Regularity of Transactions of Financial Institutions that Take Advantage of Tax Privileges under RA 9182 (Special Purpose Vehicle Act)

DOJ OPINION NO. 043 , s. 2009 September 2, 2009 Hon. Ignacio T. Arroyo Representative, 5th District, Negros Occidental Rm. 412, Ramon V. Mitra Building Batasan Complex, Constitutional Hills Quezon City, 1126 Sir : This pertains to your request for opinion on the query stated therein relative to the alleged transactions of some financial institutions that take advantage of the tax privileges under Republic Act No. 9182, otherwise known as "The Special Purpose Vehicle (SPV) Act of 2002", as amended. Specifically, you solicit this Department's opinion on whether or not the amounts covered by the promissory notes executed in connection with the assignments of non-performing loans/assets by financial institutions to SPV are part of the consideration for said assignment under the SPV Act, as amended. You state that some assignments of loans/assets by financial institutions to SPV show the purchase price as consisting of cash and a contingent obligation covered by a promissory note; that the total purchase price for the assignment is made to appear as equal to the outstanding balance of the assigned loan or asset; and that the financial institutions imposed on the SPV certain conditions under the promissory note. Hence, your request. With regret, this Department cannot issue the opinion requested. Firstly, by your own admission, the opinion is requested in preparation for the formulation of a House Resolution intended to initiate an inquiry on the compliance by financial institutions and SPV of the "true sale" requirements under the SPV Act, as amended. As such, the matter should be referred to the House legal counsel or the legislative reference division, and not to the Secretary of Justice who, in consonance with the constitutional principle of separation of powers, is primarily the legal adviser of the President of the Philippines and the Department Heads and bureau chiefs, among other government functionaries of the executive branch. It is not his duty to prepare reports or gather legal materials or studies for other government offices or private individuals or entities which service and function can be properly and adequately rendered or performed by the legal officers or the proper divisions of the department or office concerned (Sec. of Justice Op. No. 5, current series; No. 64, s. 2008; No. 93, s. 2002; and No. 27, s. 1996). Secondly, the determination of the issue herein raised would require us to pass upon the pertinent provisions of the subject law, as amended. However, under Sections 22 and 23 of the Act, it is the Congressional Oversight Committee (COC) that is mandated to approve and issue and had, in fact, already issued the Act's Implementing Rules and Regulations (IRR). Consequently, it is the said Committee that should render opinion on the issue raised as it has the competence and primary jurisdiction to apply and interpret the rules in resolving the issue, taking into account the policy repercussions of addressing the question involved (Ibid. , No. 21, s. 2008). SAHIDc Thirdly, Section 24 of the Act provides that the Securities and Exchange Commission (SEC) "shall be the primary implementing agency" of the Act. Sound administrative practice, more than official courtesy, demands that said office be, therefore, accorded first the opportunity to consider and resolve the issue raised herein. This time-honored policy is dictated not only by practical consideration but out of due respect and deference for the competence, expertise on, as well as familiarity with, the policies relating to the subject and the rightful exercise of jurisdiction conferred by law ( id. , No. 83, s. 2004). Besides, since the opinion of the Secretary of Justice is essentially advisory in nature, it need not bind the SEC (and even the COC), if that be its pleasure. As the government agency primarily responsible for the implementation and enforcement of the law, the SEC may, if it so decides, formally adopts a position on the issue raised and assume responsibility therefor ( id. , No. 49, 31 and 30, s. 2008; also, No. 59 & 55, s. 2007). However, for your information and guidance only, we would like to make the following comments and observations: Among the declared objectives of Republic Act No. 9182, as amended, is to address the non-performing asset (NPA) problems of the financial sector by providing tax incentives and exemption privileges to qualified assignment transactions. The basic requirement is that "[a]ll sales and transfers of NPA to an SPV shall be in the nature of a true sale". (Section 13, SPV Act) A true sale of NPA is one "for cash or property to an SPV with the following results: (1) The transferor relinquishes effective control over the transferred NPA; and (2) The transferred NPA are legally isolated and put beyond the reach of the transferor and its creditors. Provided, That the transferring FI shall not have direct or indirect management of the transferee SPV: Provided, further, That the selling FI does not posses a claim of beneficial ownership of more than five percent (5%) in the transferee SPV. (Section 3 [l], SPV Act; SPV RULE 3, IRR of the SPV Act, as amended) Republic Act No. 9182, as amended, is very strict in its requirements for a true sale. If the sale or transfer is not a true sale, the violator shall be subject to specific penalties under the law, as follows: "SECTION 25. Penalties. Any person who violates the provisions of this Act, or any person who, in a registration statement, notice, certification or plan filed