Romulo Mabanta Buenaventura Sayoc & De Los Angeles

June 24, 2008 BIR RULING [DA-387-08] DA059-04 Romulo Mabanta Buenaventura Sayoc & De Los Angeles 30/F Citibank Tower 8741 Paseo de Roxas Makati City Attention: Attys. Ronaldo Modesto Ventura and Jayson L. Fernandez Gentlemen : This refers to your letter dated March 3, 2008 requesting on behalf of your client, Balikatan Property Holdings, Inc. (BPHI), for confirmation that the conditional assignment of its rights over a Certificate of Sale covering a foreclosed real estate property is not subject to capital gains tax or the expanded withholding tax. It is represented that Balikatan Housing Finance, Inc. (BHFI) is a financing company organized and existing under the laws of the Republic of the Philippines with principal offices located at the 24th Floor, BPI Buendia Centre, Sen. Gil J. Puyat Avenue, Makati City; that BHPI is a corporation likewise duly organized under Philippine laws, with principal offices located at the 24th Floor, BPI Buendia Centre, Sen. Gil J. Puyat Avenue, Makati City; that in 2004, the National Home Mortgage and Finance Corporation assigned a portfolio or mortgage loan receivables in favor of BHFI and, in the ordinary course of its business, BHFI regularly initiates extra-judicial foreclosure proceedings against borrowers who default on their loan obligations; that BPHI regularly participates in the public auction of properties foreclosed by BHFI; that in instances where BPHI is declared the highest and winning bidder in the public auction sale conducted by BPHI, the Clerk of Court and Ex-Officio Sheriff of the court having jurisdiction over the property executes a Certificate of Sale in favor of BPHI; that the period within which the mortgagor or any of the latter's successors-in-interest may exercise their right of redemption over the aforementioned real estate property commences on the date of the registration of the Certificate of Sale with the Registry of Deeds and expires one (1) year thereafter. aSEDHC It is further represented that within the redemption period, BPHI may decide to conditionally assign its rights, title and interest over the Certificate of Sale for a consideration in favor of an Assignee who is interested in the property; that the terms and conditions of the conditional assignment are incorporated in a Deed of Conditional Assignment of Rights; that BPHI generally enters into two types of transactions: (a) cash transactions, where the assignment is conditioned only upon non-redemption; and (b) non-cash transactions, where the assignment is conditioned upon non-redemption and receipt by BPHI of full payment of the consideration for the assignment of rights; that the said Deed recognizes the option of the mortgagor or any of the latter's successors-in-interest to redeem the foreclosed real estate property within the redemption period; that accordingly, if said successors-in-interest should elect to exercise said option to redeem, the above parties agree, among others, that the Deed of Conditional Assignment shall be rendered as cancelled, rescinded, revoked, null and void and without any force and effect; that if, on the other hand, the aforementioned successors-in-interest fail to exercise their statutory right of redemption within the prescribed period, the Assignee, shall, among others, be allowed to consolidate their title over the real estate property and obtain the appropriate certificate of title in its name and exercise such other rights accruing and granted by law in favor of BPHI; that if the original owners/mortgagors of the foreclosed real estate property fail to exercise their statutory right of redemption on or before the expiration of the right of redemption, an Affidavit of Consolidation is executed by the Assignee in his capacity as successor-in-interest of BPHI resulting from the previous assignment of rights over the Certificate of Sale; and that the corresponding documentary stamp tax and capital gains tax are paid by the Assignee, both based on the bid price as indicated in the Certificate of Sale. Based on the following representations, you now request for confirmation of your opinion that (1) The Deed of Conditional Assignment of Rights over the Certificate of Sale executed by BPHI prior to the expiration of the redemption period is not subject to capital gains tax or the expanded withholding tax (EWT); and (2) Capital gains tax and documentary stamp tax become due upon the expiration of the mortgagor's right of redemption based on the bid price for which the Certificate of Sale was issued to BPHI and payable by the Assignee upon consolidation of their title over the foreclosed real estate property. In reply thereto, please be informed that your opinion is hereby confirmed as follows: ACTIHa 1. Section 27 (D) (5) of the Tax Code of 1997 provides that a final tax of six percent (6%) is 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 the Code, whichever is higher, of such lands and/or buildings. It is