BIR Ruling [DA-180-97]

April 16, 1997 BIR RULING [DA-180-97] The Property Forum No. 613-A Lee Street Shaw Boulevard Mandaluyong City Attention: Ms. Marissa Laurel-Asensio Gentlemen : This refers to your letter dated October 29, 1996 stating that you are a corporation principally engaged in the brokering of real estate transactions: that your clients, Mr. Antonio R. Eugenio and Nest Shirt Manufacturing, Inc. (NSMI), proposed to exchange real properties in different locations; that Mr. Antonio R. Eugenio is the registered owner of eleven (11) parcels of land in San Miguel, Bulacan with an aggregate area of thirty-five (35) hectares and a zonal valuation of P11.00; that NSMI is a registered owner of the Dionisio Royale Executive Houses, situated at Greenhills Subdivision, Tandang Sora, Quezon City, six (6) units of which will be exchanged for the Bulacan property of Mr. Eugenio, with a zonal valuation of P25,000.00; and that based on the above zonal valuation of the said properties of your clients, you are of the opinion that no capital gains accrues to either party from the proposed transaction because of the approximately equal valuation of the two (2) subject properties. Based on the foregoing representations, you are now requesting for a ruling as to whether or not the proposed transaction between your aforesaid clients is exempt from the payment of capital gains tax/expanded withholding tax required under Sections 33 [21 (e)] and 50 (b) of the Tax Code, as amended, which you will use as a guide in advising your clients as to their tax liabilities. In reply, please be informed that in BIR Ruling No. 250-82 dated September 29, 1982, this Office ruled that under Section 140 of Revenue Regulations No. 2 otherwise known as the Income Tax Regulations, for income to be realized in exchange of property, it is required that the property or interest in property received in exchange must be essentially different from the property or interest in property disposed of. Considering that the parties to an exchange of real property will not get something fundamentally and essentially different from what they already had prior to the exchange, the parties are not subject to income tax as a result of the said transaction. However, while the provision of Section 140 of Revenue Regulations No. 2 had been copied from the U.S. Income Tax Regulations, the corresponding statutory provision which it is supposed to implement does not exist in our tax laws then, in which case, the aforementioned ruling was abandoned by this Office in BIR Ruling No. 125-85 dated August 12, 1985 where this Office ruled that the net capital gains tax realized from the sale, exchange, or other disposition of real property by a citizen of the Philippines or resident alien individuals shall be subject to final income tax at the rates prescribed by then Section 34 (h) [now Section 21 (e)] of the Tax Code, as amended by Batas Pambansa Blg. 37, and implemented by Revenue Regulations No. 8-79. ITAaHc Considering that the instant case is a proposed exchange transaction or after BIR Ruling No. 125-85 dated August 12, 1985, then said BIR Ruling becomes the controlling rule and should be given prospective application. However, with the amendment of the Tax Code by Executive Order No. 37, capital gains under Section 21 (e) of the Tax Code, as amended, are now presumed to have been realized from the sale, exchange or other disposition of real property classified as capital assets by individuals. On the other hand, under Section 1 (j) (2) (3) & (4) of Revenue Regulations No. 6-85 as amended by Revenue Regulations No. 12-94 implementing Section 50 (b) of the Tax Code, as amended, there shall be withheld a creditable income tax for each class of payee from items of income payments to persons residing in the Philippines, one of which is the payment of the 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 by a corporation among others. Accordingly, exchanges of real property whether classified as capital or ordinary assets by and between individuals and/or corporations such as the proposed exchange transaction between your clients, are subject to the aforesaid taxes. In other words, your client, Mr. Antonio R. Eugenio in swapping his eleven (11) parcels of land in San Miguel, Bulacan for six (6) units of NSMI's Dionisio Royale Executive Houses at Greenville Subdivision, Tandang Sora, Quezon City, shall be liable to pay the capital gains tax imposed under Section 21 (e) of the Tax Code, as amended, based on the zonal value of the said realties. While, on the other hand, NSMI in swapping six (6) units of its Dionisio Royale Executive Houses at Greenhills Subd., Tandang Sora, Quezon City, for the eleven (11) parcels of land situated at San Miguel, Bulacan of Mr. Antonio R. Eugenio, it shall be liable to pay the expanded creditable withholding tax imposed under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94 implementing Section 50 (b) of the Tax Code, as amended. (BIR Ruling Nos. 063-88 dated February 29, 1988 and 037-88 dated February 10, 1988) Very truly yours, (SGD.) ALICIA L. TOMACRUZ Head Revenue Executive Asst. (Legal Service)