Province of Southern Leyte

September 6, 2012 BIR RULING NO. 556-12 RA 9182; RA 9343; RR 06-04 Province of Southern Leyte Maasin City Attention: Damian G. Mercado Provincial Governor Gentlemen : This refers to the 2nd Indorsement dated November 22, 2010 by Revenue Region No. 14, Government Center, Palo, Leyte of the request for Ruling/Certificate of Tax Exemption of the Province of Southern Leyte relative to the sale of parcels of land pursuant to Republic Act (R.A.) No. 9182, otherwise known as the "Special Purpose Vehicle (SPV) Act of 2002", as amended by R.A. No. 9343, implemented by Revenue Regulations (RR) No. 06-04 and Revenue Memorandum Circular (RMC) No. 44-2006, respectively. aSTHDc It is represented that a Deed of Absolute Sale dated 14 August 2008 was executed between Development Bank of the Philippines ("DBP"), a government financial institution of the Republic of the Philippines with business address at DBP Building, Makati Avenue corner Gil Puyat, Makati City with Taxpayer's Identification Number (TIN) 049-000-449-609 and Lehman Brothers Asian Investments Ltd through Philippine Investment Two (SPV-AMC), Inc. ("PITwo-SPV"), a corporation duly organized under the laws of the Philippines under Securities and Exchange Commission ("SEC") Registration No. CS200414824 dated September 17, 2004 with current business address at Unit 1615 Ayala Tower One & Exchange Plaza, Ayala Avenue, corner Paseo de Roxas, Makati City with TIN 233-834-040, covering three hundred fifteen (315) parcels of land located at Dongon, Maasin City, Southern Leyte with an aggregate area of 36,567.00 sq.m., more or less in consideration of the amount of Php7,987,512.88. On 31 July 2008, the Bangko Sentral ng Pilipinas ("BSP") qualified the abovementioned properties as Non-Performing Assets and approved the transfer/sale which appeared to be in the nature of a "true sale" in accordance with RA 9182 as amended by RA 9343, and its implementing rules and regulations under BSP Certificate of Eligibility (COE) No. BSP08C01493034C dated 31 July 2008. Thereafter, the Certificate Authorizing Registration (CAR) Nos. 2009-00135795 and 2009-00133749, both dated 29 July 2009, were issued by LTAID 1 Real Estate, Trading and Manufacturing, this Bureau, and the titles to the said properties were issued in the name of PITwo-SPV. Subsequently a Deed of Absolute Sale, notarized on 9 March 2010, was executed between PITwo-SPV represented by its Director Norman H. Macasaet, and the Province of Southern Leyte, represented by its Provincial Governor Damian G. Mercado, with TIN 004-310-229, covering the subject properties in consideration of the amount of Php10,745,983.46. The SEC issued COE No. 366 dated 7 March 2010 certifying the eligibility for benefits under SPV Act and its IRR of the subject properties. Based on the foregoing, you now request that the transfer/sale of the subject properties to the Province of Southern Leyte be exempted from the payment of appropriate transfer taxes pursuant to SPV Act and its IRR. In support of your request, you have submitted the following documents: 1) Certificate of Eligibility No. BSP08C01493034C dated 31 July 2008 issued by Bangko Sentral ng Pilipinas; HCSDca 2) Certificate of Eligibility No. 366 dated 7 March 2010 issued by Securities and Exchange Commission; 3) Certificate of Incorporation of Philippine Investment Two (SPV-AMC), Inc. issued by Securities and Exchange Commission; 4) Notarized Deed of Absolute Sale dated 14 August 2008; 5) Notarized Deed of Absolute Sale dated 9 March 2010; 6) Capital Gains Tax and Documentary Stamp Tax Returns; 7) Certificate Authorizing Registration Nos. 2009-00135795 and 2009-00133749, both dated 29 July 2009; 8) Transfer Certificate of Titles; and 9) Latest Tax Declarations and Certificate of No Improvement issued by the Office of the City Assessor, City of Maasin, Province of Southern Leyte. Please be informed as follows: 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. No. 9182 (SPV Law), as implemented by Revenue Regulations No. 6-2004, as amended by Rev. Regs. No. 9-2005, and further amended by R.A. 9343 as implemented by Revenue Memorandum Circular No. 44-2006, transactions involving the transfer of a ROPOA by an SPV to a third-party as well as those transfers qualified under the SPV law have been granted tax exemptions. cDAEIH In fine, Section 7 (a) (9) of Rev. Regs. No. 6-2004, as amended by Rev. Regs. No. 9-2005, specifies transfer of a ROPOA by an SPV to a third-party as among those transactions covered by the SPV law subject to certain conditions. Section 2 of R.A. 9343, amending Sec. 15, R.A. 9182, as implemented by RMC No. 44-2006 provides, viz. : "SEC. 15. Tax Exemptions and Fee Privileges . Any existing law to the contrary notwithstanding, the transfer of NPAs from the FI to an SPV, and from an SPV to a third party or dation in payment (dacion en pago) by the borrower or by a third party in favor of an FI or in favor of an SPV shall be exempt from the following taxes: "(a) Documentary stamp tax on the abovementioned transfer of NPAs and dation in payment (dacion en pago) as may be imposed under Title VII of the National Internal Revenue Code of 1997. "(b) Capital gains tax imposed on the transfer of lands and/or other assets treated as capital assets as defined under Section 39(A)(1) of the National Internal Revenue Code of 1997; "(c) Creditable withholding income taxes imposed on the transfer of land and/or buildings treated as ordinary assets pursuant to Revenue Regulations No. 2-98, as amended; "(d) Value-added tax on the transfer of NPAs as may be imposed under Title IV of the