BIR Ruling [DA-294-03]

September 4, 2003 BIR RULING [DA-294-03] 196; #097-96; DA-163-2000 Mariano C. Ereso, Esq. 149 Roxas Boulevard Paraaque City S i r : This refers to your letter dated July 30, 2003 requesting on behalf of your clients, FAR EASTERN UNIVERSITY ("FEU") and FERN REALTY CORPORATION ("FERN") for a confirmation of your opinion that the Contract To Sell executed by and between FEU and Moldex Realty, Inc. relating to several parcels of land situated at Metrogate Villas, Silang, Cavite on June 5, 1998 is not subject to documentary stamp tax imposed under Section 196 of the Tax Code of 1997. Based on your representations, as well as from the documents submitted, the facts are as follows: 1. On June 5, 1998, MOLDEX and FEU executed a CONTRACT TO SELL over several parcels of land situated at Metrogate Villas, Silang, Cavite, the pertinent portion of which provides as follows: "NOW, THEREFORE, for and in consideration of the foregoing premises, the VENDOR, by these presents, hereby binds and obligates itself to sell the PROPERTY to the VENDEE, which likewise binds and obligates itself to purchase the same, under the following terms and conditions:" "5. Upon full payment of the total contract price, together with accrued interests, the VENDOR shall sign and execute the covering Deed of Absolute Sale over the PROPERTY in favor of the VENDEE, which Deed shall include the VENDOR'S warranties that: . . ." "6. Upon signing and execution of the Deed of Absolute Sale, the VENDOR shall likewise execute the appropriate document granting a perpetual right-of-way over any and all the roadways and perpetual use of the underground drainage system . . ." "13. The VENDOR, by these presents, hereby grants and recognizes the absolute right of the VENDEE to assign, without any need to give notice to, or secure the consent of, the VENDOR, its interests in any or all of the portions of the PROPERTY to its affiliate company, FERN REALTY CORPORATION. The VENDEE shall not, however, assign, sell or transfer its rights and interests over the PROPERTY or any portion thereof, or to lease the same, to any other third party without prior written consent of the VENDOR." 2. FEU assigned the CONTRACT TO SELL to FERN through a Deed of Assignment, whereby such assignment was held exempt from the final tax of 6% and from the 1.5% documentary stamp tax in BIR Ruling No. DA-154-2001 dated September 5, 2001. 3. Pending the final compliance by FEU/FERN of the terms and conditions of the sale under the CONTRACT TO SELL, MOLDEX annotated it to the titles of the Property to give notice to all and sundry of the existence of a contract to sell by and between the parties over the Property. Because of the annotation of the CONTRACT TO SELL on the titles of the Property to MOLDEX, the Registry of Deeds for the Province of Cavite is requiring FEU/FERN to pay the 1.5% documentary stamp tax provided under Section 196 of the Tax Code of 1997 and to submit proof of payment thereof. The annotation of the CONTRACT TO SELL on the titles of the Property did not transfer ownership from MOLDEX to FERN. 4. On October 25, 2001, MOLDEX and FERN executed a Deed of Absolute Sale over the Property covered by the CONTRACT TO SELL. The 1.5% documentary stamp tax provided under Section 196 of the Tax Code of 1997 was paid. 5. In support of your request, you submitted copies of the following documents: (1) Contract To Sell; (2) Deed of Assignment of the Contract To Sell; (3) Deed of Absolute Sale; (4) BIR Form 2000; and (5) Official Receipt issued by the Land Bank of the Philippines dated October 10, 2001. In reply, please be informed that under Section 196 of the Tax Code of 1997, to wit: "SEC. 196. Stamp Tax on Deeds of Sale and Conveyances of Real Property. On all conveyances, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby any land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of this Code, whichever is higher: xxx xxx xxx." the documentary stamp tax on sales of real property shall be imposed on deeds or instruments conveying real property. To determine whether a contact for sale of real property is conveyed, Revenue Regulations (RR) No. 26, as amended by RR No. 9-94, otherwise known as the Revised Documentary Stamp Regulations, provides: "Section 163. Contract for sale of land. If a contract for the sale of land vests title on the land and improvement thereon, it would be subject to taxation as a conveyance. If it does not vest title but contains only certain provisions for the giving of a deed in the future upon compliance with condition precedent, it is not subject to tax. " (Emphasis supplied) The execution of a Contract to Sell does not vest title to the vendee and therefore, it is not subject to documentary stamp tax under Section 196 of the Tax Code of 1997. Conversely, the Deed of Absolute Sale which transfers title to real property and evince the consummation of the Contract to Sell is the one subject to the documentary stamp tax imposed under said Section 196. Thus, the operative act of transferring title to real property, for purposes of the imposition of the documentary stamp tax under said Section 196, is the issuance of the Deed of Absolute Sale. (BIR Ruling No. 097-96 dated September 9, 1996) Accordingly, the documentary stamp tax, in the instant case, is due and payable upon the execution of the Deed of Absolute Sale between MOLDEX and FERN, and not upon the execution of the Contract to Sell between MOLDER and FEU. 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