Vous êtes sur la page 1sur 8

June 7, 2005

BIR RULING [DA-244-05]


40 (C) (2) & (3); 115-98
National Home Mortgage and
Finance Corporation
Filomena Building III
Amorsolo St., Legaspi Village
Makati City
Attention: Mr. Celso delos Angeles
President
Gentlemen :
This refers to your letters dated 14 December 2004 and 18 May 2005
requesting for our confirmation that no gain or loss shall be recognized by the
National Home Mortgage Finance Corporation (NHMFC) upon the transfer of its
mortgage loan receivables in favor of the BALIKATAN HOUSING, INC. (the
"Corporation") in exchange for the latter's shares of stock and other debt instruments
under Section 40(C)(2) of the Tax Code.
It is represented that the NHMFC is a corporation created by virtue of
Presidential Decree No. 1267 (1977); that among its objectives are to: (a) develop and
provide for a secondary market for home mortgages granted by public and/or private
home financing institutions [Pres. Decree No. 1267 (1977)]; (b) act as the major
government home mortgage institution [Exec. Order No. 90 (1986)]; and (c) develop
and provide a secondary mortgage market to finance mortgage take and fast track the
disposition of existing mortgages [Exec. Order No. 195 (1999)]; that in line with its
objectives, NHMFC provided financing for various low-cost housing projects and
took over the various loan mortgage accounts of the buyers of houses and lots and that
over the years, many of these loan mortgage accounts defaulted and NHMFC began to
accumulate a portfolio of non-performing loans ("NPLs"); that in order to liquefy
Copyright 2015

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia First Release 2015

some fifty-five thousand (55,000) of its highly delinquent NPLs, NHMFC obtained
approval from the Office of the President of the Philippines to incorporate the
Corporation as a vehicle for holding on to the NPLs and to serve as an eventual entry
point for other investors; that in light of the Presidential approval, the Corporation
was incorporated with the Securities and Exchange Commission with an authorized
capital stock of Two Hundred Million Pesos (P200,000,000.00) divided into Two
Hundred Thousand (200,000) common shares with a par value of One Hundred Pesos
(P100.00) per share and One Hundred Eighty Thousand (180,000) redeemable
preferred shares with a par value of (P1,000.00) per share; that out of the
Corporation's authorized capital stock of Two Hundred Million Pesos
(P200,000,000.00), Forty-Nine Thousand (49,000) common shares with a par value of
Four Million Nine Hundred Thousand Pesos (P4,900,000.00) and Fifty-Eight
Thousand (58,000) redeemable preferred shares with a par value of Fifty-Eight
Million Pesos (P58,000,000.00) have been subscribed and fully paid by NHMFC; that
in full payment of its subscription, NHMFC executed a Deed of Assignment dated 13
December 2004 assigning the NPLs with an aggregate book value of approximately
Thirteen Billion Four Hundred Fifty Three Million Eight Hundred Six Thousand Five
Hundred Sixty Two Pesos and Sixty Centavos (P13,453,806,562.60) (hereinafter
referred to as the "Receivables") at an aggregate transfer value of Five Billion One
Hundred Twenty-Three Million Two Hundred Nine Thousand Five Hundred
Thirty-Nine Pesos and Five Centavos (P5,123,209,539.05) in favor of the
Corporation. On 18 May 2005, NHMFC and the Corporation executed an Amended
Deed of Assignment of Receivables to reflect mathematical adjustments made with
respect to the number and value of the mortgage loan receivables resulting in a
reduction of the book value of the receivables from P13,453,806,562.60 to
P12,837,966,661.00 and an increase in the transfer value of such mortgage loan
receivables to PhP5,172,936,190.00 instead of PhP5,123,209,539.05. Thus, pursuant
to the Deed of Assignment of Receivables dated as of 13 December 2004 and
following the execution of the Amendment to Deed of Assignment of Receivables
dated as of 18 May 2005, the Corporation issued the following equity and debt
instruments in favor of NHMFC in exchange for the Receivables:
a.

