Imposition of Capital Gains Tax, Expanded Withholding Tax and Documentary Stamp Tax on the Sale of a Piece of Land

April 14, 1998 BIR RULING NO. 047-98 21 (e), 50 (b) 196 000-00 47-98 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty . M . F . A . Balili Gentlemen : This refers to your letter dated January 6, 1997 requesting for ruling, on behalf of your client, Anflo Management & Investment Corp. (ANFLOCOR), that the sale of a piece of land subject of a Deed of Sale executed and notarized on March 27, 1979 is not subject to the 5% capital gains tax (CGT), 7.5% expanded withholding tax (EWT) and 1% documentary stamp tax (DST). It is represented that ANFLOCOR is a domestic corporation duly registered with the Securities and Exchange Commission (SEC) with office address at Lanang, Davao City; that on March 27, 1979, it purchased from Mr. Jose Agudo, Jr. a parcel of land located in Cagayan de Oro consisting of 4,059 sq.m. and covered by TCT No. T 1475 of the Register of Deeds of Cagayan de Oro City for and in consideration of the sum of P150,000 which ANFLOCOR paid in full to the seller, Jose Agudo, Jr. at the time of the sale; that the subject Deed of Sale was notarized on the same day and was entered as Doc. No. 410, Page No. 83, Book No. XXXVI, Series of 1979 in the Notarial Registry of Notary Public Larry T. Iguidez for the City of Manila; that while the Deed of Sale was executed and notarized on March 27, 1979, the sale was not immediately registered with the Register of Deeds of Cagayan de Oro City because (a) the original copies of the Deed of Sale were misplaced and ANFLOCOR had to request for a certified true copy from Atty. Iguidez; and (b) the Owner's copy of TCT No. T-1475 issued in the name of Jose Agudo, Jr., as well as the original copy in the Office of the Register of Deeds of Cagayan de Oro were lost on two (2) separate occasions, and could not therefore be presented to the BIR nor to the Register of Deeds of Cagayan de Oro City for cancellation; that ANFLOCOR had to file the necessary petitions in Court to be able to reconstitute the title; that on January 23, 1980, the CFI after due hearing, granted ANFLOCOR's petition and ordered the Register of Deeds of Cagayan de Oro City to issue a new Owner's copy of TCT No. T-1475 in the name of Jose Agudo, Jr.; that for one reason or another, ANFLOCOR was not able to present and file the January 23, 1980 CFI Order with the Office of the Register of Deeds of Cagayan de Oro City; that it was only sometime in August or September, 1989 that ANFLOCOR was able to present the said CFI Order to the said Register of Deeds; that it was discovered through that the original copy of TCT No. T-1475 which was on file with, and in the custody of, the Register of Deeds could not be found, and the said Register of Deeds could not issue a new Owner's copy of the subject TCT in the name of Jose Agudo, Jr. and that because of this development, ANFLOCOR filed on August 31, 1990 with the Regional Trial Court (RTC) of Misamis Oriental, 10th Judicial District, Cagayan de Oro City, a petition for the reconstitution of TCT No. T-1475 in the name of Jose Agudo, Jr., praying that once accomplished, the Register of Deeds of Cagayan de Oro City be ordered and directed to issue a new Owner's copy of the said title which petition was granted on June 11, 1991; that on November 29, 1991, ANFLOCOR was able to obtain the Owner's copy of TCT No. T-1475; that on December 10, 1991, when ANFLOCOR applied to have TCT No. T-1475 in the name of Jose Agudo, Jr. cancelled and to have a new one issued in its name, BIR Revenue District No. 75, Cagayan de Oro City issued an Authority to Issue Payment Order in the name of Jose Agudo, Jr. to pay capital gains tax in the amount of P811,800 and documentary stamp tax in the total amount of P202,950 on the basis of Revenue Memorandum Circular (RMC) No. 34-91 dated April 8, 1991; that on January 7, 1992, ANFLOCOR, through Counsel Tecceres X. Velez, wrote then BIR Cagayan de Oro Regional Director Jose Cembrano contesting the imposition of the capital gains tax and the 1% DST and requesting that the March 27, 1979 ANFLOCOR'S transaction with Jose Agudo, Jr. be exempted from the application of RMC No. 34-91; that on February 4, 1997, no action having been taken on the January 7, 1992 protest letter of ANFLOCOR's counsel, ANFLOCOR again wrote BIR Cagayan de Oro Regional Director, Director Teodorica Arcega reiterating the request to be exempted from the applicant of RMC No. 34-91 and submitting proof that the March 27, 1979 Deed of Sale was not ante-dated; that this time ANFLOCOR is being subjected the 7.5% EWT (or P3,348,675) and 1% DST (or P446,490), or a total of P45,115,490 on the basis of the latest zonal value of the property of P11,000 per sq.m. You are now requesting for confirmation of the following opinion, viz: 1. The tax incidents of the March 27, 1979 Deed of Sale as to the kind of tax, rate of tax and zonal value should be based on the rules prevailing on March 27, 1979 when the transaction took place, in accordance with the explicit provisions of RMC No. 43-91. 