Carissa Homes

May 31, 2007 BIR RULING [DA-321-07] R.R. 6-2001; No. 027-2002; DA-207-2002; DA-017-2003 Carissa Homes Las Pias Business Center National Road, Talon Las Pias City Attention: Ms. Cecilia A. Ramilo Tax Department Head Gentlemen : This refers to your letter dated May 16, 2006 requesting for clarification that the extrajudicial foreclosure sale of real properties classified as ordinary assets initiated by a bank wherein the mortgagor-seller is a real estate company is subject to the creditable withholding tax (CWT) under Revenue Regulations (RR) No. 6-2001 and not to the capital gains tax under RR No. 4-99; and the basis for the computation of the CWT and documentary stamp tax (DST) thereof shall be the individual bid price of each of the lots covered by the Real Estate Mortgage, as indicated in the Certificate of Sale and Annexes thereto. cASEDC It is represented that Carissa Homes Development and Properties, Inc. (hereafter referred to as "the Company") is a domestic corporation engaged in the real estate business; that the Company is registered with the Bureau of Internal Revenue as a real estate developer; that sometime in the years 2001 to 2002, the Company executed several Deeds of Real Estate Mortgage over certain real properties situated in Bulacan in favor of Bangko Sentral ng Pilipinas ("BSP"); that all the real properties subject thereof were covered by individual Transfer Certificates of Title and Tax Declaration of Real Property; that when the debtor failed to settle the obligation, the creditor BSP extra-judicially foreclosed the real estate mortgage; that pursuant thereto, the subject realty were sold at public auction on the basis of the individual bid price per lot; and that consequently, the creditable withholding tax and the documentary stamp taxes based on the bid price per lot as stated in the Notary's Certificate of Sale were paid by the Company being the mortgagor-seller. In reply thereto, please be informed that in order to determine the proper taxes to be imposed in a foreclosure sale of real property, it is necessary to first determine the character of the real property sold. Thus, if the real property is a land or building which is not actually used in the business of the seller-corporation and is treated as a capital asset, as that term is defined in Section 39 (A) of the 1997 Tax Code, as amended, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the Tax Code of 1997, whichever is higher of such land and/or building. On the other hand, it is only when the real property sold is an ordinary asset that the withholding tax rates imposed under Section 3 (J) of RR No. 6-2001, as amended, shall apply. The rate of withholding tax will depend on whether, first, the seller is exempt or taxable; second, whether the seller is habitually engaged in real estate business or not; and third, if the seller is habitually engaged in real estate business. Thus, RR No. 4-99, effective April 6, 1999, which refers to the payment of capital gains tax and documentary stamp tax on extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance companies and the payment of the capital gains tax and the documentary stamp tax after the expiration of the one (1) year redemption period from the registration of the certificate of sale, shall not apply to your case the real properties subject of the extrajudicial foreclosure sale being an ordinary asset. The applicable revenue regulation for the sale of ordinary assets is RR No. 6-2001, as amended. With regard to the tax base for the computation of CWT and DST, considering that the instant case is a foreclosure sale, the CWT and DST shall be paid based on the highest or winning individual bid price per lot since the real properties subject thereof were covered by individual/separate Transfer Certificates of Title and Tax Declaration of Real Property. (Revenue Memorandum Order No. 41-91 dated November 11, 1991 and BIR Ruling Nos. DA-207-2002 dated November 15, 2002 and DA-017-2003 dated January 22, 2003) cADEHI 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service