Equity
Type of Stock

Preferred
Common
Total

Copyright 2015

No. of Shares Par Value per


share
58,000
49,000
107,000

CD Technologies Asia, Inc. and Accesslaw, Inc.

Paid-in

Premium

1,000.00 P58,000,000.00 P688,450,747.55


100.00
4,900,000.00
0
P62,900,000.00 P688,450,747.55

Philippine Taxation Encyclopedia First Release 2015

b.

Debt
Instrument

Issue Value

Senior Debt Instruments + Additional Senior Debt Instruments


Series "A" Subordinated Debt Instrument + Additional Series "A"
Subordinated Debt Instrument
Series "B" Subordinated Debt Instrument + Additional Series "B"
Subordinated Debt Instrument
Total

3,103,761,714.00
1,055,278,982.76
262,544,745.69
4,421,585,442.45

After the transfer by the NHMFC of the Receivables in exchange for the
above-described equity and debt instruments, the outstanding capital stock of the
Corporation is as follows:
Name of Shareholder

No. of
Shares

Par Value
Per share

Amount
Paid-Up

Premium

58,000

1,000.00

P58,000,000.00

P688,450,747.55

48,995

100.00

P4,899,500.00

100%

100.00
100.00
100.00
100.00
100.00

100.00
100.00
100.00
100.00
100.00

4,900,000.00

0
0
0
0
0

Total Common

1
1
1
1
1

49,000

100%

Grand Total

107,000

P62,900,000.00

P688,450,747.55

100%

Preferred Shares
National Home
Mortgage and Finance
Corporation
Common Shares
National Home
Mortgage and Finance
Corporation

Voting
Power

That as a result of the above-described transfer, NHMFC gained control of the


Corporation; that based on the above-mentioned transactions, you requested our
confirmation of your opinion that:
"1. No gain or loss shall be recognized on the transfer by the
NHMFC of the Receivables to the Corporation in exchange for 100% of the
outstanding voting stock of the Corporation, pursuant to Section 40(C)(2) and
(C)(6) of the Tax Code;
Copyright 2015

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia First Release 2015

"2. The basis of the shares of stock or debt instruments NHMFC


acquired in the exchange shall be the same as the original acquisition cost or
adjusted cost basis to NHMFC of the Receivables exchanged therefor; and the
cost basis to the Corporation of the Receivables exchanged for stocks shall be
the same as it would be in the hands of NHMFC, pursuant to Section
40(C)(5)(a) and (b) of the Tax Code;
"3. The transfer of the Receivables by NHMFC to the Corporation
will not be subject to value-added tax (VAT);
"4. The transfer of the Receivables by NHMFC to the Corporation in
exchange for shares of stock and debt instruments shall not be subject to
donor's tax;
"5. The transfer by NHMFC to the Corporation of the Receivables is
exempt from DST pursuant to Section 199(m) of the Tax Code, as amended
by Republic Act No. 9243;
"6. The issuance of shares by the Corporation to NHMFC in
exchange of the Receivables will be subject to the DST imposed under Section
174 of the Tax Code, as amended by Republic Act No. 9243; and
"7. The issuance of the debt instruments by the Corporation to
NHMFC in exchange for the Receivables will be subject to the DST imposed
under Section 179 of the Tax Code, as amended by Republic Act No. 9243.
However, no DST shall be due on the subsequent assignment, transfer, or
amendment thereof provided there is no increase in the amount or change in
the maturity date from that of the original instrument pursuant to Section
199(f) of the Tax Code."

and that in support of your request, you submitted to this office copies of the
following documents: (1) BIR Form No. 0605 evidencing payment of the filing fees;
(2) Deed of Assignment of the Receivables executed by and between NHMFC and the
Corporation dated 13 December 2004; (3) Amended Deed of Assignment of
Receivables executed by and between NHMFC and the Corporation dated 18 May
2005; (4) certified list of the Receivables to be transferred; (5) A certification as to the
original or historical cost or acquisition/adjusted cost basis of the Receivables; (6)
Articles of Incorporation and By-Laws of the Corporation as filed with the Securities
and Exchange Commission; and (7) Audited Financial Statements of NHMFC as of
December 31, 2003.
In reply, please be informed that pursuant to Section 40(C)(2) and (6)(c) of the
Copyright 2015