undisputed that the imposition of the six percent (6%) capital gains tax is limited only to the sale, exchange or disposition of two (2) classes of realty, namely: (1) lands and (2) buildings. The particular mention of the foregoing realties operates as an exclusion of all other kinds of realties from the coverage of the capital gains tax imposed in the above-mentioned provision of law. Thus, the foregoing exclusion includes the subject matter in the above case which is the assignment of a right over a realty which under Article 415 (10) of the Civil Code, is classified as a real property. (BIR Ruling Nos. 169-98 dated November 25, 1998; 083-99 dated June 22, 1999) Such being the case, the assignment by BPHI of its inchoate right over the foreclosed property in favor of the Assignee is not subject to the capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997. Nonetheless, the above assignment by BPHI of its rights over a Certificate of Sale covering a foreclosed property to the Assignee did not effectively transfer the ownership over the said realty to them. What is transferred was merely the rights pertaining to the property and not the property itself. Therefore, the capital gains tax due on the transfer of the property from the mortgagors to the assignee shall accrue only at the time the right of the mortgagors to redeem the property had lapsed since this will be the moment that the title to the property shall be consolidated in the name of the assignee as successors-in-interest of the highest bidder, BPHI. (Revenue Regulations No. 4-99) Moreover, the said transaction is not subject to the expanded/creditable withholding tax imposed under Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001. The reason for this exemption is that under the said regulations the real property therein contemplated to be the object of a sale or exchange transaction which is subject to tax pertains only to land and/or buildings classified as ordinary assets. ETCcSa It must be emphasized, however, that if BPHI derived a gain as a consequence of the assignment of its rights over the Certificate of Sale, such gain shall be subject to the ordinary corporate income tax imposed under Section 27 (A) of the said Tax Code. (BIR Ruling No. DA059-04 dated February 10, 2004) The gain is the difference between the price or consideration for the assignment of rights and the bid price. Furthermore, the above sale or assignment by BPHI of its rights over the Certificate of Sale in favor of the Assignee is subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. The documentary stamp tax due thereon shall become due within five (5) days after the close of the month when the right of redemption lapses and is computed based upon the price for the sale or assignment of the above rights which, in the instant case, is the difference between the total amount contracted to be paid or given to BPHI and the bid price. 2. In the case of foreclosure, the capital gains tax shall accrue only upon the expiration of the right of redemption of the mortgagor. The right of redemption of a mortgagor-natural person shall be exercised within a period of one (1) year reckoned from the date the Certificate of Sale issued by the Sheriff was registered with the Registry of Deeds as provided for under Section 6 of Act No. 3135. On the other hand, Republic Act No. 8791, otherwise known as the 'General Banking Law of 2000', a mortgagor-juridical person shall have the right to redeem the foreclosed property in accordance with the procedure set forth under the first paragraph of Section 47 thereof until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. The capital gains tax herein due shall be paid within thirty (30) days from the lapse of the said period of redemption and shall be based on the highest bid price in accordance with Revenue Memorandum Order No. 41-91 and Revenue Regulations No. 4-99. (BIR Ruling No. DA332-03 dated October 1, 2003 citing BIR Ruling No. 036-00 dated September 11, 2000) CDEaAI The documentary stamp tax due under Section 196 of the Tax Code shall be paid within five (5) days after the close of the month when the right of redemption lapses pursuant to Section 200 of the Tax Code, as implemented by Revenue Regulations No. 4-99, as amended by Revenue Regulations No. 6-2001 which shall, likewise, be based on the highest bid price in accordance with Revenue Memorandum Order No. 41-91 and Revenue Regulations No. 4-99. (BIR Ruling No. DA332-03 dated October 1, 2003 citing BIR Ruling No. 036-00 dated September 11, 2000) Finally, upon presentation of the capital gains tax and the corresponding documentary stamp tax returns duly validated by an authorized agent bank (AAB) evidencing full payment of the capital gains and documentary stamp taxes due, the RDO concerned shall issue the Certificate Authorizing Registration (CAR) in favor of the Assignee as the successor-in-interest of the highest bidder, BPHI. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service