, to make loans or advances or increases thereof, to extend credit in any other manner to or for the account of the Borrower, either with or without security, and/or to purchase or discount or to make any loans or advances evidenced or secured by any notes, bills receivable, drafts, acceptance, checks or other instruments or evidences of indebtedness (all hereinafter called "instruments") upon which the Borrower is or may become liable as maker, endorser, acceptor, or otherwise, the undersigned agrees to guarantee, and does hereby guarantee in joint and several capacity, the punctual payment at maturity to you of any and all said instruments, loans, advances, credits/increases and/or other obligations hereinbefore referred to, and also any and all other indebtedness of every kind which is now or may hereafter become due or owing to you by the Borrower, together with any and all expenses which may be incurred by you in collecting all or any such instruments or other indebted or obligations hereinbefore referred to, and/or endorsing any rights hereunder, and also to make or cause any and all payments to be made strictly in accordance with the terms and provisions of any agreement(s), expressed or implied, which has (have) been or may hereafter be made or entered into by the Borrower in reference thereto, regardless of any law, regulation or decree, now or hereafter in effect, which might in any manner affect any of the terms or provisions of any agreement(s) or your rights with respect thereto as against the Borrower, or cause or permitted to be invoked any alteration in the time, amount or manner of payment by the Borrower of any instruments, obligations or indebtedness, provided however, that the liability of the undersigned hereunder shall not exceed at any one time the aggregate principal sum of *Twenty Eight Million Five Hundred Thousand Only* *28,500,000.00* (irrespective of the currency(ies) in which the obligations hereby guarantee are payable) and such interest and charges as may accrue thereon either before or after maturity (ies) thereof and such expenses as may be incurred by you as referred to above." (Emphasis supplied). HScCEa In 2000, both Uptown and Power Station's loan obligations with RCBC became past due. Thus, Uptown proposed the restructuring of its outstanding and past due loan, which RCBC favorably granted. To partially settle Power Station's outstanding and past due loan, Uptown proposed to assign, by way of dacion en pago, ten (10) of its real properties located in Cavite, Antipolo City and Cainta, Rizal and one (1) of its Class "A" Eagle Ridge Country Club share. RCBC accepted the aforementioned proposal, so that Uptown, Power Station and RCBC executed the corresponding Deeds of Absolute Assignment on August 9, 2000, and their supporting Secretary's Certificates. When the four (4) Deeds of Absolute Assignment were presented to the different Revenue District Offices (RDOs) of the Bureau of Internal Revenue (BIR), only the examiner at the Cainta RDO agreed that RCBC is not liable to donor's tax. The other examiners informed RCBC that Uptown is liable to pay donor's tax on the other transactions. Considering that the parties to the Deeds of Assignment did not make any provision for the payment of donor's tax, the actual dacion en pago of the real properties and club shares were not effected. Under the CSA executed on August 31, 1998, Uptown undertook to hold itself jointly and severally liable with Power Station to pay RCBC at maturity ". . . [a]ll said instruments, loans, advances, credits/increases and/or other obligations herein before referred to, and also any and all other indebtedness of every kind which is now or may hereafter become due or owing to you by the Borrower, together with any and all expenses which may be incurred by you in collecting all or any such instruments or other indebted or obligations hereinbefore referred to . . . ." As such, Uptown constituted itself as the surety of Power Station, insofar as RCBC is concerned. Thus, even if Uptowns' obligation as surety is not an original and direct one for the performance of its own obligation, and that it is merely accessory or collateral to the obligation of Power Station, its liability to RCBC is direct, primary and absolute. In reply, please be informed that 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. 1 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. 2 EAHcCT Conversely, in guaranty, the guarantor binds himself to the creditor to fulfill the obligation of the principal debtor in case the latter should fail to do so. (Art. 2047, New Civil Code) However, when the guarantor binds himself solidarily with the debtor, there is already a suretyship. (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. Applying the foregoing discussions in the instant case, Uptown, as surety, is primarily liable as original promissory or debtor and thereby bound immediately to pay the creditor-bank, RCBC, the amount representing the outstanding obligation. A guaranty is generally gratuitous, unless there is a stipulation to the contrary. (Art. 2048, New Civil Code) Since, the obligation entered into by the Surety and the Borrower with the creditor-bank is joint and several, the security given by the Surety to fulfill the obligation of the Borrower is not gratuitous. The guarantor must be indemnified by the principal debtor in case the former pays for the debt. The indemnity includes the total amount of the debt. (Art. 2066, New Civil Code) The foregoing being considered, the imposition of donor's tax in the present case is untenable. Inasmuch as Uptown acted as surety for Power Station's obligation it follows that the former is entitled to demand full indemnification from the latter and recover what it actually paid to RCBC. Consequently, the payment by the Surety of the principal obligation through dacion en pago shall not be considered as transfer of property by gift because the Surety has the right to be indemnified by the Borrower. 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 RCBC. (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. SITCEA This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. Antonio Garcia, Jr. vs. Court of Appeals, Lasal Development Corporation, 191 SCRA 493. 2. Government of the Philippines vs. Tizon, 20 SCRA 1187.