BIR Ruling [DA-135-05]

April 7, 2005 BIR RULING [DA-135-05] 24 (D) (1), 196; DA-437-00 Ong Ordoez and Associates 4th Floor, Miriam House Legaspi Street, Legaspi Village Makati City Gentlemen : This refers to your letter dated February 1, 2005, requesting for a confirmation of your opinion that the Deed of Reconveyance executed by a buyer of your client, Extraordinary Development Corporation (EDC),a corporation duly registered with the Securities and Exchange Commission and is engaged in realty business, be exempt from the payment of capital gains tax/creditable withholding tax and documentary stamp tax. We quote the pertinent portion of your request, thus: "Please be informed that when a buyer purchases a house and lot from EDC, thru a housing loan from either the National Home Mortgage Finance Corporation (NHMFC) or from the Home Development Mutual Fund (HDMF) or the PAG-IBIG, a Deed of Absolute Sale is being executed between EDC and the buyer as a pre-requisite for the buyer availing of the housing loan. Accordingly, creditable withholding tax, value-added tax and documentary stamp tax accruing on the transaction are required to be paid, and for this reason, the transfer certificate of title is subsequently registered in the name of the buyer. However, in some cases, for failure of the buyer to pay its monthly amortization, NHMFC or HDMF or PAG-IBIG as the case may be cancelled the loan of the aforesaid buyer and asked the developer, EDC to return the loan earlier released on behalf of the buyer. In such case, a deed of reconveyance is executed between the buyer and developer for failure on the part of the buyer to pay its monthly obligation of the supposed housing loan." In reply, please be informed that in BIR Ruling No. DA-437-00 dated December 22, 2000, this Office ruled that: ". . . please be informed that Section 24(D)(1) of the Tax Code of 1997 provides, viz : "(D) Capital Gains from the Sale of Real Property . "(1) In General. The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts: Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24(A) or under this Subsection, at the option of the Taxpayer." "From the foregoing, it is clear that the above provisions of the Tax Code does not apply to the reconveyance by the buyers of the property in question to New San Jose Builders, Inc., since the said reconveyance was done due to the non-payment of the purchase price of the subject condominium units arising from their failure to obtain the loan from the bank and with the end view of transferring the title of the said property back to new San Jose Builders, Inc. without monetary or valuable consideration and, therefore, not subject to the capital gains tax imposed under the above-quoted provisions of Section 24(D)(1) of the Tax Code of 1997. The same is likewise true in the case of the creditable withholding tax prescribed under Sec. 2.57.1(J) of Revenue Regulations No. 2-98 implementing Section 57(B) of the Tax Code of 1997. (BIR Ruling No. DA-015-97 dated January 14, 1997) "However, all payments made by the buyers in favor of New San Jose Builders, Inc. as a consequence of the said sale transaction which were not returned to the buyers by New San Jose Builders, Inc. are taxable income to the latter and therefore subject to the creditable withholding tax prescribed under Section 57(B) of the Tax Code of 1997 .In fine, whatever income which will be derived by the buyers by virtue of the said reconveyance shall be subject to income tax. (Underscoring supplied) "Moreover, the said reconveyance is not also subject to the documentary stamp tax prescribed under Section 196 of the Tax Code of 1997, since under Revenue Regulations No. 26, otherwise known as the "Revised Documentary Stamp Tax Regulations", conveyances of realty without valuable consideration is not subject to the documentary stamp tax. (BIR Ruling No. DA-015-97 dated January 14, 1997) However, the acknowledgment on the said Deed of Reconveyance is subject to a documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. "Finally, the documentary stamp taxes imposed and paid on the valid but later on cancelled Deeds of Absolute Sale executed by New San Jose Builders in favor of the buyers are not refundable for lack of legal basis." In view of the foregoing, it is clear that the abovequoted provision of the Tax Code of 1997 does not apply to the reconveyance by a buyer of the subject property to EDC, since the said reconveyance was done for failure on the part of the buyer to pay its monthly obligation. The Deed of Reconveyance is executed without consideration and is a mode of transferring back the ownership of the subject property to the developer. Since the said document is without consideration and is not in connection with a sale made to EDC, no income is generated a fortiori , no capital against tax nor creditable withholding tax is payable and collectible, and, therefore, not subject to the capital gains tax imposed under the provision of Section 24(D)(1) of the Tax Code of 1997. The same is likewise true in the case of the creditable withholding tax prescribed under Sec. 2.57.1(J) of Revenue Regulations No. 2-98, implementing Section 57(B) of the Tax Code of 1997 (BIR Ruling No. DA-437-00 dated December 22, 2000). Again, as stated in the aforecited ruling, " all payments made by the buyers in favor of New San Jose Builders, Inc. as a consequence of the said sale transaction which were not returned to the buyers by New San Jose Builders, Inc. are taxable income to the latter and therefore subject to the creditable withholding tax prescribed under Section 57(B) of the Tax Code of 1997 ." Conversely, those payments returned by EDC for and in behalf of the buyers to NHMFC or HDMF or PAG-IBIG as the case may be is not subject to creditable withholding tax. Except for the notarial acknowledgment on the said Deed of Reconveyance which is documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997, the said reconveyance is not also subject to the documentary stamp tax prescribed under Section 196 of the Tax Code of 1997, since under Revenue Regulations No. 26, otherwise known as the "Revised Documentary Stamp Tax Regulations", conveyances of realty without valuable consideration is not subject to the documentary stamp tax. (BIR Ruling No. DA-015-97 dated January 14, 1997) cHCSDa It should be stressed that the documentary stamp tax imposed and paid on a valid but on cancelled Deed of Absolute Sale executed by NHMFC or HDMF or PAG-IBIG as the case may be in favor of the herein buyer is not refundable for lack of legal basis. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group