BIR Ruling [DA-234-99]

April 15, 1999 BIR RULING [DA-234-99] Balance Tamase Alampay 12th Floor, PDCP Bank Center Corner Herrera and Alfaro Streets Salcedo Village Makati City Attention: Attys . Emmanuel P . J . Tamase and Francisco Gerardo C . Llamas Gentlemen : This refers to your letter dated October 29, 1997 requesting, on behalf of your client, Perf Realty Corporation (PERF), for confirmation of your opinion that a Certificate of Sheriff's Sale at public auction shall be subject to capital gains tax only upon the expiration of the redemption period; and that a Deed of Assignment where no gain is realized by the assignor is not subject to capital gains tax. cdll It is represented that on January 12, 1994, Spouses Lawrence and Rosalind Chan (Spouses Chan) executed a Real Estate Mortgage (REM) over a parcel of land in Makati City covered by TCT No. 167482 to guarantee the payment of a credit accommodation extended to them by Philippine American Life Insurance Company (Philamlife) in the amount of P6,800,000.00; that the Spouses Chan defaulted on their monthly amortizations prompting Philamlife to extra-judicially foreclose the property pursuant to the Deed of Mortgage and Act No. 3135, as amended; that at the auction sale held on March 20, 1995, Philamlife emerged as the highest bidder for the total sum of P8,953,586.97; that on March 27, 1995, a Certificate of Sale was issued by the Office of the Clerk of Court and Ex-Officio Sheriff of the Regional Trial Court of Makati; that on March 28, 1995, Philamlife paid the documentary stamp taxes due on the Certificate of Sale in the amount of P134,303.80, representing 1.5% of the bid price; that the foregoing Certificate of Sale had not been registered and annotated on the Transfer Certificate of Title of the foreclosed property; that on April 21, 1997, Philamlife executed a Deed of Assignment transferring all its rights and interests on the extra-judicially foreclosed property to your client, PERF, for the exact amount of Philamlife's bid price at the public auction sale; that on the same date, PERF paid the documentary stamp tax on the Deed of Assignment in the amount of P134,303.80, representing 1.5% of the consideration thereof; that on April 22, 1997, PERF paid the capital gains tax on the Certificate of Sale in the amount of P701,519.03, which includes the surcharges, interests and other penalty charged assessed to PERF allegedly for late payment beginning March 1996, one year from the date, of the extra-judicial foreclosure sale; and that PERF is now being assessed capital gains tax on the Deed of Assignment executed on April 21, 1997. In reply, please be informed that your request cannot be granted for lack of legal basis. Section 21(c) of the Tax Code of 1977 [now Section 24(D)(1) of the Tax Code of 1997] provides that capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines classified as capital assets, including pacto de retro , sales and other forms of conditional sales by individuals, including estates and trusts, shall be taxed at the rate of 5% (now 6%) based on the gross selling price or fair market value prevailing at the time of sale, whichever is higher. llcd Then Section 21(e) of the Tax Code of 1977 is amplified by Section 2.2 of Revenue Memorandum Order No. 29-86, as amended by Revenue Memorandum Order No. 16-88 and as amended by Revenue Memorandum Order No. 27-89 and further amended by Revenue Memorandum Order No. 6-92 reading: "SECTION 2.2 The tax applies not only to ordinary sale transaction but also to pacto de retro sales and other forms of conditional sales, which necessarily includes mortgage foreclosure sales (judicial and extra-judicial foreclosure sales)." Considering that in the extra-judicial foreclosure sales under Act No. 3135, as amended by Act No. 4118, the creditor-financial institution (bank, finance or insurance company) is the statutory seller, representing the owner-mortgagor of the real property, the said financial institution becomes liable for the payment of capital gains tax due on such foreclosure sale based on the bid price in the auction sale. The bank, finance or insurance company however, may get a reimbursement or recover the capital gains tax paid, if the right of redemption is exercised, by the debtor-mortgagor or when the property is sold to any party, whatsoever. Such being the case, the extra-judicial foreclosure sale held on March 20, 1995 relative to the Real Estate Mortgage executed by Spouses Chan, as mortgagors in favor of Philamlife, as mortgagee, is subject to the 5% capital gains tax imposed under then Section 21(e) of the Tax Code of 1997, based on the highest bid price, which tax is due from the date of the issuance of the Sheriff's Certificate of Sale. Based on the foregoing, since the capital gains tax due on the said extra-judicial foreclosure sale, together with the corresponding surcharge, interest and penalty have been paid on April 22, 1997 by PERF, the Deed of Assignment executed on April 21, 1997, by Philamlife in favor of PERF, whereby the former transferred to the latter all its rights and interests on the extra-judicial foreclosed property, the effect of that merely makes the assignee step into the shoes of the assignor without acquiring a better right than what the assignor had in the property to which the rights assigned pertain. Consequently, PERF representing the owner-mortgagor is the one liable to pay the capital gains tax due on such foreclosure sale based on the bid price in the auction sale. However, it could get reimbursement or recovery of the capital gains tax payment, if the right of redemption is exercised by the debtor-mortgagor or when the property is sold to any party whatsoever. (BIR Ruling Nos. 101-89 and 118-91; RMO 41-91 par. 2(3)) cdt Finally, the Deed of Assignment executed by Philamlife transferring all its rights and interest on the extra-judicial foreclosure sale in favor of PERF for the exact amount of Philamlife's bid price at the public auction sale, is subject to the 7.5% creditable withholding tax imposed, under Section 1(j)(4) of Revenue Regulations No. 12-94, as amended by Revenue Regulations No. 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. prll Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)