BIR Ruling [DA-049-00]

January 21, 2000 BIR RULING [DA-049-00] Land Bank of the Philippines 319 Sen. Gil Puyat Ave. Extn. Makati City Attention: Mr . Teofilo U. Sison, Jr . Department Manager I Catbalogan Branch Gentlemen : This refers to your letter dated April 22, 1999, stating that you normally apply the scheme of acquiring properties thru Dacion en Pago Agreements and Foreclosure Proceedings just to recover portion of your financing to cooperatives which endeavors are agricultural-related; that, however, in undertaking said recovery schemes, you usually incur losses in the amount equivalent to, more or less, the difference between the outstanding obligation and the appraised value of properties; that the said difference are written-off in your books; and that Real and Other Properties Owned or Acquired (ROPOA) is booked at an amount equivalent to the dacion consideration or booked obligations, whichever is lower. Based on the foregoing you are now requesting a ruling as to tax consequences of the above-mentioned recovery schemes. In reply, please be informed that under Section 27(D)(5) of the Tax Code of 1997, a final tax of six percent (6%) is imposed on the gains presumed to have been realized in the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, of such lands and/or buildings. In the instant case, agricultural cooperatives are presumed to have realized gain on the sale or disposition of their land and/or building or realties which are not actually used in the business and are treated as capital assets, hence, shall pay a final capital gains tax of six percent (6%). Accordingly, transfer of property through Dation in Payment is subject to the said final capital gains tax, and therefore, the various agricultural cooperative owners of real property from where you acquired the same by way of Dation in Payment are liable to pay the capital gains tax on the gains presumed to have been realized from the transfer of their property, taking into consideration the outstanding balance of their loans as the selling price before title thereto can be consolidated and issued in your name, (BIR Ruling 123-86) Moreover, under Section 58(E) of the Tax Code of 1997 in relation to Section 52(A) of the same Code, no registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner or his duly authorized representative had Certified that such transfer has been reported, and the capital gains tax or creditable withholding tax, if any, has been paid. (BIR Ruling No. 459-88) Furthermore, the return shall be filed with the Revenue District Office having jurisdiction over the place where the properties you acquired by way of Dation in Payment is located within thirty (30) days following the sale or foreclosure proceedings ( Dation in Payment ) and the total amount of tax due shall be paid on the date of return is filed by the said agricultural cooperatives. (BIR Ruling No. 459-88) On the other hand, the deed of Dacion En Pago is subject to the documentary stamp tax based on the consideration or value received or paid for the property or the selling price, whichever is higher, pursuant to Section 196 of the Tax Code of 1997 which tax is payable by either party to the said sale. (BIR Ruling No. 459-88) Finally, the losses you actually incur which is the difference between the outstanding obligation and the appraised value of the properties which difference is written-off in your books could not be taken into consideration in computing the capital gains tax and documentary stamp tax due as a consequence of your acquisition by way of Dation in Payment of the properties of said agricultural cooperatives, since the tax base in computing the capital gains tax, in this case, is the outstanding balance of the loans as the selling price. Thus, your ROPOA's acquired in the Dation should be booked on the dacion consideration, that is: the balance of the loan obligation. 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.) SIXTO S. ESQUIVIAS IV Deputy Commissioner Legal and Enforcement Group