Senator Ralph Recto, chairman of the Senate ways and means committee, said lawmakers also extended by one and a half years the time within which investors can establish special purpose vehicles or companies that would buy banks’ idle assets at substantial discounts.

Under the Special Purpose Vehicle Law that expired in April last year, banks were allowed to dispose of idle assets with neither the buyer nor the seller paying documentary stamp tax, capital gains or value-added tax.

Recto added that both chambers of Congress adopted the Senate version of proposed amendments to the Special Purpose Asset Vehicle Law, which provided for the two-year extension and covers nonperforming assets as of June 30, 2002.

The government will collect an additional P5 billion income tax once the banking sector unloads P100 billion more of its soured assets under the extended Special Purpose Vehicle Law, finance officials said.

"We will collect additional taxes when these non-performing assets become productive once more," according to Undersecretary Gil Beltran.

SPV units buy NPAs and turn them around for profit. If P100 billion of bad assets are restructured and become earning properties, Beltran estimates about P15 billion of income earned, which would translate to P5 billion income tax (35 percent). SPVs increase the potential value of NPAs cleaned up from banks’ books, he said.

"Yes the DoF (Department of Finance) supports the law extension because right now banks’ NPAs impair their bottomline. We don’t collect income tax from these useless assets," Beltran added.

The law — enacted by congress and signed into law by President Arroyo in December 2002, grants tax exemption and price discounts of 1 to 8 percent and fee privileges to SPVs that acquire or invest in NPAs. The tax perks expired last April 8, 2005.

Finance Secretary Margarito Teves said he supports the SPV law despite provisions for tax exemptions. "Overall it will help the whole banking industry in getting rid of bad assets," Teves said in an earlier interview.

As a former banker – Teves was president of Land Bank of the Philippines before taking his DoF post – he said the SPV freed up some of the bank’s idle resources and made them useful once again.

Senator Ralph Recto, the bill’s sponsor, pointed out that tax breaks will not just benefit banks but also the borrowers who will be buying the NPAs. "These tax breaks are minimal," he said, or about 1-1.5 percent for SPV transactions for NPLs and 6-8 percent for ROPOA (real and other properties owned or acquired) disposal.

Based on Bangko Sentral ng Pilipinas and Securities and Exchange Commission figures, under the SPVs, banks sold P97 billion of bad assets creating forty SPV units while P1.3 billion in paid-up capital was registered with the SEC.

At the moment local banks are burdened with over P400 billion-worth of NPAs and the BSP is helping the sector liquidate idle assets. Banks’ NPL ratio, which is an overall asset quality indicator, is at 8.43 percent as of end-January.

BSP Governor Amando Tetangco Jr. said if NPAs were reduced by another P100 billion, this would reduce the industry’s NPL ratio further to 6.5 percent. The pre-1997 financial crisis ratio was four percent.

"The banks said this is doable because they are already familiar with the law. It could be better than P100 billion. Our original target was P200 billion to P250 billion," said Tetangco.

He added that the recently approved regulation where banks are now allowed to form joint venture agreements with real estate developers in the disposition of assets will help sell off more non-performing portfolios.