BIR Ruling [DA-059-04]

February 10, 2004 BIR RULING [DA-059-04] Sec. 27 (D) (5); RR 4-99 169-98; 083-99; DA-332-03; 036-00 Policarpio Pangulayan Azura & Siquijor Suite 603, Manila Luxury Condominium Pearl Drive corner Gold Loop, Ortigas Center 1605 Pasig City Attention: Atty. Rufino L. Policarpio III Gentlemen : This refers to your letter dated November 21, 2003 requesting on behalf of your client, CHAILEASE FINANCE CORPORATION ("Chailease," for brevity), for a ruling relative to the tax consequence of the assignment of its rights over a Certificate of Sale covering a foreclosed real estate property. The facts of the case as represented are as follows: Chailease is a corporation duly organized under Philippine laws, with principal offices located at the 12th Floor, 6750 Ayala Avenue, Makati City. On March 22, 2001, Chailease was declared the highest and winning bidder in the public auction sale held by Chinatrust (Phils.) Commercial Bank Corporation in connection with the extra-judicial foreclosure proceedings against the real estate property of Spouses Rolando and Luisa Zosa covered by Transfer Certificate of Title No. RT-100232 (312517) issued by the Registry of Deeds for Quezon City. Consequently, the Clerk of Court and Ex-Officio Sheriff of the Regional Trial Court of Quezon City executed a Certificate of Sale dated November 8, 2001 in favor of Chailease. Said Certificate of Sale was duly registered with the Registry of Deeds for Quezon City on November 13, 2001 and annotated on Transfer Certificate of Title No. RT-100232 (312517). The period within which the mortgagor or any of the latter's successors-in-interest may exercise their right of redemption over the aforementioned real estate property commenced on the date of the registration of the Certificate of Sale with the Registry of Deeds for Quezon City on November 13, 2001 and expired one (1) year thereafter on November 13, 2002 ( sic ). Within the redemption period, Chailease conditionally assigned its rights, title and interest over the Certificate of Sale for a consideration in favor of Spouses Alberto and Zinnia Carmencita Rivera ("Spouses Rivera," for brevity). The terms and conditions of the conditional assignment are incorporated in a Deed of Conditional Assignment dated July 31, 2002. The said Deed recognizes the option of the mortgagor or any of the latter's successors-in-interest to redeem the foreclosed real estate property within the redemption period or until November 13, 2002. Accordingly, if said successors-in-interest should elect to exercise said option to redeem, the above parties agreed, among others, that the Deed of Conditional Assignment shall be rendered as cancelled, rescinded, revoked, null and void and without any force and effect. On the other hand, if the aforementioned successors-in-interest fail to exercise their statutory right of redemption within the prescribed period, Spouses Rivera, shall, among others, be allowed to consolidate their title over the real estate property and obtain the appropriate certificate of title in their name and exercise such other rights accruing and granted by law in favor of the assignor, Chailease. Since the original owners/mortgagors of the foreclosed real estate property failed to exercise their statutory right of redemption on or before the expiration of the right of redemption on November 13, 2002, an Affidavit of Consolidation was executed by Spouses Rivera in their capacity as successors-in-interest of Chailease resulting from the previous assignment of rights over the Certificate of Sale. The corresponding documentary stamp tax and capital gains tax were paid by the spouses on December 3, 2002, both based on the bid price as indicated in the Certificate of Sale. The Certificate Authorizing Registration or CAR was not issued by the Revenue District Officer (RDO) concerned for the reason that Chailease is being assessed additional taxes, specifically, the capital gains tax/expanded withholding tax and documentary stamp tax allegedly due on its execution of the Conditional Deed of Assignment in favor of Spouses Rivera on July 31, 2002, inclusive of interest and surcharges that have accrued thereon. However, it is your contention that only one capital gains tax and documentary stamp tax is due on the aforementioned transactions based on the bid price for which the Certificate of Sale was issued to Chailease and payable by Spouses Rivera upon consolidation of their title over the foreclosed real estate property, and that the prior assignment of Chailease's rights over the Certificate of Sale is not subject to capital gains tax since what was actually assigned by Chailease was merely its right thereto, so much so that Spouses Rivera in acquiring said rights merely stepped into the shoes of Chailease and acquired the same right which Chailease possessed over the realty concerned. In this regard, you now request for a ruling relative to the tax consequences of the foregoing transactions consummated by Chailease and Spouses Rivera, particularly, (i) the assignment of the Certificate of Sale dated November 8, 2001 by Chailease in favor of Spouses Rivera; and (ii) upon the expiration of the redemption period, the consolidation of title by Spouses Rivera over