BIR Ruling No. 009-10

June 3, 2010 BIR RULING NO. 009-10 24 (D) (1); 000-00 Office of the Provincial Assessor Province of Surigao Del Sur Tandag City Attention: Ms. Charmelinda A. Yaez Provincial Assessor Madam : This refers to your letter dated April 20, 2009, received by this Office as indorsed by the Department of Finance, requesting issuance of a policy and/or circular relative to the exemption from payment of capital gains tax on property sold by the government to private person or any private entity. TEHDIA It is represented that on January 15, 2008, Atty. Marcelinda Omila-Yap, Regional Director of BIR Revenue Region 19-Davao City issued an opinion addressed to Mr. Prisco Viduya; that said opinion was in reference to Mr. Viduya's inquiry on the sale by the government of a forfeited property and the corresponding liability for capital gains tax; that the position of said BIR Revenue Region is quoted as follows: "In reply therefore to your query on liability for capital gains on the sale by government of a forfeited property, we opine that the sale made by the government of a public property is considered exempt from the payment of capital gains tax. However, the transaction is subject to documentary stamp tax which should be shouldered by the Vendee." that on the basis of this issuance, you have requested for a similar ruling from the Regional Director of BIR Revenue Region 17-Butuan City which until now you have not received any response; and that said incident prompted you to follow-up and formally request the same from the Office of the Department of Finance. In reply, please be informed that pursuant to Revenue Administrative Order No. 11-00 1 dated August 21, 2000, it is the function of the Legal Service, which shall be under the direct supervision of the Deputy Commissioner for Legal and Inspection Group, to interpret internal revenue laws and revenue regulations. In Revenue Memorandum Circular No. 3-01 2 dated January 13, 2001, the issue resolved by the Regional Director of Davao City is not one of those enumerated subject topics of rulings which they were given authority to sign. Furthermore, Revenue Memorandum Circular No. 37-07 3 dated May 26, 2007 provides that: ''SECTION 2. Delegation of Authority. a. Regional Directors The delegated authority of the Regional Directors to sign rulings that involve in any manner the granting, as well as, confirmation of tax exemptions and/or tax incentives shall now be approved and signed by the Assistant Commissioner, Legal Service. Accordingly, Revenue Memorandum Order (RMO) No. 75-99 and RMC No. 3-2001 are hereby expressly modified, subject to the following exceptions, which shall continue to be approved by the Regional Directors: (i) Requests to use pre-numbered loose-leaf forms, receipts, invoices and books of accounts (manual); and (ii) Requests for change of accounting period (except change of accounting method) under Section 46 of the Tax Code of 1997. AcaEDC The foregoing is without prejudice to the applicability of Revenue Bulletin No. 1-2003 No-Ruling Areas 001." (Emphasis supplied) In view of the foregoing, this Office is recalling the ruling issued by BIR Revenue Region 19-Davao City dated January 15, 2008 issued to Mr. Prisco Viduya for having been issued without jurisdiction and consequently, without force and effect. Anent the request for issuance of an opinion on the issue of whether or not Local Government Units (LGUs) are exempt from payment of capital gains tax on the sale of forfeited property, this has been settled in some BIR Rulings. Sections 24 (D) (1) and 196 of the 1997 Tax Code, as amended, provides: "SEC. 24. Income Tax Rates. xxx xxx xxx (D) Capital Gains from Sale of Real Property. (1) In General. The provisions of Section 39(B) notwithstanding, a final tax of six percent (6%) based on the gross selling price or current fair market value as determined in accordance with Section 6(E) of this Code, whichever is higher, is hereby imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales , by individuals, including estates and trusts: . . . ." (Emphasis supplied) In BIR Ruling No. DA-419-98 dated September 14, 1998, relative to the exchange of property by and between the Iglesia Ni Cristo (INC) and the Caloocan City Government, this Office was of the opinion as follows: "In reply, please be informed that the income, if any, which the Iglesia Ni Cristo will derive from the aforesaid exchange of property is not subject to income tax for being a single and isolated transaction and in furtherance of the religious purposes for which it was created. (BIR Ruling No. 041-96 dated March 15, 1996) On the other hand, the City Government of Caloocan City shall be subject to the capital gains tax of 6% imposed under Section 27(D)(5) of the Tax Code of 1997 on the capital gains presumed to have been realized from the said exchange transaction of real property considered as capital assets. This is because only the income derived by the local government unit from the exercise of its essential governmental function shall be excluded from its gross income pursuant to Sec. 32(B)(7)(b) of the Tax Code of 1997 ." (Emphasis supplied) DHITcS Moreover, BIR Ruling No. DA-401-07 dated July 20, 2007 explained the tax liability of the local government for the sale of forfeited properties and held that ". . . since the sale of the realty of the delinquent taxpayer is the enforcement by the Province of Antique of its tax lien for unpaid real estate taxes and is being conducted through public bidding or on public auction sale, this Office is of the opinion as it hereby holds that the tax base in computing the capital gains tax and the documentary stamp tax on such sale transaction should, as in the case of mortgage foreclosure sale under Act 3135, as amended, be likewise on the highest bid price. Hence, the capital gains tax and the documentary stamp tax due on the said sale of the realty your client purchased in the public auction sale by the Province of Antique should be computed on the highest bid price, which shall be for the account of the delinquent taxpayer since the sale by the Province of Antique is for and in behalf of the former, and it is just enforcing a tax lien for the unpaid real property taxes. The statutory seller in this particular case is the Provincial Government of Antique. However, although under the Tax Code, the person liable to pay the CGT is the owner of the property, the CGT though is required to be paid upon consolidation of title over the property by the highest bidder which shall be made after the lapse of 1-year redemption period. If redeemed, there is no CGT due. But, if the owner fails to redeem the property, the highest bidder who, in most cases is the statutory seller, pays the CGT and DST, in order that a property may be registered under its name upon the registration of the Certificate of Sale. There is no exemption from taxes in case of foreclosure sale. The Tax Code requires payment of CGT/DST even on conditional sales of real property. " Based on the foregoing, the local government unit, as statutory seller of the forfeited property, is not exempt from paying capital gains tax. Hence, this Office regrets to deny your request for exemption from capital gains tax for lack of legal basis. STcEaI Very truly yours, (SGD.) JOEL L. TAN-TORRES Commissioner of Internal Revenue Footnotes 1. Organization and Functions of the Legal Service Including the Divisions Under it Down to Section Level. 2. Delegation of Authority to Regional Directors to Issue Certain Rulings with Established Precedents. 3. Delegation of Authority to Sign Rulings Granting and/or Confirming Tax Exemptions, Tax Incentives as well as Tax Treaty Relief Through the Ruling Process.