Tax Consequences in Foreclosure Sales

December 8, 2005 BIR RULING NO. 021-05 RR 4-99; 13-2001 000-00 Development Bank of the Philippines (DBP) Acquired Assets Management Sen. Gil Puyat Avenue Cor. Makati Avenue Makati City Attention: Mr. Renato A. Castillo Senior Vice President Gentlemen : This refers to your letter dated July 29, 2005 requesting clarification on the following: 1. Whether the payments made by the creditor-banks for the documentary stamp tax of P6,120,000.00 and creditable withholding tax of P24,479,999.94 on March 6 and 10, 2003, respectively, are in order. 2. Whether the above payments should be based on the Certificate of Sale registered on February 8, 2002 or on the Securities and Exchange Commission (SEC) Order issued on January 30, 2003, (copy received on February 7, 2003 by Angara, Abello Concepcion Regala & Cruz Law Offices, Counsel for creditors-banks) or on the final resolution of the SEC Order in view of the Motion for reconsideration/Opposition to Motion for Reconsideration filed by the concerned parties. The facts as represented are as follows: On November 8, 1996, Serg's Products, Inc. (SPI) was granted a loan of P165M representing DBP's participation (34.92%) in the P472.47M syndicated loan (1st Metro Investment Corporation - P165M or 34.93%; 1st E-Bank (PDCP) - P113.72M or 24.07%; and Solid Bank Corporation/MetroBank - P28.75M or 6.08%. HEacAS SPI filed a petition with the SEC on October 27, 1998 to secure an order of suspension of payment which was granted on October 30, 1998. However, the creditor-banks thru 1st E-Bank/PDCP, the Trustee, have successfully foreclosed SPI's mortgaged assets on November 3, 1998 as follows: Acquisition Cost Real Estate (TCT Nos. 509723 to 509727) P408,000,000.00 Chattels (various machinery & equipment) 192,000,000.00 TOTAL P600,000,000.00 ============ SPI's suspension of payments was dismissed by the SEC-Hearing Panel on June 11, 1999. However, SPI appealed to the SEC Proper seeking its reversal. In its Order dated June 23, 1999, the Commission En Banc ruled that in the meantime, the suspension order earlier issued still subsists until further advice. With the suspension order, the creditor-banks came up with a compromise agreement to avoid prolonged litigation and at the same time rehabilitate the account. The Compromise Agreement provides among others, that if SPI defaulted on the amortizations, the Sheriff's Certificate of Sale will be registered to implement the above foreclosure sale. SPI defaulted on three (3) amortizations and failed to cure them within the 90-day period; hence, following the provisions of the compromise, the Sheriff's Certificate of Sale covering the real estates was registered in the Registry of Deeds on February 8, 2002; while the Sheriff's Certificate of Sale covering the machinery and equipment was registered on February 11, 2002. On January 30, 2003, SEC issued a suspension order and dismissed SPI's petition for rehabilitation (copy of which was received by the Trustee only on April 3, 2003). However, on February 24, 2003, SPI filed a Motion for Reconsideration with the SEC relative thereto. On the other hand, on March 28, 2003, the creditor-banks filed an Opposition to the Motion for Reconsideration filed by SPI. On March 6, 2003, the Trustee paid to the BIR the amount of P6,120,000.00 for the documentary stamp tax due on the auction sale. On March 10, 2003, the Trustee paid to the BIR the amount of P24,479,999.94 for the creditable withholding taxes due thereon. The said tax payments were shared by the creditor-banks. The Affidavit of Consolidation of Ownership signed by the respective signatories of the creditor-banks was completed only on September 29, 2004. EcATDH In view of the dissolution of 1st E-Bank, it resigned from the Trusteeship effective May 16, 2003 with PDIC as its successor-in-interest. However, PDIC is not amenable to act as Trustee on subject account. To carry out the functions left by 1st E-Bank, the creditor-banks agreed to appoint DBP to act as the Administrator. Consolidation of titles in the name of the creditor-banks was held in abeyance by the Revenue District Office (RDO) of Cainta, Rizal, pending settlement of the penalties/surcharges in the aggregate amount of P42,173,348.00. SPI ceased operations since 2001. Due to continuous deterioration of the acquired properties, the creditor-banks can no longer recover their exposures on SPI totaling P472,500,000.00 (excluding interests and expenses) since the properties current appraised value is only P330,400,000.00. In reply, please be informed that in the case of foreclosure sale of an ordinary asset, the creditable withholding tax due thereon shall be paid within five (5) days after the close of the month following the lapse of the one-year redemption period pursuant to Rev. Regs. No. 6-2001. On the other hand, under Section 4 (2) of Revenue Regulations (Rev. Regs.) No. 4-99, in case of non-redemption, the corresponding documentary stamp tax shall be levied, collected and paid by the person making, signing, issuing, accepting, or transferring the real property wherever the document is made, signed, issued, accepted or transferred where the property is situated in the Philippines; Provided, That whenever one party to the taxable document enjoys exemption from the tax, the other party thereto who is not exempt shall be the one directly liable for the tax. The tax return prescribed under the Code shall be filed within five (5) days after the close of the month following the lapse of the one-year redemption period, and the tax due under Sec. 196 of the Tax Code of 1997 shall be paid based on the bid price at the same time the aforesaid return is filed. However, under Republic Act No. 8791, otherwise known as the "General Banking Law of 2000", the right of redemption of a mortgagor juridical person is set at the maximum of three (3) months. Furthermore, if the mortgagee bank registers the certificate of foreclosure sale earlier than the three-month redemption period, the right of redemption of a corporate mortgagor will cease. The foregoing in effect amended Rev. Regs. No. 4-99 insofar as the right of redemption of a corporate mortgagor is concerned. Thus, when the mortgagee bank registers the Certificate of Sale the corporate mortgagor will lose its right of redemption. The above law applies to Certificates of Sale registered after its effectivity regardless of the date the foreclosure sales were made. TIESCA In the instant case, the Sheriff's Certificate of Sale covering the real estates of SPI was registered in the Registry of Deeds only on February 8, 2002, while the Sheriff's Certificate of Sale covering SPI's machinery and equipment was registered on February 11, 2002. Accordingly, the creditable withholding and documentary stamp taxes imposed thereon were due on the 5th day after the close of the month following the registration of the above Certificates of Sale, which was on March 5, 2002. The motions filed by SPI and the creditor-banks and the orders issued by the SEC did not, in any way, affect the validity of the above transactions. However, considering that the creditor-banks, as payors of the above taxes, incurred delay on the payment of the documentary stamp tax and the creditable withholding tax, mainly due to the fact that there was an issue as to the time of payment of the same, as the BIR-ONETT Team was, likewise, in quandary in determining the reckoning period of the time of payment of the aforesaid taxes, the imposition of the penalty and surcharge on the above transactions, therefore, is hereby cancelled. One of the grounds or instances when the penalties and/or interest imposed on the taxpayer may be abated or cancelled is when the assessment is brought about by or the result of taxpayer's non-compliance with the law due to a difficult interpretation of said law. (Section 2 (2.4), Rev. Regs. No. 13-2001). However, it shall be understood that the creditor-banks shall be liable for the corresponding interest that has accrued thereon up to the time of payment of the aforesaid taxes pursuant to Section 249 of the Tax Code of 1997. 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 Footnotes 1. Previously ten (10) days. This was shortened to five (5) days under Rev. Regs. No. 6-2001.