2. Accordingly, the March 27, 1979 Deed of Sale between Jose Agudo, Jr., as seller, and ANFLOCOR, as buyer, is not subject to either the 5% CGT or the 7.5% EWT on the 1% DST being calculated by BIR Cagayan de Oro, based on either the P4,000 per sq.m. zonal value prevailing in 1991 or on the P11,000 per sq.m. zonal value currently prevailing. 3. In the event that the seller, Jose Agudo, Jr., failed to previously pay the DST on the sale of the real property, then ANFLOCOR may pay the same at the DST rates provided for under Sec. 245 of the Tax Code then in effect on March 27, 1979 based on the consideration stipulated in the subject Deed of Sale, and thus, after payment, the title may now be transferred from Jose Agudo, Jr., the seller, to ANFLOCOR, the buyer. In reply thereto, please be informed as follows: 1. Revenue Memorandum Circular No. 34-91 issued on April 8, 1991 was issued primarily to stop further losses of the Bureau due to some malpractices of antedating Deeds of Sale involving real properties to order to avoid the imposition of income tax or the creditable withholding tax or reduce their tax liabilities on these transactions. Henceforth, public instruments transferring real properties presented to the appropriate revenue officials beyond three (3) months from the date of notarization are presumed as ante-dated and the tax liabilities of the parties are determined in accordance with the rules and regulations obtaining at the time such documents are presented to the BIR. This Circular, however, was nevertheless subsequently clarified by RMC No. 43-91 dated May 27, 1991 to prevent irritations between revenue officers and taxpayers due to conflicting interpretations and to achieve uniform application of the rules prescribed in RMC 43-91, the pertinent provisions of which read as follows: "In order to remove doubts as to what rules to apply and when to impose penalties for late filing of tax return and payments of tax, the following rules are hereby prescribed: "(a) When there is only a delay in the presentation of sales document, the rules on the kind of tax, rate of tax, zonal or fair market value, obtaining at the date of notarization shall be applied but the penalties for late filing of return and payment of tax shall be imposed. There is a delay in the presentation of sales document when the taxpayer submits said document to the BIR after thirty (30) days from date of notarization. The delay could be in terms of days, months or even years. For this purpose, taxpayers have the burden of proving by the submission of other documents, such as cancelled checks, official receipts, contract to sell, or certification of the archive official, to show that there is no ante-dating of public instrument. "(b) When the document is presented to the BIR after three months from date of notarization and the taxpayer cannot present additional receipts or documents to show that the same is not ante-dated, then the rules applicable at the time of the presentation of the document shall be applied but no penalty shall be imposed. It is expected that by applying the current rules, a higher tax will be collected from the taxpayer that when the old rules plus penalties had been followed." prcd In the instant case, your client has proven that the alleged Deed of Sale executed on March 27, 1979 is NOT ante-dated when it submitted a photocopy of the subject Deed of Sale, together with the certification of the Clerk of Court Jesusa P. Maningas of the RTC of Manila, National Capital Judicial Region, dated October 8, 1996, to the effect that she has compared the signature of Notary Public Larry Iguidez as appearing in the file copy of the latter's appointment and qualification as a Notary Public in and for the City of Manila with his signature in the subject Deed of Sale and found the same to be genuine plus the Certification of the Notary Public himself, Larry Iguidez, that the subject Deed of Sale is in fact a true and faithful reproduction of the original. Furthermore, the delay in the presentation of the subject Deed of Sale to the BIR and to the Register of Deeds is beyond the control of ANFLOCOR because the loss of the original copy of the Deed of Sale, the loss of the