BIR Ruling [DA-286-03]

August 29, 2003 BIR RULING [DA-286-03] 27 (D) (5); 196 DA 157-2002 dated September 11, 2002 Mateo Samson & Zorrilla 4th Floor Pilar Building 148 Amorsolo Street Legaspi Village Makati City Attention: Atty. Maria Cristina S. Samson Gentlemen : This refers to your undated letter requesting on behalf of your client, 19-1 Realty Corporation, for a ruling on the tax consequence relative to the transfer of rights with assumption of liability over a parcel of land made by PDCP Development Bank, Inc. (PDCP) and Multi-Addweal Corporation (MAC) in favor of 19-1 Realty Corporation by virtue of a Deed of Assignment executed on July 23, 1999. It is represented that FBDC, a corporation duly organized and existing under the laws of the Philippines with principal office address at the Bonifacio Centre, NDCP Compound, Fort Bonifacio, Taguig, Metro Manila, is the owner of certain parcels of land within a specifically controlled and planned newtown development area known as the Fort Bonifacio Global City located within the Fort Bonifacio, Taguig, Metro Manila; that FBDC has entered into several documents with PDCP Development Bank, Inc., a corporation duly organized and existing under the laws of the Philippines with the principal office address at PDCP Bank Building, 8737 Paseo de Roxas, Makati City, MAC, a corporation duly organized and existing under the laws of the Philippines with principal office address at 6/F Pilar Building, 148 Amorsolo Street, Legaspi Village, Makati City and the Sunvar, Inc., VAR Building, Inc., Delruf Realty & Development Corporation, Carella Management, Inc., Marilex Realty Development Corporation and Atty. Manuel S. Tanjangco (collectively referred to as the Rufino Group) involving the above-mentioned property as follows: First Contract to Sell: On October 22, 1996, a Contract to Sell was entered into by and between FBDC, as the seller, and PDCP Development Bank, Inc. as Trustee for Trust Account No. 618013, as buyer; that under the aforesaid contract, the seller agrees to sell, transfer and convey to the buyer a parcel of land within the Global City designated as Lot No. 1, Block No. 19 with an area of 1,643 square meters; that the lot is located within the mixed use (M1) zone of the Global City and shall be used and devoted only for the specific purpose or purposes allowed within the said zone; that the lot shall be subject to a floor area ratio (FAR) of 9 and a permissible gross floor area (GFA) of 14,787; and that the purchase price for the lot shall be P15,059 per square meter of GFA or accommodation value per square meter of the lot or the aggregate amount of P222,683,753. Second Contract to Sell On July 23, 1999, a Contract to Sell was executed by and among FBDC, as the seller, and PDCP and MAC, as buyers; that the seller and the PDCP Trust Department as Trustee for Trust Account No. 618013 (Assignor) have previously executed a Contract to Sell dated October 22, 1996 (Assigned Contract) for the sale and purchase of Lot 1 Block 19 (Lot) at Fort Bonifacio Global City; that the Assignor assigned fifty percent (50%) of its rights and interests in the Assigned Contract to MAC, which assignment was approved and consented to by the seller; that under the Assigned Contract the Assignor has already paid to the Seller the amount of P222,583,673 prior to the assignment of the lot; that the parties agreed to amend the Assigned Contract to reflect that PDCP and MAC are now the true and beneficial buyers of the lot and have jointly and severally assumed all responsibilities, obligations and undertakings of the Assignor as buyer under the Assigned Contract. Deed of Assignment On July 23, 1999, a Deed of Assignment was executed by and among PDCP, as the Assignor, MAC, as the Assignee, with the conformity of Sunvar, Inc. VAR Building, Inc., Delruf Realty & Development Corporation, Carella Management, Inc., Marilex Realty Development Corporation and Atty. Manuel S. Tanjangco (collectively referred to as the Rufino Group) and FBDC; that the Rufino Group is the sole trustor and beneficiary of PDCP Trust Account No. 618013 and as such trustor and beneficiary of PDCP Trust Account No. 618013 has instructed the Assignor to sign, execute and deliver the contract to sell; that the Assignor with the knowledge and consent of the Rufino Group, is willing to assign, transfer and convey 50% of its rights and interests as buyer in and under the Contract to Sell to the Assignee, and the Assignee is willing to accept the same, under the terms and conditions stipulated herein; that FBDC interposes no objection to the aforesaid assignment, transfer and conveyance; that as of the date hereof, the remaining balance of the purchase price for the subject land is P100,080 the payment for which shall be equally divided on a 50-50 basis between the Assignor and the Assignee. Deed of Transfer of Rights with Assumption of Liability A proposed Deed of Transfer of Rights with Assumption of Liability will be executed by and between MAC and PDCP, as the Assignors and 19-1 Realty Corporation, a corporation duly organized and existing under the laws of the Philippines with principal office address at 2nd Floor; Rufino Tower, Ayala Avenue corner Herrera Streets, Legaspi Village, Makati City, as the Assignee with the conformity of the Rufino Group and FBDC; that on July 23, 1999, the Assignors, as buyers, and FBDC, as seller, executed a Contract to Sell which was acknowledged before Atty. Josena Paz Pajarillo-Uybarreta for the sale and purchase of a parcel of land within the mixed-use (M1) zone of the Fort