Mr. Salvador C. Navarra

September 25, 2007 BIR RULING [DA-510-07] DA-149-03 Mr. Salvador C. Navarra 1544 P. Guevarra Street corner Quiricada Street, Sta. Cruz Manila S i r : This refers to your letter dated September 6, 2007 stating that Union Bank of the Philippines, as the Seller, is a universal bank duly organized and existing under the laws of the Philippines with business address at Unionbank Plaza Building, Meralco Avenue, corner Onyx & Sapphire Streets, Ortigas Center, Pasig City; that on the other hand, Faithful Servant Business Holdings (FSBH) Corporation, as the Buyer, is a corporation duly organized and existing under the laws of the Philippines with principal office address at 475 Paul Tomas Building, C3 Road, Kaunlaran Village, Caloocan City; that the Seller is the owner of two (2) parcels of land together with the improvements thereon located at Lots 11 & 12 Block 5, Evangelista Street, corner Hen. Malvar Street, Barangay Bangkal, Makati City, covered by TCT Nos. 221796 and 221797 of the Registry of Deeds for Makati City with an aggregate area of 462 square meters; that on March 9, 2006, a Contract to Sell was executed by the Seller in favor of the Buyer involving the above-mentioned properties for and in consideration of P38,405,000.00; that the purchase price shall be paid by the Buyer as follows: ACIDTE a) P40,000.00 as reservation money was paid on March 18, 2006; b) P1,880,250.00 as partial downpayment was paid on March 24, 2006; c) P1,920,250.00 as full payment was paid on April 25, 2006; d) The balance of P34,564,500.00 shall be paid over fifteen (15) years with an interest rate of 13% per annum fixed for the first three years in equal monthly installments of P437,324.64 and 15% per annum fixed for the succeeding twelve years in equal monthly installments of P477,490.40 as stipulated in the Schedule of Amortization. First monthly amortization shall commence on June 3, 2006. CIHTac and that Section 10 of the Contract to Sell provides that all costs and expenses arising out of or in connection with the Buyer's purchase of the property, such as registration fees, value-added tax, creditable withholding tax, documentary stamp tax, transfer fees and notarization shall be for the account of acid to be paid by the Buyer. DcTAIH In connection therewith, you now request for clarification on the following issues 1. Is the transaction subject to capital gains tax of six percent (6%)? 2. If subject to capital gains tax, will it be based on per installment or upon full payment? IHDCcT 3. What is the classification of the asset? 4. What is the basis of the capital gains tax? Is it on the principal only or the principal and interest? 5. For accounting purposes, is it proper to record the principal as the value of the asset and the interest as expense? In reply thereto, please be informed as follows: 1. The sale of the above-mentioned properties on installment by Union Bank of the Philippines is subject to creditable withholding tax of 6% pursuant to Revenue Regulations No. 2-98, as amended, notwithstanding that banks are not considered as habitually engaged in the real estate business. This is so because properties acquired by banks through foreclosure sales are considered as ordinary assets pursuant to Revenue Regulations No. 7-2003. ASCTac 2. Considering that the sale of the said properties is on installment plan i.e., payments in the year of sale do not exceed twenty-five percent (25%) of the selling price, and the buyer is engaged in trade or business, the tax shall be deducted and withheld by the buyer on every installment. 3. The above-mentioned properties acquired by Union Bank of the Philippines are classified as ordinary assets pursuant to Revenue Regulations No. 7-2003. AEIDTc 4. Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Tax Code, whichever is higher. Accordingly, the basis of the creditable withholding tax shall be the zonal value or the amount of P38,405,000.00 as stated in the sales document, whichever is higher. 5. Finally, for accounting purposes, FSBH is allowed to record or book the principal as the value of the asset and claim as expense whatever additional interest is paid in connection thereto. 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. TDSICH Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service