BIR Ruling [DA-230-00]

May 12, 2000 BIR RULING [DA-230-00] RR 2-98, 27 (D) (5), 196, 188 DA-537-98, 45-99, DA-230-2000 Castro Cadiz & Carag Law Offices Suite 25PC, Eisenhower Condominium No. 7 Eisenhower Street, Greenhills San Juan, Metro Manila Attention: Atty . Othelo C . Carag and Atty . Anna Liza M . Ang-Co Gentlemen : This refers to your letter dated February 9, 2000 requesting for a confirmation of your opinion on the tax consequences of the sale, cancellation and reconveyance of the houses and lots developed and sold by Rizal Cement Company, Inc. (the "Corporation") to its employees. cdll It appears that in its desire to help its employees in their needs for shelter and to support the government's thrust in housing, the Corporation engaged the services of a competent contractor to develop and construct low-cost housing units for its employees in a Subdivision in Binangonan, Rizal several employees bought houses and lots ("Subject Properties") by availing of housing loans from the Social Security System, banks or other lending institutions ("Creditors"); as required by the Creditors, the titles to the Subject Properties were transferred and registered in the name of the employees-buyers of the Corporation, through Deeds of Sale executed between the Corporation and employees-buyers; at the time of the execution of the Deeds of Sale, the employees-buyers agreed to reconvey and transfer back to the Corporation the Subject Properties in the event that their housing loan applications are not approved or not prosecuted within a reasonable period of time, which period shall in no case exceed four (4) months from execution of the Deed/s of Sale, or the employee-buyer resigns from his employment or is no longer connected with or employed by the Corporation before the approval of the housing loan and/or actual receipt by the Corporation in full of the purchase price agreed upon, or the employee-buyer violates any of the terms and conditions of the housing grant of the Corporation, including any agreement, deed, document or paper the employee-buyer signed, executed or delivered pursuant to such housing grant, or employee-buyer becomes ineligible as a grantee or recipient of the Corporation's housing program; in instances where the loan applications of employees-buyers did not materialize due to their resignation from the Corporation or for some other reasons, the Corporation sought to transfer back to the Corporation the corresponding titles to the Subject Properties involved through the Deeds of Reconveyance executed by the employees-buyers in favor of the Corporation. You are now requesting for opinion that: "1. The sale of the Subject Properties by the Corporation to its employees-buyers is subject to creditable withholding tax and documentary stamp tax; "2. The Deeds of Reconveyance between the employees-buyers and the Corporation that effect the return of the corresponding Subject Properties to the Corporation are not subject to capital gains tax and documentary stamp tax; and "3. Notwithstanding the cancellation of the sale and subsequent reconveyance of the corresponding Subject Properties, the Corporation may credit the withholding tax paid on the sale of the corresponding Subject Properties against its income tax due for quarter/year during the creditable taxes were withheld for the taxable quarters/years immediately succeeding the taxable quarters/years in which the excess credit arose. In the alternative, the Corporation may apply for a cash refund or a tax credit certificate within two years after the payment of the tax." In reply, please be informed that with respect to the sale of the Subject Properties, under Revenue Regulations No. 2-98 and Section 4 of Revenue Regulations No. 8-98, a creditable withholding tax based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, paid to the seller/owner for the sale, transfer, or exchange of real property, other than capital asset, shall be imposed upon the withholding agent/buyer in accordance with the following schedules: A. Upon the following values of real property, where the seller/transferor is habitually engaged in the real business as per proof of registration with the HLURB or HUDCC; With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less 1.5% With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not more than Two Million Pesos (P2,000,000.00) 3.0% With a selling price of more than Two Million Pesos (P2,000,000.00) 5.0% B. Where the seller/transferor is not habitually engaged in the real estate business 7.5% prcd C. Where the seller/transferor is exempt from creditable withholding tax in accordance with Section 2.57.5 of Revenue Regulations No. 2-98 exempt. Such being the case, the sale of the Subject Properties is subject to creditable withholding tax imposed in accordance with the foregoing regulations, based on the gross selling price/total amount of consideration or fair market value (zonal valuation) of the Subject Properties sold, whichever is higher (BIR Ruling No. 45-99 dated April 7, 1999). Moreover, the sale of the Subject Properties is subject to documentary stamp tax of P15.00 for every P1,000.00 or a fractional part of the consideration contracted to be paid for such realty or the fair market value determined in accordance with Section 6(E) of the Tax Code, whichever is higher. With respect to the reconveyance of the corresponding Subject Properties, the Deeds of Sale executed by the Corporation in favor of employees-buyers, as required by the Creditors, did not produce any legal effect because the Corporation failed to receive the proceeds of the loans from the creditors which was to be the cause/consideration for the sale. For lack of consideration, it cannot be said that Subject Properties have been disposed, transferred or conveyed in favor of the employees-buyers, pursuant to Article 1352 of the Civil Code, stating: "Art. 1352. Contracts without cause, or with unlawful cause, produce no effect whatsoever. cdll xxx xxx xxx" Consequently, since the Deed of Sale between the Corporation and the employees-buyers failed to transfer ownership of the Subject Properties for lack of consideration, the Deeds of Reconveyance executed by the employees-buyers so as to effect the return of the Subject Properties to the Corporation are not subject to the capital gains taxes and documentary stamp taxes prescribed in Sections 27(D)(5) and 196 of the Tax Code, as amended, respective (BIR Ruling No. DA-537-11-27-98; BIR Ruling No. 009-95 dated January 16, 1995; BIR Ruling No. 186-93 dated May 5, 1993). However, the notarial acknowledgment of the Deeds of Reconveyance shall be subject to the documentary stamp tax of P15.00 imposed under Section 188 of the Tax Code of 1997. Finally, notwithstanding the cancellation of the sale and the reconveyance of the corresponding Subject Properties, the Corporation may credit the withholding tax paid on the sale of the corresponding Subject Properties against its income tax due for the quarter/year during which the creditable taxes were withheld or for the taxable quarters/year immediately succeeding the taxable quarters/year in which the excess credit arose. If in lieu of the automatic application of its excess credit, the Corporation wants a cash refund or a tax credit certificate for use in payment of its other national internal revenue tax liabilities, the Corporation shall make a written request therefor, within two years after the payment of the tax (Ref. Secs. 204(c) and 229 of the Code), provided however, that if the Corporation has indicated in its income tax return its option for either a cash refund or a tax credit certificate, such indication shall be considered sufficient for the purpose (Section 2.58.3(C), Revenue Regulations 2-98). 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. llcd Very truly yours, Commissioner of Internal Revenue By: (SGD.) MILAGROS V. REGALADO Acting Assistant Commissioner Legal Service