BIR Ruling [DA-032-98]

February 3, 1998 BIR RULING [DA-032-98] Hon. Benjamin S. Abalos City Mayor Mandaluyong City S i r : This refers to your letter dated November 10, 1997 stating that on August 5, 1997, the City Council of Mandaluyong enacted Resolution No. 544, Series of 1997 authorizing the Department of Public Works and Highways to implement the Rev. Aglipay Street (formerly F. Blumentritt Street) Development Project; that this project involves the widening of Aglipay Street to Boni Avenue for a total length of 195 meters; that among the improvements include a curb and gutter a two-meter tree lined sidewalk on each side, with modern street lighting; that this project will be funded from the public works share in the total amount of P95,082,000.00 upon the initiative of Senator Neptali A. Gonzales; that there are about seventy (70) property owners along the area that will be affected by this road widening; that to facilitate the early implementation of this project you offered to buy said areas at P20,000.00 per square meter and the buildings improvements affected thereby at P4,000.00 per square meter depending on the type of building material or materials used; and that to make your proposal acceptable, you offered to shoulder the capital gains tax that will be realized from the transaction. In connection therewith, you are requesting for exemption from the payment of capital gains tax on the sale of the land that will be affected by the said widening project. In reply, we regret to inform you that your request cannot be granted for lack of legal basis. Section 21 (c) of the Tax Code, as amended, is explicit in its provisions that 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, estates and trusts, shall be taxed at the rate of 5% based on gross selling price or the fair market value prevailing at the time of sale, whichever is higher. Accordingly, expropriation sale is subject to 5% capital gains tax regardless of whether any gain or profit was derived therefrom since the aforecited law is comprehensive enough to cover not only voluntary sale but also involuntary sale as in the instant case. (BIR Ruling No. 091-89 dated May 2, 1989) However, both capital gains and documentary stamp taxes shall be computed based on the actual consideration appearing in the Deed of Sale pursuant to Revenue Memorandum Order No. 41-91 which provides as follows: "In all cases involving sole, exchange, or any disposition of real property, the tax base for DST purposes shall be the same as the tax base used in the computation of the capital gains tax which means, gross selling price, fair market value, or zonal value of the real property whichever is higher, except in the following instances, where ACTUAL CONSIDERATION appearing in the Deed of Sale shall be an acceptable tax base in the computation of not only the CGT but also of the DST, viz: "xxx xxx xxx "(5) When the state or any of its instrumentalities in the exercise of its power of eminent domain, acquires through expropriation proceedings, private real property for public use upon payment of "just compensation to the owner. Both capital gains and documentary stamp taxes shall be computed based on said "just compensation" as actual consideration." Very truly yours, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal & Enforcement Group