Tax waivers during rehabilitation proceedings

THE Financial Rehabilitation and Insolvency Act (FRIA), or Republic Act 10142, was enacted with the aim of offering debtors an avenue to preserve and maximize the value of their assets and prioritize claims and, at the same time, ensure fair treatment of creditors in similar situations. In essence, FRIA serves as a mechanism to help debtors navigate financial challenges.

One of the generous grants of FRIA is the waiver of taxes and fees due to the national and local governments found in Section 19.

Section 19 of FRIA provides a significant benefit by granting a waiver of all taxes and fees due to both the national and local governments. This waiver comes into effect from the issuance of the commencement order until the approval of the rehabilitation plan or the dismissal of the petition (for rehabilitation), whichever occurs first. During this period, all taxes and fees and any associated penalties, interests, and charges due to the national or local government are considered waived.

Section 21 of FRIA provides for the effectivity and duration of a commencement order. Under Section 21 of FRIA, the commencement order shall be effective for the duration of the rehabilitation proceedings for as long as there is a substantial likelihood that the debtor will be successfully rehabilitated.

Recently, the Court of Tax Appeals (CTA) issued a decision that discusses the important periods under Section 19 in relation to Section 21 of FRIA.

In said case, the petitioners filed for a petition for corporate rehabilitation. A commencement order was issued, and later on, a rehabilitation plan was approved. During the pendency of the case, petitioners sent letters to the local treasurer requesting a waiver of the local business taxes and real property taxes under the FRIA. Subsequently, petitioners received a response from the local treasurer opining that that there is no such explicit pronouncement on the waiver of local business taxes and real property taxes. In spite of this, the court-appointed receiver filed a motion for exemption for real property and local business taxes in the same court where the corporate rehabilitation case was pending. The court denied the motion for exemption for real property and local business taxes. A motion for reconsideration was filed but was likewise denied. Hence, the petitioners filed a case with the CTA.

In deciding the case, the CTA discussed the three important periods under Section 19 in relation to Section 21 of FRIA.

The first pertains to the period preceding the issuance of a commencement order. Within this timeframe, all taxes, whether national or local, relating to taxable periods before the issuance of the commencement order may be assessed but not immediately collectible. Claims during this point in time are considered as claims against a troubled corporation. In relation to Sections 19 and 21 of FRIA, the CTA explained that claims falling within this period are affected by a stay order, which should have been presented by the claimant national or local government to the rehabilitation court for inclusion in the schedule of claims, which is a necessary part of the rehabilitation plan. Again, the assessment of such taxes must be presented to the rehabilitation receiver rather than directly to the distressed corporation. Failure to do so may result in the collecting party being held in indirect contempt.

The second period, which spans from the issuance of the commencement order to the approval of the rehabilitation plan, marks an important and beneficial stage or phase for the debtor. During this interval, debtors are granted relief from taxes, considering that during this period, all taxes are deemed waived, as provided under Section 19 of FRIA.

The third period pertains to the time following the approval of a rehabilitation plan. All taxes beginning at this point are neither claims nor deemed waived.

Therefore, from this point onward, all taxes may be assessed and collected by the national and local governments against the debtor.

Indeed, granting relief to debtors can come in various forms under FRIA. This could be by waiving payment of taxes and even by just temporarily suspending tax imposition and collection.

Certainly, through the FRIA, debtors are given crucial tools to navigate financial adversity. FRIA offers a structured approach to financial restructuring, delineating clear guidelines for tax waivers and procedural safeguards to facilitate an effective and efficient rehabilitation process.

Nica Marsha V. Gasapo is a senior associate of Mata-Perez, Tamayo & Francisco (MTF Counsel). This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any questions or comments regarding this article, you may email the author at info@ mtfcounsel.com or visit the MTF website at www.mtfcounsel.com