Tax Consequences Relative to the Acquisition by Way of Purchase of a Foreclosed Property of Philippine Commercial and International Bank (PCIB)

February 24, 1995 BIR RULING NO. 041-95 50-00 000-00 041-95 Filiden Realty and Development Corp. 319 Villareal Street, Pasay City Attention: Mr . Fidel O . Chua President Gentlemen : This refers to your letter dated December 9, 1993 stating that on November 23, 1993 you acquired by way of purchase foreclosed property of Philippine Commercial and International Bank (PCIB); that to facilitate the issuance of tax clearance you have advanced the payment of creditable withholding tax of 2.5% in the amount of P37,592.00 based on the zonal valuation of P3,503,700.00 against a sale consideration of P3,261,000.00 in the expectation of immediate reimbursement; that PCIB refused to reimburse you unless you sign BIR Form No. 1743-1 known as Certificate of Creditable Income Tax Withhold at Source and BIR Form No. 1743-1W or a Monthly Remittance Return of Income Tax Withheld and that under your contract with PCIB, you will be responsible for paying the applicable taxes to effect the transfer for said property. cdll Based on the foregoing facts, you now request our opinion on the following queries, to wit: "1. As seller, should PCIB have prepared the necessary Manager's check for creditable withholding tax? "2. Is there a need to accomplish Forms 11743-1 & W? "3. If No. 2 is to be followed, as requested by PCIB to be their standing procedure, will this not complicate our reportorial and remittance submission/compliance later on? "4. Will it be alright for us to demand prevailing interest rate for the amount advanced?" If at the time of sale, the one year redemption period has already lapsed and title to the foreclosed property was already transferred to the PCIB which is a CREBA member, it becomes directly liable for corporation income tax at the rate of 35% on gains realized in said transaction; hence, subject to withholding tax at 2.5% pursuant to Section 1 of Revenue Regulations No. 1-90 which subjects to withholding tax income payments on sale of real property. However, if the foreclosed property is still in the name of the individual debtor-mortgagor, or even if transferred in the redemption period, the bank becomes a statutory seller (a seller in law) pursuant to Revenue Memorandum Order No. 6-82 in which case, it assumes the liability of the real owner who, if an individual debtor-mortgagor, shall be subject to the 5% final capital gains tax under Section 21(e) of the Tax Code. Accordingly, the Bank shall be the person directly responsible in filing the final capital gains tax return in behalf of the individual debtor-mortgagor. Based on the foregoing premises, your queries are answered as follows: 1. If title to the foreclosed property was already transferred to PCIB, the sale of said property amounts to a sale of capital asset. Such being the case, the gains realized therefrom is includible in PCIB's taxable income which is subject to the 35% corporate income tax. Being a juridical person selling acquired real property, it is subject to the creditable withholding tax which, in the present case, is 2.5% because PCIB is a CREBA member, while the regulations designates the buyer (income payor) as the withholding agent, it is perfectly acceptable for PCIB (seller) to prepare a manager's check to pay for the creditable withholding tax that you are required later on to remit to this Bureau. 2. Yes, there is still need to accomplish BIR Forms No. 1743-1 and 1743 W, now consolidated BIR Form No. 1743-1R (Annual Information Return of Income Tax Withhold on Compensation, Expanded and Final Tax). 3. Duplication will certainly result if in addition to what was paid with PCIB's manager's check, you will also withhold the 2.5% withholding tax from the amount which you are required to pay to PCIB and prepare a separate return for withholding and remittance to the Bureau of Internal Revenue. To avoid such duplication, the amount covered by PCIB's manager's check should be reported as your withholding tax liability in which case you will no longer withhold any amount from the sales proceeds payable to PCIB. llcd 4. The matter of charging or not charging interest for any amount that you have advanced to cover your payment of creditable withholding tax is a management decision and does not concern this Office at all. LLphil Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue