BIR Ruling [DA-058-06]

February 23, 2006 BIR RULING [DA-058-06] 27 (D) (5); 188; #012-2001 Moldex Realty Inc . Moldex Bldg., Ligaya St. cor. West Avenue, Quezon City Attention: Mr. Maurito C. Tarobal AVP- Finance Gentlemen : This refers to your letter dated January 11, 2006 requesting for confirmation of your opinion that the conveyance by Moldex Realty, Inc. ("MRI" for brevity) of its Twenty Six (26) parcels of land in favor of the farmer beneficiaries pursuant to the provisions of Section 66 of Republic Act (RA) No. 6657, otherwise known as the "Comprehensive Agrarian Reform Law of 1988" is not subject to capital gains, creditable withholding, and documentary stamp taxes. Based on your representations, as well as from the documents submitted, the facts are as follows: 1. On January 20, 1995, MRI acquired the Hacienda Sapang Palay from Cipriano P. De Guzman through a Deed of Absolute Sale. Hacienda Sapang Palay is covered by Transfer Certificate of Title No. 5668 located in San Jose Del Monte, Bulacan. 2. Pursuant to the said Deed of Absolute Sale, the parties thereto were fully aware of the existing problems and conflicts covering the said property, to wit: a) Those of Abelardo D. Valenzuela, Jr. and other third-party claimants in Civil Case No. 311-M-93 (Abelardo D. Valenzuela, Jr. vs. Cipriano De Guzman, et al.) at the Regional Trial Court, Branch 15 in Malolos, Bulacan; b) Claims of tenants and other occupants for security of tenure, leasehold rights, disturbance compensation and other similar claims, including those involved in Special Civil Action CA-G.R. No. 30212 ( Federation of Free Farmers, et al. vs. Hon. Ernesto D. Garilao, et al .) then pending with the Court of Appeals; and c) Claims of other heirs of the registered owners which were disclosed to BUYER (MRI) at the time of the agreement. 3. It was further agreed that MRI shall settle the tenants' claims which include payment of disturbance compensation. 4. As a result of the sale, the farmer beneficiaries were displaced from their areas of tillage. Under the law, farmer beneficiaries who may be displaced from their areas of tillage because of the sale, transfer or conveyance of the property of which they are tenants, shall have the right to be paid disturbance compensation. 5. As per verification made by the Municipal Agrarian Reform Office (MARO) of the Department of Agrarian Reform (DAR), the farmer beneficiaries who will be the recipients of the subject 26 parcels of land as disturbance compensation were agricultural lessees over the landholding of Francisca Reyes, et al., located at Bgy. Sapang Palay proper, City of San Jose del Monte, Bulacan. In reply, please be informed that Section 66 of RA 6657 provides, to wit: "SEC. 66. Exemption from Taxes and Fees of Land Transfers . Transactions under this Act involving a transfer of ownership, whether from natural or juridical persons, shall be exempted from taxes arising from capital gains. These transactions shall also be exempted from the payment of registration fees, and all other taxes and fees for the conveyance or transfer thereof: Provided, That all arrearages in real property taxes, without penalty or interest, shall be deductible from the compensation to which the owner may be entitled." Since the conveyance of the 26 parcels of land by MRI in favor of the farmer beneficiaries is in the form of disturbance compensation to the farmer beneficiaries who were displaced from their respective areas of tillage, no capital gains tax/creditable withholding tax is due on the transaction in accordance with the aforequoted provisions of RA 6657. HScaCT Furthermore, since the transaction is without any monetary consideration and not in connection with a sale, no creditable withholding tax and documentary stamp tax imposed under Sections 27 and 196, respectively, of the Tax Code, as amended, is due on the transaction. However, the notarial acknowledgment on the Deed of Conveyance of Land and Voluntary Surrender of Leaseholding and Tenancy Rights is subject to the DST on certification pursuant to Section 188 of the 1997 Tax Code, as amended. Accordingly, this Office hereby confirms your opinion that the conveyance of the 26 parcels of land through a Deed of Conveyance of Land and Voluntary Surrender of Leaseholding and Tenancy Rights by Moldex Realty Inc. in favor of the farmer beneficiaries is not subject to capital gains/creditable withholding and documentary stamp taxes. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service