BIR Ruling No. 107-10

October 19, 2010 BIR RULING NO. 107-10 R.A. 9182; RR 6-2004; RR 9-2005; 000-00 Belo Gozon Elma Parel Asuncion & Lucila 15th & 16th Floors, Sagittarius Condominiums H.V. dela Costa Street, Salcedo Village Makati City Attention: Attys. Roberto Rafael V. Lucila Maria Theresa E. de Mesa Reynold D.G. Mata Gentlemen : This refers to your letter dated May 20, 2010 requesting on behalf of your client, Asset Pool A (SPV-AMC), Inc. ("Asset Pool A"), for confirmation of your opinion that the dacion en pago transaction between your client and its debtor, Ebedev, Inc. ("Ebedev") is a tax-exempt transaction under Republic Act (RA) No. 9182 or the Special Purpose Vehicle ("SPV") Act of 2002, as amended by RA 9343. DICcTa Background Assignment of Rights over the Ebedev NPL On June 23, 2005, United Coconut Planters Bank ("UCPB") transferred all of its rights, titles and interests in and to the Non-Performing Loans ("NPL's") of Ebedev, in the total principal amount of One Hundred Forty Two Million Seven Hundred Seventy Thousand Eight Hundred Eighty Seven and 20/100 Pesos (P142,770,887.20) Philippine Currency (the "Ebedev NPLs"), including all security interests, mortgages, reimbursement rights, resale rights and similar rights, and privileges relating to such loan or indebtedness, under and pursuant to the Deed of Absolute Sale of even date. UCPB is a universal bank registered with the Securities and Exchange Commission (SEC) under Company Registration No. 23009, while Asset Pool A is a special purpose vehicle registered with the SEC under SEC Registration No. CS200414547. While it was captioned as such, the four corners of the Transfer of Rights Deed clearly show that what was assigned, transferred or conveyed by UCPB in favor of Asset Pool A are merely the rights, titles and interests in the Ebedev's NPLs and the accompanying mortgages. The Transfer of Rights Deed was executed pursuant to and in accordance with the provisions of R.A. No. 9182 or the SPV Act of 2002 and implemented by the implementing Rules and Regulations of the SPV Act of 2002, Revenue Regulations No. 6-2004 dated March 31, 2004, Revenue Regulations No. 9-2005 dated March 19, 2005. The Ebedev NPLs were included among the NPLs eligible under the SPV Act of 2002 as further evidenced by the Certificate of Eligibility ("COE") No. BSP050602-00001 dated June 6, 2005 issued by the Bangko Sentral ng Pilipinas ("BSP") to UCPB. The Transfer of Rights Deed contains no provisions changing the conditions of the promissory notes and the mortgage or changing the maturity or period of coverage of the promissory notes and the mortgages from those of the original instruments. As assignee under the Transfer of Rights Deed, Asset Pool A merely steps into the shoes of UCPB as creditor-mortgagee, acquires no better right than what UCPB had in the mortgaged properties, and clearly does not receive any title to the mortgaged properties. The caption Deed of Absolute Sale for the Transfer of Rights Deed does not alter its tax-exempt status. As a necessary implementation of the transfer of rights, title and interests in and to the Ebedev NPLs, UCPB duly endorsed the following promissory notes of Ebedev in favor of Asset Pool A, as follows: Ebedev, Inc. Outstanding Loan as of 12/31/2004 Peso Loan PN No. Grant Date Maturity Original Principal Date Amount Outstanding 1 5735-95-03890-4 12/11/95 9/30/98 100,000,000.00 50,000,000.00 2 5735-96-001990-0 01/22/96 9/30/98 7,000,000.00 3,500,000.00 3 5735-96-00626-7 02/28/96 9/30/98 45,000,000.00 22,500,000.00 4 5735-96-00915-0 03/28/96 9/30/98 10,500,000.00 5,250,000.00 5 5735-96-01168-6 04/19/96 9/30/98 7,500,000.00 3,750,000.00 6 5735-96-01225-9 04/24/96 9/30/98 10,000,000.00 5,000,000.00 7 5735-96-01416-2 05/13/96 9/30/98 12,500,000.00 6,250,000.00 8 5735-96-01576-2 05/24/96 9/30/98 16,200,000.00 8,100,000.00 9 5735-96-01804-4 06/07/96 9/30/98 17,400,000.00 8,700,000.00 10 5735-96-02126-6 