Seller's Owner's copy and the Register of Deeds' copy of TCT No. T-1475, which necessitated the filing by ANFLOCOR of two (2) cases before the Courts in Cagayan de Oro City to reconstitute said title. All of these proved that the subject sale was in fact made on March 27, 1979. Thus, the rules on the kind of tax, rate of tax, zonal or fair market value obtaining at the date of notarization on March 27, 1979 shall be applied in accordance with the provisions of RMC 34-91, as clarified by RMC 43-91. prcd In view thereof, we confirm your opinion that the said transaction is not subject to the 5% capital gains tax, the same having been consummated on March 27, 1979, when capital gains tax on sale of real property classified as capital assets was not yet effective. However, considering that the seller, Mr. Jose Agudo, Jr., derived income from the said sale of his real property, the same is then subject to the ordinary income tax and it is incumbent upon him to prove that he has paid the income tax due thereon by showing his income tax return for the taxable year 1979. 2. As of March 27, 1979, the date when the Deed of Sale was executed and notarized, the provision of the Tax Code on the 5% capital gains tax under Sec. 21(e) [now Section 24 (D) of RA No. 8424, otherwise known as the Tax Reform Act of 1997] was not yet in existence because the Capital Gains Tax Law (BP Blg. 37) took effect only on September 7, 1979. Therefore, prior to the effectivity of BP Blg. 37, capital gains from the sale or transfer of real property classified as capital assets were then subject to the regular income tax rates. Accordingly, the subject sale of real property between Jose Agudo, Jr., as seller, and ANFLOCOR, as buyer, is not subject to the 5% capital gains tax now imposed under Sec. 21(e) of the Tax Code, as amended [now under Sec. 24 (D) of RA No. 8424]. Likewise, it is not subject to the 7.5% EWT primarily because EWT on the sales or transfers of real property other than capital assets was first introduced by Revenue Regulations No. 12-89 on December 21, 1989 only and the said Regulations explicitly provides that the same shall apply only to sales, exchanges or transfers of real properties classified as ordinary assets consummated on or after January 1, 1990. For purposes of the said Regulations, the date of notarization appearing on the Deed of Sale is considered the prima facie date of consummation of the contract of sale. However, sales evidenced by documents notarized on or before November 1989 shall be deemed consummated on the date the same is filed with or submitted to the proper revenue office. Accordingly, the subject sale is not subject to the creditable withholding tax imposed under RR 12-89, as amended by RR 1-90, and as last amended by RR No. 12-94 which provided for the 7.5% EWT rate, since the subject Regulations took effect only on January 1, 1990. ( BIR Ruling No . 174-90 dated September 10 , 1990 ) 3. However, considering that the subject Deed of Sale does not show that it had already been subjected to the documentary stamp tax, Jose Agudo, Jr. or ANFLOCOR should be made liable to the documentary stamp tax based on the consideration stipulated in the Deed of Sale at the rate prevailing on March 27, 1979 in accordance with Sec. 245 (now Sec. 196) of the Tax Code in relation with the provisions of RMC 43-91, viz: "(a) When the consideration, or value received or contracted to be paid for such realty, after making proper allowance of any encumbrance, exceeds P200 and does not exceed P1,000, P2.00; "(b) For each additional P1,000, or fractional part thereof in excess of P1,000 of such consideration or value, P8.00" The amount of documentary stamp tax due, however, shall be subject to penalties and other charges as provided for under the then Sec. 191 (now Sec. 249) of the Tax Code of 1977, as amended. In view of all the foregoing, the piece of land subject of the aforesaid Deed of Sale executed on March 27, 1979 may now be issued a Certificate Authorizing Registration (CAR) or Tax Clearance Certificate (TCC) without paying the 5% capital gains tax nor the 7.5% expanded withholding tax but the same shall be subject to the documentary stamp tax plus the corresponding penalties and other charges thereto from the date of execution of the contract until finally paid based on the law then prevailing. This ruling is being issued based on the foregoing representations. If upon investigation, however, it will be shown that the facts are different from the said representations, then this ruling shall be considered null and void from the time of its issuance. Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue