[INTRC Tax Research Journal Volume XXI6 Assessment of Republic Act No. 9343 Entitled "An Act Amending Republic Act No. 9182, Otherwise Known as the Special Purpose Vehicle Act of 2002 for the Purpose of Allowing the | Establishment and Piso Registration of New SPVs and For Other Purposes” 1, SALIENT FEATURES Republic Act (RA) No. 9343' amends RA 9182", otherwise known as the “The Special Purpose Vehicle (SPV) Act of 2002” by: (1) allowing the establishment and registration of new SPVs for another 18 months (up to November 2007) from the law's effectivity; and (2) granting extension of the tax exemptions and fee privileges to financial institutions (FIs), SPVs and any individual on the transfer of non-performing assets (NPAs)’ from the FI to an SPV, from an SPV to a third party or dation in payment (dacion en pago) by the borrower or by a third party to an FI or an SPV in accordance with the Act's Implementing Rules and Regulations (IRR), * Prepared by Josefina Manuela V. Albano, Tax Specialist I, reviewed by Monica G. Rempillo, Economist IV and Aurora C. Seraspi, Economist V of the Economies Branch, NTRC. ' Approved on April 24, 2006 and became effective on May 14, 2006. *“An Act Granting Tax Exemptions and Fee Privileges to Special Purpose Vehicles which Acquire or Invest in Non-Performing Assets, Setting the Regulatory Framework Therefor, and For Other Purposes”, signed into law by President Gloria Macapagal Arroyo on January 10, 2003 and became effective on April 12, 2003 * ‘The term NPAs include non-performing loans (NPLs) and real and other properties owned ot ‘acquired (ROPOA) by Fls. ‘Assessment of Republic Act No. 9343...the Special Purpose Vehicle Act of 2002 9[ NRC Tax Research Journal 7 _ Volume XXIL6 In effect, Fis, SPVs and individuals or third parties may avail of said incentives for a period of two (2) more years (from May 2006 to May 2008); while SPVs can enjoy such for a period of five (5) years from the date of acquisition of NPAS. The tax incentives and fee privileges included in the SPV laws are exemptions from documentary stamp tax (DST), capital gains tax (CGT), creditable withholding tax and value added tax (VAT) of transfers of NPAS to and fiom the SPVs. The fee privileges on the transfer of NPAs, on the other hand, are the following: (a) 50% of the applicable mortgage registration and transfer fees on real estate mortgage and chattel mortgage registrations to and from the SPV; (b) 50% of the filing fees for any foreclosure initiated by the SPV in relation to any NPA acquired from an FI; and (c) 50% of the land registration fees. Il, ASSESSMENT 1. As a response to the growing NPAs problem besetting the country’s banking sector, SPVs' were created. The first SPV law or RA 9182 provides for the establishment and registration of SPVs as the corporate vehicle to acquire NPAs and in turn, dispose of them in the market. Essentially, the law grants tax exemptions and fee privileges to Fls, ‘SPVs and any individual on the transfer of NPAs. 2. Initially, the foregoing tax exemptions and fee privileges under RA No. 9182 were granted for a petiod of two (2) years (ftom April 2003 to April 2005) while SPVs which acquired NPAs within that two-year period can avail of said incentives for a period of five (5) years from the date of the acquisition of such NPAs. However, the worrisome NPA dilemma has not yet been solved after the expiration of RA 9182 in 2005. Thus, the need to extend the deadline on the transfer of NPAs was considered, hence, the passage of RA 9343. The covered assets under the amending law are those remaining under RA 9182. 3. The practice of establishing SPVs or AMCs to bail out the financial system from bad loans problem is already an international norm, Many countries like China, Korea, Indonesia, Malaysia and Thailand adopt the same scheme to unburden their debt-ridden banks of bad assets. However, it is the governments of these countries that directly set up ‘SPVs or AMCs and buy out the banks’ bad loans whereas in the Philippines, SPVs are set up as stock corporations by the private sector. Lack of government funds due to falling revenues and persisting budget deficit make it difficult for the Philippine government to set up SPVs and purchase the bad assets of the country’s banking sector. Presently, the Securities and Exchange Commission (SEC) has 54 registered SPVs, 40 of which were registered under the former law and the additional 14 under the amending law. * SPV, or asset management companies (AMCs) in other countries, are stock corporations organized jn accordance with the Corporation Code of the Philippines which are primarily incorporated to invest in, oF acquire non-performing assets (NPAs) of financial institutions (FIs). An SPV shall