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia First Release 2015

Tax Code of 1997, no gain or loss shall be recognized if property is transferred to a


corporation by a person, in exchange for stock in such a corporation of which, as a
result of such exchange, said person, alone or together with others, not exceeding four
persons, gains control of said corporation. The term "control" shall mean ownership
of stocks in a corporation possessing at least 51% of the total voting power of all
classes of stocks entitled to vote. Control is determined by the amount of stocks
received i.e., total subscribed, whether for property or for services by the transferors.
In determining the 51% stock ownership, only those persons who transferred property
for stocks in the same transaction may be counted up to a maximum of five.
Section 40(C)(3)(a) of the 1997 Tax Code further states that if, in connection
with the above-described exchange, an individual, a shareholder, security holder or
corporation receives not only stock or securities permitted to be received without
recognition of gain or loss, but also money and/or other property, the gain, if any, but
not the loss, shall be recognized but in an amount not in excess of the sum of the
money and the fair market value of such other property received. Pursuant to Section
40(A) of the same Tax Code, the gain from the sale or other disposition of property
shall be the excess of the amount realized therefrom over the basis or adjusted basis
for determining gain, and the loss shall be the excess of the basis or adjusted basis for
determining loss over the amount realized. The amount realized from the sale or other
disposition of property shall be the sum of money received plus the fair market value
of the property (other than money) received. In an assignment of receivables, the gain
shall be the excess of the amount realized therefrom over the cost or adjusted cost of
the receivables and the loss to be recognized by the transferee from the assignment of
receivables shall be the excess of the cost or adjusted cost of the receivables over the
amount realized. The amount to be realized from the assignment of receivables is
determined by considering the selling/transfer price of the receivables shall be the fair
market value of the property received in exchange therefor and not the fair market
value of the receivables transferred. (BIR Ruling No. 15-98 dated July 28, 1998)
Accordingly, no gain or loss shall be recognized both to the transferors and the
transferee corporation on the transfer by NHMFC of the Receivables in exchange for
the common shares, redeemable preferred shares of stock and debt instruments issued
by the transferee corporation, considering that as a consequence of the exchange, the
transferor will gain control of the transferee corporation by owning 100% of its total
voting stocks. Notwithstanding acceptance by NHMC of property consisting of debt
instruments other than shares of stock to be issued by the Corporation in exchange for
the Receivables, NHMFC will not realize any gains by virtue of the transaction since
NHMFC will be transferring property consisting of the Receivables with a book value
of approximately P12,837,966,661.00 in exchange for shares of stock and debt
Copyright 2015

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia First Release 2015

instruments with an aggregate par value of only P4,484,485,442.45.


It should be emphasized, however, that Section 40(C)(2) and (6)(c) of the 1997
Tax Code merely defers recognition of the gain or loss from such transaction, for in
determining the gain or loss from a subsequent transaction of the properties or of the
stocks involved in the exchange, the original or historical cost of the properties or
stocks is considered. Thus, if NHMFC later sells or exchanges the shares of stock or
debt instruments it acquired in the exchange, it shall be subject to income tax on gains
derived from such sale or exchange, taking into consideration that the cost basis of the
shares and debt instruments shall be the same as the original acquisition cost or
adjusted cost basis to the NHMFC of the Receivables exchanged therefor, and that the
cost basis to Balikatan of the Receivables exchanged for stocks and the debt
instruments shall be the same as it would be in the hands of NHMFC. (Section
40(C)(5)(a) and (b) of the Tax Code)
In this connection, you are further advised that, in order that the parties to the
exchange can avail of the non-recognition of gains provided for in Section 40(C)(2)
and (6)(c) of the Tax Code of 1997, as amended, they should comply with the
requirements hereunder mentioned:
a.

b.

