BIR Ruling No. 088-13

March 5, 2013 BIR RULING NO. 088-13 Secs. 24 (D) (1), 27 (D) (5) 196, 248 & 249 of the NIRC, as amended; Revenue Regulations No. 4-1999; Revenue Regulations No. 6-2001; Revenue Regulations No. 9-2012; Revenue Memorandum Circular No. 55-2011; BIR Ruling No. 046-01 Edouard George 11 H Carreon Drive Talipapa, Quezon City Sir : This refers to your letters dated April 11, 2011 and May 18, 2011 requesting for a clarification as to the basis for the payment of Capital Gains Tax and the reckoning period for payment of the taxes in foreclosure of property. ICacDE It is represented that ATE REAL ESTATE CORPORATION with Tax Identification Number 005-325-233-000, is a domestic corporation. On the other hand, Cindy P. Daquer is the owner of the two properties covered by Transfer Certificate of Title No. 162572 located in Brgy. Sta. Lourdes, Puerto Princesa City with an area of Eight Thousand Seven Hundred Seven (8,707) sq.m. and Transfer Certificate of Title No. 162532 located in Brgy. San Manuel, Puerto Princesa City with an area of Twenty Thousand (20,000) sq.m.; that on April 30, 2001, Cindy P. Daquer obtained a Three Million Five Hundred Thousand Pesos (P3,500,000.00) loan from the ATE REAL ESTATE CORPORATION secured by a mortgage over the Subject Property; that upon Cindy P. Daquer's default, ATE REAL ESTATE CORPORATION caused the extra-judicial foreclosure of the mortgage on the Subject Property; that during the public auction on September 6, 2004, ATE REAL ESTATE CORPORATION emerged as the highest bidder for the total sum of Seven Million Pesos (P7,000,000.00) and in due time was issued the sheriff's certificate of sale; that on November 9, 2005, the certificate of sale was inscripted in the TCT's; that on June 30, 2006, a case of Estafa thru falsification of Public Documents against Felimon B. Reynosa, Jr., Eugenio Daquer and Cindy Daquer before the Ombudsman for alleged falsified certified copy of the tax declaration by the respondents making it appear that the declared property is valued at Six Million Pesos (P6,000,000.00) and is a residential/beach lot when in fact it is valued at Three Hundred Eight Thousand Seven Hundred Fifty Four pesos (P308,754.00) and is an agricultural Lot; that on May 17, 2010, in a Joint Order (Motion for Reconsideration), the Office of the Deputy Ombudsman for Luzon, denied the motion for reconsideration for lack of merit. Now, you are requesting for a ruling that the tax base in the computation of the Capital Gains Tax and Documentary Stamp Tax should be the Market Value instead of the Auction Value and what will be the reckoning period for the payment of taxes. In reply, please be informed that in foreclosure sale, there is no actual transfer of the mortgaged real property until after the expiration of the one-year redemption period as provided in Act No. 3135 and title thereto is consolidated in the name of the mortgagee in case of non-redemption. In the interim, the mortgagor is given the option whether or not to redeem the real property. The issuance of the Certificate of Sale does not by itself transfer ownership. There has to be a Deed of Absolute Sale to effect transfer of title over realty. Therefore, the capital gains tax becomes due only in cases of non-redemption and only upon expiration of the one-year redemption period because of the principle that there is yet no transfer of title and no profit or gain is realized by the mortgagor at the time of foreclosure sale but only upon expiration of the one-year redemption period. Furthermore, Section 2 of Revenue Regulations No. 9-2012, 1 provides: Section 2. Taxability of Owner's/Mortgagor's Failure to Redeem his Foreclosed/Auctioned Off Property/ies within the Applicable Statutory Redemption Period. In case of non-redemption of properties sold during involuntary sales, regardless of the type of proceedings and personality of mortgagees/selling persons or entities, the Capital Gains Tax (CGT) imposed under Sections 24(D)(1) and 27(D)(5) of the Tax Code, in relation to Section 57 of the Tax Code and RR 2-98, as amended, if the property is a capital asset; or the Creditable Withholding Tax (CWT) imposed under Section 57 and RR 2-98, as amended if the property is an ordinary asset; the Value-added Tax (VAT) imposed under Section 106 of the Tax Code and RR 16-2005, as amended; and the Documentary Stamp Tax (DST) imposed under Section 196 of the Tax Code shall become due. EaICAD The buyer of the subject property, who is deemed to have withheld the CGT or CWT due from the sale, shall then file the CGT return and remit the said tax to the Bureau within thirty (30) days from the expiration of the applicable statutory redemption period; or file the CWT return and remit the said tax to the Bureau within ten (10) days following the end of the month after expiration of the applicable statutory redemption period, provided that, for taxes withheld in December, the CWT return shall be filed and the taxes remitted to Bureau on or before January 15 of the following year. If the property sold through involuntary sale is under the circumstances which warrant the imposition of VAT, the said tax must be paid to the Bureau by the VAT-registered owner/mortgagor on or before the 20th day or 25th day, whichever is applicable, of the month following the month when the right of redemption