BIR Ruling [DA-332-03]

October 1, 2003 BIR RULING [DA-332-03] #169-98; 36-00, DA 436-98-09-24-98 Baniqued & Baniqued Suite 803, 8th Floor, Jollibee Centre San Miguel Avenue, Ortigas Center Pasig City Attention: Atty. Carlos G. Baniqued Tax Counsel Gentlemen : This refers to your letter dated December 20, 2002, requesting for confirmation of the following opinions: 1. In case of extra-judicial foreclosure of real property, the 6% capital gains tax imposed under Section 27(D)(5) of the National Internal Revenue Code of 1997 shall be based on the bid price of the highest bidder but it shall be paid only upon the expiration of the one-year redemption period (with the mortgagor not exercising the right of redemption) and, specifically, within thirty (30) days from the expiration of the said one-year redemption period; 2. In case of extra-judicial foreclosure of real property, the documentary stamp tax imposed under Section 196 of the NIRC of 1997 shall be based on the bid price of the highest bidder but it shall be paid only upon expiration of the one-year redemption period (with the mortgagor not exercising the right of redemption) and, specifically, within five (5) days after the close of the month in which the lapse of the said redemption period occurs; 3. The assignment by JLI of its rights as highest bidder over the foreclosed real property shall not be subject to the creditable withholding tax imposed on the sale or transfer of real property pursuant to Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended, and to the DST imposed under Section 196 of the 1997 NIRC, but only to the P15.00 DST imposed under Section 188 of the 1997 NIRC; and 4. The corresponding Tax Clearance Certificate and/or Certificate Authorizing Registration shall be issued directly in the name of JLI's assignee upon presentation of the CGT and DST returns duly validated by an authorized agent bank evidencing full payment of the CGT and DST referred to in items 1 and 2 above. The facts, as represented, are as follows: JLI is a corporation organized and existing under the laws of the Philippines and is engaged in business as a real estate developer. On July 28, 1998, JLI, as a lender-mortgagee, entered into a Loan Agreement with Real Estate Mortgage ("Loan Agreement") with Philippine Women's University ("PWU") and Unland Resources Development Corporation ("Unlad") as borrowers-mortgagors. Pursuant to the Loan Agreement, Unlad mortgaged in favor of JLI three (3) parcels of land ("Mortgaged Property") covered by Transfer Certificates of Title No. RT-71869, RT-71870 and RT-71873 as security for Unlad and PWU's indebtedness to JLI in the amount of P210 million. Unlad and PWU, however, defaulted on their obligations under the Loan Agreement, which prompted JLI to file on March 29, 2001 with the Office of the City Sheriff of Quezon City a Petition for Extrajudicial Foreclosure of the Mortgaged Property. On September 12, 2002, the City Sheriff conducted an extrajudicial foreclosure sale of the Mortgaged Property where JLI won as the highest bidder with a bid of P150 million for the Mortgaged Property. On September 20, 2002, the City Sheriff issued a Certificate of Sale in favor of JLI as the highest bidder during the foreclosure sale. On October 7, 2002, JLI paid the amount of P2.25 million representing DST on the extrajudicial foreclosure sale of the mortgaged property imposed under Section 196 of the 1997 NIRC. On October 24, 2002, the Certificate of Sale was registered with the Registry of Deeds of Quezon City and annotated on the TCTs covering the Mortgaged Property. Pursuant to Section 6 of Act No. 3151, as amended, in relation to Section 63 of Presidential Decree No. 1529, a mortgagor whose property is sold pursuant to an extrajudicial foreclosure sale has a period of one year from the date of registration of the Certificate of Sale with the appropriate Registry of Deeds within which to redeem the foreclosed property. Unlad and/or PWU, therefore, have one year from October 24, 2002, or on or before October 24, 2003, within which to redeem the Mortgaged Property. In reply, please be informed of the following: 1. Section 27(D)(5) of the 1997 NIRC imposes 6% capital gains tax on the sale, exchange or disposition of land and/or buildings treated as capital assets. Section 27(D)(5) of the 1997 NIRC provides: "SEC. 27. Rates of Income Tax on Domestic Corporations . "(D) Rates of Tax on Certain Passive Incomes. "(5) Capital Gains Realized from the Sale, Exchange or Disposition of Lands and/or Buildings. A final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized 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 this Code, whichever is higher, of such land and/or buildings. On the other hand, Revenue Memorandum Order ("RMO") No. 41-91, dated November 11, 1991, provides that while generally taxes on the sale, exchange or other disposition of real property are based on the gross selling price, fair market value or zonal value of the real