BIR Ruling [DA-209-02]

November 15, 2002 BIR RULING [DA-209-02] 27 & 39 59-99 Home Development Mutual Fund Cor. Lopez Jaena & Del Pilar Extension Tacloban City Attention: Ms. Flordeliz B. Menzon, CESO V Regional Manager II Gentlemen : This refers to your letter dated April 19, 2000 requesting in effect for a ruling that the sale by Pag-IBIG Fund, Tacloban Regional Office of acquired assets to Pag-IBIG Fund members/qualified buyers is exempt from capital gains tax. It is represented that the Bureau of Internal Revenue of Tacloban Regional Office requires Home Development Mutual Fund (HDMF) to pay the capital gains tax on the sale by Pag-IBIG Fund of Tacloban Regional Office of its acquired assets to Pag-IBIG Fund members/qualified buyers; that you received communications from the BIR Regional Directors of Makati City and Cebu City that Pag-IBIG Fund, as a government corporation, is exempt from the 6% capital gains tax imposed under Section 27(D)(5) of the 1997 Tax Code considering that these properties acquired through mortgage foreclosures cannot be treated as capital assets as defined in Section 39 of the same Code; and that you were exempted from payment of capital gains tax on the sale of an acquired asset in Ormoc City. In reply, please be informed that Section 2.57.2(J) of Revenue Regulations (Rev. Regs) No. 2-98 (then Rev. Regs. No. 6-85, as amended by Rev. Regs. No. 1-90 and as further amended by Rev. Regs. No. 6-94 and 12-94), implementing Republic Act No. 8424, "An Act Amending the National Internal Revenue Code, as Amended" relative to the withholding on income subject to the Expanded Withholding Tax, provides that except as otherwise provided, there shall be withheld a creditable income tax from the following items of income payments to persons residing in the Philippines, viz: "(J) 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, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule Those which are exempt from a withholding tax Exempt at source as prescribed in Sec. 2.57.5 of these regulations With a selling price of five hundred thousand 1.5% pesos (P500,000.00) or less With a selling price of more than five hundred 3.0% thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000.00) With a selling price of more than two million 5.0% pesos (P2,000,000.00) "A seller/transferor must show proof of registration with HLURB or HUDCC to be considered as habitually engaged in the real estate business . . ." The foregoing creditable withholding tax rates apply to sale or disposition of real properties by a taxpayer who is habitually engaged in the real estate business. Categorically, under Section 39 of the 1997 Tax Code, properties held by a taxpayer primarily for sale in the ordinary course of business are considered as ordinary assets, the same being excluded in the definition of "capital asset." For purposes of the above regulations, the term habitually engaged in the real estate business is not limited or restricted only to persons duly registered with the Housing and Land Use Regulatory Board (HLURB) or Housing Urban Development Coordinating Council (HUDCC). The proviso simply means that any person duly accredited by the said government agencies shall be deemed habitually engaged in the real estate business. However, even in the absence of registration therewith, a person may also be treated as habitually engaged in the real estate business upon showing that he is in fact actually engaged in the said business. (BIR Ruling No. 59-99 dated April 30, 1999) While the regulations require membership in the HLURB or HUDCC to be considered as habitually engaged in the real estate business, the same should not be the sole criterion considering that the taxpayer government-owned or controlled corporation (GOCC) is able to acquire numerous real estates in settlements of loans and/or for other reasons, most of which were acquired through foreclosure of collaterals of its borrowers who were unable to pay their warrants with Pag-IBIG Fund/HDMF. In view of the foregoing, this Office is of the opinion and so holds that Pag-IBIG Fund/HDMF is habitually engaged in the real estate business. The above-described acquired assets of Pag-IBIG Fund/HDMF should be treated as "ordinary assets" of Pag-IBIG Fund/HDMF and therefore, the sale of which in the course of its business will not be subject to the capital gains tax imposed under Section 27(D)(5) of the 1997 Tax Code. However, and considering that the disposition of said foreclosed properties qualifies Pag-IBIG Fund/HDMF to be habitually engaged in the real estate business, income from sale or disposition of the same is subject to a creditable withholding tax at the rates provided for in Section 2.57.2(J) of Rev. Regs. No. 2-98. Contrary to the opinion of the Regional Director of Cebu City, the Pag-IBIG Fund/HDMF is not exempt from income tax pursuant to Section 27(C) of the 1997 Tax Code, which expressly provides that only 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 be exempt from income tax. (BIR Ruling No. 74-98 dated May 24, 1998) Moreover, Executive Order (E.O.) No. 93 which took effect on March 10, 1987 withdrew all tax and duty incentives granted to government and private entities subject to certain exceptions. The Fiscal Incentives Review Board (FIRB) created under Presidential Decree (P.D.) No. 776, as amended, which under E.O. No. 93 is authorized to restore tax and/or duty exemptions withdrawn in whole or in part under the said E.O. No. 93, did not restore the tax exemption privileges granted to Pag-IBIG Fund/HDMF under Sec. 16 of Presidential Decree No. 1752, the law which created Pag-IBIG Fund/HDMF. CcAESI Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group