BIR Ruling [DA-221-06]

April 7, 2006 BIR RULING [DA-221-06] 1977 Tax Code, as amended by E.O. 273 Pelaez Gregorio Gregorio & Lim Padilla Building, Emerald Avenue Ortigas Center, Pasig City Attention: Atty. Robert H. Samarita Gentlemen : This refers to your letter dated June 8, 2005 requesting a ruling that the sale of real property by the Development Bank of the Philippines (DBP) to a private corporation in 1991 is not subject to the capital gains tax. The facts as represented are as follows: On June 27, 1991, DBP made and executed a Deed of Absolute Sale whereby it transferred to First Plywood Corporation (FPC) two (2) parcels of land covered by Transfer Certificate of Title Nos. 494133 and 494134 of the Registry of Deeds for the Province of Rizal and located in Angono, Rizal. In a Sworn Statement attached to the said Deed of Absolute Sale, it was stated that the DBP is not required to pay the capital gains tax on the sale of real properties described therein because the final tax on capital gains prescribed under Revenue Regulations (RR) No. 8-79, implementing Section 34(h) of the Tax Code, as amended by Batas Pambansa (BP) Blg. 37, applies only to individual taxpayers and not to duly organized corporations. FPC decided to transfer the title of the said lots to its name only this year, i.e. 2005, or after a period of fourteen (14) years from the date of sale. In reply, please be informed that Section 34(h) of the 1977 Tax Code, as amended by Batas Pambansa Blg. 37 and implemented by Revenue Regulations No. 8-79, requires the imposition of a final schedular tax on capital gains realized from sales or other disposition of real property on or after September 7, 1979 by citizens of the Philippines or resident alien individuals only. Thus, sales or other disposition of real property by a corporation remain subject to the corporate income tax imposed under Section 24 of the Tax Code of 1977, as amended. Such being the case, the sale by DBP of the real properties of FPC is not subject to the final schedular tax imposed on capital gains under Section 34(h) of the 1977 Tax Code, as amended by Batas Pambansa Blg. 37. However, the said transaction is subject to the regular corporate income tax imposed under Section 24 of the same Code, and consequently, to the expanded withholding tax imposed under RR No. 1-90, amending RR No. 6-85. Moreover, Section 8(1)(b) 1 of RR No. 6-85, as amended by RR No. 1-90, provides, viz : "(b) Surcharge and interest for failure to deduct and withhold. If, the withholding agent, in violation of the provisions of these regulations, fails to deduct and withhold the amount of tax required to be withheld, he shall be liable to pay in addition to the tax required to be deducted and withheld, a surcharge of fifty per centum if the failure is due to willful neglect or with intent to defraud the government, or twenty five per centum if the failure is not due to such cause, plus interest at the rate of fourteen per centum per annum from the time the tax is required to be withheld until the dated of assessment ." (emphasis supplied) On the other hand, in BIR Ruling No. 078-94 dated March 18, 1994, this Office had ruled to the effect that if the income derived from the sale of real property had already been reported by the seller in the year of sale, the buyer is no longer required to withhold any creditable expanded withholding tax. Likewise, in BIR Ruling No. DA-017-2003 dated January 22, 2003 citing BIR Ruling No. 079-96 dated July 24, 1996, this Office ruled that payment by the seller of the income tax due on the sale of real property subject to the expanded/creditable withholding tax is already a substantial compliance with the withholding tax requirements. The foregoing has the effect of exonerating the buyer-withholding agent from his/its failure of performing his/its obligation to deduct and withhold the tax as prescribed in the withholding tax regulations. Thus, the penalties, surcharge and interest imposed for failure to deduct and withhold the tax shall not apply anymore in this case. In the instant case, if it is proven that the income tax has already been paid by DBP corresponding to the year the above sale transaction took place, the surcharge and interest imposed under Section 8(1)(b) of RR No. 6-85, as amended, and the penalties imposed for failure of the withholding agent to perform his/its obligation under Section 251 of the 1977 Tax Code, as amended, shall not be applied anymore. Otherwise, if the above sale transaction was not included or declared by DBP as part of its taxable income during the year the transaction took place or subsequent thereto, the above penalties, surcharge and interest imposed for failure to withhold and remit the tax shall be applied to FPC. Likewise, DBP shall be assessed for the income tax due on the above sale transaction plus the additions/increments thereon. The Certificate Authorizing Registration (CAR) shall be released only upon showing by FPC that there is already substantial compliance with the withholding tax requirements. 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. DHEACI Very truly yours, Commissioner of Internal Revenue By: (SGD.) PABLO M. BASTES, JR. OIC-Head Revenue Executive Assistant Legal Service Footnotes 1. Implementing Section 51(e) of the 1977 Tax Code, as amended.