BIR Ruling No. 311-11

August 22, 2011 BIR RULING NO. 311-11 R.A. 9182; RR 6-2004; RR-9-2005; BIR Ruling No. 112-10; BIR Ruling No. 107-10; BIR Ruling No. DA (OSL-030) 475-2009 Bernaldo Directo & Po Law Offices Unit 1807 Cityland Condominium 10 Tower 1, 6815 Ayala Avenue cor. H.V. dela Costa St. Makati City Attention: Pepito G. Po Partner Gentlemen : This refers to your letter dated April 27, 2010 requesting on behalf of your client, regarding certain properties in Malarayat Golf and Country Club (Malarayat) forming part of its real and other properties owned and acquired (ROPOAs), which are eligible and was actually issued Certificates of Eligibility (COE) for certain tax exemptions and privileges by virtue of the Special Purpose Vehicles Act of 2004 (SPV), but still in the name of the respective owner-debtor. Background: Planters Development Bank (PDB) is a domestic corporation duly organized and existing under and by virtue of the laws of the Republic of the Philippines under SEC Registration No. 196118428, primarily to engage in the business of development banking, and with principal office at Plantersbank Building, 314 Senator Gil J. Puyat Avenue, 1200 Makati City, Philippines. On the other hand, Malarayat Golf and Country Club (Malarayat) is a joint venture project of the Lorenzo family (Lorenzo) and Active Realty, Inc. (Active), a domestic company engaged in realty business in the Philippines, with office address at ACT Tower, 135 Buendia, Makati City, Metro Manila, covering an area of 975,883 square meters located in Lipa, Batangas. Originally, Malarayat properties cover 27 parcels of land owned by several persons (Lorenzo Group) which where later developed into a golf course and residential dwellings, "Mount Malarayat Golf and Country Club", through a joint venture agreement (JV) with Active Realty, Inc. (Active) sometime in May 1994, with the following salient features: a. The Lorenzo Group to contribute said properties; b. Active to develop the same in accordance with the terms of the JV; c. Expenses in the development to be shouldered by Active along with the processing of the necessary permits, licenses and other papers for the said development; d. Subdivision of the mother titles; e. Agreement and appointment of a marketing agent for the sale of the developed units; f. 60:40 sharing ratio to Active and Lorenzo Group respectively, based on the net proceeds; g. Setting aside of the part of the proceeds from the sale for the payment of mortgage liabilities attached to the properties; h. Establishment of a trust fund for turnover to the homeowners' association; and, i. Such other stipulations. HICEca By virtue of an amendment to the said agreement sometime in 1995 with the end view of facilitating and simplifying the implementation of the JVA, the properties were then agreed to be transferred under the name of Active with related expenses shouldered based on the 60:40 ratio and executing such documents necessary for the transfer of the titles. After sometime when the JVA was in place, Lorenzo secured a loan from PDB using its interest in the subject Malarayat properties as collateral security for the loan. Lorenzo then, defaulted payment and was constrained to offer its 50% interest in the subject Malarayat properties to PDB as full settlement of its obligation, which was accepted by the latter. In this connection, Deeds of Assignment of such rights in the Joint Venture Agreement were executed by the Lorenzo in favor of PDB. To effect the said agreement and in order to be able to transfer the 50% shares in the JV, Active executed a Declaration of Trust in favor of the PDB and Planters now wish to transfer the titles over the said properties in its name. Later, when Active, the rest of Lorenzo, and PDB, as successor in interest to the JVA of other Lorenzos, had accounted for the unsold lots, it was determined that the 50% interest of PDB on Lorenzos equity (equivalent to 10.7536% interest in the total unsold lots) was equivalent to thirty four (34) parcels of lands with an aggregate area of thirty four thousand eight hundred ninety two (34,892) square meters. To give effect to the said determination, Active executed a Declaration of Trust in favor of PDB sometime in July 2002 thereby allowing the latter to sell, convey, or assign its share to any interested party. Likewise, the related shares of stocks on the Mount Malarayat Golf Country Club, Inc. consisting of 325 shares of stock from various classes had been assigned to PDB. When PDB applied with the Bangko Sentral ng Pilipinas (BSP) Certificate of Eligibility (COE) under the Special Purpose Vehicles Act for tax exemptions and privileges on its ROPOAs, said equity in the JVA had been included and the 34 parcels of land from the said equity had formed part thereof. After the requisite procedural and documentary requirements, PDB was issued COE that included the 34 parcels of lands still under the name of Active with the related tax exemptions for its transfer to a Special Purpose Vehicle (SPV). Based on the foregoing representations, you now request for confirmation of your following opinion: a) The transfer of Malarayat properties from Active directly to SPV is not subject to DST, VAT, and EWT for the reason that the same represents the distributive share of Lorenzo in the JV with Active for the Mount Malarayat Golf and Country Club project, which Lorenzo used as dacion en pago for its obligation to PDB. Also, the transfer of the said assets to SPV was qualified for tax exemption by virtue of the COE issued by the latter and b) To order the Revenue District Officer where Malarayat properties are located, to issue the corresponding Certificate Authorizing Registration (CAR) in the name of the SPV covering the said properties. 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 However, with the enactment of Republic Act (RA) No. 9182 (SPV Law), as implemented by Revenue Regulations No. 6-2004 and Revenue Regulations No. 9-2005, and further amended by RA 9343 as circularized by Revenue Memorandum Circular No. 44-2006, transactions involving transfers of property by way of dacion en pago , as well as those transfers qualified under the SPV law have been granted tax exemptions. (BIR Ruling No. 112-10 dated October 28, 2010 and BIR Ruling No. 107-10 dated October 19, 2010) 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 HDIATS 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. 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." 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." Furthermore, SPV regulations provides that in order for the dation to be entitled to tax exemption, the transaction must have occurred within the period from April 12, 2003 to April 12, 2005, as amended by Republic Act No. 9343 extending the same within eighteen months from the date of the amendatory act (RA 9343) which is May 14, 2006. Thereafter, the tax exemption provided shall no longer apply. Thus, 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 under the law for a period of not more than two (2) years from May 14, 2006. As represented, on August 13, 1998 and September 8, 1998, the Lorenzo group assigned to the Planters Development Bank one half of its share under the JVA by virtue of Deeds of Assignment of Property in Payment of Obligation (Dation in Payment). Thus, considering that the transaction involved took place not within the period set by R.A. 9182, regrettably, your request that you be entitled to certain tax exemptions and privileges by virtue of the Special Purpose Vehicles Act of 2004 (SPV), is hereby denied for lack of legal basis. 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. HTCSDE Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Section 27 (D) (5) of the Tax Code of 1997.