On May 11, 2020 the National Economic and Development Authority (NEDA) through Acting Socioeconomic Planning Secretary Karl Kendrick Chua revealed that House Bill No. 6622 (HB6622) or “The Philippine Banking Industry Resiliency Against COVID-19 Pandemic Act” is likely to be certified as urgent by President Rodrigo Duterte.
The Bill authored by Representative Junie Cua will encourage financial institutions to sell their non-performing assets (NPAs) to Financial Institution Strategic Transfer Corporations (FISTSCs), and grants tax exemptions and reduced registration and transfer fees to certain transactions.
One of the major reason for the probable fast-tracking of HB6622 is because financial institutions should be of sound financial condition to be effective partners of the government in tackling the adverse effects of the COVID-19 pandemic.
SALIENT PROVISIONS OF HOUSE BILL 6622
FINANCIAL INSTITUTION STRATEGIC TRANSFER CORPORATION (FISTC) – a FISTC is a stock corporation organized under the Corporation Code of the Philippines with the main purpose of (a) investing in, or acquiring Non-Performing Assets (NPAs) like non-performing loans or real and other properties acquired by Financial Institutions (FIs). If the FISTC will acquire real property, it shall be at least 60 percent controlled by Filipinos. These are the other powers that a FISTC shall have, to wit:
(b) to engage third parties to manage, operate, collect and dispose of NPAs acquired from an FI;
(c) to rent, lease, hire, subject to security interest, mortgage, transfer, sell, exchange, usufruct, secure, securitize, collect rents and profits, and other similar acts concerning its NPAs acquired from an FI;
(d) in case of NPLs, to restructure debt, condone debt and undertake other restructuring related activities. In restructuring debt, the FISTC may reduce the principal, interest, interest rates, and the period for calculating the interest, extend the time for debt repayment or relax the conditions for debt repayment, agree to the conversion of the borrower’s debt to equity in the borrower’s business, agree to a transfer of assets or claims from the borrower to repay the debt or dispose of some of the borrower’s property or claims to third persons;
(e) to take, transfer shares or buy shares issued by the borrower for the purpose of business reorganization or rehabilitation of the borrower, subject to the provisions of the Revised Corporation Code of the Philippines in respect of the rights of the shareholders of the borrower company, and apply any other measures or restructuring techniques with the approval of the Commission;
(f) to enter into dation in payment (dacion en pago) arrangements, foreclose judicially or extra-judicially and other forms of debt settlement involving NPLs;
(g) to spend funds to renovate, improve, complete or alter its NPAs acquired from an FI;
(h) to issue equity or participation certificates or other forms of IUIs for the purpose of acquiring, managing, improving and disposing of its NPAs acquired from an FI;
(i) to borrow money and issue other instruments of indebtedness for the purpose of paying operational and administrative costs;
(j) to guarantee credit, accept or intervene for honor the bills of borrowers;
(k) to advance funds to borrowers where required by an acquired asset or any debt restructuring agreement pursuant thereto, or under any court order or rehabilitation plan; and
(I) to engage the services of a third-party asset servicing company for the collection and receipt of the debt payments for debts under debt restructuring or business reorganization, management and disposition of assets of the FISTC in accordance with the rules, procedures and conditions prescribed by the Commission or by the courts. Except in the case of ROPAs whose redemption periods have already expired, the FISTC shall notify the borrower and all persons holding prior encumbrances upon the properties or a part thereof or are actually holding the same adversely to the borrower within fifteen (15) days from the date of the appointment of the said servicing company.
Incentives and Exemption Privileges under HB6622
The transfer of NPAs from FI to an FISTC, FISTC, and from an FISTC to a third party or dation in payment (dacion en pago) by the borrower or by a third party in favor of an Fl or in favor of an FISTC shall be exempt from the following taxes:
(a) Documentary stamp tax
(b) Capital gains tax;
(c) Creditable withholding income
(d) Value-added tax
- Fifty percent (50%) of the applicable registration and transfer fees on the transfer of real estate mortgage and security interest to and from the FISTC.
- Fifty percent (50%) of the filing fees for any foreclosure initiated by the FISTC in relation to any NPA acquired from an FI.
- Fifty percent (50%) of the land registration fees.
Additional Tax Exemptions under HB6622
(a) The FISTC shall be exempt from income tax on net interest income, documentary stamp tax and mortgage registration fees on new loans in excess of existing loans extended to borrowers with NPLs which have been acquired by the FISTC.
(b) In case of capital infusion by the FISTC to the borrower with NPLs, the FISTC shall also be exempt from the documentary stamp tax.
Privileges of Financial Institution Under House Bill 6622
Any loss that is incurred by the financial institutions as a result of the transfer of NPAs shall be treated as an ordinary loss. However, the accrued interest and penalties shall not be included as a loss on said loss carryover from operations subject on the net operating loss carry-over (NOLCO) principle.
Except that the loss incurred by the FI from the transfer of NPAs within the two-year period from the effectivity of the IRR may be carried over for a period of five (5) consecutive taxable years immediately following the year of such loss.
The tax savings derived by FIs from the NOLCO shall not be made available for dividend declaration but shall be retained as a form of capital build-up.
Written by: Atty. Jon Dominic Penaranda