have a minimum authorized capitalization of 500 million, with a minimum subscribed capital stock of B125 million and a minimum paid~ up capital of P31.25 million, (lost of ist No. 9343 Special Purpose Velie det F202)NTRC Tax Research Journal Volume XXI6 4. The initial progress of SPV transactions clearly shows the ability of the national government, local private sector and as well as investors to work together to solve a major impediment to the viability of the banking sector. The difficulties encountered by the financial sector in the aftermath of the 1997 Asian financial crisis were addressed to a great extent by the establishment of SPVs as the latter became actively involved in the trading of NPAs. After the lapse of RA 9182 in 2005, 297 billion in NPAs were sold to local and foreign institutions through the use of SPVs, bringing down the industry's NPL ratio to 9.1%, its lowest level since May 1998.° By the first quarter of 2006, the NPL ratio further improved to 8.26%, the lowest NPL ratio recorded by the Bangko Sentral ng Pilipinas (BSP) in eight (8) years.® With the extension of the tax incentives allowed under RA 9343 for two (2) more years, banks are given mote time to sell soured assets or loans, 5. As of June 30, 2002, the total NPAs of the banking sector came in at BS19.986 billion, Out of this amount, 2316.531 billion involved NPLs while 2203.455 billion were ROPOAs. The first phase transfer (April 2003 to April 2005 under RA 9182) of NPAs totaled to 96.669 billion or 18.59% of total NPAs. This covered P88.020 billion NPLs and 8,649 billion ROPOAs. Under the second phase implementation (May 2006 to May 2008) of the SPV Act or RA 9343, only B49.563 billion or 9.53% of the total NPAs was transferred, comprising P31.959 billion worth of NPLs and P17.604 billion of ROPOAs. (Table 1) The result of RA 9343 is way below the estimated 2100 billion target. Table 1, AMOUNT OF NPAs TRANSFERRED UNDER THE SPV ACTS (In Billion Pesos) Nak, | Transferred | % to Total Transferred | % to Total NPAs of June under NPAs as of under NPAs as of | RA9182 | June 30,2002, RA9343 | June 30, 2002 30, 2002 NPLs | 316.531 88.020 27.81 31.959 10.09 ROPOAs | 203.455 8.649, 4.25 17.604 8.65 TOTAL 519.986 96.669 18.59 49.563 I 9.53 ‘Source: BSP. 6. The aggregate book value of NPAs transferred under both phases of the SPV Act implementation amounted to a total of B146.232 billion. As observed, the total NPAs transferred under RA 9343 was lower by 48.73% compared to total NPAs transferred under RA 9182. SPAY law spurs sale of B97B in non-performing assets by banks” by Zinnia B, Dela Pena, The Philippine Star, PB3, November 28, 2005, © Banks’ NPL ratio is lowest in 8 years" by Lee C. Chipongian, Manila Bulletin, PB1, May 2, 2006, Assessment of Republic Act No, 9343...the Special Purpose Vehicle Act of 200? TT[TRC Research Toul Volume XX] 7. Moreover, in order to be entitled to the incentives under the SPV law, a Certificate of Eligibility’ (COE) to be issued by the BSP is required. During the initial implementation of the SPV law, 234 COEs were issued with a total amount of B75.726 billion.® Under RA 9343, a total of 184 COEs? worth 249.563 billion were issued. Of these, 118 COEs have been issued to banks for SPV transactions amounting to B47.189 billion, 39 COEs for dacion en pago with loan equivalent to 22.299 billion and 27 COEs for ROPOA sale to individuals worth 20,075 billion (Table 2). In terms of the type of institution that availed of the SPV incentives, universal/commercial banks registered the highest book value of NPAs transferred with a total of P46.172 billion, followed by thrift banks (P3.044 billion) and rural banks (0.341). (Table 3) ‘Table 2. AMOUNT AND NUMBER OF CERTIFICATES OF ELIGIBILITY (COEs) ISSUED UNDER RA 9343 ‘Type Of Transaction _| Number of COEs Issued Ge oimaeaasa) Sale to SPV Tis 47.189 Dacion en Pago 39 2.299 ROPOA sale to individual 21 0.075 TOTAL 184 49.563, Toure BSF ‘Table 3. SUMMARY OF TRANSACTIONS TRANSFERRED UNDER RA 9343 ‘Type of Transaction (In Billion Pesos) Sale to SPV | Dacion en Pago | ROPOA | Total Type of Institution Universal/Commercial Banks | 43.878 2273 021 [46.172 Thrift Banks 2.984 0.010 |_0.050 3.044 Rural Banks 0.327 0.010 (0.004 0.341 ‘Non-banks - 0.006 0.006 Source: BSP. * Reters to the certificate issued by the Appropriate Regulatory Authority as to the eligibility of the NPL or ROPOA for purposes of availing of the tax exemptions and privileges pursuant to the provisions of the SPY law * As of June 15, 2008. ° Issued to 63 financial institutions (62 are banks and 1 non-bank), universal/commercial banks have been issued 78 COEs, 29 COES for thrift banks, 74 COEs for rural/cooperative banks and 3 COEs for non-bank financial