The proposed Implementing Rules and Regulations of the SPV Act
March 15, 2003 | 12:00am
Co-Managing Partner
Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW)
From a practical standpoint, there are also worrisome prob-lems. A good example is the IRR provision that the sale from the FI to the SPV will not be consi-dered true sale if the transfer-ring FI "extends any credit faci-lity, guaranty or similar transac-tion to any party for the purpose of . . . acquiring the NPAs from the SPV", (SPV Rule 13[k]) In this regard, the SPV Act gives an FI a maximum period of two years from the effectivity of the IRR to dispose of its NPA to a SPV for the transaction to enjoy the tax exemptions. The SPV, in turn, has the right to sell the acquired NPAs to third parties. If the SPV wants to avail of the tax exemptions and incentives during the turn-around sale, it must sell these assets within a period of five years from the date it acquired the properties from the FI. Otherwise, it can sell these assets at any time but this time without the tax exemp-tions and privileges granted by the SPV Act (Sec. 15). The sale to the third party may therefore take place long after the sale by the FI to the SPV company. If a third person borrows money from the transferring FI to help it acquire the assets from the SPV, the first sale from the FI to the SPV will not be considered as a true sale. This, of course, presents practical problems. How will the BSP and BIR monitor that the third party buyer will not borrow money or avail of any credit facility from the transferring FI? What if the prospective buyer has ready credit facilities from the trans-ferring FI? What if such buyer does not bank with any other bank? If the buyer actually bor-rows from the transferring FI, will the first sale to the SPV be undone? How will it be un-done? These and similar practi-cal issues will have to be ad-dressed as a result of the ques-tioned provision.
Some provisions of the pro-posed IRR are also unacceptable from a policy standpoint. These provisions have limiting effects which may make the law un-workable. A good example is the true sale provisions dis-cussed above. The proposed IRR expressly provides that "[a]ny transfer of NPAs not in the nature of True Sale … shall not qualify for tax exemptions and fee privileges granted under the Act." (SPV Rule 13). The expanded definition of the true sale concept by the IRR, as discussed above, will unduly li-mit the tax exemptions and fee incentives granted by the Act. Indeed, the proposed IRR not only does this but it also fails to clarify provisions that would give meat to the tax exemptions and fee incentives privileges granted by the SPV Act. For example, the pro-posed IRR does not cla-rify whether the capital gains tax and documen-tary stamp tax exemp-tions also apply to invo-luntary transfers such as foreclosure sale and auction sale of NPAs by banks and SPVs. While a Commissioner of the Internal Revenue has privately opined that the term ‘transfer’ under SPV Rule 15, which deals with tax exemptions and privileges, may be construed as including invo-luntary transfers like foreclosure sales, the proposed IRR must clarify this issue once and for all to avoid any controversy and the consequent delay in the dispo-sition of the non-performing assets of the banking industry.
At this point, it may be recalled that the original version of the SPV Act sought to solve our NPA problem in a two-fold way — first, by granting tax incentives and fee privileges and second, by remo-ving obstacles to the enforcement of creditors’ rights. The second is equally important as the first. Indeed, no matter how attractive the tax incentives under the law are, no investor in his right mind would buy non-performing loans if he could not efficiently collect them in the first place. That was the reason why the earlier versions of the new law had provisions removing the present-day obs-tacles to the enforcement of cre-ditors’ rights. For example, the bills filed in both Houses con-tained provisions regulating the issuance of temporary restraining orders and preliminary injunc-tions against foreclosures of mort-gages. The bills also had provi-sions granting creditors and SPVs the right vote down suspension/stay orders issued in rehabilitation cases. Unfortunately, the law, as fi-nally passed, did not contain these non-tax incentives because of op-position during the legislative deliberations. Congress hoped that the law would still work by giving tax exemptions and fee pri-vileges. The SPV Act is, therefore, essentially a tax exemption and fee incentive piece of legislation. For the IRR to unduly limit the tax exemptions and fee incentives granted by the SPV Act would violate the very essence of the law. Again, it is a settled principle that implementing rules and regula-tions cannot defeat or be in dero-gation of the purpose of the basic statute. Indeed, while the general rule is that tax exemptions should strictly be construed against the taxpayer, there is authority to the effect that such rule does not apply to special taxes relating to special cases and affecting only special classes of persons. Surely, the SPV law is one such kind of legis-lation.
Another limiting ef-fect of the proposed IRR is the provision that all taxes on previous tran-sfers to the transferor-financial institution or SPV must have been paid. In the first place, this may not be necessary at all. If a parti-cular asset is already in the name of the transferring FI or SPV, then taxes on the transfer must have already been paid. It is public knowledge that payment of trans-fer taxes is a condition precedent to the registration of the property in the name of the transferee. Secondly, this provision creates an unnecessary risk on the part of potential investors. It may be uti-lized as a tool of harassment by unscrupulous tax collectors. The provision will give these tax collectors a reason to review payment of taxes on previous transfers, notwithstanding the fact that the proper taxes had presu-mably been already paid. Why will a SPV, for example, buy a ROPOA from a bank with such risks? Will a bank give a repre-sentation and warranty to address the concerns of the SPV on the matter? Better still, will a bank give an indemnity in favor of the SPV to cover the risks? These and a host of other issues arising in connection with the questioned provision will delay the bank’s sale of its non-performing assets to the SPV.