property, whichever is higher, in the event of a sale of real property effected through a public bidding, such as an extrajudicial foreclosure sale, the actual consideration appearing in the Deed of Sale shall be an acceptable tax base in the computation of taxes. In BIR Ruling No. 36-00 dated September 11, 2000, this Office ruled that the tax base for computing the capital gains tax and documentary stamp tax on a foreclosure sale is the highest bid price, to wit: ". . ., this Office is of the opinion as it hereby holds that the tax base in computing the capital gains tax and the documentary stamp tax on such sale transaction, should, as in the case of mortgage foreclosure sale under Act 3135, as amended, be likewise on the highest bid . . ." In fine, the foreclosure sale under consideration shall be subject to 6% capital gains tax based on the highest bid price. Under Section 63 of Presidential Decree 1529, the "Property Registration Decree", the mortgagor has one year within which to redeem the Mortgaged Property, to wit: "SEC. 63. Foreclosure of Mortgage . xxx xxx xxx (b) If the mortgage was foreclosed extrajudicially, a certificate of sale executed by the officer who conducted the sale shall be filed with the Register of Deeds who shall make a brief memorandum thereof on the certificate of title. In the event of redemption by the mortgagor, the same rule provided for in the second paragraph of this section shall apply. In case of non-redemption, the purchaser at foreclosure sale shall file with the Register of Deeds, either a final deed of sale executed by the person authorized by virtue of the power of attorney embodied in the deed of mortgage, or his sworn statement attesting to the fact of non-redemption; whereupon, the Register of Deeds shall issue a new certificate in favor of the purchaser after the owner's duplicate of the certificate has been previously delivered and cancelled." It is clear from the above provision of the Property Registration Decree that where the right of redemption of the mortgagor exists, the certificate of title of the mortgagor shall not be cancelled yet even if the property had already been subjected to foreclosure sale, instead only a brief memorandum shall be annotated at the back of the certificate of title. The cancellation of the title and the subsequent issuance of a new title in favor of the purchaser/highest bidder depends on whether the mortgagor shall redeem or not the mortgaged property within one year from the issuance of the certificate sale. Thus, no transfer of title to the highest bidder can be effected yet until and after lapse of the one-year period from the issuance of the said certificate of sale. It should be noted that there is no distinction whether the property is a capital asset or an ordinary asset. Regardless of the nature of the property foreclosed, the mortgagor has one year within which to redeem said property. Accordingly, the capital gains tax shall be due only after the lapse of the one year redemption period. Therefore, considering that the mortgagor has one year to redeem the property, the capital gains tax shall be due only after the expiration of the one-year redemption period. The capital gains tax return shall be filed and the tax payment should be made within thirty (30) days from the date the one-year redemption period expires. 2. The documentary stamp tax imposed under Section 196 of the NIRC of 1997 shall be based on the bid price of the highest bidder but it shall be paid only upon expiration of the one-year redemption period (with the mortgagor not exercising the right of redemption) and, specifically, within five (5) days after the close of the month in which the lapse of the said redemption period occurs. In BIR Ruling No. 36-00, supra, and BIR Ruling No. DA-207-02 dated November 12, 2002, this Office ruled that the tax base for computing the documentary stamp tax on a foreclosure sale is the highest bid price. aIHSEc 3. Likewise, the assignment by Jardine Land of its rights to the mortgaged property shall not be subject to documentary stamp tax pursuant to the ruling of this Office in DA-436-98-09-24-98, to wit: "Accordingly, the sale or assignment by the Spouses Angeles in favor of the Spouses Yambao of their rights over the said property is not subject . . . to the documentary stamp tax prescribed under Section 196 of the same Code. The notarial acknowledgment of the deed, however, is subject to the P15.00 DST pursuant to Section 188 of the Tax Code of 1997." 4. The corresponding Tax Clearance Certificate and/or Certificate Authorizing Registration shall be issued directly in the name of JLI's assignee upon presentation of the CGT and DST returns duly validated by an authorized agent bank evidencing full payment of the CGT and DST referred to in items 1 and 2 above. This ruling is being issued on the basis of the foregoing facts as represented. However, if Zupon 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 & Inspection Group