AFP Retirement and Separation Benefits System

December 11, 2009 BIR RULING [DA-(C-314) 771-09] AFP Retirement and Separation Benefits System Camp General Emilio Aguinaldo Quezon City Attention: Ariel G. Palacios EVP/COO Gentlemen : This refers to your letter dated November 11, 2009 requesting for a clarification on the issue of whether a Certificate Authorizing Registration (CAR) may be issued to a purchaser of foreclosed property after it has paid the capital gains tax/creditable withholding tax and documentary stamp tax due on the foreclosure sale for purposes of transferring the property in its name. It is represented that sometime in 1995, St. Michael Int'l. Realty & Management Corp. ("SMIRMC") executed a real estate mortgage in favor of the AFP-Retirement & Separation Benefits System ("AFP-RSBS") over a property consisting of a parcel of land, covered by Transfer Certificate of Title No. T-167832, and all the improvements/unfinished condominium units thereon located at Yakal St., San Antonio Village, Makati City, more particularly identified as St. Michael Tower, to secure the payment of its loan. When SMIRMC defaulted on its obligations, AFP-RSBS extra-judicially foreclosed the mortgage. On February 18, 2009, AFPRSBS was declared as the winning bidder in the public auction sale of the mortgaged property after it submitted its bid in the amount of P254,702,054.79. Currently, AFP-RSBS is working on the transfer of the above-mentioned title and the Condominium Certificates of Title over the unfinished condominium units after the three-month redemption period under Republic Act 8791 expired without redemption having taken place. As a requirement hereof, AFP-RSBS needs to secure the Certificate Authorizing Registration (CAR) from the Revenue District Office (RDO) 49 North Makati. While AFP-RSBS has already exerted all efforts in securing the CAR, RDO 49, however, is continually holding the same on account of its letter to SMIRMC subjecting the property under "Oplan Kandado" pursuant to the provisions of RMO 3-2009. SMIRMC is being assessed the amount of P48.586M in VAT liabilities including surcharge and interest for the sale of foreclosed property. aTSEcA For the record, AFP-RSBS has in fact already paid the following on May 21, 2009 in its desire to expeditiously secure the CAR and transfer the property in its name: Capital Gains Tax/Creditable Withholding Tax P15,282,123.29 Documentary Stamp Tax 3,820,654.00 P19,102,778.11 =========== In this connection, you would like to request for an opinion as to whether the issuance of the CAR is now due AFP-RSBS after settlement of the above fees. In reply, please be informed of the following provisions of Revenue Memorandum Circular 058-08 dated August 15, 2008 quoted hereunder as follows: "REVENUE MEMORANDUM CIRCULAR NO. 058-08 SUBJECT : Clarifying the Time within which to Reckon the Redemption Period on the Foreclosed Asset and the Period within which to Pay Capital Gains Tax or Creditable Withholding Tax and Documentary Stamp Tax on the Foreclosure of Real Estate Mortgage by those Governed by the General Banking Law of 2000 (Republic Act No. 8791), as Well as the Venue for the Payment of These Taxes TO : All Internal Revenue Officers and Others Concerned Republic Act No. 8791 (R.A. 8791), otherwise known as "The General Banking Law of 2000", has provided for the following with respect to the foreclosure of real estate mortgages by banks, those engaged in quasi-banking activities, and trust companies: "SEC. 47. Foreclosure of Real Estate Mortgage. In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is security for any loan or other credit accommodation granted, the mortgagor or debtor whose real property has been sold for the full or partial payment of his obligation shall have the right within one year after the sale of the real estate, to redeem the property by paying the amount due under the mortgage deed, with interest thereon at the rate specified in the mortgage, and all the costs and expenses incurred by the bank or institution from the sale and custody of said property less the income derived therefrom. However, the purchaser at the auction sale concerned, whether in a judicial or extrajudicial foreclosure, shall have the right to enter upon and take possession of such property immediately after the date of the confirmation of the auction sale and administer the same in accordance with law. Any petition in court to enjoin or restrain the conduct of foreclosure proceedings instituted pursuant to this provision shall be given due course only upon the filing by the petitioner of a bond in an amount fixed by the court conditioned that he will pay all the damages which the bank may suffer by the enjoining or the restraint of the foreclosure proceeding. cEHSTC "Notwithstanding Act 3135, juridical persons whose property is being sold pursuant to an extrajudicial foreclosure, shall have the right to redeem the property in accordance with this provision until, but not after, the registration of the certificate of foreclosure sale with the applicable Register of Deeds which in no case shall be more than three (3) months after foreclosure, whichever is earlier. Owners of property that has been sold in a foreclosure sale prior to the effectivity of this Act shall retain their redemption rights until their expiration. . . ."