Hon. Enrique T. Garcia, Jr.

February 26, 2009 BIR RULING [DA-(I-007) 129-09] 27 (D) (5), 196 Hon. Enrique T. Garcia, Jr. Governor of Bataan Provincial Capitol Balanga City Gentlemen : This refers to your letter dated March 14, 2007 requesting for a reconsideration of Regional BIR Ruling No. 255-06 dated July 24, 2006 which denied your request for exemption from the payment of capital gains tax and documentary stamp tax on the proposed Dacion en Pago arrangement between the Provincial Government of Bataan and the Home Development Mutual Fund (HDMF) or the Pag-ibig Fund. It appears that the Provincial Government of Bataan, thru its developer, Bataan Provincial Development Corporation entered into a Joint Venture Agreement with the Local Government of Samal, Bataan to develop the Samal Low-Cost Housing Project also called the "Bataan Peninsula Heights" pursuant to Sangguniang Panlalawigan Resolution No. 196 dated July 24, 2000. The said project qualified under the category of Socialized Housing Project of the housing program of the Provincial Government of Bataan pursuant to Sec. 18 of Republic Act (RA) 7279, otherwise known as the Urban Development Housing Act of 1992. On account of structural defects of the units constructed, the whole project has become of little, if not of no value to the province, more so, the Provincial Government has to deal with the huge developmental loan with the HDMF. Due to the enormous losses already suffered by the Province of Bataan on the subject housing project, it is now constrained to execute a Deed of Assignment (Dacion en Pago) in favor of its creditor to avert further financial losses. In response to your request, the Bureau, through RDA, RR No. 4, BIR Ruling No. 255-06 dated July 24, 2006 which was signed by Regional Director Jose N. Tan, has denied your request for exemption in the following manner. TcCSIa "xxx xxx xxx The proposed dacion en pago arrangement to be executed by the Provincial Government of Bataan in favor of the Home Development Mutual Fund whereby the former will cede the pool of collaterals under the Mortgage Contract in full satisfaction of its obligation is in all aspect, a mode of transfer or disposition of real properties subject to the 6% final tax pursuant to the above-cited law. It deserves a different characterization for tax purposes in contrast to its socialized housing program for which a Regional BIR Ruling was previously issued on December 21, 2005. Moreover, under Section 27(C) of the 1997 Tax Code, as amended, only four (4) government-owned or controlled corporations, agencies or instrumentalities, namely, Government Service and Insurance System (GSIS), the Social Security System (SSS), Philippine Health Insurance Corporation (PHIC), and the Philippine Charity Sweepstakes Office (PCSO) are exempted from the payment of internal revenue tax on their taxable income imposed upon corporations or associations engaged in a similar business, industry or activity. The Provincial Government of Bataan is not one of those enumerated government corporations exempted thereof. Further, the proposed dacion en pago arrangement between the parties is subject to documentary stamp tax pursuant to Section 196 of the Tax Code of 1997, as amended. This provision covers all types of conveyances, deeds, instruments, agreements or writings and definitely subjects the transaction to documentary stamp tax. Lastly, as a basic principle in taxation, exemption from taxes is strictly construed against the person claiming it and in the absence of any provision of law providing for exemption, a particular transaction or subject cannot be exempted thereto." It should be emphasized that dacion en pago is a special mode of payment recognized under Art. 1245 of the New Civil Code. Under the said provision of law this undertaking partakes the nature of a sale, as such there is no reason to disturb the above-stated BIR Regional Ruling and to reverse the same. Such being the case, we regret to inform you that the position held by Revenue Region No. 4 on RDA, RR No. 4, BIR Ruling No. 255-06 is still maintained. This constitutes the final decision of this Bureau on this case. DTIcSH Very truly yours, Commissioner of Internal Revenue By: (SGD.) GREGORIO V. CABANTAC Deputy Commissioner