Basis of Capital Gains Tax on the Pacto de Retro Sale

March 29, 1990 BIR RULING NO. 042-90 21 (e) 217-81 042-90 Gentlemen : This refers to your letter dated November 21, 1989 requesting a ruling as to the applicable value on which the 5% capital gains tax should be based relative to the two parcels of land situated at Sta. Ana and Paraaque which Finasia Investments and Finance Corporation (FIFC) bought on February 14, 1983 from the Spouses William and Thelmita Tiongson under a pacto de retro sale. cdtech It is represented that on February 14, 1983, FIFC bought from the Spouses William and Thelmita Tiongson two parcels of land situated at the municipalities of Sta. Ana and Paraaque under a pacto de retro sale; that on July 29, 1983, FIFC assigned the account of the Spouses Tiongson to your client, Pioneer Savings and Loan Bank (PSLB); that the Spouses Tiongson failed to redeem the said parcels of land; that on April 16, 1985, your client filed a Petition for Consolidation of Ownership before RTC Branch 139 for failure of the Spouses Tiongson to redeem the said properties; that on June 2, 1989, the Spouses entered into a Compromise Settlement Agreement with your client wherein the former acknowledged that their right of redemption had already expired; that by virtue of the said Compromise Settlement Agreement, the Court in its order dated September 28, 1989, directed the Registers of Deeds of Sta. Ana and Paraaque to allow your client to consolidate their titles over the said properties; that you requested the Examiner from BIR Revenue District No. 25 to compute the capital gains tax due on the Sta. Ana property who based her computation on the present zonal value of the property; that you clarified the said computation with the Revenue District Officer (Atty. Odullo) who informed you that a recent BIR regulation dated June 20, 1989 is controlling wherein the capital gains tax is based on the zonal value of the land at the time of consolidation; and that you are confused as to the basis of the computation of the capital gains tax with respect to pacto de retro sales, since the Tax Code as well as the pertinent BIR Revenue Memoranda and BIR Rulings consider said sales as conditional sales, thus, the computation of the capital gains tax should be based on the gross selling price or fair market value prevailing at the time of sale. In reply, please be informed that the provisions of law applicable to the pacto de retro sale between FIFC and the Spouses William and Thelmita Tiongson on February 14, 1983 were those provided under then Section 34(h) [now Section 21(e)] of the Tax Code since the tax provided thereunder was the applicable tax at the time of the transaction. Under then Section 34(h) of the Tax Code net capital gains from the sale or other disposition of real property by citizens of the Philippines or resident alien individuals shall be subject to the final tax rates prescribed as follows: NET CAPITAL GAINS RATES On the first P100,000 or less 10% On any amount over P100,000 20% such tax shall be in lieu of the tax imposed under then Section 21 of the Tax Code. Accordingly, the capital gains tax on the pacto de retro sale between FIFC and the Spouses William and Thelmita Tiongson on February 14, 1983 should be based on the net capital gains derived by the Spouses Tiongson from said sale. Very truly yours, (SGD.) JOSE U. ONG Commissioner