BIR Ruling [DA-081-00]

February 7, 2000 BIR RULING [DA-081-00] PHILBANK PhilBank Bldg., 6778 Ayala Avenue 1226 Makati City Attention: Atty . Noel S . R . Jose Assistant Vice-President Gentlemen : This refers to your letter dated January 3, 2000 requesting for a ruling as to whether or not the disposition, sale, conveyance or transfer of the bank's foreclosed acquired properties in favor of the buyers pursuant to Section 25(c) of the General Banking Act, is subject to creditable withholding tax rates of 1.5%, 3.0% and 5.0% under Section 2.57.2(j) of the Revenue Regulations No. 2-98. It is represented that the Philippine Banking Corporation (Philbank) is a domestic commercial corporation engaged in the business of banking; that in the course of its normal operation, Philbank extends loans to clients and such loans are invariably secured by mortgages on real estate properties; that in the event that the clients are unable to pay loans on due date or its maturity, and in order to protect its (bank) interests, the bank resorts to foreclosure of mortgage; that after the expiration of the redemption period allowed by law without the mortgage exercising his right to redeem said property, the bank takes step to consolidate the title to the property in its name, and these steps include the payment of the required internal revenue taxes associated with the transfer of the title; and that pursuant to Section 25 (c) of the General Banking Act, pertinent portion of which provides, thus "Any commercial bank may purchase, hold and convey real estate for the following purposes: xxx xxx xxx "c) such shall be conveyed to it in satisfaction of debts previously contracted in the course of its dealing; "d) Such as it shall purchase at sales under judgment, decrees, mortgagees, or trust deeds held by it and such as it shall purchase to secure debts due it. "But no such bank shall hold the possession of any real estate under mortgage or trust deed, or the title and possession of any real estate purchased to secure any debt due to it, for a longer than five years. (as amended by P.D. No. 71)." the bank shall hold the possession of any real estate under mortgage or trust deed, or the title and possession of any real property purchased to secure any debt due to it, for a period not longer than five (5) years. In reply, please be informed that pursuant to Section 2.57.2(J) of the Revenue Regulations No. 2-98 (then Rev. Regs. 6-85, as amended by Rev. Regs. 1-90 and further amended by Rev. Regs. 6-94 and 12-94), implementing R.A. No. 8424, "An Act Amending the National Internal Revenue Code, as amended" relative to the withholding on income subject to the Expanded Withholding Tax, except as otherwise provided, there shall be withheld a creditable income tax rates from the following items of income payments to persons residing in the Philippines: "(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of Real property, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule Those which are exempt from a withholding tax at Exempt source as prescribed in Section 2.57.5 of these regulations With a selling price of five hundred thousand pesos (P500,000.00) or less 1.5% With a selling price of more than five hundred thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000.00) 3.0% With selling price of more than two million pesos (P2,000,000.00) 5.0% "A seller transferor must show proof of registration with HLURB or HUDCC to be considered as habitually engaged in the real estate business . . ." cdt The foregoing creditable withholding tax rates apply to sale or disposition of real properties by a taxpayer who is habitually engaged in the real estate business. Categorically, under Section 39 of the 1997 Tax Code, these properties held by a taxpayer primarily for sale in the ordinary course of business are considered as ordinary assets the same being excluded in the definition of "capital asset". While the regulations requires membership in the Housing and Land Use Regulatory Board (HLURB) or Housing Urban Development Coordinating Council (HUDCC) to be considered as habitually engaged in the real estate business, the same should not be the sole criterion considering that the taxpayer Bank is able to acquire numerous real estates which, by law, are being required to be disposed in the course of its business. In Section 25 of the general Banking Act, banks are required to dispose of the foreclosed properties within a period not longer than five (5) years, rather than hold them for investment or speculation. Thus, by operation of law, these properties should be included by banks in their inventory of assets to be sold in the course of their business. In this light, this Office believes that this kind of activity is a valid consideration in treating the taxpayer Bank to be habitually engaged in the real estate business. For purposes of the above regulations, the term habitually engaged in the real estate business is not limited or restricted only to persons duly registered with the HLURB or HUDCC. The proviso simply means that any person duly accredited by the said government agencies shall be deemed habitually engaged in the real estate business. However, even in the absence of registration therewith, a person may also be treated habitually engaged in the real estate business upon showing that he is in fact actually engaged in the said business. (BIR Ruling No. 059-99 dated April 30, 1999) Furthermore, then Rev. Regs. 12-94 merely requires submission of evidence showing that the taxpayer is in fact habitually engaged in the real estate business. This fact is duly disclosed in the Bank's financial statements, such as the inventory of the foreclosed real properties, as well as income earned from the disposition or sale of the same. In the light of the foregoing, this Office hereby holds that the Bank's inventory of foreclosed properties which are mandated by law to be disposed within a period not longer than five (5) years are ordinary assets, the gain or loss from the sale of which is to be included in computing the Bank's net taxable income during the year pursuant to Section 28 (A) of the 1997 Tax Code. Moreover, and considering that the disposition of said foreclosed properties qualifies the Bank to be habitually engaged in the real estate business, income from sale or disposition of the same is subject to a creditable withholding income tax at the rate provided for in Section 2.57.2(J) of Rev. Regs. No. 2-98 (BIR Ruling No. 143-99 dated September 14, 1999) This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall 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