Bonifacio Global City, Fort Bonifacio, Taguig, Metro Manila, designated as Lot No. 1, Block No. 19, with an area of 1,643 square meters; that the Rufino Group is the sole trustor and beneficiary of PDCP Trust Account No. 618013 and as such trustor and beneficiary has instructed PDCP to sign, execute and deliver the Contract to Sell; that the Assignors with the knowledge and consent of the Rufino Group and FBDC, are willing to assign, transfer and convey their respective rights and interest as buyers in and under the Contract to Sell to the Assignee, and the Assignee is willing to accept the same, under the terms and conditions stipulated herein; that the Rufino Group and FBDC interpose no objection to the aforesaid assignment, transfer and conveyance; that as of the date hereof, the remaining balance of the purchase price for the subject land under the Contract to Sell is P100,080.00; that for and in consideration of the amount of P222,583,673.00 which amount shall be payable equally to MAC and PDCP, the Assignors hereby assign, transfer and convey, absolutely and exclusively in favor of the Assignee, the respective rights and interests as well as obligations and liabilities of the Assignors as buyers under the Contract to Sell as will result in the Assignee becoming the sole buyer of` the subject land; and that the Assignee likewise accepts and assumes the obligation of paying the balance of the purchase price and performing all the terms and conditions of the Contract to Sell incumbent upon the Assignors as buyers as if the Assignee is the original and sole party-buyer therein. In connection therewith, you now request for confirmation of the following that: "1. (t)he transfer of the fifty percent (50%) rights and interest over the subject land made by PDCP in favor of MAC is not subject to the capital gains tax nor to the creditable withholding tax imposed under Revenue Regulations No. 2-98; "2. the transfer of rights and interest over the subject land made by PDCP and MAC in favor of 19-1 Realty is not subject to the capital gains tax nor to the creditable withholding tax imposed under Revenue Regulations No. 2-98; "3. The Deed of Assignment executed between PDCP and MAC is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997; and "4. The Transfer of Rights with Assumption of Liability executed among PDCP, MAC and 19-1 Realty is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code." In reply thereto, please be informed as follows: 1. Section 27(D)(5) of the Tax Code of 1997 provides that a final tax of six percent (6%) is hereby imposed on the gain presumed to have been realize on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the said Code, whichever is higher. Corollarily, Section 2.57.2(J) of Revenue Regulations No. 6-2001, amending Revenue Regulations No. 2-98, implementing Section 57 of the Tax Code of 1997, provides that 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 Code, whichever is higher paid to the seller/owner for the sale, exchange or transfer of real property, other than capital asset, shall be imposed upon the withholding agent/buyer at the rate of 6%. From the foregoing, it is clear that only sales, exchanges or transfers of real properties are subject to the 6% capital gains tax or 6% expanded withholding tax respectively imposed under Section 27(D)(5) of the Tax Code of 1997 or Section 2.57.2(J) of Revenue Regulations No. 6-2001, amending Revenue Regulations No. 2-98, hence, assignments of rights over realty although classified as real property under the Civil Code, are not included within the purview of the said law and regulations inasmuch as in the assignment of rights the assignee merely steps 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. Accordingly, the transfer of the fifty percent (50%) rights and interest over the above-mentioned property made by PDCP in favor of MAC is neither subject to the capital gains tax nor to the creditable withholding tax, but to the income tax. 2. As stated in the discussion above, the transfer of rights and interest over the subject property made by PDCP and MAC in favor of 19-1 Realty is neither subject to the capital gains tax nor to the creditable withholding tax as the Transfer of Rights with Assumption of Liability executed among PDCP, MAC and 19-1 Realty is not a Deed of Sale because what is conveyed by the assignor is not the property itself but the rights pertaining to such property and 19-1 Realty is merely stepping into the shoes of both PDCP and MAC without acquiring a better right than what PDCP and MAC may have over the property to which the rights assigned pertain. ( BIR Ruling Nos. 174-90 dated September 10, 1990; 083-99 dated June 22, 1999; DA 024-00 dated January 11, 2000; DA157-2002 dated September 11, 2002 ). The transfer is, however, subject to the income tax. 3. The Deed of Assignment is not a Deed of Sale because what is being conveyed by the assignor is not the property itself but the rights pertaining to such property. Accordingly, the Deed of Assignment executed between PDCP and MAC is not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. 4. Finally, since what is being transferred by PDCP and MAC in favor of 19-1 Realty is not the property itself but the rights pertaining to the property, the Transfer of Rights with Assumption of Mortgage is therefore not subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. However, the notarial acknowledgment is subject to the documentary stamp tax of P15.00 under Section 188 of the said Code. 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group