DOJ Opinion No. 154, s. 1988

DOJ OPINION NO. 154 , s. 1988 July 25, 1988 Mr. Federico C. Gonzales President and General Manager Home Insurance and Guaranty Corp. First Holdings Centre 349 Sen. Gil J. Puyat Avenue Makati, Metro Manila Sir : This has reference to your request for a confirmatory ruling on the tax-exempt feature of HIGC bonds issued in accordance with its Charter, Republic Act No. 580, as amended. You state that on February 26, 1988, the Monetary Board in its Resolution No. 190 approved the proposed issuance by the Home Insurance and Guaranty Corporation (HIGC) of P700 million worth of bonds, subject to certain conditions, one of which requires HIGC to secure from the Department of Justice a confirmatory ruling regarding the optional 8-1/2% tax-exempt interest on subject bonds and in the absence thereof, said bonds shall bear 14% taxable interest as uniform option of target investors. cdlex It appears that you earlier sought the opinion of the Office of the Government Corporation Counsel (OGCC), HIGCs General Counsel, regarding the effect of Executive Order NO. 93 dated December 17, 1986 on the tax exemption privileges granted under Republic Act No. 580, as amended; that in response to HIGCs request the OGCC rendered Op. No. 18, s. 1987, stating among others, that the bonds issued by HIGC pursuant to Sec. 14(d) of its Charter as well as interests accumulated by banks/lending institutions on mortgages insured under R.A. No. 580 as amended, continue to enjoy their tax exemption features, these specific cases being covered by the first exception provided for in Section 1 (non-impairment clause) of E.O. No. 93; that pursuant to the authority granted under Section 2(d) of Executive Order No. 535 (1979), vesting the HIGC with the power to revise/adjust all ceilings otherwise fixed in the Home financing Act to conform with the prevailing economic and financial conditions, the HIGC Board revised the rate of interest of the bonds issued by HIGC (under HIGC [then HFC] Board of Resolution No. 42-1980), at 8-1/2% tax free or, at 14% gross of taxes; and that subsequently, HIGCs Legal Department observed that said Board Resolution insofar as the option to pay 14% gross of taxes is concerned, seems to be inconsistent with the provisions of the HIGC Charter (Sec. 14[d], expressly providing that the bonds to be issued shall be exempt from all taxation. The pertinent provisions of Republic Act No. 580, as amended, provide as follows: SEC. 14. . . . (d) The debentures issued under this chapter to any mortgage with respect to mortgages or loans insured under Chapters II and III . . . shall be negotiable, exempt from taxation , attachment, execution or seizure, redeemable at the option of the Commission at or before maturity and fully guaranteed as to principal and interest by the Republic of the Philippines. . . .. (Emphasis supplied) SEC. 25. Amendatory provisions. xxx xxx xxx (c) Interests accumulated by lending institutions on mortgages insured under the provisions of this Act shall be exempt from all taxation. On the other hand, Section 1 of E.O. No. 93 reads: SEC. 1. The provisions of any general or special law to the contrary notwithstanding, all tax and duty incentives granted to government and private entities are hereby withdrawn except: a) those covered by the non-impairment clause of the Constitution. xxx xxx xxx We think there is sufficient legal basis to support the view that bonds to be issued by the HIGC as well as interests earned by banks/Lending institutions on mortgages insured under R.A. No. 580, as amended, carry tax exemption features provided for in the HIGC Charter. While the said Executive Order withdraws all tax and duty incentives granted to government and private entities, it also provides for exceptions where the tax privileges may continue to be claimed, such as those cases covered by the non-impairment clause of the Constitution. prcd The purpose of the impairment clause is to safeguard the integrity of valid contractual agreements against unwarranted interference of the State (Cruz, Constitutional Law, p. 224). Impairment contract (Lim v. Register of Deeds, 46 O.G. 3665). There is an impairment if the law changes the terms in a legal contract between parties, either in the time or mode of performance or imposes new conditions or dispenses with those expressed (Clemons v. Nolting, 42 Phil. 702, 171; U.S. v. Diaz Conde, Id. at 776, 779). We understand that the tax exemption feature of HIGC bonds may be enjoyed by the beneficiary thereof only through the exercise by HIGC of a power granted to it by its Charter, i.e., a contract of mortgage insurance with interested banking/lending institutions. The concerned banks, in turn, had extended the loan accommodation to qualified buyers relying on the provisions of R.A. No. 580, as amended, that their earnings in respect of such transactions with HIGC would enjoy tax exemption privileges. Notably, E.O. No. 93 did not expressly provide for the amendment or partial repeal of HIGCs Charter. It follows then that to consider the tax exemption privileges as withdrawn would amount to impairment of contracts that the HIGC has entered into in the exercise of its powers with various participating financial institutions in its program. Notwithstanding the issuance therefore of E.O. No. 93, the bonds issued by HIGC in payment of calls on its mortgage insurance contracts executed prior to the promulgation of E.O. No. 93 are still tax-exempt and the interest accumulated by banking institutions on mortgages insured by virtue thereof continue to enjoy the tax exemption privileges granted under R.A. No. 580, as amended. It is noted that E.O. No. 93 was issued for the purpose of withdrawing all tax and duty incentives granted to government and private entities because a number of the affected entities whose tax and duty exemptions withdrawn by P.D. Nos. 1931 and 1955, respectively, were able to get back their tax and duty exemptions privileges through the review mechanism implemented by the Fiscal Incentives Review Board (FIRB) or by Presidential action without benefit of review by the FIRB (3rd and 4th whereas clauses, E.O. No. 93). It was observed that these privileges have become convenient opportunities for tax manipulation or avoidance, especially in the case of interrelated entities, and that assistance to government and private entities may be better provided where necessary by explicit subsidy and budgetary support rather than tax and duty exemption privileges if only to improve the fiscal monitoring aspects of government operation (6th and 9th whereas clauses, Id.). From the foregoing, it would appear that these tax exemption privileges withdrawn by E.O. No. 93 were direct grants to and/or enjoyed to direct operation of the corresponding statutes to the government corporation or private entity. On the other hand, as previously stated, the tax exemption feature of HIGC bonds is enjoyed by the beneficiaries thereof (not by HIGC) through the exercise by HIGC of a power granted by its Charter the execution of a contract of mortgage insurance. Accordingly, as you correctly aver, the case of HIGC bonds is different from the tax exemption privileges directly granted to entities under their Charters, and which privileges were withdrawn by E.O. No. 93. Hence, it is believed that HIGC bonds are not covered by the provisions of E.O. No. 93. prcd Anent the other issue as to the optional feature of 14% taxable interest rate of the proposed bonds, it is clear that the scheme is not sanctioned by the HIGC Charter (Sections 14[d] and 25[c] of R.A. No. 580), which expressly provide that debentures issued to any mortgages with respect to mortgages on loans insured thereunder shall be exempt from taxation and that interest accumulated by lending institutions on mortgages insured under the Act shall be exempt from all taxation. Thus, the action taken by the HIGC Board under res. No. 42-1980 in providing a taxable 14% gross of taxes interest rate on its bonds constitutes an ultra vires act since the HIGCs power to issue tax-exempt bonds or debentures is clearly provided or defined in its Charter. cdll Very truly yours, (SGD.) SEDFREY A. ORDOEZ Secretary of Justice