BIR Ruling [DA-563-04]

November 9, 2004 BIR RULING [DA-563-04] Sec. 21 (e) 1977 NIRC; DA 179-97 Paragon Business Consultancy, Inc. Rm. 201 Mercantile Insurance Bldg. Gen. Luna cor. Beaterio Streets Intramuros, Manila 1002 Attention: Atty. Cecilio E. Dela Cruz Gentlemen : This refers to your letter dated September 14, 2004 requesting for confirmation of your opinion that the transfer of a parcel of land between the Heirs of Pedro S. Lavadia, Sr. (hereinafter the Seller) and S.M. Fernando Realty and Development Corporation (hereinafter the Buyer) is subject to 5% capital gains tax and 1.5% documentary stamps tax based on the amount of consideration of the said sale which is Four Million Two Hundred Thousand Pesos (PHP4,200,000.00). It is represented that on February 15, 1996, the heirs of Pedro S. Lavadia, Sr. sold a parcel of land located in Barrio Binayuyu and Lewin, Municipality of Lumban, Province with an area of 427,383 square meters, under TCT No. RT T-77059 for Four Million Two Hundred Thousand Pesos (PhP4,200,000.00); that the property has been classified as agricultural land with a total fair market value of PhP961,247.55 as reflected in its 1997 Tax Declaration, i.e., land P576,976.05 and improvement (plants & trees P354,280.50; that the Buyer, however, is yet to transfer the registration of the subject property in its name; and that the Estate of Pedro Lavadia, Sr. has already paid the transfer taxes on June 21, 1974. In reply, please be informed that pursuant to Sec. 21 (e) of the 1977 Tax Code, as amended, (now Sec. 24 (D) of the Tax Code of 1997) which is the law applicable at the time of sale, to wit: HEDaTA "SEC. 21. Tax on Citizens or residents. . . . (e) Capital gains from sales of real property. The provisions of Sec. 33(b) notwithstanding, 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 trust, shall be taxed at the rate of 5% based on gross selling price or the fair market value prevailing at the time of the sale whichever is higher; Provided, That the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 21 (a) or under this sub-section, at the option of the taxpayer." the tax base in computing the 5% capital gains tax shall be the higher amount between the gross selling price or the fair market value at the time of sale. It has been noted that at the time of sale in 1996, the zonal values of properties for Binayuyu and Lewin, Municipality of Lumban, Province of Laguna has not yet been determined by the Commissioner of Internal Revenue. However, the fair market valuation prescribed pursuant to Section 219 of R.A. No. 7160, otherwise known as "The Local Government Code of 1991" and the last paragraph of the Local Assessment Regulations No. 1-92 dated October 6, 1992, and deemed appearing in the 1994 or later years Tax Declaration, had already been implemented in the covered areas. Considering this, the provision of Revenue Memorandum Order No. 2-91 dated February 18, 1991, increasing the fair market value of property per Tax Declaration by 100% or 150%, as the case may be, to cover the adjustment in value shall no longer apply in the instant case. 1 Accordingly, since the fair market value and the gross selling price of the property sold are ascertainable at the time of sale in 1996, the 5% capital gains tax imposed under then Section 21 (e) of the 1977 Tax Code, as amended, shall be computed based on the higher valuation, in this case, the gross selling price reflected in the Deed of Sale or P4,200,000.00. DEcITS Moreover, the Deed of Sale is also subject to the documentary stamp tax at the rate prescribed under then Section 196 of the same Tax Code, based on the consideration reflected therein and ascertained to be higher than the prescribed fair market value appearing in the Tax Declaration. Finally, for failure to pay the tax on time, it shall be subject to the twenty five percent (25%) surcharge and to interest at the rate of twenty percent (20%) per annum reckoned from the date prescribed for its payment until fully paid, pursuant to the provisions of Section 248 and 249 of the Tax Code, respectively. 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, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group Footnotes 1. BIR Ruling DA-179-97 dated April 16, 1997 citing BIR Ruling UN-089-95 dated March 7, 1995.