Rodil Enterprises Co., Inc.

July 1, 2009 BIR RULING [DA-(C-107) 334-09] B.P. 233; 27 (C) & (D) (5); 32 (B); (7) (b); 58 (E); 196; 201; RR 2-98; 071-98; 020-02; 038-02; 013-04; DA-215-01; DA-217-02; DA-516-04; DA-200-06 Rodil Enterprises Co., Inc. No. 810 C. Planas Street, Binondo Manila Attention: Mrs. Natalia R. Atienza President Gentlemen : This refers to your letter dated June 19, 2009 requesting confirmation of your opinion that the sale in favor of Rodil Enterprises Co., Inc. ("RECI") of two (2) parcels of land owned by the Republic of the Philippines, through the Department of Environment and Natural Resources ("DENR"), in accordance with Batas Pambansa (BP) Blg. 233 "An Act Authorizing the Sale of Commercial and Industrial Lands of the Public Domain (commonly known as NAFCO Lands), transferred from the Boards of Liquidators to the Bureau of Building and Real Property Management, amending for the purpose Republic Act No. 477, as amended", is exempt from the payment of capital gains, withholding and documentary stamp taxes. Documents submitted disclosed that the DENR, through the Land Management Bureau ("LMB"), is the government agency vested with the authority to administer and dispose of the two (2) parcels of land covered by Transfer Certificate of Title Nos. 37994 and 37995, of the Registry of Deeds for the City Manila, known as "Ides O'racca Property", with four-storey reinforced concrete building, situated in M. de los Santos and Fulgueras Streets, Binondo, Manila, pursuant to BP Blg. 233 and Executive Order (EO) No. 285, Series of 1987. On February 4, 2008, acting on the favorable recommendation by the LMB and in accordance with the provisions of Republic Act No. 477, as amended by BP Blg. 233, the Honorable DENR Secretary, Jose L. Atienza, Jr., awarded the above two (2) parcels of land to RECI, the recognized lessee and actual occupant of the aforesaid properties. On June 12, 2008, RECI has paid ten percent (10%) of the purchase price for the two (2) parcels of land in the amount of Php6,427,984.59, under LMB Official Receipt No. 0416425 M. On January 8, 2009, Executive Secretary Eduardo Ermita wrote a letter to the DENR Secretary Jose L. Atienza, giving him the authority to sign, in behalf of the President of the Republic of the Philippines, the Deed of Sale between the Republic of the Philippines and RECI, pursuant to Section 51 (1), Chapter 12, book 1 of the Administrative Code of 1987. On June 1, 2009, upon full payment of the purchase price of Php64,279,845.90, DENR Secretary Jose L. Atienza, Jr. executed the Deed of Sale whereby the above two (2) parcels of land were transferred in favor of RECI. ICTHDE In reply thereto, please be informed that government-owned or -controlled corporations, agencies or instrumentalities of the government are no longer exempt from taxation and shall be liable to pay such rate of tax upon their taxable income as are imposed upon corporations or associations engaged in similar business, industry or activity. [Sec. 27 (C) of the Tax Code of 1997, as amended.] The general rule enunciated in Section 27 (C) of the Tax Code of 1997, as amended, subjecting all corporations, agencies, or instrumentalities owned or controlled by the Government, with the exception of certain entities, to corporate income tax is subject to exception. Thus, Section 32 (B) (7) (b) of the same Tax Code, excludes from the gross income and exempts from income tax, the income derived from the discharge of any essential governmental functions accruing to the Government of the Philippines or to any of its political subdivisions. From the foregoing, in order for government entities to be taxable, the following requisites must concur: (1) the government entity concerned must not be performing an essential governmental function; and (2) it must be engaged in similar business, industry, or activity as performed by other ordinary taxable corporations. (BIR Ruling No. DA-215-01 dated October 22, 2001 & BIR Ruling Nos. 020-02 dated May 15, 2002 & 013-04 dated September 13, 2004) It is noted that the DENR, through the LMB, is the government agency vested with the authority to administer and dispose of the subject two (2) parcels of land, a function transferred from the Board of Liquidators pursuant to BP Blg. 233 and Executive Order (EO) No. 285, Series of 1987. As this function is not originally vested with the LMB neither to the DENR, it is viewed that the same is not in consonance with either of the governmental functions of the two offices. As such, the DENR or the LMB is deemed engaged in a proprietary function. On the other hand, the DENR or the LMB, as the administrator of the subject properties, is considered as the lessor of said realties to RECI. Since the DENR or the LMB, is engaged in leasing activities, likewise, selling of real properties, activities ordinarily performed by taxable corporations, the DENR or the LMB is deemed to be engaged in the realty business. In that case, the DENR, through the LMB, is subject to the regular income tax imposed under Section 27 (A) of the Tax Code of 1997, as amended, on the income it derived from the sale of the subject real properties considered as its ordinary assets. 