BIR Ruling [DA-143-05]

April 12, 2005 BIR RULING [DA-143-05] Tan & Busmente Unit 1705, Antel Global Corporate Center Julia Vargas Avenue Ortigas Center Pasig City Attention: Atty. Rufino R. Tan Counsel Gentlemen : This refers to your letter dated March 23, 2005 stating that the Government Service Insurance System (GSIS),as Vendor, sold 78 parcels of land to the Group Management Corporation (GMC),as Vendee, with a total area of 298,504 square meters located at Barrio Marigondon, Lapu Lapu City; that all said lots were described and registered with the Land Registration Office of Lapu Lapu City under Transfer Certificate of Title Nos. 8052 to 8099 and 8101 to 8130 at the time the Contract of Conditional Sale was executed on February 20, 1980 between GSIS and GMC; that the Contract of Conditional Sale between the same parties was amended on August 31, 1983 upon discovery that the total area of the 78 lots sold was only 298,504 square meters instead of 423,177 as stated in the Contract of Conditional Sale and the Amendment likewise reduced the selling price from P1,100,000.00 to P775,926.00; that the term of payment was amended to reduce the period from 5 years to pay in the Original Contract to Sell to 1 1/2 years in the Amended Contract; that the Vendee, GMC, complied and paid the total contract price within the reduced period of 1 1/2 years, all payments were acknowledged and receipted by the Vendor, GSIS; that under the terms of the Contract to Sell, the Vendor shall execute a final Deed of Absolute Sale and deliver the certificates of title covering subject parcels of land in favor of the Vendee upon full and faithful compliance by the Vendee with all the terms and conditions in the Contract of Conditional Sale, as amended; that the Vendee paid in full the purchase price and complied with all the terms and conditions of the Contract of Conditional Sale, but the Vendor failed and refused and still failed and refused to execute the final Deed of Absolute Sale, leaving the Vendee no choice but to file a complaint for specific performance with damages; that the case was filed with the Regional Trial Court, 7th Judicial Region, Branch 27 Lapu Lapu City and docketed as CIVIL CASE No. 2203-L entitled " Group Management Corporation, plaintiff vs. Government Service Insurance System, defendant ;that the previous owner of the subject 78 lots, Lapu Lapu Development and Housing Corporation, from whom GSIS acquired ownership through foreclosure, intervened in Civil Case No. 2203-L ( GMC vs. GSIS );that the case was tried and heard by RTC, Branch 27-Lapu Lapu City; that after several years of trial, Civil Case No. 2203-L was decided by Judge Teodore K. Risos of RTC Branch 27-Lapu Lapu City in favor of the plaintiff, Group Management Corporation against the defendant, Government Service Insurance System; that the dispositive portion of the Decision reads as follows: "WHEREFORE, judgment is hereby rendered ordering defendant to: 1. Execute the final Deed of Absolute Sale and deliver the seventy-eight (78) certificates of title covering said seventy-eight (78) parcels of land to the plaintiff; 2. Pay plaintiff actual damages, plus attorney's fees and expenses of litigation in the amount of P285,638.88 and P100,000.00 exemplary damages; 3. Dismissing in toto intervenor's complaint-in intervention for lack of evidence of legal standing and legal interest in the suit, as well as failure to substantiate any cause of action against either plaintiff or defendant. SO ORDERED City of Lapu Lapu, Philippines, February 2, 1992." that the intervenor, Lapu Lapu Housing and Development Corporation, questioned the Decision of the Regional Trial Court of Lapu Lapu City by filing a petition with the Supreme Court under Rule 65 of the revised rules of Court, docketed as G.R. No. 1186333, seeking to annul and set aside the February 2, 1992 decision of Judge Teodore K. Risos; that however, the petition of intervenor, Lapu Lapu Housing and Development Corporation was dismissed by the Supreme Court on September 6, 1996; and that with the dismissal by the Supreme Court of the Petition and Motion for reconsideration filed by intervenor, Lapu Lapu Housing and Development Corporation, the decision of the Regional Trial Court, Branch 27 of Lapu Lapu City became final and executory. DISEaC In connection therewith, you now request for a ruling on the exemption from the payment of taxes by GSIS, as Vendor, in transferring the 78 lots sold to GMC, as Vendee, under Section 27(C) of the Tax Code of 1997. In reply thereto, please be informed that in cases of sale, exchange or disposition of lands and/or buildings owned by a corporation, which are not actually used in its business and are treated as capital assets, a final tax of six percent (6%) is imposed on the gain presumed to have been realized on the said transactions, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, of such lands and/or buildings. ( Section 27(D)(5), Tax Code of 1997 ) However, when the lands and/or buildings subject to sale, exchange or disposition are actually used in the business of a corporation and are classified as ordinary assets, the transaction is subject to ordinary income, and not capital gains tax, which includes any gain from the sale or exchange of property which is not a capital asset as defined in Section 39(A)(1) of the same Code. ( Section 22(Z), Tax Code of 1997 ) On the other hand, Section 27(C), supra provides as follows: "(C) Government-owned or-Controlled Corporations, Agencies or Instrumentalities . The provisions of existing special or general laws to the contrary notwithstanding, all corporations, agencies or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS),the Social Security System (SSS),the Philippine Health Insurance Corporation (PHIC),the Philippine Charity Sweepstakes Office (PCSO) and the Philippine Amusement and Gaming Corporation (PAGCOR),shall pay such rate of tax upon their taxable income as are imposed by this Section upon corporations or associations engaged in a similar business, industry, or activity." It is clear from the foregoing provisions, that in cases of sale, exchange or disposition by a corporation of lands and/or buildings classified as capital assets/ordinary assets, the burden of paying the 6% capital gains tax/creditable withholding tax rests upon the seller/transferor because the latter is the one who realized the capital gains/ordinary income subject to tax, unless there is a stipulation to the contrary. In the instant case, GSIS is the one directly liable to pay the corresponding taxes due on the sale transaction, it being the registered owner of the subject properties. However, Section 27(C) of the Tax Code of 1997 provides, among others, that GSIS is not liable to pay such rate of tax as are imposed on other domestic corporations which necessarily includes the payment of capital gains tax. Thus, in BIR Ruling No. DA167-02 dated September 17, 2002 ,this Office ruled that "Accordingly, the burden of paying the capital gains tax rests upon the GSIS which is exempt from the payment of such tax and therefore, Viron, being the buyer, has no obligation to pay the capital gains tax. "However, there shall be levied, collected and paid for, and in respect of the transaction so had or accomplished, the documentary stamp tax imposed under Section 196 of the Tax Code of 1997, by the person making, signing, issuing, accepting or transferring the real property wherever the document is made, signed, issued, accepted or transferred where the property is situated in the Philippines: Provided, that whenever one party to the taxable document enjoys exemption from the tax, the other party thereto who is not exempt shall be the one directly liable for the tax. (Sec. 173, 1997 Tax Code) Thus, since Viron is not exempt from the payment of any tax arising from the above-mentioned transaction, it shall be liable to pay the documentary stamp tax on deeds of sale and conveyances of real property being imposed under Section 196 of the Tax Code of 1997." WHEREFORE, in view of the foregoing , this Office holds that the sale of the aforesaid 78 lots by GSIS to GMC is not subject to income tax nor to capital gains tax. However, GMC, as Vendee, and which is not exempt from the payment of any tax arising from the above-mentioned transaction, shall be the one liable to pay the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. 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. aTEScI Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group