University Savings Bank

September 8, 2009 BIR RULING [DA-(C-198) 506-09] Secs. 24 (D) (1), 27 (D) (5) & 196; BIR Ruling No. VAT-034-01, DA 332-03, DA-479-04, DA-487-04 & DA-062-06 University Savings Bank UPHSL Compound, Elementary Building Sto. Nio, Laguna Attention: Mr. Rodrigo G. Tamayo Asset Management Officer Gentlemen : This refers to your letter dated July 16, 2009 requesting for a ruling on the reckoning date to be used in calculating capital gains and documentary stamp. The purpose of the ruling is to clarify the memo sent out by RDO-39 Q.C. South dated May 28, 2009 on a refund you requested in the amount of PhP270,275.76 re erroneous tax payment due to inadvertent double payment of capital gains tax made on the Consolidation of the Property of Spouses Eduardo and Hortencia B. Anduyan in the Bank's name. In reply, please be informed that Revenue Regulations (RR) No. 4-99 prescribes the time of payment of capital gains tax and documentary stamp tax on extra-judicial foreclosure sales of capital assets initiated by banks, finance and insurance companies. Specifically, Sections 3 and 4 thereof, provide, viz. : "SECTION 3. Capital Gains Tax . (1) In case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale, no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of real property was realized. . . . (2) In case of non-redemption, the capital gains on the foreclosure sale imposed under Sec. 24(D)(1) and 27(D)(5) of the Tax Code of 1997 shall become due based on the bid price of the highest bidder but only upon the expiration of the one-year period of redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid within thirty (30) days from the expiration of the said one-year redemption period. HScAEC SECTION 4. Documentary Stamp Tax . (1) In case the mortgagor exercises his right of redemption, the transaction shall only be subject to the P15.00 documentary stamp tax imposed under Sec. 188 of the Tax Code of 1997 because no land or realty was sold or transferred for a consideration. (2) In case of non-redemption, the corresponding documentary stamp tax shall be levied, collected and paid by the person making, signing, issuing, accepting, or transferring the real property wherever the document is made, signed, issued, accepted or transferred where the property is situated in the Philippines; Provided, That whenever one party to the taxable document enjoys exemption from the tax, the other party thereto who is not exempt shall be the one directly liable for the tax. The tax return prescribed under the Code shall be filed within ten (10) days (now five (5) days pursuant to RR 6-2001) after the close of the month following the lapse of the one-year redemption period, and the tax under Sec. 196 of the Tax Code of 1997 shall be paid based on the bid price at the same time the aforesaid return is filed." While the NIRC imposes a 6% capital gains tax on conditional sales of property, including mortgage foreclosure sales, it must be stressed that the said conditional transactions presuppose transfer of interest or ownership over the subject properties. This is the reason why in cases 'where the right of redemption of the mortgagor exists, the certificate of title of the mortgagor shall not be cancelled yet instead only a brief memorandum shall be annotated at the back of the certificate of title, and the cancellation of the title and the subsequent issuance of a new title in favor of the purchaser/highest bidder depends on whether the mortgagor shall redeem or not the mortgaged property within one (1) year from the issuance of the certificate of sale'. (page 106, The National Internal Revenue Code Annotated, De Leon 2000 Edition). In foreclosure sale, there is no actual transfer of the mortgaged real property until after the expiration of the one-year redemption period as provided in Republic Act (RA) No. 3135 and title thereto is consolidated in the name of the mortgagee in case of non-redemption. In the interim, the mortgagor is given the option whether or not to redeem the real property. The issuance of the Certificate of Sale does not by itself transfer ownership. There has to be a Deed of Absolute Sale to effect transfer of title over realty. DEcTIS Therefore, the capital gains tax becomes due only in cases of non-redemption and only upon expiration of the one-year redemption period because of the principle that there is yet no transfer of title and no profit or gain is realized by the mortgagor at the time of foreclosure sale but only upon expiration of the one-year redemption period. In view of the foregoing, in cases of foreclosure sale, the capital gains tax return should have been filed and the capital gains tax paid within thirty (30) days from the date of the expiration of the one-year redemption period (RR No. 4-99). On the other hand, the documentary stamp tax imposed under Section 196 of the NIRC shall be paid within five (5) days after the close of the month after the lapse of the redemption period (RR No. 6-2001). Please be guided accordingly. SDIACc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service