1 Accordingly, the said sale transaction of DENR is not subject to the capital gains tax imposed under Section 27 (D) (5) of the Tax Code of 1997, as amended. Moreover, considering that the DENR is engaged in the realty business, selling ordinary assets, it is subject therefore to the provisions of Revenue Regulations (RR) No. 2-98, as amended. Sec. 2.57.5 (A) of RR No. 2-98, as amended, provides as follows: aCTcDH "SEC. 2.57.5. Exemption from Withholding. The withholding of the creditable withholding tax prescribed in these Regulations shall not apply to income payments made to the following: (A) National government and its instrumentalities, including provincial, city or municipal governments and barangays except government-owned and controlled corporation. 2 . . . ." Accordingly, the above sale of realties by DENR to RECI is not subject to the creditable withholding tax (CWT) imposed under Sec. 2.57.2 (J) of RR 2-98, as amended. Consequently, RECI is not required to withhold the CWT from the above-mentioned sale transaction. On the other hand, under Section 196 of the Tax Code of 1997, as amended, a documentary stamp tax (DST) is imposed on all conveyances, deeds, instruments, or writings, other than grants, patents or original certificates of adjudication issued by the Government, whereby land, tenement or other realty sold shall be granted, assigned, transferred or otherwise conveyed to the purchaser, or purchasers, or to any other person or persons designated by such purchaser or purchasers, at the rate of P15.00 for every P1,000 based on the consideration contracted to be paid for such realty or its fair market value determined in accordance with Section 6 (E) thereof, whichever is higher. However, when one of the contracting parties is the government, the tax to be imposed shall be based on the actual consideration subject to the proviso that, where one party to the transaction is exempt, the other party shall pay the tax (Section 173 of the Tax Code of 1997, as amended). Accordingly, since the DENR is not subject to tax, RECI, therefore, will shoulder the payment of the DST at the rate of 1.5% based on the actual consideration contracted to be paid. (BIR Ruling No. 020-02, supra.) Finally, before the above-mentioned realties can be transferred in the name of RECI, RECI must first obtain a Certificate Authorizing Registration (CAR) in the revenue district office concerned where the subject properties are located. Section 58 (E) of the Tax Code of 1997, as amended, provides that "no registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner of Internal Revenue or his duly authorized representatives has certified that such transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid". On the other hand, Section 201 of the same Code provides that "an instrument, document or paper which is required by law to be stamped and which has been signed, issued, accepted or transferred without being duly stamped, shall not be recorded, . . . until the requisite stamp or stamps shall have been fixed thereto and cancelled". (BIR Ruling Nos. 011-06 dated October 20, 2006, circularized by Revenue Memorandum Circular No. 62-06) Accordingly, since the above sale transaction is neither subject to the CGT nor to the CWT, upon payment by RECI of the DST due thereof, the Revenue District Officer (RDO) concerned shall cause the issuance of the CAR pertaining to the real properties covered by the sale transaction by and between DENR and RECI. Finally, the DENR or the LMB is hereby required to declare the proceeds from the above sale transaction in accordance with Section 56 (A) of the Tax Code of 1997, as amended, in relation to Section 27, paragraph (A) and (C) thereof. 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.) JAMES H. ROLDAN Assistant Commissioner Legal Service Footnotes 1. On several occasions, the BIR ruled that government agencies or instrumentalities performing proprietary functions are subject to income tax. (See BIR Ruling No. 071-98 dated May 25, 1998, stating that exemption of government entities is effectively revoked, repealed or deleted under RA 8424; BIR Ruling No. 038-02 dated Nov. 5, 2002; DA-516-04 dated Oct. 4, 2004; BIR Ruling Nos. DA-217-02 dated Nov. 22, 2002 & DA-200-06 dated Mar. 29, 2006, whereby it is in effect negatively stated that if BOC is exercising a proprietary function, it will be subject to tax). SHECcT 2. As amended by RR No. 14-2002.