BIR Ruling No. 005-07

February 22, 2007 BIR RULING NO. 005-07 122 00-000 Punongbayan & Araullo 20th Floor, Tower 1 The Enterprise Center 6766 Ayala Avenue Makati City Attention: Atty. Benedicta Du-Baladad Tax Partner Gentlemen : This refers to your letter dated April 20, 2006 stating that your client, Philippine Opportunities for Growth and Income (SPV-AMC), Inc., (POGI) is a domestic stock corporation incorporated primarily to invest in, or acquire Non-performing Assets (NPAs) of financial institutions (FIs) pursuant to Republic Act (R.A.) No. 9182, otherwise known as The Special Purpose Vehicle Act of 2002 (SPV Law); that as an SPV, it also has the power granted to it under R.A. No. 9182 (POGI's registered secondary purposes), as follows: 2uptax07 1. To engage third parties to manage, operate, collect and dispose of NPAs acquired from an FI; 2. To rent, lease, hire, pledge, mortgage, transfer, sell, exchange, usufruct, secure, securitize, collect rents and profits, and other similar acts concerning its NPAs acquired from FIs; 3. In case of non-performing loans (NPLs),to restructure debt, condone debt and undertake other restructuring related activities. In restructuring the debt, the SPV may reduce the principal, interest, interest rates, and the period for calculating the interest, extend the time for debt repayment or relax the conditions for debt repayment, agree to the conversion of the borrower's debt to equity in the borrower's business, agree to a transfer of assets or claims from the borrower to repay the debt or dispose of some of the borrower's property or claims to third parties; 4. To take, transfer shares or buy shares issued by the borrower, for the purpose of business reorganization or rehabilitation of the borrower, subject to the provisions of the Corporation Code in respect of the rights of the stockholders of the borrower company, and apply any other measures or restructuring techniques with the approval of the Commission; 5. To enter into dation in payment ( dacion en pago ) arrangements, foreclose judicially or extra-judicially and other forms of debt settlement involving non-performing loans (NPLs); 6. To spend funds to renovate, improve, complete or alter its NPAs acquired from an FI; 7. To issue equity or participation certificates or other forms of investment unit instruments (IUIs) for the purpose of acquiring, managing, improving, and disposing of its NPAs acquired from an FI; 8. To borrow money and issue other instruments of indebtedness for the purpose of paying operational and administrative costs; 9. To guarantee credit, accept or intervene for honor the bills of the borrowers; 10. To advance funds to borrowers where required by an acquired asset or any debt restructuring agreement pursuant thereto, or under any court order or rehabilitation plan; and 11. To entrust to third parties asset servicing company, the collection and receipt of the debt payments for debts under restructuring or business reorganization, management and disposition of assets of the SPV in accordance with the rules, procedures and conditions prescribed by the Commission or by the courts. Except in the case of real or other properties owned or acquired (ROPOAs) whose redemption periods have already expired, the SPV shall notify the borrower and all persons holding prior encumbrances upon the properties or a part thereof or are actually holding the same adversely to the borrower within fifteen (15) days from the date of the appointment of the said collection agent. that the tax exemptions and privileges granted to an SPV, pursuant to the aforementioned law and IRR, pertain mainly to the transfers of NPAs from an FI to an SPV, and from an SPV to a third party or dation in payment by the borrower or by a third party in favor of an FI or in favor of an SPV; that no mention was made on transactions other than those involving the transfers of NPAs, for example, collections from the acquired NPAs, particularly the interest income, are not among those covered by the tax exemptions and privileges granted to an SPV; that the law and the IRR do not define in particular what an SPV is and to what business tax or taxes it is subject to. ADaECI In your supplemental letter dated June 5, 2006, it is your contention that during the year 2000, R.A. No. 8761 was passed into law implementing the imposition of VAT on certain services including those rendered by banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions, to commence on January 1, 2001; that the said imposition was, however, deferred until January 1, 2003 when R.A. No. 9010 was passed into law on February 27, 2001; that later, through the passage of R.A. No. 9238, the GRT was once again re-imposed, subjecting the services rendered by banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions to GRT; that with the changes and confusions created by the said laws, the SPV Law was worded so as to exempt SPVs from either VAT or GRT, whichever is applicable, on transfers of NPAs, where qualified; that as to transactions other than transfers of NPAs, the SPV Law recognized that banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions could be subject to either VAT or GRT, depending on the circumstances present and the law prevailing at the relevant time; that Section 4 (d) of Revenue Regulations No. 6-2004 provides that ". . . unless otherwise exempted under the Act, an SPV shall be subject to all applicable taxes imposed by the NIRC of 1997 such as, but not limited to, income tax, value-added tax (VAT), other percentages taxes, documentary stamp tax (DST), etc., whichever is applicable . . . "; that inasmuch as the SPV Law was passed into law at a time when the services of banks, non-bank financial intermediaries, finance companies, and other financial intermediaries not performing quasi-banking functions were being transitioned from being subject to GRT into VAT, the SPV Law tried to give an elbow room by providing that SPVs may be subjected to either VAT or GRT, whichever is applicable; that this is an affirmation that an SPV is viewed as being akin to a non-bank financial intermediary; that Section 5 of Revenue Regulations No. 6-2004 deals with an instance where an SPV could be subject to VAT; that this provision, however, merely provides what to do in case an SPV is subject to VAT; that this does not mean that an SPV is subject to VAT; that this should be read in connection with all the other provisions of the regulations; that as already stated, the framers of the law anticipated that an SPV could either be subject to VAT or GRT; that similarly, in Section 7 (d) (4) of the same regulations provides that certain transactions of an SPV shall be exempt from VAT ". . . or gross receipts tax . . . whichever is applicable: Provided, that in case of a VAT-exemption and pursuant to Section 110 (A) (3) of the NIRC of 1997, the following rules shall apply: . . . "; that