(emphasis supplied) For purposes of reckoning the one-year redemption period, in the case of individual mortgagors, or the three-month redemption period for juridical persons/mortgagors, the same shall be reckoned from the date of the confirmation of the auction sale which is the date when the certificate of sale is issued. In case of non-redemption, the capital gains tax on the foreclosed capital asset of the mortgagor shall become due within thirty (30) days following the expiration of the redemption period referred to in the preceding paragraph. Nonetheless, if the property is an ordinary asset of the mortgagor, the creditable expanded withholding tax shall be due and paid within ten (10) days following the end of the month in which the redemption period expires. If the property foreclosed is under the circumstances which warrant the imposition of the Value-added Tax (VAT) under Section 106 of the Tax Code, as implemented by Revenue Regulations No. 4-2007, the VAT must be paid by the mortgagor on or before the 20th day or 25th day, whichever is applicable, of the month following the month when the right of redemption prescribes. Moreover, the payment of the documentary stamp tax and the filing of the return thereof shall have to be made within five (5) days from the end of the month when the redemption period expires. The taxes due on the foreclosure sale must be based on the bid price of the highest bidder pursuant to Revenue Regulations No. 4-99. The classification of the asset as either ordinary asset or capital asset depends upon the nature of the asset in the hands of the mortgagor. Under the foregoing circumstances, the mortgagee banks, quasi-banks, and trust companies, are considered the statutory sellers in the foreclosure sales of these foreclosed real properties, and are thus, expected to have paid the aforesaid taxes, within the period provided therefor, once the redemption period thereon has expired, Hence, without need to further wait for another or subsequent buyer before taxes on said foreclosed property shall be paid. Generally, the venue for the filing of the returns and payment of taxes on foreclosure sales, except the VAT, shall be at the place where the real property foreclosed is located. The VAT, if applicable, must in all cases involving foreclosure sale of real property, be paid by the VAT-registered mortgagor through the filing of the required return in the Revenue District Office (RDO) where the said mortgagor is registered. The foregoing rule on venue to the contrary notwithstanding, if the statutory seller (mortgagee-bank/quasi-bank/trust company) is classified as a Large Taxpayer, the venue for the payment of capital gains tax/creditable withholding tax, and documentary stamp tax on the foreclosure sale of real properties mortgaged with them shall be with the concerned office of the Large Taxpayers Service pursuant to the provisions of Revenue Regulations No. 4-2008. ADcEST Upon submission of proof that the taxes required to be paid by the statutory seller mentioned herein had been actually paid, the Certificate Authorizing Registration (CAR) must be issued without waiting for the VAT compliance of the mortgagor in all cases where the property is subject to VAT. The BIR Office having jurisdiction over the statutory seller is, nonetheless, required to notify the RDO where the mortgagor is registered to collect the VAT on the said transaction. All internal revenue officers and others concerned are hereby enjoined to give this Circular as wide a publicity as possible." It is clear from the foregoing that a CAR must be issued to the statutory seller (purchaser of the foreclosed property) once the taxes required to be paid have actually been paid without waiting for the VAT compliance of the mortgagor. Thus, provided that the correct amount of CWT and DST due on the foreclosure sale was paid by AFP-RSBS, it is our opinion that the CAR may be issued in its favor without waiting for payment of VAT by SMIRMC on the transaction. Please be guided accordingly. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service