BIR Ruling [DA-480-99]

August 23, 1999 BIR RULING [DA-480-99] Multi-Realty Development Corporation Makati Stock Exchange Building Ayala Avenue, Makati City Attention: Ms . Cecilia R . Patricio AVP, Tax Division Gentlemen : This refers to your letter dated April 26, 1999 requesting confirmation of your opinion that the Deed of Exchange executed by Multi-Realty Development Corporation (MRDC) and Mr. Jesus Sy to correct erroneous titling of units F-202 and E-202 is not subject to the capital gains tax, expanding withholding tax and documentary stamp tax. It is represented that MRDC is the owner and developer of Galeria de Magallanes Condominium Project located at Magallanes Village, Makati City; that on November 12, 1984, MRDC sold to Mr. Jesus Sy Unit E-202 of the Galeria de Magallanes covered by Condominium Certificate of Title (CCT) No. 4583, registered with the Registry of Deeds of Makati City; that the Deed of Absolute Sale of E-202 was presented to the Registry of Deeds of Makati City for the recording of the sale and the transfer of Title in Mr. Sy's name; that, however, CCT No. 4689 for Unit F-202 also owned by MRDC was the one surrendered and presented to the Register of Deeds together with the said Deed of Absolute Sale instead of CCT No. 4583 for Unit E-202 which was purchased by Mr. Sy; that accordingly, the Register of Deeds cancelled CCT No. 4689 for Unit F-202 and issued a CCT No. 6982 in the name of Mr. Sy; that as a result of the above-mentioned error, Mr. Sy who is actually occupying Unit E-202 in Galeria de Magallanes is presently holding CCT No. 6982 for Unit F-202 as the registered owner thereof instead of a newly issued CCT for Unit E-202 which he actually bought; that in order to correct the above-mentioned error, both parties agreed to exchange their respective titles in favor of each other free from all liens and encumbrances subject to the following terms and conditions: 1. Mr. Jesus Sy agrees to convey, cede and transfer CCT No. 6982 for Unit F-202 which was inadvertently registered in his name and in consideration thereof, MRDC cedes, transfer and conveys unto Mr. Sy CCT No. 4583 for Unit E-202, the Title for the unit actually purchased by Mr. Sy, free from all liens and encumbrances. 2. Said exchange transaction is done without any monetary consideration and is being resorted merely to correct and rectify the above-mentioned errors and mistakes committed in the registration of the Deeds of Absolute Sale of Unit E-202, the cancellation of CCT with No. 4689 for Unit F-202, the transfer of the said title to the said unit in the name of Mr. Sy and to revert back the CCT of Unit F-202 in the name of MRDC. and that you are of the opinion that since the Deed of Exchange was made merely to correct the mistake resulting from the typographical error committed in the preparation of the sales document and since no monetary consideration is involved, the subject transaction is exempted from the payment of capital gains tax, documentary stamp tax and expanded withholding tax. LexLib In reply, please be informed that under Section 24(D)(1) of the Tax Code of 1997, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of the Tax Code, whichever is higher, is imposed upon 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. On first impression, it would appear that the said transaction is subject to the 6% capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997. However, a perusal of the facts would reveal that the said exchange transaction was resorted to by the parties in order to correct the error committed in the preparation of the sales document resulting in the issuance of CCT No. 4689 for Unit F-202 owned by MRDC which was the one surrendered and presented to the Register of Deeds instead of CCT No. 4583 for Unit E-202, the one actually purchased of Mr. Sy, coupled with the fact that no monetary consideration is involved in the said exchange transaction. In view thereof, this Office is of the opinion, as it hereby holds, that the exchange transaction between Mr. Sy and MRDC, involving CCT No. 6982 for Unit F-202 issued in the name of Mr. Jesus Sy and CCT No. 4583 for Unit E-202 registered in the name of MRDC, is not subject to the six percent (6%) capital gains tax imposed under Section 24(D)(1), and to the expanded withholding tax imposed under Section 57(B), and to the documentary stamp tax imposed under Section 196, all of the Tax Code of 1997, for the reason that the purpose of the said exchange is merely to rectify the error previously committed in the preparation of the subject sales document. However, the acknowledgment on the Deed executed for the purpose, shall be subject to the documentary stamp tax prescribed under Section 188 of the same Code. (BIR Ruling No. DA-240-99 dated April 15, 1999) Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)