BIR Ruling [DA-121-03]

April 21, 2003 BIR RULING [DA-121-03] Sec. 27 (D) (5); 83-99 & DA 24-00 Catindig Tiongco & Nibungco 21/F, Robinsons Equitable Tower 4 ADB Avenue, Ortigas Center Pasig City Attention: Mr. Gari M. Tiongco Gentlemen : This refers to your letter dated February 6, 2003 requesting for a ruling on the tax consequences of the transactions stated therein. It is represented that on May 4, 2000, First E-Bank (FEB) executed a Promissory Note (Assigned Note) in favor of the Philippine Deposit Insurance System (PDIC) as evidence of FEB's obligation to PDIC under a Financial Assistance Agreement executed by the parties; that on September 10, 2002, the parties entered into a Deed of Assignment, whereby PDIC assigned in favor of Bangko Sentral ng Pilipinas (BSP), the above Promissory Note issued by FEB to PDIC, but without change in the terms and conditions of the Note, except the substitution of creditor. By virtue of this assignment, BSP as the Assignee, now stands as creditor of FEB under the Assigned Note; that the Deed of Assignment does not involve any sale, exchange, assignment or any other disposition of real property or real property right; that on October 1, 2002, to partially settle its obligation under the Assigned Note, FEB conveyed by way of Dacion en Pago in favor of BSP (as the Assignee of the Note) a certain parcel of land covered by TCT T-134156 and located at Iloilo City, at a Dacion price of P560,000.00; and that FEB had paid the corresponding capital gains and documentary stamp taxes on the said conveyance. You now request confirmation of your opinion that the capital gains and documentary stamp taxes levied upon conveyance of the real property shall apply only upon actual conveyance by FEB to BSP; and that, capital gains tax will not apply in the execution of the Deed of Assignment since the property was not conveyed under the said deed. In reply, please be informed as follows: 1) The Promissory Note dated May 4, 2000 executed by and between FEB and FDIC is subject to the documentary stamp tax pursuant to Section 180 of the Tax Code of 1997. 2) Pursuant to Section 2.57-1 (G)(5) of Revenue Regulations No. 2-98, implementing Section 27(D)(5) of the Tax Code of 1997, a final withholding tax of six percent (6%) is imposed on the gain presumed to have been realized on the sale, exchange or disposition of real property located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the same Tax Code, whichever is higher. Accordingly, the conveyance by FEB of the parcel of land covered by TCT T-134156 situated in Iloilo City by way of Dacion en Pago in favor of BSP as the Assignee of the Promissory Note, in partial settlement of the above described note is subject to the capital gains tax at the rate of 6% based on the gross selling price or the fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher pursuant to Section 27(D)(5) of the same Tax Code. Take note that Revenue Regulations No. 7-2003 does not apply in the case at bar since the transaction took place prior to its effectivity. Likewise, the said conveyance is subject to the documentary stamp tax under Section 196 of the Tax Code of 1997. CTIEac 3) Under Section 27(D)(5) of the Tax Code of 1997, as implemented by Revenue Regulations No. 2-98, as amended, only sales, exchanges or transfers of real properties are subject to the final withholding tax hence, an assignment of rights over realty, although classified as real property under the Civil Code, is not included within the purview of the said regulations considering that in assignment of rights, the assignee merely steps into the shoes of the assignor without acquiring a better right than what the assignor had in the property to which the rights assigned pertain. Moreover, a Deed of Assignment is not a Deed of Sale because what is conveyed by the assignor is not the property itself but the rights pertaining to such property. ( BIR Ruling Nos. 083-99 dated June 22, 1999 and DA-024-2000 dated January 11, 2000 ) Such being the case and since the transfer of PDIC's rights over the abovementioned realty in favor of BSP is without any monetary consideration, this Office holds that it is not subject to the final withholding tax imposed under Section 2.57-1 (G)(5) of Revenue Regulations No. 2-98, as amended, nor to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. However, the notarial acknowledgment in the said Deed of Assignment is subject to the documentary stamp tax of P15.00 under Section 188 of the same Code. 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 as null and void. EDIHSC Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group