07/03/96 9/30/98 3,900,000.00 1,950,000.00 11 5735-96-02256-4 07/11/96 9/30/98 10,000,000.00 5,000,000.00 12 5735-96-02405-2 07/24/96 9/30/98 4,300,000.00 1,710,887.20 13 5735-96-02626-8 08/07/96 9/30/98 8,320,000.00 4,160,000.00 14 5735-96-02982-8 09/04/96 9/30/98 9,600,000.00 4,800,000.00 15 5735-96-03412-0 09/30/96 9/30/98 5,700,000.00 2,850,000.00 16 5735-96-03551-8 10/10/96 9/30/98 4,500,000.00 2,250,000.00 17 5735-96-04107-0 11/28/96 9/30/98 8,000,000.00 4,000,000.00 18 5735-96-04200-0 12/05/96 9/30/98 6,000,000.00 3,000,000.00 Total P286,420,000.00 P142,770,887.20 ============= ============= The Ebedev Loan is secured by a Real Estate Mortgage, as modified by the Amendment of Mortgage and reduced by Partial Cancellations of Mortgage over certain condominium units. EaCSTc Dacion en Pago Between Ebedev and Asset Pool A Towards the full settlement of the Ebedev NPLs, Ebedev and Asset Pool A executed the following dacion en pago agreements ("Dacion en pago Agreements") : (1) On April 29, 2010, Ebedev and Asset Pool A executed two (2) Assignments of Property in Payment of Outstanding Debt (Dacion en Pago) , wherein Ebedev assigned, transferred and conveyed to Asset Pool A some One Hundred Twenty-two (122) condominium units and Three Hundred Twenty Eight (328) parking slots, respectively, on an as is where basis, including all improvements thereon, located at the Condominium ("Westmont Village") along A. Santos Avenue, Paraaque City, with ascribed dacion values of P7,013 per square meter for the condominium units and P3,004 per square meter for the parking slots. (2) Subsequently, on May 12, 2010, Ebedev and Asset Pool A executed Twenty-Eight (28) additional Assignments of Property in Payment of Outstanding Debt (Dacion en pago) , wherein Ebedev assigned, transferred and conveyed to Asset Pool A some Seven (7) additional condominium units and Twenty-One (21) additional parking slots, also in Westmont Village, and also with ascribed dacion values P7,013 per square meter for the condominium units and P3,004 per square meter for the parking slots. We reply as follows: As a rule, acquisitions of real property treated as capital asset are subject to capital gains tax ("CGT") on the gains presumed to have been realized from said transfer. 1 With the enactment of R.A. 9182, as implemented by Revenue Regulations (RR) No. 6-2004, as amended by RR No. 9-2005, however, dation in payment (dacion en pago) by the borrower or by a third party in favor of a Financial Institution (FI) or in favor of an SPV is now considered among the enumerated transactions qualified under the tax exemptions of the SPV Act. Specifically, Section 7 (d) in relation to Item (a) (8) thereof, both of RR No. 6-2004, as amended by RR No. 9-2005, enumerates the following tax exemptions that are given to a qualified transaction, to wit: 1. Documentary stamp tax (DST) on any document evidencing the transfer or dation in payment as may be imposed under Title VII of the NIRC of 1997, the last phrase of Section 173 of the same Code notwithstanding; 2. Capital gains tax (CGT) imposed on the transfer of land and/or a building treated as capital asset in the hands of the transferor, as defined under Section 39 (A) (1) of the NIRC of 1997; 3. Creditable withholding taxes imposed on the transfer of land and/or building treated as ordinary assets in the hands of the transferor pursuant to RR No. 2-98, as amended; and 4. Value-added tax as may be imposed under Title IV of the NIRC of 1997: Provided, that in case of VAT-exemption and if the property being transferred is a capital good used in the trade or business of a VAT-registered person, the input tax on the said property shall be allocated as follows: the depreciated book value of the property over its acquisition cost, multiplied by the input tax directly attributed to the said property shall not be allowed as input tax to the transferor's other VAT-taxable activities. DISHEA The