institutions. ir} ‘Assessment of Republic Act No. 9343... he Special Purpose Vehicle Act of 2002[NERC Tax Research oural Volume XXIL6 ] 8. Records of the BSP show that there was 2395.4 billion of NPAs in 2005 or upon the completion of RA 9182. This amount is 8.8% of the B4.5 trillion banking sector's gross assets. ARter the expiration of RA 9343 in 2008, NPAs totaled 2296 billion comprising 5.1% of the B5.8 trillion gross assets of banks. It may be noted that the ratio of NPAs to gross assets has been on a downward trend since 2003. The NPL ratio to total loan portfolio has likewise been descending. Both the NPA and the NPL ratio have been trimmed down to a single digit since 2005. (Table 4) Table 4. NPA AND NPL OF THE BANKING SYSTEM, 2001-2008 (In Billion Pesos) Total PL Ratio to NPA Ratio. Year | NPLs Loan Total Loan NPAs Gross to Gross Portfolio Portfolio Assets. Assets. (in Percent) (Un Percent) 2001 | 305.8 | 1,812.2 16.9 | 497.2 | 3.4063, 14.6 2002 269.6 1,840.8 14.6 487.2 | 3,622.5 4 2003 | 271.4 | 1,961.4 138 302.1 | 3,816.3 13.2 200d | 2529 | 2.0144 126 495.7 | 4,189.0 18 2005 | 178.9 2,135.8 84 395.4 | 4470.8 88 2006 147.2 2,402.6 61 345.5 4,994.6 6.9 2007 | 128.0 [2,585.2 5.0) 307.5_| 5,256.3 39 2008 120.6. 2,904.6 42 296.0 | 5,806.3 Sl Source: BSP, 9, ‘The downward trend of the NPAs of the banking system is partly attributed by the BSP to the transfer of the NPAs to SPVs under the first and second phases of the implementation of the SPV Law. The decline in the NPA ratio is likewise perceived to be caused by the increase in total loans and gross assets of the banking sector. 10. BSP data as of December 2009 revealed a B283.423 billion and 21 15.420 billion worth of NPAs and NPLs, respectively, with gross assets of about P6.3 trillion, The ratio of the NPA and the NPL to the total gross assets ate at a low 4.48% and 1.82%, respectively. The situation is said to be brought about by the extension of the SPV Act which gave more time to the banking sector to clean up its balance sheet peppered with NPAs the bulk of which are NPLs. In addition, it is worthy to mention that the average discount rates on NPA sales under RA No. 9343 are 50% for NPLs and 35% for ROPOAs. 11. Further, of the 249.563 billion NPAs transferred under RA 9343, 247.189 billion NPLs were sold to SPVs while 2.374 billion were ROPOAs. The ratio of transferred NPLs and ROPOAs are 64% and 36% in favor of NPLs. It is estimated that the total revenue loss of the government on taxes and fees amounted to P0.425 billion consisting of 20.28 billion for DST, BO.14 billion for CGT and 20.005 for LRA fees for the first level only (from Fls to SPVs or individuals). (Table 5) (dasessnon’ of Republe Het No 934. . the Special Purpose Viele Het of 2002 5NIRC Tax Research Journal Volume XXIL6 Table 5. ESTIMATED REVENUE ROREGONE UNDER RA 9343 First Level (From FIs to SPVs or Individuals) (In Billion Pesos) Taxes Fees Total NPA — P49.563, | pst] car NPL PAT.IS9 024 | O24 ROPOA | 2.374 aos [0.14 0.005 0.185 (TOTAL _ 0.28 O14 0.005 0.425 12. Moreover, pursuant to SEC Memorandum Circular No. 3,'° second leg transfers (NPA transfer from SPV or individual to third party and/or dacion en pago by borrower to SPY or third party) shall only be entitled to tax incentives/privileges if sucl transactions occur not later than April 10, 2010.'' Additionally, the transaction should cover NPAs acquired under the original SPV Law or RA 9182. Registered SPVs are mandated to submit a status report to that effect which must be signed under oath by the Chief Executive Officer and Chief Finance Officer/Treasurer of the corporation and submitted to the Office of the General Accountant not later than July 30, 2010. 13. The SPV law engenders the speedy recovery of the Philippine banking system from the huge burden of disposing NPAs from banks to SPVs or individuals through the grant of fiscal incentives. SPVs, in turn, would then assume the rights and obligations of the bank in collecting and restructuring the NPLs or in selling the ROPOAs. In effect, buyers of NPAs actually help the country detoxify itself from the adverse repercussions of a high incidence of bad loans, which if allowed to linger in the financial system, would be disastrous to the economy as a whole. 