under this Act, makes any untruthful statement of a material fact or omits to state any material fact required to be stated therein, shall, upon conviction, suffer a fine of not less than Fifty thousand pesos (P50,000.00) nor more than One million pesos (P1,000,000.00) or imprisonment of not less than six (6) years and one (1) day nor more than twelve (12) years, or both, in the discretion of the court, without prejudice to the penalties provided under Section 18 hereof and other applicable laws. If the offender is a corporation, association, partnership or any juridical person, the penalty shall be imposed upon the responsible officers, as the case may be, who participated in the commission of the crime or who shall have knowingly permitted or failed to prevent its commission. If the offender is a juridical person, the court may order the suspension or revocation of license. If the offender is an alien, he shall, in addition to the penalties herein prescribed, be deported without further proceedings after serving the penalties herein prescribed. If the offender is a public official or employee, he shall, in addition to the penalties prescribed herein, suffer absolute or temporary disqualification from government or public office, as the case may be." IAEcCT In addition, the violator will be required to refund to the government double the amount of tax exemptions and privileges availed of under the SPV Law, plus 12% interest, as follows: "SECTION 18. Abuse of Tax Exemptions and Privileges. Any person, natural or juridical, who benefits from the tax exemptions and privileges herein granted, when such person is not entitled thereto, shall be subject to the penalties provided under Section 25 hereof. In addition, the offender shall refund to the government double the amount of tax exemptions and privileges availed of under this Act, plus interest of twelve percent (12%) per year from the date prescribed for its payment until the full payment thereof." One of the indications that a transaction is not a true sale is the situation where the selling financial institution directly or indirectly extends to the transferee SPV any credit facility, guaranty or any similar financial transaction. (Rule 13 [d], SPV IRR). Another indication is when the SPV enters into any transaction where the financial institution retains effective control over the transferred NPA or shares in the losses of the SPV. In the situation described in your letter, the financial institutions effectively grant the SPV a credit facility if the promissory note is allowed to be part of the consideration. It also appears that the financial institutions retain effective control over the transferred assets and shares in the SPV' losses since there is a chance of further payment, albeit a contingent one (Rule 13 [j], supra ). Clearly, the promissory note appears to be inconsistent with the true sale requirement. The SPV Act aims to improve the liquidity of the financial system. To allow a credit or obligation under a promissory note to be part of the consideration for the assignment or sale of an NPA/loan would be in violation of the declared policy of the law. A non-performing obligation will just be replaced with another obligation, contingent at that. The inclusion of a contingent obligation under a promissory note in the consideration for the assignment of an NPA/loan may thus be assailed as legally incorrect. As rightfully observed, the promissory note executed by the SPV in favor of the financial institution is not consistent with the true sale requirement of the law for the reasons stated in your letter, thus: TcDIaA 1. The financial institution retained control over the disposition of any collection on the obligation sold to the SPV. This is contrary to the requirement of the law that the financial institution relinquishes effective control over the transferred NPA. The fact that the financial institution retains residual control over the assigned NPA/loan through the promissory note betrays its not being a true sale. 2. The financial institution retained an interest in the assigned obligation in that 75% of the remaining balance of any collection will be paid to the financial institutions. DHACES Again, this is against the requirement of the law as transferred NPA must be legally isolated and put beyond the reach of the transferor financial institution. In so retaining an interest in the transferred NPA/loan through the promissory note, the financial institution violates the true sale requirement. 3. The SPV have the option of writing off the debt under the promissory note if it has no money to pay the bank upon the maturity date. Again, this betrays the not true sale character of the promissory note. The obligation under the promissory note is not fixed, the payment of which is subject to the sole discretion of the SPV. 4. A promissory note is not a proper consideration for the sale or transfer of an NPA as it is against the express policy of the law that the liquidity of the financial system should be improved. A non-performing loan should be purchased by cash or property. It cannot be replaced with another loan. Concluding, what may be deemed to be the real and legal consideration that should be documented in the assignment of the NPA/loan under the Special Purpose Vehicle Act, as amended, is the cash payment made by the SPV to the financial institutions, not the amount or obligation under the promissory note which appears to be contrary to the nature and requirement of a "true sale" under the law. CSTDEH Please be guided accordingly. Very truly yours, (SGD.) AGNES VST DEVANADERA Acting Secretary