BIR Ruling [DA-207-02]

November 15, 2002 BIR RULING [DA-207-02] RR 2-98; R.A. 8367 #017-2001 Meralco Savings & Loan Association, Inc. Operations Building, Meralco Center, Ortigas Avenue, Pasig City Attention: Mr. Eustacio L. Sapang, Jr. General Manager Gentlemen : This refers to your letter dated January 9, 2002 requesting for confirmation of your opinion that any income derived from the sale of the foreclosed properties by Meralco Savings & Loan Association, Inc. ("MESALA") is exempt from income tax under Section 27(A.) of the 1997 Tax Code and consequently, from the creditable withholding tax under Revenue Regulations No. 2-98 and also from the capital gains tax under Section 27(D)(5) of the same Code. It is represented that MESALA is a non-stock, non-profit savings and loan association duly licensed by the Bangko Sentral ng Pilipinas (BSP) and registered with the Securities and Exchange Commission (SEC); that MESALA exists for the purpose of having its members extend mutual help and financial assistance to one another through the acceptance of contributions and extensions of loans; that to secure the real estate loans granted to its members, MESALA requires collateral from the borrower such as real estate properties; and that in case of default in the payment of the loans, the property set up as collateral of the loan is foreclosed and eventually sold through public auction. In reply, please be informed that pursuant to Section 5 of Republic Act No. 8367, otherwise known as "An Act Providing for the Regulation of the Organization and Operation of Non-Stock Savings and Loan Association," the pertinent portion of which reads: "Sec. 5. Tax Exemption. An association shall be exempt from payment of tax in respect of income it receives, including interest on its deposits with any bank; Provided, however, That income derived from any of its properties, real or personal, or any activity conducted for profit, regardless of the disposition thereof, is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code. xxx xxx xxx." only the income derived from any of its properties, real or personal, or any activity conducted for profit regardless of the disposition thereof, is subject to the corresponding internal revenue taxes imposed under the National Internal Revenue Code. The subject foreclosed properties of MESALA were just collateral and served to secure the loans granted to the members. Considering that MESALA sells the foreclosed properties not as a separate activity that is conducted for profit, but rather in the ordinary or normal course of its savings and loan association business to recoup the amount loaned, the gain, if any, from such sales is exempt from taxes as provided under Sec. 5 of Republic Act No. 8367. There is, therefore, no basis in imposing the capital gains tax under Section 27(D)(5) of the 1997 Tax Code, or the expanded withholding tax required to be withheld under Sec. 2.57-2(J) of Revenue Regulations No. 2-98, as amended. Accordingly, any income derived from the sale of the foreclosed properties by MESALA is exempt from the income tax under Sec. 27(A) of the Tax Code of 1997 and consequently from the creditable withholding tax under Revenue Regulations No. 2-98, as amended, and also from the capital gains tax under Section 27(D)(5) of the same Code. However, the sale of the foreclosed properties will be subject to the documentary stamp tax under Section 196 of the 1997 Tax Code, based on the highest or winning bid price. (Revenue Memorandum Order No. 41-91 dated November 11, 1991) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal and Inspection Group