DOF pushes tax breaks in transfer of securities-backed assets to SPVs

The Deparment of Finance (DOF) is supporting proposals in Congress to eliminate transaction taxes in the transfer of securities-backed assets to special purpose vehicles (SPVs) or asset management companies (AMCs) that will market foreclosed assets to new investors.

The proposed tax exemptions are one of the critical features of House Bill 2759 entitled An Act to Establish the Legal and Regulatory Framework for Securitization and the Development of an Asset-Backed Securities Market authored by Speaker Jose de Venecia.

HB 2759 is similar to HB 2733 which seeks to rationalize the tax, legal and regulatory regime governing asset-backed securities that will pave the way for a well-developed and functioning securitization market.

Both bills call for the removal of taxes such as value-added tax (VAT) and documentary stamp tax (DST) on the transfer of assets from the seller to the SPV.

"We believe that the taxation of securitization-related transactions should be rational and not unduly burdensome so that taxes will not serve as disincentive for an activity that aims to generate long-term funding, particularly for housing development," the DOF said in its position paper on the two House bills.

The DOF, however, qualified its support, stressing that for one, income taxes resulting from these transactions should be retained.

The DOF cited the taxes applicable to securitization and its recommendations vis-à-vis related proposals in HB 2759 and 2733.

On VAT:

•With regard to the transfer of assets from the seller to the SPV, the first step in securitization, the transaction should be exempt from VAT since there is no value added involved. Under the present VAT law, financial assets such as receivables, mortgage loans, personal loans, lease receivables are not subject to VAT.

• However, on services rendered by the SPV or any entity providing services to the SPV, VAT on services will still apply.

On Gross Receipts Tax:

• GRT does not apply if the seller of the assets to the SPV is a financial institution since GRT only applies to interest, commissions, earned by the financial institution. The receipts generated from the sale of the assets are not in the form of interest, commissions, thus, no GRT is applicable.

On Documentary Stamp Tax:

• In a securitization transaction, the primary instrument (original mortgage) has already been subjected to DST, thus, asset transfer to the SPV should be exempt.

On the issuance of the security by the SPV to the investor, the DOF said this is recognized as a principal issuance of the instrument and should continue to be subject to DST based on existing provisions of the law.

However, the subsequent trading of the instrument in the secondary market should be exempted from DST.

"As a matter of policy, the DOF is predisposed to removing all DSTs on secondary trading in order to promote capital market development," the DOF said.

Securitization is the process of converting bank loans and other assets into marketable securities for sale to investors. It allows firms or agencies to remove non-performing assets from their balance sheet, and allows them to make new loans from the proceeds of securities sold to investors.

Present laws do not allow the conversion to be tax-free as DST is slapped on investors who buy securities.

The securitization bills are being pushed by the Arroyo administration to pave the way for the sale of banks’ estimated P70-billion worth of foreclosed properties to government that will support the low-cost, mass-housing program of the government.

A SPV or an AMC on the other hand, is an entity that will buy and sell banks’ bad debts and acquired assets at a discount.