Department of Public Works and Highways

January 27, 2009 BIR RULING [DA-(C-014) 046-09] Sec. 24; DA 290-07 Department of Public Works and Highways Project Management Office (ROW-PMO) Office of the Project Director Rosario, Pasig City Attention: Patrick B. Gatan, Ceso III Project Director Gentlemen : This refers to your letters dated November 21, 2008 and October 6, 2008 requesting for an opinion as to whether or not the voluntary demolition and removal of the improvements or structures affected by the Department of Public Works and Highways (DPWH) infrastructure projects, for the C-5 Northern Link Project Segment 8.1 from Mindanao Avenue to NLEX, Valenzuela City is exempt from the payment of capital gains tax. CTEaDc In your aforesaid letters, you posit that for the improvements and/or structures on the affected land, the owner signs an Agreement to Demolish and Remove Improvements and not Deed of Sale before full payment for said improvements is made by DPWH based on replacement cost method; that in an expropriation, once the Writ of Possession is issued by the concerned court, the DPWH will demolish and remove said improvements; that as such, there is forcible taking of said improvements; that in the said Agreement, there is no indication that there is a sale and transfer of ownership of said improvements in favor of the government; and that these infrastructure projects are mostly priority projects under the State of the Nation Address (SONA) of the President. In reply thereto, please be informed that Section 24 (B) of the National Internal Revenue Code of 1997 (NIRC) states: "(D) Capital Gains from Sale of Real Property. (1) In General. The provisions of Section 39(B) notwithstanding, 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 this Code, whichever is higher, is hereby 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: 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 24(A) or under this Subsection, at the option of the taxpayer ;" (Emphasis supplied) The above-cited provision clearly gives the transferor of real property to a government agency or political subdivision the option to either compute his tax liability based on Sec. 24 (A) or under Sec. 24 (D). Since the DPWH is a government agency, this option is available to the owner of the improvements or structures. The first option, which is to compute the tax liability under Sec. 24 (A), requires the transferor to declare in his annual income tax return the income earned from the transfer of real property. The tax due is computed in accordance with the tax rates provided in Sec. 24 (A). Under this method, DPWH will not be required to withhold any tax as the payment is not among those enumerated under Revenue Regulations (RR) 2-98, as amended, as subject to withholding tax. Under the second alternative, a capital gains tax of six percent (6%) is imposed pursuant to Sec. 24 (D). The tax base is the actual consideration appearing on the Agreement as per Revenue Memorandum Order (RMO) No. 41-91. 1 Under this option, DPWH is required to withhold the six percent (6%) final tax as mandated by RR 2-98. THESAD If the property is a principal residence and the transferor opts to avail of the provisions of Sec. 24 (D) (2) of the Tax Code of 1997, as amended, he may apply for exemption from capital gains tax provided he complies with the requirements imposed thereof. 2 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. The RMO states that when the State or any of its instrumentalities in the exercise of its power of eminent domain, acquires through expropriation proceedings, private real property for public use upon payment of "just compensation" to the owner. Both capital gains tax and documentary stamp tax shall be computed based on said "just compensation" as actual consideration. cAECST 2. Sec. 24 (D) (2) reads: "(2) Exception . The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: Provided, still further, That the said tax exemption can only be availed of once every ten (10) years: Provided, finally, That if there is no full utilization of the proceeds of sale or disposition, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to capital gains tax. For this purpose, the gross selling price or fair market value at the time of sale, price in order to determine the taxable portion and the tax prescribed under paragraph (1) of this Subsection shall be imposed thereon.