BIR Ruling [DA-076-01]

May 3, 2001 BIR RULING [DA-076-01] 6 (E); 145-94 SGV and Co . 6760 Ayala Avenue Makati City Attention: Atty . C . P . Noel Tax Division Gentlemen : This refers to your undated letter requesting for a ruling confirming your opinion that in cases where the BIR zonal value has been established, the basis for valuation of a real property, excluding improvements thereon which is subject to sales agreements shall be the fair market value of the said property or its zonal value, whichever is higher and not the mortgage value thereof. It appears that on November 12, 1999, Titan Cement Manufacturing Corporation (TCMC),a domestic corporation primarily engaged in the business of manufacturing cement products sold ten (10) parcels of registered land and three (3) parcels of unregistered land to Quimson Limestone, Inc. (QLI),a domestic corporation engaged in the quarrying and mining of limestone and other minerals; that the subject of the sale excludes the improvements and permanent fixtures found on the aforestated lots; that 3 parcels of registered land which serve as the access road leading to the above-mentioned thirteen (13) parcels of land which are owned by Mr. Benito Araneta were likewise sold to QLI; that the abovesaid parcels of land are all located at Barrio Balimbing, Barangay Plaza Aldea, Tanay, Rizal; that as of May 15, 1996 up to the present, the prevailing zonal value for a commercial property within the vicinity of the said properties is P100.00 per square meter; that the consideration paid for the sale is equivalent to the zonal value of properties transferred; that the 10 parcels of land registered in the name of TCMC are covered by a mortgage annotated on the corresponding Transfer Certificates of Title (TCT) in the total amount of P300,000,000.00; that prior to the actual sale of the aforesaid 10 parcels of registered land from TCMC to QLI, TCMC paid China Banking Corporation (CBC) the balance of the mortgage; that CBC executed a cancellation of the mortgage on November 12, 1999, however, CBC and TCMC were not able to annotate the said cancellation prior to the sale; that after the consummation of sale, QLI and TCMC then paid the necessary creditable withholding tax, documentary stamp tax and local transfer tax on the above transaction within the reglementary periods provided for under the law; that on March 14, 2000, you filed your request for the issuance of Certificate Authorizing Registration (CAR) from the Revenue District Office (RDO) No. 46, Cainta-Taytay; and that the said Office refused to grant the said request and raised the issue of undervaluation of the real properties on the aforecited sale contending that the real property, including the improvements, should be valued at P300,000,000.00 or the mortgage value of the said properties. In reply, please be informed that pursuant to Section 6(E) of the Tax Code of 1997, pertinent portion of which reads: "(E) Authority of the Commissioner to Prescribe Real Property Values . The Commissioner is hereby authorized to divide the Philippines into different zones or areas and shall, upon consultation with competent appraisers both from the private and public sectors, determine the fair market value of real properties located in each zone or area. For purposes of computing any internal revenue tax, the value of the property shall be, whichever is higher of: cSATEH "(1) the fair market value as determined by the Commissioner; or "(2) the fair market value as shown in the schedule of values of the Provincial and City Assessors." Based on the foregoing, the fair market value shall be determined in accordance with Section 6(E) of the Tax Code of 1997. In case of a sale, transfer, or exchange of real property, other than a capital asset, a creditable withholding tax shall be imposed upon the withholding agent/buyer, based on the gross selling price/total amount of consideration or the fair market value thereof, whichever is higher, paid to the seller. In the instant case, since the seller is not habitually engaged in real estate business, the creditable withholding tax of 7.5% pursuant to Section 4B of Revenue Regulations No. 8-98 shall apply. Thus, considering that the subject of the sale is only the parcels of land, excluding the improvements thereon, the mortgage value annotated in the TCTs may not be used as the basis in determining the tax base for sales, transfers or any disposition of real property where the zonal value of the land has been established. (BIR Ruling No. 145-94 dated September 28, 1994). Furthermore, the aforesaid sale shall also be subject to the documentary stamp tax under Section 196 of the Tax Code of 1997 based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(e) of the Tax Code of 1997, whichever is higher. In view thereof, Certificates Authorizing Registration (CARs) of the subject parcels of land may be issued provided that the income tax under Section 27 of the Tax Code of 1997, and consequently, the creditable withholding tax, and documentary stamp tax under Section 196 of the Tax Code of 1997 have been fully paid. 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group