the foreclosed real estate property covered by Transfer Certificate of Title No. RT-100232 (312517) in their capacity as successors-in-interest of Chailease resulting from said assignment. In reply, please be informed as follows: 1. Under Section 27(D)(5) of the Tax Code of 1997, a final tax of six percent (6%) is imposed on the gain presumed to have been realized on 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 Code, whichever is higher, of such lands and/or buildings. From the foregoing provision of Section 27(D)(5) of the Tax Code of 1997, it is clear that the imposition of the six percent (6%) capital gains tax is limited only to the sale, exchange or disposition of two (2) classes of realty, namely: (1) lands and (2) buildings. The particular mention of the foregoing realties operates as an exclusion of all other kinds of realties from the coverage of the capital gains tax imposed in the abovementioned provision of law. Thus, the foregoing exclusion includes the subject matter in the above case which is the assignment of a right over a realty which under Article 415 (10) of the Civil Code, is classified as a real property. (BIR Ruling Nos. 169-98 dated November 25, 1998 and 083-99 dated June 22, 1999). Such being the case, the assignment by Chailease of its inchoate right over the foreclosed property of Spouses Rolando and Luisa Zosa to Spouses Rivera is not subject to the capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997. However, if in the said transaction Chailease derived a gain, such gain shall be subject to the income tax imposed under Section 27(A) of the same Tax Code. EHSCcT Nonetheless, the above assignment by Chailease of its rights over a Certificate of Sale covering a foreclosed property to Spouses Rivera did not effectively transfer the ownership over the said realty to them. What was transferred was merely the rights pertaining to the property and not the property itself. The capital gains tax, therefore, shall accrue only at the time the right of the mortgagors, Spouses Zosa, to redeem the property had lapsed since this will be the moment that the title of the property shall be consolidated in the name of Spouses Rivera as successors-in-interest of the highest bidder, Chailease. ( Revenue Regulations No. 4-99 ) Moreover, the said transaction is not subject to the expanded/creditable withholding tax imposed under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. The reason for this exemption is that under the said regulations the real property therein contemplated to be the object of a sale or exchange transaction which is subject to tax pertains only to land and/or buildings classified as ordinary assets. Furthermore, the above sale or assignment by Chailease of its rights over the Certificate of Sale in favor of Spouses Rivera is subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. The documentary stamp tax due thereon shall be computed based upon the price for the sale or assignment of the above rights which, in the instant case, is the difference between the total amount contracted to be paid or given to Chailease and the bid price. ( BIR Ruling No. 169-98, supra, citing BIR Ruling No. 530-88 ) 2. As discussed above, the capital gains tax shall accrue only upon the expiration of the right of redemption of the mortgagor. The right of redemption of a mortgagor-natural person shall be exercised within a period of one (1) year reckoned from the date the Certificate of Sale issued by the Sheriff was registered with the Registry of Deeds as provided for under Section 6 of Act No. 3135. On the other hand, under Republic Act No. 8791, otherwise known as the "General Banking Law of 2000," a mortgagor-juridical person shall have the right to redeem the foreclosed property in accordance with the procedure set forth under the first paragraph of Section 47 thereof until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. The capital gains tax herein due shall be paid within thirty (30) days from the lapse of the said periods of redemption and shall be based on the highest bid price in accordance with Revenue Memorandum Order No. 41-91 and Revenue Regulations No. 4-99. ( BIR Ruling DA-332-2003 dated October 1, 2003 citing BIR Ruling No. 036-00 dated September 11, 2000 ) The documentary stamp tax due under Section 196 of the Tax Code shall be paid within five (5) days after the close of the month when the right of redemption lapses pursuant to Section 200 of the Tax Code as implemented by Revenue Regulations No. 4-99, as amended by Revenue Regulations No. 6-2001, which shall, likewise, be based on the highest bid price in accordance with Revenue Memorandum Order No. 41-91 and Revenue Regulations No. 4-99. ( BIR Ruling DA-332-2003 dated October 1, 2003 citing BIR Ruling No. 036-00 dated September 11, 2000 ) Upon presentation of the capital gains and documentary stamp tax returns duly validated by an authorized agent bank (AAB) evidencing full payment of the capital gains and documentary stamp taxes due, the RDO concerned shall issue the Certificate Authorizing Registration (CAR) in favor of the assignees, Spouses Rivera, as the successors-in-interest of the highest bidder, Chailease. 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group