Atty. Wencito F. Yap

December 22, 2009 BIR RULING [DA-(C-338) 819-09] Sec. 27; 196; BIR Ruling 114-99; DA 009-03; 264-03; 312-08 Atty. Wencito F. Yap Rooms 332 and 334 Regina Bldg. Escolta Street, Binondo, Manila Sir : This refers to your letter dated December 3, 2009 requesting a ruling on behalf of your client, ELLIMAC PRIME HOLDINGS, INC. ("EPHI" for brevity), on the valuation of a parcel of land to be acquired by EPHI for purposes of computing the creditable withholding tax and documentary stamp tax due on the transfer of said property. It is represented that EPHI is a domestic corporation duly organized and existing under Philippine laws with principal address at 2nd Floor, Tabacalera Building, Romualdez Street, Paco, Manila. EPHI intends to purchase from the Land Bank of the Philippines a parcel of commercial land covered by TCT No. N-227800 of the Registry of Deeds of Quezon City with an area of 58,364 square meters located along Quirino Highway corner Maligaya Drive, Novaliches, Quezon City (the "Property") for a consideration of Php362,150,000.00. The frontage of the Property located along Quirino Highway is equal to 5,948.10 square meters or 198.27 meters multiplied by the standard depth of 30 square meters. The rest of the property consists of 52,426.62 square meters. Based on the above representations, you would like to request for confirmation of your opinion that: 1. The zonal value of P30,000.00 per square meter for lots located along Quirino Highway should only apply to the frontage of the Property and not the total area of the Property; and ECcaDT 2. The interior portion of the Property which cannot be classified under any particular street/subdivision shall be lumped under "all other streets" with a zonal value of P4,000.00 per square meter. In reply please be informed that in BIR Ruling No. 114-99 dated July 29, 1999, this Office has already made a determination of the correct value of land for internal revenue tax purposes where the depth of the lot is deeper than the standard depth of land. In such a case, it is an accepted principle that the area of a lot beyond the standard depth is valued lower than the frontage area. This is because as the depth of lot increases, the unit value decreases. Accordingly, and pursuant to Section 201 of R.A. 7160 as well as Department Order No. 10-97 of the Department of Finance, this Office, in the said ruling, ruled as follows: "It is undisputed that the zonal value or fair market value of lots located along the Zapote-Alabang Road is at P19,900.00. However, this Office recognizes that to extend such zonal valuation not only to the frontage area but to the rest of the Property would be inequitable and unjustified under the premises. According to the rules of valuation and under the above quoted Department Order No. 10-97 [The Revised Zonal Values of Real Properties in Las Pias and Muntinlupa under Revenue District No. 53 for Internal Revenue Tax Purposes] and considering the guidelines in the valuation of urban lands, the following are in order [ sic ]: (a) Only lots located along the Alabang-Zapote Road and vicinity (Ceciles R. Moonwalk) are valued at P19,900 for tax purposes. (b) If the area cannot be classified under any particular street/subdivision of vicinity the area would be lumped under the "All Other Streets" category; (c) The valuation of lands under the "All Other Streets" category are as follows: i. Residential Residential P2,200 ii. Commercial Residential 3,700 iii. General Purpose 1,900 xxx xxx xxx Hence, since the frontage area would consist of 4,500 sq.m., (150 meters x 30 meters) applying the zonal value of P19,900, the fair market value of this particular portion is P85,000,000. The remaining property would be General Purpose lot with an assigned zonal value of P1,900. xxx xxx xxx." Accordingly, this Office confirms your opinion that the zonal value of P30,000.00 per square meter for lots located along Quirino Highway should apply only to the frontage of the Property and not to the entire Property. It is a recognized fact that the value of lots decreases from street frontage to the rear. (Section 26, DOF Local Assessment No. 001-92) Thus, a standard depth is established to determine the true and correct value of a particular property where the depth of the lot is deeper than the standard depth. Under this rule, the frontage area which is computed on the basis of the length of the property located along a particular street/subdivision multiplied by the standard depth of the locality is valued more than the rear. BIR Ruling No. DA-009-2003 dated January 14, 2003 reiterates this accepted principle that the area beyond the standard depth is valued lower than the frontage area in recognition of the fact that as the depth of lot increases, the unit value decreases. Thus, applying the above formula for computing frontage area (length of property located along a particular street/subdivision multiplied by the standard depth), the frontage area of the Property would be equal to 5,948.10 square meters (the length of the property of 198.27 square meters multiplied by the standard depth of 30 meters). Thus, the zonal value of P30,000,00 * per square meter shall apply to this portion of the Property. Accordingly, the fair market value of frontage area shall be P178,443,000.00. With respect to the interior portion of the Property, it appears that the same cannot be classified under any particular street/subdivision. Thus, under Department Order No. 43-98, the interior portion shall be lumped under the "All Other Streets" Category which has the following assigned valuation: 1. Residential P2,200.00 2. Commercial P4,000.00 Since the Property is classified as commercial land, the zonal value of the interior portion of the Property with an area of 52,426.62 square meters is P4,000.00 per square meter. Thus, the fair market value of this particular portion of the Property is P209,706,480. All in all, therefor, the total fair market value of the Property is P388,106,600.00. Considering that the fair market value of the Property is higher than the proposed consideration/purchase price for the sale of the Property, this Office hereby holds that the fair market value can serve as the basis in computing the creditable withholding tax and documentary stamp tax due on transfer of the Property. Finally, please be advised that the deadline for the filing of return and payment of documentary stamp tax shall be on the 5th day after the close of the month when the Deed of Absolute Sale conveying the Property is executed. CTIEac 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