BIR Ruling No. 226-11

July 13, 2011 BIR RULING NO. 226-11 Section 27 (D) (5); R.A. 9182; RR 6-2004, as amended by RR 9-2005; BIR Ruling No. DA-483-05; BIR Ruling No. DA-148-08 Rodrigo Berenguer & Guno 4th Floor, Phil. First Bldg., 6764 Ayala Avenue, Makati City Attention: Atty. Tomas M. Guno Atty. Rainerio S. Macamay Gentlemen : This refers to your letter dated January 29, 2009, received by this Office on April 24, 2009 by way of Indorsement dated April 22, 2009 from Revenue Region No. 8, Makati City, requesting on behalf of your client, Mr. Eusebio Tanco, exemption from payment of capital gains and documentary stamp taxes pursuant to R.A. 9182, as amended by R.A. 9343 otherwise known as the "Special Purpose Vehicle Law". AEHCDa It is represented that your client, Mr. Eusebio H. Tanco, purchased from a Special Purpose Vehicle (SPV), Tranche 1 (SPV-AMC), Inc. 5,159,567 redeemable preferred shares of stock in Advent Capital & Finance Corporation pursuant to R.A. 9182 as amended by R.A. 9343; that by way of background the following are the antecedent facts: 1) On June 2, 2005, Philippine National Bank (PNB) assigned its Five Million Two Hundred Five Thousand Five Hundred Fifty Eight (5,205,558) redeemable preferred stocks of Advent Capital and Finance Corporation (ACFC), covered by Stock Certificate No. 0042, to Tranche 1 (SPV-AMC), Inc.; 2) On the same date, PNB notified ACFC, the obligor, that the latter's loan with the former is no longer a loan or indebtedness but has been converted to five million two hundred five thousand five hundred fifty-eight (5,205,558) redeemable preferred stocks and that PNB has absolutely and irrevocably sold and assigned the same in favor of Tranche 1 (SPV-AMC), Inc.; 3) A Certificate of Eligibility (of Non-Performing Assets) was issued by the Bangko Sentral ng Pilipinas (BSP) under COE No. BSP050405-00004 certifying PNB as a qualified Financial Institution with assets that qualify as Non-Performing Assets in accordance with R.A. 9182 and that BSP has likewise approved the transfer to Tranche 1 (SPV-AMC), Inc. which appears to be in the nature of a "true sale"; 4) On or about July 2008, a Deed of Absolute Sale of Shares of Stock was executed by and between Tranche 1 (SPV-AMC), Inc. and Eusebio H. Tanco whereby the former sold 5,159,567 redeemable preferred stocks of ACFC, covered by Stock Cert. 0308, to the latter for a consideration of One Million (P1,000,000) Pesos; 5) The par value of 5,159,567 shares is P0.50/share or a total of P2,579,783.50. In reply, please be informed that pursuant to Section 27 (D) (5) of the Tax Code of 1997, acquisition of real property treated as capital asset is subject to capital gains tax on the gains presumed to have been realized from said transfer. However, with the enactment of R.A. 9182 ("SPV Law"), the transfer of a ROPOA 1 by an SPV to a third-party is among the enumerated transactions qualified under SPV Law 1 as exempt from taxes. Section 7 (d) in relation to Item (a) (8) thereof, both of Revenue Regulations (RR) No. 6-2004, 2 enumerates the following taxes that a qualified transaction is exempt from under the SPV Law, 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 said Code notwithstanding; (2) Capital gains tax (CGT) imposed on the transfer of land and/or building treated as capital asset in the hands of the transferor, as defined in Section 39(A)(1) of the NIRC of 1997; (3) Creditable withholding income taxes imposed on the transfer of land and/or buildings treated as ordinary assets in the hands of the transferor pursuant to Revenue Regulations No. 2-98, as amended: Provided, That this shall not include exemption from income tax under Title II of the NIRC of 1997. The transfer by an FI or by an SPV of its NPA which is treated as ordinary asset shall continue to be subject to the ordinary corporate income tax or minimum corporate income tax, as the case may be, under pertinent provisions of the NIRC of 1997; and (4) Value-added tax (VAT) as may be imposed under Title IV of the NIRC of 1997: Provided, that in the 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." SEACTH However, Section 3 of RR No. 9-2005 3 amending RR No. 6-2004, provides that: "SEC. 7. Tax-exempt transactions. xxx xxx xxx (c) The tax exemptions as provided in paragraph (d) hereof shall apply to the transactions listed in paragraph (a) above only if the following particular requirements, where applicable, are complied, to wit: xxx xxx xxx 3. In the case of transactions (a)(7), (a)(8), (a)(11) and (a)(12) above, the NPL/ROPOA must have been acquired by