as can be deduced from the provision of the SPV Law and its implementing rules and regulations, the SPV Law contemplated a situation where, because of the pending proposals for the adoption of a GRT for banks and NBFIs, an SPV could either be subject to VAT or GRT, depending on the law prevailing at the moment; and that since other non-bank financial intermediaries are subject to GRT, an SPV should likewise be subject to GRT. And lastly, in your letter dated July 23, 2006, it was stated that POGI cannot engage in the acquisition of ROPOAs given that it does not meet the nationality requirement as provided in the SPV Law itself; that since it is controlled by foreign owners, POGI could not own land, therefore, practically removing the possibility of POGI having a VATable transaction from the acquisition and subsequent disposition of ROPOAs; that with this, POGI's business activity will effectively be limited to the acquisition of non-performing loans or NPLs. In connection therewith, you now request for an opinion as to whether or not POGI, can be classified as a non-bank financial intermediary, and thus, its transactions, other than those covered by the exemption under the SPV Law, are subject to the gross receipts tax (GRT) imposed under Section 122 of the Tax Code of 1997, as amended by R.A. No. 9238 and is therefore exempt from VAT under Sections 109 (E) and (U) of the same Code. In reply thereto, please be informed that Section 122 of the Tax Code of 1997, as amended by R.A. No. 9238, provides that "Sec. 122. Tax on Other Non-Bank Financial Intermediaries . There shall be collected a tax of five percent (5%) on the gross receipts derived by other non-bank financial intermediaries doing business in the Philippines, from interest, commissions, discounts and all other items treated as gross income under this Code: Provided, That interest, commissions and discounts from lending activities, as well as income from financial leasing, shall be taxed on the basis of remaining maturities of the instruments from which such receipts are derived, in accordance with the following schedule: Maturity period is five (5) years or less 5% Maturity period is more than five (5) years 1% Provided, however, That in case the maturity period is shortened thru pretermination, then the maturity period shall be reckoned to end as of the date of pretermination for purposes of classifying the transaction and the correct rate shall be applied accordingly. Provided, finally, That the generally accepted accounting principles as may be prescribed by the Securities and Exchange Commission for other non-bank financial intermediaries shall likewise be the basis for the calculation of gross receipts. Nothing in this Code shall preclude the Commissioner from imposing the same tax herein provided on persons performing similar financing activities." From the above-cited provision, it is clear that GRT can be imposed on persons, whether natural or juridical, as long as it is performing financing activities similar to a non-bank financial intermediary. The term " Non-bank Financial Intermediaries " refers to persons or entities whose principal functions include the lending, investing or placement of funds or evidences of indebtedness or equity deposited with them, acquired by them or otherwise coursed through them, either for their own account or for the account of others. This includes all entities regularly engaged in the lending of funds or purchasing of receivables or other obligations with funds obtained from the public through the issuance, endorsement or acceptance of debt instruments of any kind for their own account, or through the issuance of certificates of assignment or similar instruments with recourse, trust certificates, or of repurchase agreements, whether any of these means of obtaining funds from the public is done on a regular basis or only occasionally. ( Sec. 2.3, Revenue Regulations No. 9-2004 ) Embraced in the definition of the term "non-bank financial intermediaries" are financing companies which refer to corporations except banks, investments houses, savings and loan associations, insurance companies, cooperatives, and other financial institutions organized or operating under other special laws, which are primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial, or agricultural enterprises, by direct lending or by discounting or factoring commercial papers or accounts receivables, or by buying and selling contracts, leases, chattel mortgages, or other evidences of indebtedness, or by financial leasing of movable as well as immovable properties. ( Sec. 2.7, Revenue Regulations No. 9-2004 citing R.A. No. 5980, as amended by R.A. No. 8556 ) Furthermore, Section 3 of R.A. No. 9182, as implemented by Rule 3 of the Implementing Rules and Regulations, defines NPAs and NPLs as follows: "(p) Non-Performing Assets or NPAs" consist of the NPLs and ROPOAs by the FIs, certified to be eligible as such by the Appropriate Regulatory Authority. "(q) Non-Performing Loans or NPLs" refer to loans and 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." Section 4 of the SPV Law, in turn, provides that: "Sec. 4. Special Purpose Vehicle . An SPV shall be organized as a stock corporation in accordance with Batas Pambansa Blg. 68, otherwise known as "The Corporation Code of the Philippines" and the rules promulgated by the Commission for purposes of registering the SPV: Provided, That if the SPV will acquire land, at least sixty percent (60%) of its outstanding capital stock shall be owned by Philippine nationals pursuant to Republic Act No. 7042, otherwise known as "The Foreign Investments Act." In view of the foregoing, given that POGI's main activity being an SPV, is to invest in and acquire loans, receivables, and other evidence of indebtedness and that it is not capable of acquiring ROPOA's or can only acquire non-performing loans, POGI's activities are deemed akin to the principal activities of non-bank financial institutions, particularly that of financing companies which are primarily organized for the purpose of extending credit by discounting or factoring commercial papers or account receivables, or by buying and selling contracts and other evidence of indebtedness. aTADCE WHEREFORE, this Office holds that for tax purposes, POGI (SPV-AMC) shall be treated as an Other Non-Bank Financial Intermediary performing activities similar to a financing company provided that it will not acquire ROPOAs or perform such other activities that would entail the imposition of VAT. Consequently, with regard to its business tax liability arising from the above-mentioned transactions, POGI is subject to GRT imposed under Section 122 of the Tax Code of 1997, as amended, and is exempt from VAT pursuant to Section 109 (E) and (U) of the same Code. 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.) JOSE MARIO C. BUAG Commissioner of Internal Revenue