BIR Ruling [DA-661-04]

December 23, 2004 BIR RULING [DA-661-04] 24 (D) (1); #372-92; 122-97 Unionbank of the Philippines SSS (Makati) Building, Ayala Ave., cor. Herrera St., Makati City Attention: Atty. Abelardo G. Luzano VP-Asset Recovery Group Gentlemen : This refers to your letter dated March 26, 2004 requesting for a ruling on whether the execution of a real estate mortgage by Ms. Consuelo Cabarlo, to secure the principal obligation of Macquarie International Trading Corp. ("Macquarie"), in favor of Unionbank of the Philippines ("Unionbank") is subject to capital gains tax, despite the fact that the capital gains tax on the same real estate mortgage was already paid by Unionbank when it became the highest bidder in the foreclosure sale conducted by the latter. It is represented that on August 19, 1996, Unionbank granted a loan to Macquarie; that the loan was secured by a real mortgage over TCT No. 183835 owned by and registered in the name of Consuelo Cabarlo; that when Macquarie defaulted on its loan, Unionbank foreclosed the mortgaged property on December 17, 1998 where the bank was the highest bidder and was issued a Certificate of Sale; that when the one-year redemption period expired on June 2, 2000, Unionbank commenced the consolidation of the title to the property by paying the capital gains tax and documentary stamp tax for the foreclosure sale of the property from Consuelo Cabarlo to Unionbank as the buyer; and that the bank is being assessed by RDO No. 29 for another payment of capital gains tax on the ground that when Consuelo Cabarlo mortgaged her property to secure the loan of Macquarie, the former in effect transferred the beneficial use of her property to the latter and surrendered ownership thereto to secure the loan of Macquarie. In reply, please be informed that capital gains tax shall only be due when there is a sale, exchange of other disposition of real property, including pacto de retro sales and other forms of conditional sales. [Section 24(D)(1), Tax Code of 1997] There is a sale when one of the parties in a contract obligates himself to transfer the ownership of and to deliver a determinate thing, and the other party has the obligation to pay therefore a price certain in money or its equivalent. (Art. 1458, New Civil Code) An extension of a real estate mortgage is not tantamount to a sale, exchange or disposition of real property because the elements of transfer of ownership, delivery and payment of money or its equivalent are wanting. The facts being considered, since there is no sale, exchange or disposition of real property involved when Consuelo Cabarlo accommodated the loan of Macquarie, no capital gains tax shall be due thereon. DHITSc 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 & Inspection Group