Copyright 2015

The transferor must file with its income tax return for the taxable year in
which the exchange transaction was consummated, a complete
statement of all facts pertinent to the exchange, including:
1.

A description of the properties transferred, or of its interest in


such properties, with a statement of the original acquisition
cost/adjusted cost basis or other basis thereof at the time of the
transfer;

2.

The kind of stocks or other properties received and preferences,


if any;

3.

The number of shares of each class received; and

4.

The fair market value per share of each class at the date of the
exchange.

On the other hand, the transferee corporation must file with its income
tax return for the taxable year in which the exchange was consummated
the following:

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia First Release 2015

1.

A complete description of the properties received from the


transferor;

2.

A statement of the original acquisition cost or other basis of the


properties in the hands of the transferor and the adjusted cost
basis thereof at the time of the transfer; and

3.

Information with respect to the capital stock of the corporation


including:
a.

The total issued and outstanding capital stock immediately


prior to and immediately after the exchange with a
complete description of each class of stock;

b.

The classes of stocks and number of shares and other


property issued to the transferor in the exchange; and

c.

The fair market value as of the date of the exchange of the


capital stock issued to the transferor.

In addition to the foregoing requirements, permanent records in substantial


form must be kept by the taxpayers participating in the exchange, showing the
information listed above in order to facilitate the determination of gain or loss from a
subsequent disposition of stocks/properties received in the exchange.
Furthermore, your opinion on the following are likewise hereby confirmed:
(1) Pursuant to Section 4.100-5(b)(1) of Revenue Regulations No. 7-95, as
amended, a change of control of a corporation by the acquisition of the controlling
interest of such corporation by another stockholder or group of stockholders shall not
be subject to output tax. Example: transfer of property to a corporation in exchange
for its shares of stock under Section 40(C)(2) and (6)(c) of the 1997 Tax Code.
Consequently, the transfer of the Receivables by NHMFC to Balikatan will not be
subject to value added tax;
(2) The transfer of the Receivables by NHMFC to Balikatan in exchange for
common shares, redeemable preferred shares, and debt instruments shall not be
subject to donor's tax since there is no donative intent involved in the transfer. (BIR
Ruling No. 224-93 dated May 18, 1993)
(3) The certificates of stocks to be issued by Balikatan are subject to the
Copyright 2015

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia First Release 2015

documentary stamp tax at the rate of P1.00 for every P200.00, or a fractional part
thereof, of the par value of the shares issued pursuant to Section 174 of the Tax Code,
as amended by Republic Act No. 9243, which shall attach upon issuance by the SEC
of Balikatan's Certificate of Incorporation.
(4) The documentary stamp tax due on the issuance of the Senior Debt
Instrument, Series "A" Subordinated Debt Instrument, Series "B" Subordinated Debt
Instrument and the Additional Senior and Subordinated Debt Instruments by Balikatan
shall be subject to P1.00 for every P200.00, or a fractional part thereof, of the issue
value of the debt instruments pursuant to Section 179 of the Tax Code, as amended by
Republic Act No. 9243. However, the subsequent assignment, transfer or amendment
of such debt instruments by NHMFC shall not be subject to DST provided that there
is no increase in the amount or change in the maturity date from that of the original
instrument pursuant to Section 199(f) of the Tax Code of 1997, as amended by
Republic Act No. 9243.
ADTCaI

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 and/or
any of the requirements imposed in this letter is not complied with, then this ruling
shall be considered null and void.

Very truly yours,

Commissioner of Internal Revenue


By:

(SGD.) JAMES H. ROLDAN


Assistant Commissioner
Legal Service
Bureau of Internal Revenue

Copyright 2015

CD Technologies Asia, Inc. and Accesslaw, Inc.

Philippine Taxation Encyclopedia First Release 2015