BIR Ruling [DA-388-00]

November 14, 2000 BIR RULING [DA-388-00] Development Bank of the Philippines DBP Building, Sen. Gil J. Puyat Avenue Makati City Attention: Atty . Carlos R . Cruz Chief Legal Counsel Gentlemen : This refers to your letter dated June 11, 1999 stating that under the Development Bank of the Philippines (DBP) Individual Housing Loan Program, the DBP made available to its employees housing loans for the purchase of a house and lot or for the purchase of a lot and construction of a residential house; that as a condition for the grant of the loan, the DBP required that title to the property be transferred in its name, with the bank in turn, simultaneously executing a deed of conditional sale in favor of the employee-availee; and that upon full payment of the loan, the bank executes a Deed of Absolute Sale in favor of said employee-availee. In connection therewith, you now request for a ruling that the series of transactions entered into by and between DBP and its employees relative to the DBP Individual Housing Loan Program is a simple loan with equitable mortgage and therefore not subject to capital gains tax and the corresponding documentary stamp tax. In reply thereto, please be informed that Section 24(D)(1) of the Tax Code of 1997 provided that capital gains presumed to have been realized from the sale, exchange, of other disposition of real property located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts shall be taxed at 6% based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the said Code, whichever is higher. Proceeding from the tone of the above-cited section of the Tax Code, a sales exchange, or other disposition of real property classified as capital asset, including pacto de retro sale and other forms of conditional sale, shall be subject to the 6% capital gains tax based on the gross selling price or fair market value, whichever is higher. In the instant case, since the transaction entered into by the employee-availee and the DBP relative to the Individual Housing Loan Program is without any monetary consideration but only for the purpose of availing the said loan, wherein it is required that the subject realty must first be transferred in favor of the DBP as collateral, with the subsequent obligation on the part of the latter to reconvey the same to the owner of the land upon full payment of its obligation, this Office is of the opinion as it hereby holds that the same is not subject to capital gains tax and the corresponding documentary stamp tax, respectively, imposed under Sections 24(D)(1) and 196 of the Tax Code. CEDScA Corollarily, this Office in BIR Ruling No. 372-92 dated December 28, 1992, has already occasioned to rule on the matter when it said, thus "xxx xxx xxx "However, since there is no monetary consideration involved in the said sale transaction as the same was executed . . . in order . . . to avail of the DBP's Housing Program for its employees wherein it is required among others that the realty that secures the housing loan must first be transferred in favor of DBP as collateral for the loan, this Office is of the opinion as it hereby holds that said sale transaction is not subject to income tax and consequently to the then capital gains tax prescribed under Section 34(h) of the Tax Code. "The same is also true with respect to the conditional sale of the said realty executed by DBP . . . as well as the absolute sale of the same realty executed by DBP . . . upon full payment of . . . housing loan under the DBP's Housing Program for its employees considering that there is likewise no monetary consideration involved in both of the said sale transactions since the conditional sale executed by the DBP . . . is conditioned upon . . . utilizing the proceeds of the housing loan . . . obtained from DBP to the acquisition of the house and lot . . . which is the very purpose . . . for said housing loan while the Deed of Absolute Sale executed by DBP . . . was merely a release of the collateral used to secure the housing loan . . . from the DBP. Hence, both sale is not likewise subject to income tax and consequently, to the creditable withholding tax imposed under Revenue Regulations No. 1-90 which became effective beginning January 1, 1990. "xxx xxx xxx" IN THE LIGHT OF ALL THE FOREGOING, the series of transactions entered into by and between the employee-availee and the DBP relative to the Individual Housing Loan Program is indeed a loan with equitable mortgage and, therefore, not subject to capital gains tax and documentary stamp tax prescribed in Sections 24(D)(1) and 196 of the Tax Code of 1997, respectively. However, considering that the said transactions are in the nature of a loan with equitable mortgage because of the inadequacy of the purchase price for the supposed sale, it is therefore subject to the documentary stamp tax imposed under either Section 180 or Section 195 of the Tax Code, whichever will yield the higher tax. 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. aITDAE Very truly yours, (SGD.) LILIAN B. HEFTI Deputy Commissioner Legal & Inspection Group