National Internal Revenue Code of 1997 or gross receipts tax under Title V of the same Code, whichever is applicable." For purposes of SPV Law, "ROPOA" shall refer to real and other properties owned or acquired by an FI in settlement of its loans and receivables, including, but not limited to real properties, shares of stock, and chattel formerly constituting collateral for secured loans, by way of dation in payment (dacion en pago) , judicial or extra-judicial foreclosure, or execution of judgment, as of June 30, 2002; and to such real and other properties acquired by an FI after June 30, 2002, through the same modes in settlement of a loan or receivable classified as NPL as of June 30, 2002; in either case as certified by the Appropriate Regulatory Authority. HCSEIT The foregoing rules are consistent with Rule 15 of SPV Act, which provides: "SPV RULE 15 Tax Exemption and Fee Privileges (a) Transaction Covered Only the following transactions shall be exempt from the payment of taxes and reduction of fees, as provided in Section 15 of Article IV of the Act and Section (d) and (e) of this Rule: xxx xxx xxx (8) The transfer of the ROPOA by the SPV to a third party: xxx xxx xxx (b) Provided, That these tax exemptions and reduction of fees shall apply only if all of the following requirements are complied with: (1) The NPA has been certified by the Appropriate Regulatory Authority as an NPL or ROPOA as of June 30, 2002: Provided, That for tax purposes, a property shall be deemed acquired after the lapse of the redemption period in cases where such period still exists. (2) All transfer taxes and registration fees have been paid or subsequently paid upon assessment on ROPOAs whose redemption period has lapsed as of June 30, 2002, where legal title has not been transferred in the name of the FI; (3) The properties acquired by an SPV from the GFIs or GOCCs which are devoted to socialized or low-cost housing shall not be converted to other uses. (c) Provided, further, That these tax exemptions and reductions and reduction of fees shall apply only if the following particular requirements, where applicable are complied with: IaAEHD xxx xxx xxx (3) For purposes of a(7) to (a)(12) of this Rule, the transaction occurred within a period of not more than five (5) years from the date of acquisition of NPA by the SPV or individuals from the FIs. Provided, That the SPV or individual acquired the NPA from the FI within the two-year period provided in (c) (2) of this Rule. After the lapse of these periods, the tax exemptions and fee privileges provided for in this Rule shall not be allowed xxx xxx xxx." Paragraph (c) (3) of said Section 7 of RR 09-05 further provides that "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." However, the enactment of the amendatory R.A. 9343, which became effective on 14 May 2006, specifically requires that in order to be entitled to tax exemption privileges, the sale/transfer of Non-Performing Assets (NPAs) by the FI to the SPV must have occurred within two (2) years from the effectivity of the amendatory Act or from 14 May 2006 to 14 May 2008. Thereafter, the tax exemptions provided under the Act shall no longer apply. Such being the case, it would appear from the records that such transfer of ROPOA by PITwo-SPV to the Province of Southern Leyte is not exempt from the internal revenue taxes under Rule 15 of SPV Act since DBP and PITwo-SPV executed the Deed of Absolute Sale of the ROPOAs on 14 August 2008 or 3 months after and clearly beyond the 2-year period provided for by law. It is a well-settled principle in statutory construction that exemption from tax is strictly construed against the taxpayer and liberally in favor of the taxing authority. A taxpayer who claims an exemption must be able to justify by the clearest grant of organic or statute law its exemption from the payment of tax. An exemption from the common burden cannot be permitted to exist upon vague implication. DTSaIc It must be stressed that along with police power and eminent domain, taxation is one of the three basic and necessary attributes of sovereignty. Thus, the State cannot be deprived of this most essential power and attribute of sovereignty by vague implications of law. Rather, being derogatory of sovereignty, the governing principle is that tax exemptions are to be construed in strictissimi juris against the taxpayer and liberally in favor of the taxing authority; and he who claims an exemption must be able to justify his claim by the clearest grant of statute. 1 Tax exemptions must be construed strictly against the taxpayer and liberally in favor of the taxing authority. The burden of proof rests upon the party claiming exemption to prove that it is in fact covered by the exemption so claimed. In case of doubt, non-exemption must be favored. Taxes being the lifeblood of the government that should be collected without unnecessary hindrance, every precaution must be taken not to unduly suppress it. 2 In view of the foregoing premises, this Office rules that the sale or transfer of ROPOAs by DBP to PITwo-SPV and the subsequent sale or transfer by PITwo-SPV to the Province of Southern Leyte do not qualify as a tax-exempt transaction under RA 9182, as amended by RA 9343. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner Bureau of Internal Revenue Footnotes 1. Jaka Investment Corporation vs. Commissioner of Internal Revenue, G.R. No. 147629 citing Compagnie Financiere Sucres Et Denrees v. Commissioner of Internal Revenue , G.R. No. 133834, August 28, 2006, 499 SCRA 664, 667-668. 2. Republic vs. Caguioa, G.R. No. 168584, October 15, 2007.