BIR Ruling [DA-029-05]

January 24, 2005 BIR RULING [DA-029-05] Secs. 24; 196 RR No. 17-2003 Mr . Jose F. Montao Bian, Laguna S i r : This refers to your letter dated December 17, 2004 stating that in November 2004, the local government of Mondragon, Northern Samar, in need of a site for a public market, purchased from the heirs of Rosalia F. Montao a 400 sq. m. lot located along the national highway for a contract price of P300,000.00; that the said property is part of a farm land owned and cultivated by the family of the decedent; that no member of the family is engaged in buying, developing or selling real properties; that based on a local tax table covering government money payments (GMP), the Municipal Accountant of Mondragon, upon payment of the contract price to the heirs, deducted therefrom the following taxes: 1. 3% VAT P8,181.82 2. 5% EWT 13,636.36 Total Taxes Withheld P21,818.18 that based on the foregoing, you are requesting, in effect, for a ruling on the following: 1. Whether or not the above taxes imposed are correct? 2. What taxes are involved in the above transaction and who has the liability to pay the same? In reply thereto, please be informed that under Section 24(D)(1) of the Tax Code of 1997, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the same Code, whichever is higher, is imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or -controlled corporations (GOCC's) shall be determined either under Section 24(A) or under this Subsection, at the option of the taxpayer. From the foregoing, the taxpayer-seller (individuals, estates or trusts) is clearly given the option on how he/it would report and pay the income tax due on the sale or other dispositions of his/its real property treated as capital asset, to the government or to any of its political subdivisions or agencies or to GOCC's. Thus, under the foregoing circumstance, the taxpayer-seller may either; (a) report the transaction and pay the tax under the scheme provided for under the first paragraph of Section 24(D)(1) of the Tax Code, as amended (capital gains tax scheme), or (b) report the same under the income tax scheme provided for under Section 24(A) of the same Code. If taxpayer-seller opted that said transaction be subject to the 6% capital gains tax, he/it will report and pay the said tax through the one time transaction scheme (ONETT). The taxpayer-seller then will be required to file to the revenue district concerned a capital gains tax return (Form No. 1706) covering the said transaction. However, if the taxpayer in the above transaction opted that his/its tax liability therefrom shall be determined under Section 24(A) of the Tax Code, as amended, a 6% final withholding tax shall be imposed thereof pursuant to Revenue Regulations (Rev. Regs.) No. 17-2003, which re-established the policy prescribed under Rev. Regs. No. 2-98, that the capital gains tax on the sale, exchange or other disposition of real property classified as capital assets shall be collected as final withholding tax. Thus, in this case, the government and any of its political subdivisions or agencies or GOCC's shall be constituted as the withholding agent and therefor, under obligation to withhold the 6% final tax and remit the same to the revenue district office concerned using the withholding tax form. The name of the taxpayer-seller must be indicated in the said return/form as the tax paid therein is for his/its account. Further, the taxpayer-seller shall report the transaction to the revenue district office where he/it is registered using the Annual Information Return or Form No. 1604-CF. Moreover, and since the real property involved in the above transaction is a capital asset of the taxpayer, the same is not subject to the value-added tax (VAT) pursuant to Section 109(w) of the Tax Code, as amended. However, the said transaction is subject to the documentary stamp tax imposed under Section 196 of the Tax Code, as amended, at the rate of 1.5% based on the actual consideration. On the other hand, and since in the instant case the party selling a realty is an estate, the tax clearance or certificate authorizing registration (CAR) showing payment of the corresponding estate tax should be presented to the revenue district office concerned together with the proof showing payment of the taxes due on the above sale transaction before a CAR will be issued authorizing the transfer of the subject property to the Local Government of Mondragon, Northern Samar. cHAIES This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group