foregoing rule is consistent with Rule 15 of the SPV Act which provides: "Sec. 15. Tax Exemptions and Fee Privileges. xxx xxx xxx All sales or transfers of NPAs from the FIs to an SPV or transfers by way of dation in payment (dacion en pago) by the borrower or by a third party to the FI shall be entitled to the privileges enumerated herein for a period of not more than two (2) years from the date of effectivity of this amendatory Act: Provided, That transfers from an SPV to a third party of NPAs acquired by the SPV within such two-year period or transfers by way of dation in payment (dacion en pago) by a borrower to the SPV shall enjoy the privileges enumerated herein for a period of not more than five (5) years from the date of acquisition by the SPV: Provided, further, That properties acquired by an SPV from GFIs or GOCCs which are devoted to socialized or low-cost housing shall not be converted to other uses." (Emphasis supplied) On the other hand, Rule 15 of the SPV Act is implemented by Section 7 (a) of RR No. 6-2004 which provides: "Sec. 7. Tax exempt transactions. (a) Pursuant to Section 15 of Article IV of the Act, only the following transactions shall be covered by the tax exemptions as provided in paragraph (d) hereof: xxx xxx xxx (9) Dation in payment (dacion en pago) of an NPL by a borrower to an SPV; xxx xxx xxx" The IRR of the SPV Act of 2002 defines dation in payment or dacion en pago as a "payment whereby property, whether real or personal, tangible or intangible, is alienated in favor of the creditor, which could either be an FI or an SPV, in satisfaction of an NPL." The same rules also define Non-Performing Loans as "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 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". cDCEIA Furthermore, RR No. 6-2004, as amended by RR No. 9-2005 set as a condition that the dation in payment must be in settlement of an NPL that has been acquired by the SPV from an FI within a period from April 12, 2003 to April 12, 2005, in the nature of, and approved by the Appropriate Regulatory Authority as a "true sale", pursuant to the Act and its implementing rules and regulations, and the dation in payment must have occurred within the period of five (5) years from the date of said acquisition. Applying the foregoing in the instant case, the full settlement of the Ebedev NPLs fall under item (9) of the above-enumerated transactions entitled to the tax exemptions provided by the IRR of the SPV Act of 2002 since the Transfer of Rights Deed show that the Sale and Purchase Agreement and Accession Undertaking were executed on April 11, 2005 and since the same Transfer of Rights Deed was executed on June 23, 2005, the dacion en pago Agreements executed by Ebedev and Asset Pool A on April 29, 2010 and May 12, 2010 or within the 5-year period from the date of acquisition on June 23, 2005. (BIR Ruling Nos. DA-407-2005 dated October 3, 2005 and DA-284-2005 dated June 23, 2005) Thus, considering that the rights, titles and interests in and to the NPL's of Ebedev were acquired by Asset Pool A (SPV) from UCPB (FI) in accordance with the provisions of the SPV Act as evidenced by the COEs issued by the BSP, the transfer of properties (NPLs), including the condominium units and the parking slots located at the Westmont Village (condominium) by Ebedev to Asset Pool A by way of dacion en pago within five (5) years from Asset Pool A's acquisition of the NPL shall be exempt from the payment of DST, CGT, CWT and VAT. (BIR Ruling Nos. DA (OSL-037) 728-09 dated December 3, 2009) This will serve as the authority and guide for the Revenue Region/Revenue District Office concerned to issue the corresponding Certificate Authorizing Registration (CAR) and/or Tax Clearance (TCL) on the aforementioned transaction. 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. HIEASa Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Section 27 (D) (5) of the Tax Code of 1997.