What is more, the IRR has a chilling effect on both the banks and potential investors. As poin-ted out above, a violation of the expanded true sale provisions of the IRR will result both in civil and criminal liabilities. The offender will be made to refund to the government double the amount of the tax exemptions and privi-leges availed of, plus interest of twelve percent per year from the date prescribed for its payment until full payment thereof. A matter of more serious concern is the attendant criminal liability attached to the violation, which is imprisonment ranging from 6 years and 1 day to 12 years. The offender shall also be made to pay, at the discretion of the court, a fine ranging from Php50,000.00 to Php1,000,000.00 (Sec. 25, SPV Act). The expanded definition of the true sale concept, therefore, unne-cessarily exposes bank officers, external auditors and even the officers of the buying SPVs to criminal liability.
Equally problematic or trouble-some is the minimum net worth required of the SPVs. What this means is that the SPVs will be required to put up cash or pro-perty to comply with the mini-mum net worth required by the proposed IRR. This, of course, will work undue hardship on the investors of SPVs, not to men-tion the criminal penalties at-tached to the non-compliance with the minimum net worth requirement. This is especially so because the SPV Act categori-cally provides that IUIs issued by the SPVs will not form part of their capital (Sec. 3[f]). These IUIs, indeed, form part of the liabilities of the SPV and, there-fore, counterpart assets will have to be put up in order to comply with the minimum net worth requirement prescribed by the IRR.
Fortunately, the proposed IRR is still pending review by the Congressional Oversight Com-mittee decreed under the SPV Act. What I attempted to do was to demonstrate — by no means exhaustively — the objectionable provisions of the proposed IRR from the legal, practical and po-licy standpoints. From the pers-pective of one who was heavily involved in the passage of the SPV Act, the proposed IRR is a classic example of the age-old saying: "what the right hand giveth the left hand taketh away! My unsolicited advice, therefore, is that the COC must review the proposed IRRs not only from the legal standpoint but, more importantly, from the practical and policy standpoints. The COC must take particular note of the fact that there is a maxi-mum period of two years to enjoy the tax exemptions and fee incentives under the SPV Act. Indeed, the policy of the law is to help liquefy our banking sector’s non-performing assets at the earliest possible time. Every effort must therefore be made to remove the roadblocks and delays unduly prescribed by the proposed IRR in the disposition of our banking sector’s NPAs. Otherwise, the SPV Act will not - at least to a meaningful level — achieve its policy objectives. If that happens, then all the time, effort, expense and pain that went into the passage of this con-troversial piece of legislation will go to naught.
(The author is a senior partner and the co-managing partner of the Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He may be contacted at telephone number (632) 830 — 8000 or e-mailed at "[email protected]")
Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW)
Practical Considerations |
At this point, it may be recalled that the original version of the SPV Act sought to solve our NPA problem in a two-fold way — first, by granting tax incentives and fee privileges and second, by remo-ving obstacles to the enforcement of creditors’ rights. The second is equally important as the first. Indeed, no matter how attractive the tax incentives under the law are, no investor in his right mind would buy non-performing loans if he could not efficiently collect them in the first place. That was the reason why the earlier versions of the new law had provisions removing the present-day obs-tacles to the enforcement of cre-ditors’ rights. For example, the bills filed in both Houses con-tained provisions regulating the issuance of temporary restraining orders and preliminary injunc-tions against foreclosures of mort-gages. The bills also had provi-sions granting creditors and SPVs the right vote down suspension/stay orders issued in rehabilitation cases. Unfortunately, the law, as fi-nally passed, did not contain these non-tax incentives because of op-position during the legislative deliberations. Congress hoped that the law would still work by giving tax exemptions and fee pri-vileges. The SPV Act is, therefore, essentially a tax exemption and fee incentive piece of legislation. For the IRR to unduly limit the tax exemptions and fee incentives granted by the SPV Act would violate the very essence of the law. Again, it is a settled principle that implementing rules and regula-tions cannot defeat or be in dero-gation of the purpose of the basic statute. Indeed, while the general rule is that tax exemptions should strictly be construed against the taxpayer, there is authority to the effect that such rule does not apply to special taxes relating to special cases and affecting only special classes of persons. Surely, the SPV law is one such kind of legis-lation.
Another limiting ef-fect of the proposed IRR is the provision that all taxes on previous tran-sfers to the transferor-financial institution or SPV must have been paid. In the first place, this may not be necessary at all. If a parti-cular asset is already in the name of the transferring FI or SPV, then taxes on the transfer must have already been paid. It is public knowledge that payment of trans-fer taxes is a condition precedent to the registration of the property in the name of the transferee. Secondly, this provision creates an unnecessary risk on the part of potential investors. It may be uti-lized as a tool of harassment by unscrupulous tax collectors. The provision will give these tax collectors a reason to review payment of taxes on previous transfers, notwithstanding the fact that the proper taxes had presu-mably been already paid. Why will a SPV, for example, buy a ROPOA from a bank with such risks? Will a bank give a repre-sentation and warranty to address the concerns of the SPV on the matter? Better still, will a bank give an indemnity in favor of the SPV to cover the risks? These and a host of other issues arising in connection with the questioned provision will delay the bank’s sale of its non-performing assets to the SPV.
Equally problematic or trouble-some is the minimum net worth required of the SPVs. What this means is that the SPVs will be required to put up cash or pro-perty to comply with the mini-mum net worth required by the proposed IRR. This, of course, will work undue hardship on the investors of SPVs, not to men-tion the criminal penalties at-tached to the non-compliance with the minimum net worth requirement. This is especially so because the SPV Act categori-cally provides that IUIs issued by the SPVs will not form part of their capital (Sec. 3[f]). These IUIs, indeed, form part of the liabilities of the SPV and, there-fore, counterpart assets will have to be put up in order to comply with the minimum net worth requirement prescribed by the IRR.
(The author is a senior partner and the co-managing partner of the Abello Concepcion Regala & Cruz Law Offices or ACCRALAW. He may be contacted at telephone number (632) 830 — 8000 or e-mailed at "[email protected]")
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