Ms. Jona Ruth G. Alonte

March 13, 2007 BIR RULING [DA-151-07] DA 040-03 Ms. Jona Ruth G. Alonte Revenue District Officer Revenue District No. 74 Iloilo City M a d a m : This refers to your letter dated February 5, 2007 requesting for an opinion as to whether or not the dacion en pago executed by Bacolod Commercial & Industrial Park, Inc., as Debtor/Mortgagor, over a portion of the 200,000 square meters of the reclamation area or consisting of 99,000 square meters, in favor of Metropolitan Bank & Trust Company, is subject to the capital gains tax of 6% pursuant to Section 27 (D) (5) of the Tax Code of 1997 and to the corresponding documentary stamp tax of 1.5% based on the consideration or value received or paid for the property, which in effect is the amount of obligation that is extinguished or on its fair market value whichever is higher, pursuant to Section 196 of the Tax Code of 1997, as amended by Republic Act (R.A.) No. 9243; and that said dacion en pago is exempt from the 12% value-added tax (VAT) pursuant to Section 109 (w) of the Tax Code of 1997, as amended by R.A. No. 9337, as implemented by Section 4.109-1 (B) (1) (p) of Revenue Regulations No. 16-2005. It is represented that the Bacolod Commercial & Industrial Park, Inc. (BCIP) is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with principal office address at Golden Commercial Center, Iznart Street, Iloilo City; that BCIP is primarily organized to develop, sell, lease real estate properties; that BCIP is the owner of undeveloped 200,000 square meters lot located at the reclamation area in Bacolod City; that on the other hand, Metropolitan Bank & Trust Company (Metrobank) is a universal banking corporation with Head Office at Metrobank Plaza, Sen. Gil Puyat Avenue, Makati City; that BCIP is indebted to Metrobank under various loan facilities in the total amount of P300,562,983.83 as of March 31, 2005, inclusive of outstanding principal and interest; that BCIP executed a Deed of Real Estate Mortgage dated November 26, 1997 over 78 parcels of land located at the Barangay Reclamation Area, Bacolod City all covered by TCT duly issued by the Registry of Deeds for Bacolod City; that to partially settle the obligation up to the extent of P252,740,250.00, BCIP, as Debtor/Mortgagor, offered to transfer and convey by way of Dacion en Pago the above-mentioned properties together with the improvements thereon in favor of Metrobank; and that the aforesaid properties shall be considered as partial payment of the obligation of BCIP, as Debtor/Mortgagor with Metrobank. AcICTS In reply thereto, please be informed that under the foregoing circumstances, the transfer via dacion en pago of undeveloped lots by BCIP shall be treated as a sale of capital assets subject to capital gains tax of 6% under Section 27 (D) (5) in relation to Section 39 (A) (1) of the Tax Code of 1997. ( BIR Ruling No. 166-81 dated September 3, 1981; DA217-99 dated April 12, 1999; DA397-2000 dated November 20, 2000; DA010-02 dated January 29, 2002; DA009-2002 dated January 28, 2002 ) It is necessary to first determine the character of the real property being sold. Thus, if the real property is a land or building which is not actually used in the business of the seller-corporation and is treated as a capital asset, as that term is defined in Section 39 (A) of the Tax Code of 1997, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building 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 land and/or building. ( Sections 27 (D) (5) Tax Code of 1997 ) This rule applies, whether or not the seller-corporation is engaged in real estate business. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, shall apply. The rate of withholding tax will depend on whether, first, the seller is exempt or taxable, second, whether the seller is habitually engaged in the real estate business or not; and third, if the seller is habitually engaged in real estate business, the gross selling price, as that term is defined in the above-mentioned Revenue Regulations. ( BIR Ruling No. 027-02 dated July 3, 2002 ) The undeveloped lots, which BCIP conveyed to its creditor-bank by way of a dacion en pago are idle and unproductive lands of a real estate developer not primarily held for sale to its customers in that ordinary course of its business. Thus, the same are properly classified and taxed as capital assets pursuant to Sections 27 (D) (5) and 39 (A) (1) of the Tax Code of 1997. ECTSDa Dacion en pago is a special mode of payment recognized under Article 1245 of the New Civil Code. Under the same provision of law, this undertaking partakes of the nature of a sale. In dacion transactions and for tax purposes, the outstanding balance of the loan must be considered as the selling price for purposes of computing the taxes due thereon. ( BIR Ruling No. 459-88 dated September 19, 1988 and BIR Ruling No. 123-86 dated July 23, 1986 ) Accordingly, the dacion of the undeveloped lots by BCIP is subject to capital gains tax at the rate of 6% of the balance of the loan obligation or the fair market value of the property, whichever is higher. The Deed of Dacion en Pago , embodying the dacion transaction, is subject to documentary stamp tax (DST) based on the consideration or value received or paid for the property, which in effect is the amount of obligation that is extinguished, or on its fair market value whichever is higher, pursuant to Section 196 of the Tax Code of 1997. This tax is payable by either party to the said sale. ( BIR Ruling Nos. 459-88 dated September 19, 1988 and DA049-2000 dated January 21, 2000 ) Finally, the dacion en pago of BCIP's undeveloped lots is not subject to the 12% value-added tax (VAT) inasmuch as the said properties remained idle and unproductive and are considered as capital assets not primarily held for sale or lease to its customers nor used in the ordinary course of its trade or business pursuant to Section 109 (w) of the Tax Code of 1997, as amended by R.A. No. 9337, as implemented by Section 4.109-1 (B) (1) (p) of Revenue Regulations No. 16-2005. 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. 3up07tax Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service