Tax Breaks To Help Philippine Banks Divest Bad Assets

by Mary Swire, for LawAndTax-News.com, Hong Kong

17 March 2006

The Philippines Congress has approved a 2-year renewal of the Special Purpose Vehicle Act, which expired a year ago and which will give banks tax breaks to encourage them to get rid of non-performing assets.

The Special Purpose Vehicle Act, originally passed in 2003, with a 2-year time-span, was to have been revised and extended last year when it expired, but the legislation was not passed. Under the revised rules, transfers by financial institutions, special purpose vehicles (SPVs), or individuals of earmarked NPAs consisting primarily of non-performing loans (NPLs) and real and other properties owned or acquired (ROPOAs) by banks or FIs in settlement of loans and receivables were to be granted tax exemptions and fee privileges.

Crucially, the end date for the establishment of qualifying assets is to be extended from December 2002 to December 2004.

Financial Institutions includes Banks (as defined under the General Banking Law), Financing Companies (as defined by the Financing Company Act), Investment Houses (as defined by the Investment Houses Law), Government Financial Institutions and Quasi-banking institutions.

Transfers of NPAs from qualifying institutions to an SPV, from an SPV to a third party, and amounts paid by a borrower or by a third party in favor of a financial institution or an SPV are exempt from payment of documentary stamp taxes, capital gains tax, creditable withholding tax, and value-added tax under the Act. Exemptions from taxes arising from transfer are also available for individuals. These transfers are also entitled to a 50% reduction in fees for land and mortgage registration and transfer fees with the Land Registration Authority, and filing fees for foreclosure under the Rules of Court. Transfers of NPAs made for less than adequate and full consideration in money's worth are not subject to donor's tax.

The new law is expected to persuade banks to sell bad debts and foreclosed properties worth between $2bn-$3bn to international investment banks and equity funds. Although few Philippine banks went under in the Asian crisis, they emerged from it weakened by bad debts and over-valued assets, which has prevented them from playing a part in the country's economic development.

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