BIR+Ruling+091-99.pdf

July 8, 1999

BIR RULING NO. 091-99 091-99 THE MANILA BANKING CORPORATION Manila Bank Building 6772 Ayala Avenue, Makati City Attention: Atty. Clarence D. Guerrero Counsel Gentlemen : This refers to your letter dated June 18, 1999 which, in effect, seeks the confirmation by this Office of your opinion on certain consequences arising from the Dacion en Pago con Pacto de Retro agreement entered into by your client, The Manila Banking Corporation (TMBC), calling for the "transfer" of certain bank properties in favor of the Central Bank Board of Liquidators (CB-BOL). cdtai

It is represented that in May 1987, TMBC was place under receivership by the then Central Bank of the Philippines (now Bangko Sentral ng Pilipinas); that as a result thereof, TMBC was directed to cease and desist from engaging in any form of banking activity; that attempts are now made to arrive at an acceptable Rehabilitation Plan for TMBC; that one of the conditions for the approval of the proposed Rehabilitation Plan by the Monetary Board is for TMBC to settle its obligation with CB-BOL in the amount of PhP8,636,941,026.43, whereby the amount of PhP6,370,987,647.60 is to be paid in cash, while the payment of the balance of PhP2,265,953,378.83 is to be guaranteed by bank assets; that the latter arrangement shall be reflected in a Deed of Assignment with Right to Repurchase (Dacion en Pago con Pacto de Retro) which instrument calls for the transfer and conveyance by TMBC, as assignor, in favor of CB-BOL, as assignee, of certain parcels of lands, to wit: A. Copyright 1994-2009

Silang (Cavite) Property (Foreclosed from Capitol City Farms, CD Technologies Asia, Inc.

Philippine Taxation 2008

1

Inc.):

B.

TCT No.

Area (sq. m.)

T-128673 T-128674 T-128675 T-829169 T-829170 T-829171

32,290 252,354 252,354 34,542 211,231 6,582

Porac, Pampanga Property TCT No. 308513-R 10,240,000 sq.m.

C.

San Miguel, Bulacan Property (Foreclosed from Baguio Growers and Producers, Inc.) TCT No.

Area

T-275531 T-285532 T-275553 T-275554 T-276442

D.

78,008 78,008 1,560,267 984,298 1,009,420

San Miguel (Bulacan) Property (Foreclosed from Aseabrid Farms Corp.) TCT No.

Area

T-277927 T-277928 T-277929 T-277930 T-277931 T-277932 T-277933 T-277934 T-277935

E. Copyright 1994-2009

1,680,064 2,472,379 459,358 240,868 1,575,235 278,891 66,067 240,000 868,738

San Miguel (Bulacan) Property (Foreclosed from Interfarms CD Technologies Asia, Inc.

Philippine Taxation 2008

2

Livestock Feeds, Inc.) TCT No.

Area

T-284752 T-284753 T-284754 T-284755 T-284756 T-284757 T-284758 T-284677 T-284678 T-284679 T-284680 T-277956

F.

G.

289,044 327,265 173,382 64,602 309,727 278,448 1,023,678 863,243 11,792 9,441 446,191 123,002

San Jose del Monte, Bulacan Property (Foreclosed from Gregorio Araneta, Inc.) TCT

Area

T-203043 T-203045

830,894 903,914

San Jose del Monte, Bulacan Property (Foreclosed from Carmel Farms, Inc.) TCT

Area

T-43.500(M) T-44.782(M)

68,545 966,208

It is your further contention that although such assignment was denominated as Dacion en Pago con Pacto de Retro, as evidenced by a copy of the agreement which you likewise submitted to this Office, the same was in reality a Mortgage Agreement as the transfer and conveyance is not absolute and unconditional but intended merely to secure the payment of the balance of the loan obligation; that under Article 1602 of the New Civil Code, a contract of sale with right of repurchase shall presumed to be an equitable mortgage when (a) the price of the sale is inadequate, (b) the vendor remains in possession of the property, (c) the vendee a retro retains part of the purchase price, and (d) when it can be fairly inferred that the real intention of the Copyright 1994-2009

CD Technologies Asia, Inc.