prescribes. The DST return shall be filed and the said tax paid to the Bureau within five (5) days after the close of the month after the lapse of the applicable statutory redemption period. The CGT/CWT/VAT and DST shall be based on whichever is higher of the consideration (bid price of the highest bidder) or the fair market value or the zonal value as determined in accordance with Section 6(E) of the Tax Code. Moreover, increments as provided under Sections 248 and 249 of the 1997 Tax Code for failure to file returns and pay taxes within the prescribed period shall be imposed. Sections 248 and 249 of the 1997 Tax Code provides that: "SEC. 248. Civil Penalties . (A) There shall be imposed, in addition to the tax required to be paid, a penalty equivalent to twenty-five percent (25%) of the amount due, in the following cases: (1) Failure to file any return and pay the tax due thereon as required under the provisions of this Code or rules and regulations on the date prescribed; or (2) Unless otherwise authorized by the Commissioner, filing a return with an internal revenue officer other than those with whom the return is required to be filed; or (3) Failure to pay the deficiency tax within the time prescribed for its payment in the notice of assessment; or (4) Failure to pay the full or part of the amount of tax shown on any return required to be filed under the provisions of this Code or rules and regulations, or the full amount of tax due for which no return is required to be filed, on or before the date prescribed for its payment. (B) In case of willful neglect to file the return within the period prescribed by this Code or by rules and regulations, or in case a false or fraudulent return is willfully made, the penalty to be imposed shall be fifty percent (50%) of the tax or of the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud: Provided, That a substantial under declaration of taxable sales, receipts or income, or a substantial overstatement of deductions, as determined by the Commissioner pursuant to the rules and regulations to be promulgated by the Secretary of Finance, shall constitute prima facie evidence of a false or fraudulent return: Provided, further, That failure to report sales, receipts or income in an amount exceeding thirty percent (30%) of that declared per return, and a claim of deductions in an amount exceeding thirty percent (30%) of actual deductions, shall render the taxpayer liable for substantial underdeclaration of sales, receipts or income or for overstatement of deductions, as mentioned herein. CIDaTc SEC. 249. Interest. (A) In General. There shall be assessed and collected on any unpaid amount of tax, interest at the rate of twenty percent (20%) per annum, or such higher rate as may be prescribed by rules and regulations, from the date prescribed for payment until the amount is fully paid. (B) Deficiency Interest. Any deficiency in the tax due, as the term is defined in this Code, shall be subject to the interest prescribed in Subsection (A) hereof, which interest shall be assessed and collected from the date prescribed for its payment until the full payment thereof. (C) Delinquency Interest. In case of failure to pay: (1) The amount of the tax due on any return required to be filed, or (2) The amount of the tax due for which no return is required, or (3) A deficiency tax, or any surcharge or interest thereon on the due date appearing in the notice and demand of the Commissioner, there shall be assessed and collected on the unpaid amount, interest at the rate prescribed in Subsection (A) hereof until the amount is fully paid, which interest shall form part of the tax. (D) Interest on Extended Payment. If any person required to pay the tax is qualified and elects to pay the tax on installment under the provisions of this Code, but fails to pay the tax or any installment hereof, or any part of such amount or installment on or before the date prescribed for its payment, or where the Commissioner has authorized an extension of time within which to pay a tax or a deficiency tax or any part thereof, there shall be assessed and collected interest at the rate hereinabove prescribed on the tax or deficiency tax or any part thereof unpaid from the date of notice and demand until it is paid." In view of the foregoing, in cases of foreclosure sale, the capital gains tax return should have been filed and the capital gains tax paid based on the consideration (bid price) or fair market value or the zonal value as determined in accordance with Section 6 (E), whichever is higher, of the Tax Code of 1997 within thirty (30) days from the date of the expiration of the one-year redemption period, counting from the date of registration of certificate of sale with the Register of Deeds. 2 (BIR Ruling No. 046-01 dated September 26, 2001) On the other hand, the documentary stamp tax shall be paid based in accordance with Section 196 of the NIRC which shall be paid within five (5) days after the close of the month after the lapse of the redemption period (RR No. 6-2001). Please be guided accordingly. ESDcIA Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Implementing Sections 24 (D) (1), 57, 106 and 196 of the National Internal Revenue Code of 1997 on non-redemption of properties sold during involuntary sales. 2. Revenue Memorandum Circular No. 55-2011.