Emmanuel C. Alcantara & Associates

June 16, 2020 BIR RULING NO. OT-332-20 Sec. 19, RA 10142; 000-00 Emmanuel C. Alcantara & Associates Unit 1008, 10th Floor, National Life Insurance Bldg. 6762 Ayala Avenue, Makati City 1226 Attention: AAA _______________ Gentlemen : This refers to your letter dated March 6, 2018 requesting on behalf of your client, M.E.T.R.O (Manufacture, Export, Trade, Research Office), Incorporated ("METRO" or the "Company") for the waiver of national taxes applicable to the sale of properties made in furtherance of METRO's corporate rehabilitation pursuant to Section 19 of Republic Act (RA) No. 10142. As represented, METRO is a domestic corporation duly organized and existing in accordance with the laws of the Philippines under SEC Registration No. 147899 with office address at 27th Floor, Insular Life Corporate Centre Tower 1, Filinvest Alabang Muntinlupa City. It is engaged in the business of exporting of furniture products, as well as other merchandise related to furniture, to the United States. Its biggest customer was Target Corporation ("Target") , a US based entity situated in Minneapolis, Minnesota, US. HTcADC During the mid-1990's, the Company decided to expand its operations by investing heavily in the local manufacturing of wood and metal products. To address the demands of its bigger clients in Europe and Asia, not only did the Company opened up factories and employed a thousand workers, but it also decided to acquire an existing company to act as its foreign counterpart. Resultantly, it acquired Kerson Industries Limited ("Kerson") , a company based in Hong Kong and is engaged in the trading of furniture and other related products. By the year 1997, the Asian Financial Crisis, and the Company responded to address the said financial crisis by shifting its production operations to other Asian countries like Vietnam. Further, the Company and Kerson took out loans from banking institutions by reason of the optimistic view of the business, as well as the growing prospects and assured business with Target. Rizal Commercial Banking Corporation ("RCBC") granted a _____________ Pesos (PhP___________) loan while BDO Unibank ("BDO") granted a __________________ Pesos (PhP_____________) loan. The Company used all of the assets of its subsidiaries, as well as the respective properties of the members of the Board of Directors as collaterals to the said loans. Unfortunately, Target removed METRO from its list of suppliers. It alleged that the products sold to Target by the Company were defective and did not pass quality control, as demonstrated by the numerous complaints received by Target on the products it sold from METRO. This was done even after the issuance of a letter from the US Consumer Product Safety Commission stating that there is no reason to recall or destroy the products delivered by the Company. The loss of its largest and primary customer greatly affected METRO. Currently, it has been experiencing difficulties in meeting their obligations. This prompted the Company to file a Petition for Corporate Rehabilitation. 1 Among the reliefs prayed for was the issuance of a Commencement Order with the effect of staying of the enforcement of all claims by METRO's creditors, and the inclusion of the properties owned by and registered to the individual and corporate mortgagors as part and parcel of Company's Rehabilitation Plan. The Regional Trial Court granted the said petition and issued a Commencement Order 2 with the effect of staying of the enforcement of all claims by the Company's creditors, and the inclusion of the properties owned by and registered to the individual and corporate mortgagors as part and parcel of the Company's Rehabilitation Plan. CAIHTE As a result of the Commencement Order, METRO started to initiate its corporate rehabilitation plan, which includes the disposal and conversion of its properties into cash. You now request for a ruling that the said sale of properties is not subject to the following taxes pursuant to the waiver under Section 19 of RA No. 10142: 3 1. Income tax on the gains realized by and withholding tax on the proceeds to be received by METRO; 2. Value added tax on the proceeds of the said sale; and 3. Documentary stamp tax assumed by the seller, if any. In reply, please be informed that Section 19 of RA 10142 provides as follows: " SECTION 19. Waiver of Taxes and Fees Due to the National Government and to Local Government Units (LGUs) . Upon issuance of the Commencement Order by the court, and until the approval of the Rehabilitation Plan or dismissal of the petition, whichever is earlier, the imposition of all taxes and fees, including penalties, interests and charges thereof, due to the national government or to LGUs shall be considered waived, in furtherance of the objectives of rehabilitation." Section 19, RA 10142 above should be read in connection with Section 4 (c) of the same Act which defines "claim" "(c) Claim shall refer to all claims or demands of whatever nature or character against the debtor or its property , whether for money or otherwise, liquidated or unliquidated, fixed or contingent, matured or unmatured, disputed or undisputed, including, but not limited to; (1) all claims of the government, whether national or local, including taxes, tariffs and customs duties ; and (2) claims against directors and officers of the debtor arising from acts done in the discharge of their functions falling within the scope of their authority: Provided, That, this inclusion does not prohibit the creditors or third parties from filing cases against the directors and officers acting in their personal capacities." (Emphasis Supplied) In DOF Opinion dated May 26, 2011 relative to the request of Steel Corporation of the Philippines to avail of the privileges granted under RA 10142, it was clarified that the waiver of taxes, tariffs and customs duties refers to such claims already due to the government at the time of the issuance of the Commencement Order . Thus, those taxes and customs duties due on the incoming importations after the issuance of such Commencement Order shall not be considered waived . Citing the case of Commissioner of Internal Revenue vs. Fortune Tobacco Corporation 559 SCRA 160, July 21, 2008 , the DOF in its May 26, 2011 Opinion stated that it is basic that tax exemption is regarded as derogation of sovereign authority and, therefore, must be strictly construed against the person or entity claiming the exemption. As aptly ruled by the Supreme Court "Tax exemption is a result of legislative grace. And he who claims an exemption from the burden of taxation must justify his claim by showing that the legislature intended to exempt him by words too plain to be mistaken . The rule is that tax exemptions must be strictly construed such that the exemption will not be held to be conferred unless the terms under which it is granted clearly and distinctly show that such was the intention." (Emphasis Supplied) Since waiver of taxes under Section 19 of RA 10142 refers to such claims already due to the government at the time of the issuance of the Commencement Order, it follows that taxes that will be due on the future sale of properties of financially distressed enterprises and individuals are not considered waived for being claims for taxes due to the government after the time of the issuance of the Commencement Order. aScITE Accordingly, your request for the waiver of income tax, value-added tax, and documentary stamp tax pertaining to the sale of METRO's properties, in furtherance of its corporate rehabilitation, pursuant to Section 19 of RA 10142 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 ascertained that the facts are different, then this ruling shall be considered null and void. DETACa Very truly yours, (SGD.) CAESAR R. DULAY Commissioner of Internal Revenue Footnotes 1. SCC Case No. 17-029 filed on May 30, 2017 with RTC Branch 263, Muntinlupa City. 2. Issued by RTC Branch 203, Muntinlupa City on August 22, 2017. 3. Also known as the "Financial Rehabilitation and Insolvency Act (FRIA) of 2010."