BIR Ruling [DA-487-04]

September 10, 2004 BIR RULING [DA-487-04] 27 (D) (5); DA-332-2003 Aover Sanchez Arteche & Associates 3rd Floor, Phinma Plaza 39 Plaza Drive, Rockwell Center Makati City Attention: Atty. Filomeo A. Arteche III Gentlemen : This refers to your letter dated May 13, 2002 requesting for a ruling, in behalf of your client, Union Cement Corporation [UCC for brevity (formerly Altas Cement Corporation)] as to when capital gains tax and documentary stamps tax shall be paid in cases of extra-judicial foreclosure sale. It is represented that UCC is a company engaged in manufacturing and selling of cement; that in the conduct of its marketing business, it designates cement dealers where . credit lines are extended secured by a Real. Estate Mortgage (REM); that when one of its cement dealers (CEMX Inc. ) defaulted in payment of its obligation, UCC extra judicially foreclosed its property located in Trece Martires City; that a public auction was conducted on 23 September 1999 and a Certificate of Sale was released on 15 October 1999; that the mortgagor failed to redeem the property within the one (1) year period allowed by law; that on November 9, 2000 capital gains tax and documentary stamp tax were paid per BIR Form 1606 and Form 2000 as evidenced by Land Bank Official Receipt No. 6095330; that despite this payment, BIR Trece Martires refused to release the Certificate Authorizing, Registration (CAR) to allow us, to transfer the title in the name of UCC, claiming that payments of capital gains tax and documentary stamp tax should have been made within thirty (30) days from the inscription of the Certificate of Sale at the back of the title which is October 15, 1999. In reply, please be informed that 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. CTAIHc 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 . (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 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 nonredemption; 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 of 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 one year period within which to redeem the property had lapsed, the capital gains tax should have been paid and the capital gains tax return filed within thirty (30) days from the date of the expiration of the one-year redemption period. However, the documentary stamp tax imposed under Section 196 of the NIRC of 1997 shall be based on the bid price of the highest bidder and 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 after the lapse of the said redemption period. In BIR Ruling No. 36-00, supra , and BIR Ruling No. 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. (BIR Ruling No. DA-332-2003 dated October 1, 2003) 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group