14, However, the success of RA 9343 is affected by several issues. For one, it is observed that it is not easy to get a fair return on the NPAs due to the lackluster performance of the property market in the country which is further affected by the constitutional ban on foreign ownership of real estate in the Philippines. As noted, if the SPV will acquire land, foreign investors’ equity is limited to only 40%, with the rest of the shares of the capital stock being owned by Philippine nationals. Apart from this, the tax incentives and fee privileges offered to SPVs are still not enough to outweigh the huge amount of capitalization required in setting up an SPV. " Guidelines on the Issuance of Certificates of Eligibility under the Special Purpose Vehicle Act and Status Reports of Registered Special Purpose Vehicle Corporations, Series of 2010. "' For the purpose of determining whether a transaction occurred within the 10 Aprit 2010 deadline, relevant documents to support the application (e.g. Deed of Assignment or Sale, Deed of Dacion, among others) should be dated on or before the deadline and said documents must be notarized. The deadline for the applications for COE is 30 June 2010. us ssessment of Republi Het No 9343..the Special Purpose Vehicle et of.[INTRC Tax Research Journal 7 Volume XXL 15. Another obstacle to the success of the law is the pricing, i.e. the considerable gap between the target selling price and the bid price of assets marked for disposal. Banks are not willing to accept significant losses even though the BSP granted them deferred booking of losses over a period of ten (10) years." On the part of the SPV, the maximum discount or the lowest value for assets generally reflects its earnings. Negotiating a low acquisition value from the banks is, therefore, crucial to the SPV’s profitability and its ability to quickly dispose of the NPAs. At this juncture, it may be observed that the average discount rates under RA 9343 for NPA sales (50% for NPLs and 33% for ROPOAs) of banks are quite low. Other factors that contribute to the failure of RA 9343 to meet its objectives include other legal issues like those involving the Anti-Dummy Law because some banks have resorted to setting up and dealing with their own SPV instead, which is not legally permissible under the SPV Act." 16. Lastly, the practice of transferring a bank's bad assets to a private or public SPVs or AMCs has become an international practice. Many countries have recognized this strategy as a meant of alleviating the bad loan problems of their respective financial systems. Some Asian countries restructure their banks through centralized AMCs like Danaharta in Malaysia, Indonesia Bank Restructuring Agency (IBRA), Korea Asset Management, Corporation (KAMCO) in Korea and Thailand Asset Management Co. (TAMC)."* The Philippines, India and Taiwan are the only economies in Asia that pursued private sector-led AMCs, instead of government or centralized AMCs." In the US market, there are institutions that act as principal intermediaries for purposes of purchasing mortgage loans. Their role could be likened to those of SPVs. On the other hand, according to the Trust Law in Argentina, a trust takes a similar form as that of an SPV where a person (the trustor) transfers the ownership in trust of certain assets to another person (the trustee who is a financial institution) who must manage the assets for the benefit of the party specified in the trust agreement (the beneficiary), and transfers the trust property upon termination of the trust to the trustor or the beneficiary. Furthermore, in Morocco, SPVs can be: (a) institutional investors in debt; or (b) other entities which are governed by the legislative or regulatory system of either Morocco or other foreign countries. The functions of its SPV are administered by its management depository institution, which is akin to AMC in India. 17. In sum, the objective of further lowering the level of NPAs of banks as of June 30, 2002 by as much as P100 billion was not achieved via the extension of incentives for two more years under RA 9343. It is therefore suggested that banks should craft a more prudent loan policy to avoid or minimize the occurrence of high © Memorandum to All Banks and Non-Bank Financial Institutions with Quasi-Banking Functions, dated 16 February 2004, as amended by Memorandum dated 2 December 2008. ° Financial institutions shall have no equity share exceeding five (S) percent in the buying SPV and they shall have no director indirect management thereo. ™ husp:/wow philstar conv/Article aspx?articleld=$07643&publicationSubCategoryld~66. °* http//dirp3.pids gov phitisdps/pidsdps0S06,par © hup:itbidoes.rbi.org.in/rdocs/PublicationRepor/pdf.10796.pd. ‘Assessment of Republic Act No, 9343...the Special Purpose Vehicle Act of 2002 5[IRC Tax Research Journal Vato RIN incidence of NPAs. Among others, this policy should contain strict adherence or compliance to: (1) loan repayment conditions; (2) comprehensive audit of borrowers: (3) collateral and other financial capability criteria; (4) project viability; and (5) monitoring and assessment of loan status as of a given period, etc. Cs ser of Republi Act No 950th Specie Purpose Vehicle Act of 200]