the SPV or Individual from an FI within the 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 that the transaction must have occurred within the period of five (5) years from the date of said acquisition. Thereafter, the tax exemptions provided in paragraph (d) hereof shall no longer apply." (Emphasis supplied) Based on the foregoing, in order for the transfer of a ROPOA by an SPV to a third party 4 to qualify as tax exempt transaction the all following requirements should be complied with: a) The ROPOA must have been acquired by the SPV or individual from an FI within the period from April 12, 2003 to April 12, 2005; b) The transfer is 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 c) The transaction must have occurred within the period of five (5) years from the date of said acquisition. As to the first requirement, documents submitted disclose that the Deed of Assignment executed between the financial institution, PNB and Tranche 1 (SPV-AMC), Inc. transferring the assets to the latter was on June 2, 2005, which is beyond the period set under the foregoing provisions April 12, 2003 to April 12, 2005. Neither does the transaction qualify under Section 2 of R.A. 9343 5 which states that: "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." In relation with this, BSP issued Memorandum No. M-2006-004 dated June 23, 2006 providing for the significant time lines relative to the implementation of R.A. No. 9182, as amended by R.A. 9343 "b. Sale/Transfer of Non-Performing Assets (NPAs) Entitled to Tax Exemptions and Fee Privileges The following transactions enumerated as items 1 to 6 of Section 15 of the Implementing Rules and Regulations of the SPV Law are entitled to tax exemptions and fee privileges under the same Section only if such transactions occur within two (2) years from the effectivity of the amendatory Act or from 14 May 2006 to 14 May 2008 : 1. The transfer of the NPL by the FI to an SPV; 2. The transfer of the ROPOA by the FI to an SPV; 3. The dation in payment (dacion en pago) of the NPL by the borrower to the FI; 4. The dation in payment (dacion en pago) of the NPL by the third party, on behalf of the borrower, to the FI; 5. The transfer of the NPL (secured by a real estate mortgage on a residential unit) by the FI to an individual; and caEIDA 6. The transfer of the ROPOA (single family residential unit) by the FI to an individual. For the purpose of determining whether a transaction occurred within the two-year period or from 14 May 2006 to 14 May 2008, relevant to documents to support the application ( e.g. , Asset Sale and Purchase Agreement, Deed of Assignment, Deed of Dacion, etc.) should be notarized within the said two-year period." The transfer from Tranche 1 (SPV-AMC) to Mr. Eusebio Tanco is not one of those transactions enumerated in the foregoing and even if it was, the same was executed sometime July 2008, which is well after the period stated therein. Based on the foregoing and considering that the transfer from PNB to Tranche l did not comply with the first requirement, this Office cannot grant your request for exemption from payment of capital gains and documentary stamp taxes pursuant to R.A. 9182, as amended by R.A. 9343 otherwise known as the "Special Purpose Vehicle Law". Accordingly, the said transfer is subject to capital gains tax and documentary stamp tax under Sections 27 (D) (2) and 175 of the 1997 Tax Code, as amended. 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.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. ROPOA refers to real and other properties owned or acquired by an FI in settlement of loans and receivables, including real properties, shares of stocks, and chattels formerly constituting collaterals for secured loans which have been acquired by way of dation in payment (dacion en pago) or judicial or extra-judicial foreclosure or execution of judgment. (R.A. 9182) 2. March 31, 2004. Implementing the Tax Exemptions and Privileges Granted Under Republic Act No. 9182, Otherwise Known as "The Special Purpose Vehicle (SPV) Act of 2002". 3. March 19, 2005. Amending Pertinent Provisions of Revenue Regulations (RR) No. 06-04 Relative to the Tax Exemptions and Privileges Granted Under Republic Act No. 9182," Otherwise Known as "The Special Purpose Vehicle (SPV) Act of 2002 (the "Act"). 4. Section 7 (a) (8), Rev. Regs. 06-2004. 5. April 24, 2006. An Act Amending Republic Act No. 9182, Otherwise Known as the Special Purpose Vehicle Act of 2002 for the Purpose of Allowing the Establishment and Registration of New SPVs and for Other Purposes.