Privatization and Management Office

December 22, 2009 BIR RULING [DA-(OSL-039) 806-09] Sec. 35, Proc. No. 50; BIR Ruling No. 141-98 & 061-92 Privatization and Management Office 104 Gamboa Street Legaspi Village, Makati City Attention: Mr. Felipe C. Gella Deputy Privatization Officer Gentlemen : This refers to your letters dated December 9, 2009 and December 22, 2009 stating that the Martel Group of Companies (MGC) incurred loan obligations with the Development Bank of the Philippines (DBP) secured by mortgages; that in order to fully liquidate its obligations, MGC agreed to cede the mortgaged properties, including the 15,178 square meter lot located at Barangay Baesa, Quezon City, to DBP by virtue of the Memorandum of Agreement (MoA) dated October 21, 1982; that because of the disagreement on the valuation of some of the properties to be ceded, MGC filed Civil Case No. 86-35033 entitled, "Tourist Trade and Travel Corporation vs. DBP, et al." with the Regional Trial Court of Manila, Branch 40 essentially to thresh out the issues on valuation; that on December 8, 1986, Proclamation No. 50 was issued creating the Asset Privatization Trust (APT) [now Privatization and Management Office (PMO)] to take title to and possession of, conserve, provisionally manage and dispose of the non-performing assets of the National Government; that by virtue of Administrative Order No. 14, series of 1987, and as implemented by the Deed of Transfer dated February 27, 1987, DBP, for a consideration, assigned certain accounts, including the MGC account, to the National Government, with the APT as its trustee, pursuant to the Trust Agreement dated February 27, 1987; that in an Order dated September 30, 1987, APT was ordered to substitute in place of DBP as one of the defendants in the above-mentioned civil case; that on June 2, 2000, MGC, in accordance with the various orders issued by the RTC Branch 40, Manila, executed a Dacion En Pago in favor of the National Government, thru the APT, formally conveying the aforementioned mortgaged properties, including 15,178 sq.m. lot located in Baesa, Quezon City. From the foregoing, you are requesting for clarificatory ruling regarding the applicability of BIR Ruling No. 141-98 dated September 29, 1998, in the following transactions: 1) In the acquisition by the National Government, through then APT as trustee, of certain accounts/properties from the Development Bank of the Philippines (DBP) pursuant to Administrative Order No. 14, Series of 1987, and Deed of Transfer dated February 27, 1987, particularly of the subject property of MGC; and 2) In the conveyance by MGC of the mortgaged properties to the National Government, through the APT, by way of Dacion En Pago, as the same just formally embodied the terms and conditions of the previous memorandum of agreement between MGC and DBP which is the actual cession of the mortgaged properties as payment for MGC's loan obligations. Further, it is your request that in case of denial of your application for exemption on the above Dacion En Pago transaction, the penalties, surcharge or interest imposed therein be condoned. In reply, please be informed as follows: Section 35 of Proclamation No. 50, cited as basis in granting tax exemption to the transactions of APT under BIR Ruling No. 141-98, supra, provides viz. : IDSaAH "Sec. 35. Exemption from Taxes, fees, and Other Charges. The provision of any law to the contrary notwithstanding, the Trust as well as the corporations and assets held by it, shall be exempt from all taxes, fees, charges, imposts, and assessments arising from or occasioned by the passing of title over such corporations or assets from the government institutions to the Trust and/or from the Trust to a private acquisitor or buyer imposed by the National Government or any subdivision thereof including but not limited to stock transfer taxes, capital gains taxes, documentary stamps, registration fees, and the like: Provided, that in the case of the said government institutions acquired the said assets by foreclosure, the non-payment of similar taxes, fees, charges, imposts and assessments shall not be a bar to the consolidation of the title in the foreclosing institutions and the subsequent passing of the title to the Trust or the corporations held by the Trust. (Emphasis supplied)" Thus, the tax exemption applies only to the transfer of (a) assets from the Government Institutions to the Trust and/or (b) assets from the Trust to the private acquisitors or buyers. Obviously, the assignment by DBP in favor of the National Government, with the APT as its trustee, of certain accounts, including the MGC account, for a consideration, by virtue of the Deed of Transfer dated February 27, 1987, and pursuant to the Trust Agreement dated February 27, 1987, falls under the first instance (a) of tax-exempt transfers. Accordingly, the said assignment by DBP of certain accounts/properties in favor of the National Government, through the APT/PMO, is exempt from income, capital gains and documentary stamp taxes. Moreover, Section 2.57.5 of Revenue Regulations (RR) No. 2-98, as amended, exempts those persons enjoying exemptions from payment of income taxes pursuant to the provisions of any law, general or special, from the withholding tax provisions of the said Regulations. As such, the above assignment by DBP of certain accounts/properties is exempt from the creditable withholding tax imposed under Section 2.57.2 (J) of RR No. 2-98, as amended. On the other hand, the conveyance by MGC of the mortgaged properties, including the real property located in Baesa, Quezon City, to the National Government, through the APT, by way of Dacion En Pago, although claimed as a mere formality in the implementation of the terms and conditions embodied in the previous memorandum of agreement between MGC and DBP which is the actual cession of the mortgaged properties as payment for MGC's loan obligations to DBP, the same is still subject to the capital gains tax and documentary stamp tax based on the outstanding balance of the loans of MGC vis--vis the fair market value of the mortgaged properties, including the real property located in Baesa, Quezon City, as determined in accordance with Section 6 (E) of the Tax Code of 1997, as amended, whichever is the highest of the afore-mentioned valuations. Transfer of assets from the original debtor of government institutions to APT/PMO by virtue of the asset privatization trust is not covered by the exemption granted under Section 35 of Proclamation No. 50. As eloquently stated in BIR Ruling No. 141-98, only transfers of assets from the government institutions to the Trust and/or assets from the Trust to the private acquisitors or buyers are exempt from taxation. Finally, on your request for abatement of penalties surcharge and interest imposed on the Dacion En Pago transaction by and between MGC and the National Government, through the APT [now PMO], please be informed that this Office has no authority to grant the same. As such, you are hereby advised to address your particular concern to the Technical Working Group-Assessment, Attention: The Assistant Commissioner, Assessment Service, Bureau of Internal Revenue. Please be guided accordingly. cHITCS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service