Bank of Commerce

July 20, 2009 BIR RULING [DA-(DT-037) 384-09] BIR Ruling No. 114-99, DA-049-2000, DA-006-05, DA-710-06 & DA-(DT-006) 120-08 Bank of Commerce Phil. First, 6764 Ayala Avenue Makati City Attention: Atty. Raul B. Marifosque Senior Manager Legal Management Services Group Gentlemen : This refers to your letter dated January 6, 2009 requesting for a ruling or legal opinion on whether the transfer of the real properties of PVC International Sales Corporation ("PVC" for brevity) through dacion in favor of the Bank of Commerce ("Bank" for brevity) in payment of the loan of Pansun Hardware Philippines Corporation ("Pansun" for brevity), constitutes a donation which shall be subject to donor's tax. As represented, Pansun obtained and was granted a loan by the Bank in the amount of PhP21,985,555.55. To secure the above-mentioned loan obligation, PVC acted as surety and executed a Continuing Suretyship Agreement in favor of the Bank. The Continuing Suretyship Agreement stated that the surety shall be jointly and severally liable with the Borrower, provided, however, that the liability shall not exceed PhP20,000,000.00, and such interest and expenses as may be incurred by the Bank in the collection of the said obligation. The loan was also secured by real estate mortgages on several parcels of land owned by PVC in Las Pias City located at Blk. 34 Lot 23 Vatican Drive, BF Resort Village, Las Pias City covered by TCT Nos. 75104, 75282, 53264 and 67890 with a total area of 2,126 square meters, more or less. Pansun failed to pay its loan of PhP21,985,555.55 to the Bank, hence, PVC, with the conformity of Pansun, offered to settle the loan by way of Dacion En Pago Agreement dated August 3, 2007, of four (4) residential lots with an area of 2,126 square meters, more or less, which was accepted by the Bank as full settlement of the loan subject to the terms as set forth in the dacion agreement. The registration expenses and other necessary expenses were already paid. In reply, please be informed that this Office ruled in BIR Ruling No. DA-006-05 dated January 11, 2005: SHTcDE "xxx xxx xxx 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)" Applying the foregoing in the instant case, PVC, as surety, is primarily liable as original promissor or debtor and thereby bound immediately to pay the creditor-bank, Bank of Commerce, the amount representing the outstanding obligation. Since the obligation entered into by Pansun and PVC with the Bank of Commerce is joint and several, the security in the form of real properties given by PVC to fulfill the loan obligation of Pansun, as borrower is not gratuitous. Thus, 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. Clearly, there is no intention on the part of PVC to donate to Pansun anything of value since the transaction is purely a loan accommodation. Accordingly, the aforesaid transaction will not be subject to donor's tax since there is no intention to donate. 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 Bank of Commerce. (BIR Ruling No. DA-049-2000 dated January 21, 2000) 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 96 of the Tax Code of 1997, as amended. cTaDHS 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