BIR Ruling [DA-224-04]

April 29, 2004 BIR RULING [DA-224-04] 40 (A) DA-207-2002 Philippine Deposit Insurance Corporation Receivership & Liquidation Department II PDIC Building, 2228 Chino Roces Avenue, 1231 Makati City Attention: Mr . Alberto M. Cruz Officer-in-Charge Gentlemen : This refers to your letter dated June 14, 2002 requesting on behalf of Island Savings Bank for an exemption from the payment of capital gains tax or creditable withholding tax on the sale of an acquired asset of a closed bank considering the fact that no gain, but rather loss, was realized on the sale of the property. It is represented that Island Savings Bank sold its parcel of land covered by TCT No. 36952 in favor of Atty. Leonardo Salazar; that Island Savings Bank, as the seller incurred a loss of P2,991.39 in the aforesaid sale, computed as follows: Particulars Amount Book Value of the Property P12,991.39 Less: Selling Price (10,000.00) Loss on Sale P2,991.39 that it would be unfair for Island Savings Bank to pay for the capital gains tax or creditable withholding tax when no gain, but rather loss, was realized on the sale of the property; and that you submitted photocopies of Deed of Sale and the Inventory and Turnover of Assets Acquired together with the Schedule of Adjustments on Assets Acquired as of November 23, 1992 showing that Island Savings Bank indeed incurred a loss of P2,991.39 on the sale of the said property. In reply, please be informed that Section 40(A) of the Tax Code of 1997 provides, to wit: "SEC. 40. Determination of Amount and Recognition of Gain or Loss . (A) Computation of Gain or Loss . The gain from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain, and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received;" aSIETH The aforecited provision laid down the manner in determining whether there arises a gain or a loss incurred in cases of sale or other disposition of property, for purposes of computing the ordinary income and not capital gains tax, which includes any gain from the sale or exchange of property which is not a capital asset as defined in Section 39(A)(1) of the Tax Code of 1997. It should be emphasized however that the determination of gain or loss applies only in cases of sale or other disposition of a real property classified as ordinary asset in order to claim an ordinary loss. In the sale of real property classified as ordinary asset, there is no presumed gain to have been realized on the sale, exchange or disposition of lands and/or buildings, unlike in the sale, exchange or disposition of lands and/or buildings classified as capital assets. The term ordinary loss includes any loss from the sale or exchange of property which is not a capital asset. Any loss from the sale or exchange of property which is treated or considered as ordinary loss, shall be treated as loss from the sale or exchange of property which is not a capital asset. [Section 22(Z), Tax Code of 1997] The tax herein involved is not capital gains tax but rather an income tax whereby the burden of the tax is really upon the seller although the mode of payment of the tax is through withholding by the buyer, i . e ., creditable/expanded withholding tax. Taxes withheld on income payments covered by the expanded withholding tax, such as sale of real property classified as ordinary asset, is creditable in nature. Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. The income recipient is still required to file an income tax return, as prescribed in Secs. 51 and 52 of the NIRC, as amended, to report the income and/or pay the difference between the tax withheld and the tax due on the income [ Sec . 2 . 57(B), Revenue Regulations No. 2-98, as amended ]. As such, the tax withheld is considered a part of the consideration agreed upon between the seller and buyer resulting, therefore, to a net take to the seller of only the difference between the agreed consideration/selling price and the tax withheld. Consequently, in the sale or other disposition of real property classified as ordinary asset, the tax due is not capital gains tax but a creditable withholding tax, which in turn, will be credited against the tax due for the taxable year covering the date of sale. aDIHCT 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. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group