Philippine Taxation 2008

3

parties is that the transaction shall secure the payment of a debt or the performance of any other obligations. In reply, we hereby confirm that the terms of the agreement between CB-BOL and TMBC calling for the transfer of its assets, although denominated as Deed of Assignment with Right to Repurchase, is in reality an equitable mortgage created over the said properties. Instruments covering a sale with right to repurchase may be captioned or labelled as such. However, when any one or more of the circumstances enumerated under Article 1602, Civil Code, obtain in the agreement, the contract shall be presumed as an equitable mortgage. (BIR Ruling No. 217-81 dated November 6, 1981). This is relevant in determining whether or not the transaction had is subject to the corresponding taxes, i.e. capital gains tax and documentary stamp tax. cdtai

Insofar as corporation are concerned, its liability to the capital gains tax imposed on the presumed gains realized from the sale, exchange or disposition of lands and/or buildings is governed by Section 27(D)(5) of the Tax Code of 1997 viz: "(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. — A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, of such lands and/or buildings."

The clear import of the foregoing is that for a corporation to be liable to the tax, a true sale, exchange or disposition of capital assets must have transpired. Unlike in transactions made by individuals under Section 24 (D)(1) of the Code, where all sales of real property classified as capital assets, including pacto de retro or other forms of conditional sales are subject to the capital gains tax, no similar qualifications exist for capital asset transaction of a corporation. Hence, the latter is subject to such tax only upon a close and completed transaction in which income is realized. "A closed transaction for tax purposes results from a contract of sale which is absolute and unconditional on the part of the seller to deliver to the buyer a deed upon payment of a consideration and by which the purchaser secures immediate possession and exercises all the rights of ownership" (Comm. vs. Union Pacific R. Co., 86 F (2d) 637 CCA 2nd, 1936 Mertens, Chap. 12.118 Vol. 2, p. 326). Corollarily, "income consists of realized appreciation of capital or investment and realized returns, either in the form of receipts or benefits, flowing from the use of capital, services, activities or acts of the taxpayer, or which come to the taxpayer other than as a return of Copyright 1994-2009

CD Technologies Asia, Inc.

Philippine Taxation 2008

4

capital or investment, or as a substitution of money value for something permanently lost." (U.S. vs. Supplee-Biddle Hardware Co., 265 U.S. 189, L.Ed. 970, 44 S. Ct. 546 (1924) Mertens, Chap. 5.04, Vol. 1, p. 165). Hence, realization of income includes the requirement that the transaction be closed or consummated before any taxable income may result. "Any substantial conditional element in a transaction will postpone taxability" (Michigan Steel Corporation of New Jersey, 38 BTA 435, Mertens, Chap. 12.120, Vol. 2, p. 330). Accordingly, this Office is of the opinion and so holds that only upon the execution of the final absolute deed of sale covering any of the above-described properties of the bank subject of the pacto de retro, will the payment of the 6% capital gains tax apply. cdlex

By the same token, since no actual conveyance of real property is to be made, the stamp tax on deeds of sale and conveyances of real property imposed under Section 196 shall not apply. However, since the transaction is in the nature of an equitable mortgage and made primarily as a security for the payment of a pre-existing loan, the same is subject instead to the rate of documentary stamp tax imposed under Section 195 (Stamp Tax on Mortgages, Pledges and Deeds of Trust), thus — "SECTION 195. Stamp Tax on Mortgages, Pledges and Deeds of Trusts. — On every mortgage or pledge of lands, estate, or property, real or personal, heritable or movable, whatsoever, where the same shall be made as a security for the payment of any definite and certain sum of money lent at the time or previously due and owing or forborne to be paid, being payable, and on any conveyance of land, estate, or property whatsoever, in trust or to be sold, or otherwise converted into money which shall be and intended only as security, either by express stipulation or otherwise, there shall be collected a documentary stamp tax at the following rates: (a)

When the amount secured does not exceed Five thousand pesos (P5,000), Twenty pesos (P20.00).

(b)

On each Five thousand pesos (P5,000) of fractional part thereof in excess of Five thousand pesos, an additional tax of Ten pesos (P10.00). xxx

xxx

xxx"

This ruling is being issued on the basis of the foregoing facts, as represented. However, if upon investigation it will be established that the facts are different, then this ruling shall be considered null and void. Copyright 1994-2009

CD Technologies Asia, Inc.

Philippine Taxation 2008

5

Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue

Copyright 1994-2009

CD Technologies Asia, Inc.

Philippine Taxation 2008

6