BIR Ruling [DA-388-03]

October 28, 2003 BIR RULING [DA-388-03] 24 (D) (1), 90, 98, 196 #096-98, 110-93, 200-90, 551-59 Department of Environment and Natural Resources Visayas Avenue, Diliman Quezon City Attention: Mylene G. Albano Assistant Director for General Legal Services LAMP Executive Director Gentlemen : This refers to your letter dated July 23, 2003 requesting for an opinion on whether or not transfers prior to the registration of the patent shall be liable to capital gains, estate, and donor's taxes. It is represented that the Department of Environment and Natural Resources (DENR), along with the Land Registration Authority (LRA) and the Department of Agrarian Reform (DAR), has been implementing the Land Administration and Management Project (LAMP) for the past three years. One of the areas under study is how to improve the administrative titling procedures undertaken by the DENR through its issuance of free patents. Under Commonwealth Act (CA) No. 141, as amended, a free patent may be issued to "any natural born citizen of the Philippines who is not the owner of more than twelve (12) hectares and who, for at least thirty (30) years prior to the effectivity of this amendatory Act, has continuously occupied and cultivated, either by himself or through his predecessors-in-interest, a tract or tracts of agricultural public lands subject to disposition, who shall have paid the real estate tax thereon while the same has not been occupied by any person. . . " Once a free patent is granted by the DENR, the same is registered with the Register of Deeds. In connection with the titling activities in Leyte, it often happens that the Tax Declaration presented by a free patent applicant to support his/her claim of continuous occupation for the required length of time has not yet been transferred in his/her name but remains in the name of his/her predecessor-in-interest. The Register of Deeds of Northern Leyte has taken note of this and opined that this is due to the fact that "the declared owner has sold his right over the property in favor of the patentee without the benefit of paying the taxes due thereon such as capital gains tax, documentary stamps, sales tax or transfer fee to the disadvantage of the government. As a matter of policy between the Registry of Deeds (ROD) and the Provincial Government of Leyte, represented by the Provincial Assessors Office, the latter agency requires all documents to be registered first at ROD before it can effect the transfer of Tax Declaration to the patentee." The Register of Deeds goes on to say that "[t]o (sic) dispense with the requirement of the presentation of the current Tax Declaration in the name of the patentee will be a violation to Section 93 of P.D. 1529 and it also encourages and pampers the vendees/buyers of real estate not to pay the corresponding taxes, re: capital gains tax, documentary stamp tax, transfer fee, real property tax, etc. to the detriment of the government national coffer of its much needed revenues by just simply filing a Free Patent application with the DENR thru the LAMP." Apart from the issue raised by the Register of Deeds on the need to pay "capital gains tax, documentary stamp tax, transfer fee, real property tax," we have observed that Section 95 of the National Internal Revenue Code prohibits the Register of Deeds from "registering any document transferring real property or real rights therein or any chattel mortgage, by way of gifts inter vivos or mortis causa , legacy or inheritance, unless a certification from the Commission that the tax fixed in the Title [estate and donor's tax] and actually due thereon had been paid." (emphasis and italics ours) Thus, you respectfully requested for an opinion on whether transfers prior to the registration of the patent should be liable to capital gains tax, estate tax, donor's tax or documentary stamp tax. In reply, please be informed that in BIR Ruling No. 096-98 dated June 23, 1998 and BIR Ruling No. 110-93 dated March 16, 1993 , this Office ruled that a transfer of property for consideration is subject to capital gains and documentary stamp taxes, to wit: DaTHAc "In reply, please be informed that under then Section 21(e) of the Tax Code, as amended [now Section 24(D)(1) of the Tax Code of 1997], capital gains presumed to have been realized from the sale, exchange, or 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 the rate of 5%, (now 6%) based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher." ". . . Moreover, pursuant to Section 196 of the Tax Code, as amended, a conveyance or deed thereof, whereby any land is assigned or transferred to the purchaser is subject to documentary stamp tax based on the consideration for transfer of real property. [Section 177, Documentary Stamp Tax Regulations]." If the transfer is by way of gift, the transaction shall not be subject to capital gains tax but to donor's tax imposed under Section 98 of the NIRC of 1997 but shall not be subject to documentary stamp tax as ruled by this Office in BIR Ruling No. 200-90 dated by October 16, 1990, viz. : ". . . Moreover, the Deed of Donation is not subject to the documentary stamp tax as prescribed by Section 196 of the Tax Code on Deed of Sale and Conveyance of Real Property since the transfer is gratuitous and has no consideration. (Section 161 Revenue Regulations No. 26 or the Revised Documentary Stamp Regulations) However, the acknowledgment of the Deed of Donation before a Notary Public is subject to the documentary stamp tax of P3.00 (P15.00) pursuant to Section 188 of same Code." If the property way, transferred by way of succession, the transfer shall be subject to estate tax under Section 90 of the NIRC of 1997 but shall not be subject to documentary stamp tax in accordance with the ruling of this Office in BIR Ruling No. 551-59 dated October 27, 1959 , quoted as follows: "In reply to your query, I have the honor to inform you that estate and inheritance tax returns are not subject to documentary stamp tax inasmuch as they are required to be filed for the use of the Bureau of Internal Revenue to enable it to collect the corresponding taxes. These returns are not filed for the benefit of the taxpayers filing them." Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group