Del Monte Motor Works Incorporated

August 13, 2008 BIR RULING [DA-(C-037) 136-08] 24 (A); 196; RR 2-98; 13-2001 Del Monte Motor Works Incorporated 283 Del Monte Avenue, Quezon City Attention: Atty. Narciso O. Morales President Gentlemen : This refers to your letter dated July 22, 2008 requesting for opinion on the following queries: cAHITS 1) Is the transfer of real property by virtue of the order of the court subject to capital gains tax, transfer tax and documentary stamp tax? 2) If in the affirmative, is the transferee obliged to comply with the requirements of Revenue Regulations No. 2-98, withholding of tax at source on the sale of real property, an ordinary asset of the seller? When is the proper time the transferee is required to withhold the taxes? If in the negative, what should the transferee do to expedite the registration of subject property? 3) Is the transferee required to pay penalties or surcharges for their failure to withhold the tax and register the sale of realty though not of their own fault but because of the unjust refusal of the seller to accept payment and execute the corresponding document of sale? aScIAC Documents submitted show that DEL MONTE MOTOR WORKS, INC. ("DMMWI" for brevity) is the lessee of the property owned by Fernando S. Angeles situated at No. 144 Talayan Avenue, Talayan Village, Quezon City since 1995. The land area of said property per representation of the lessor is 2,000 square meters. In 1999, DMMWI and Mr. Angeles discussed, negotiated and finalized their agreement for the former to purchase the leased premises for a consideration of P20 Million or at P10,000.00 per square meter. As a consequence of said agreement, on May 13, 1999, DMMWI signed a proposal for it to purchase the said leased premises for P20 Million payable in three (3) installments, to wit: (a) P2 Million down payment upon signing of the Contract; (b) P3 Million after sixty (60) days; and (c) the balance of P15 Million shall be paid from the proceeds of the loan to be secured by DMMWI from a Bank using the leased premises as collateral. Mr. Angeles signed the proposal on May 13, 1999 expressing his conformity therewith. Thereafter, DMMWI caused the verification of the title of the subject property. It was discovered that the area existing in the said property was only for 1,294.8 square meters instead of 2,000 square meters as claimed by Mr. Angeles. CTAIHc DMMWI through written notices demanded from Mr. Angeles to sell in its favor the subject property. Mr. Angeles repeatedly ignored the said demand and instead filed a case of ejectment against DMMWI. DMMWI instituted a civil case against Mr. Angeles for Specific Performance with Damages docketed as No. Q-01-43522 in the Regional Trial Court, Branch 78, Quezon City. DMMWI was seeking the issuance of a judgment after due hearing mandating the defendant-seller, Mr. Angeles, to comply with the terms and conditions of the written proposal dated May 13, 1999, to sell the subject property in its favor at the agreed price of Ten Thousand Pesos (P10,000.00) per square meter or at an aggregate of Twelve Million Nine Hundred Forty Eight Thousand Pesos (P12,948,000.00) considering that the actual land area of the subject property is only 1,294.8 square meters. DMMWI obtained a favorable decision on May 30, 2005. However, despite order of the court to perform the obligations under the "Proposal", the seller-defendant, Mr. Angeles, refused to deliver the property by not executing the document of sale and by refusing to accept the payment tendered by DMMWI. HCSEcI DMMWI made a consignation with the Court of the amount corresponding to the purchase price of P12,948,000.00. The Court upon the consignation ordered the Registry of Deeds to cancel the title covering the subject realty and issue a new Transfer Certificate of Title in the name of DMMWI. In support of your request, you submitted the following documents: 1) Copy of Transfer Certificate of Title No. 256476 (T-46040) of the Registry of Deeds of Quezon City; CAaEDH 2) Decision of the Court dated May 30, 2005; 3) Order divesting ownership of the defendant-seller over the subject property issued on December 21, 2007; and 4) Order on the Consignation dated March 26, 2008. HIACEa In reply, please be informed that although the transfer of the subject realty is by virtue of a court order, the same has emanated from a sale transaction. As such, the corresponding taxes on sales, conveyances or transfers of real property for a consideration shall be imposed therewith. Considering that the subject realty is an ordinary asset of the seller-defendant, Mr. Angeles, as it was leased to the buyer-plaintiff, DMMWI, before the decision of the court transferring the ownership in favor of the latter, the transfer of said property, therefore, is subject to the ordinary income tax imposed under Section 24 (A) of the Tax Code of 1997, as amended, and consequently, to the creditable withholding tax imposed under Section 2.57.2 (J) of Revenue Regulations No. 2-98, as amended. Under Section 2.57.4 of Revenue Regulations No. 2-98, prescribing the withholding of creditable income tax on the sale, exchange or transfer of real property, the obligation of the payor to deduct and withhold arises at the time the consideration is paid or payable. In the instant case, however, we take due recognition of the unique situation that DMMWI was faced with in having to go to court to enforce its rights. DMMWI had to petition the court to compel the seller, Mr. Angeles, to acknowledge its obligation and this fact precluded DMMWI from fulfilling its duty to withhold the taxes as the consideration for the sale of the subject property was made through consignation. In view thereof, this Office hereby discharged DMMWI of its duty to withhold the taxes due from the above-mentioned sale of property in its favor. (Unnumbered Ruling issued in 2002 by then Commissioner Guillermo L. Parayno, Jr. to Atty. Emmanuel N. Camitan involving a sale transaction by and between Spouses Ricardo and Elizabeth Zarate and Kalfam Enterprises, Inc.) TaEIcS The foregoing, however, is without prejudice to the right of the BIR to assess and collect from the seller, Mr. Angeles, the income tax due on the subject sale transaction. Since it is only at the time that the consideration for the transfer of the subject realty was consigned with the Court that income is deemed realized by Mr. Angeles, he may, therefore, declare the same for taxation on or before April 15th of 2009. Failure to declare the said income within the prescribed period shall cause the imposition of the corresponding penalties, surcharges and interest. On the other hand, the transfer of the subject realty in favor of DMMWI is subject to the one and one-half percent (1.5%) documentary stamp tax (DST) imposed under Section 196 of the Tax Code of 1997, as amended, based on the actual consideration of the said transfer or sale transaction, or the fair market value of the property involved in accordance with Section 6 (E) of the same Code, whichever is higher. CAaEDH The Certificate Authorizing Registration (CAR) on the transfer of the properties covered by Transfer Certificate of Title No. 256476 (T-46040) of the Registry of Deeds of Quezon City to DMMWI shall be issued immediately in its favor upon payment by the latter of the DST as above prescribed. Although the Court transferred the ownership over the subject realty to DMMWI in December of 2007, no surcharge, penalties and/or interest shall be due thereon considering the legal intricacies surrounding the case. (Sec. 2.5 of Revenue Regulations No. 13-2001) Finally, on your query whether the transfer of the subject property is subject to transfer taxes, please be informed that this Office has no authority to rule on the matter as the jurisdiction thereof falls within the power of the Local Government Unit (LGU) concerned. ETISAc Please be guided accordingly. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service