BIR Ruling No. 090-11

March 21, 2011 BIR RULING NO. 090-11 24; BIR Ruling No. 071-82; BIR Ruling No. DA-243-96 Office of the Mayor Municipality of Norzagaray Province of Bulacan Attention: Hon. Feliciano P. Legaspi Mayor Gentlemen : This refers to your letter dated October 19, 2009, which was referred to this Office by the Assistant Commissioner, Assessment Service on January 15, 2010, requesting, in effect, for the exemption of capital gains tax assumed by the Municipality of Norzagaray, Bulacan in connection with the purchase of lots to be used for the expansion of the Norzagaray College. aSEHDA In reply, please be informed that Section 24 (D) (1) of the National Internal Revenue Code (NIRC) of 1997, as amended, provides that: "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 trust, Provided, that the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 24(A) or under this Subsection, at the option of the taxpayer." Based on the above provision, the sale by an individual of real property classified as capital asset is subject to the 6% final capital gains tax. The capital gains tax imposed on the sale of real property is an income tax, hence, a direct tax which is the direct liability of the seller of real property. 1 The fact that the tax is shifted to the buyer will not convert the same as tax on the buyer. 2 Thus, granting that the Municipality of Norzagaray assumed payment of the capital gains tax on its purchase of real property, the nature of capital gains tax as a direct tax does not change. Hence, it remains a direct liability of the seller. In essence, 'direct internal revenue tax liability' pertains to the liability of a person mandated by law to file the tax return and pay the tax due thereon. 3 To exempt the transaction from capital gains tax, the taxpayer (seller of real property in this case) must show that he is clearly exempt by law to pay such taxes. One claiming the benefit of tax exemption must bring himself substantially within the terms of the statute or justify his claim by the clearest grant of the organic or state law. 4 Accordingly, in the absence of a clear grant of tax exemption, the capital gains realized from the sale of real property is taxable on the seller. Consequently, as there is no showing that the seller of the real property acquired by the Municipality is exempt from direct taxes, this Office regrets to inform you that your request for exemption from the payment of capital gains tax in connection with the purchase of lots for the expansion of Norzagaray College is hereby denied for lack of legal basis. We also wish to inform you that exemption from the capital gains tax or any other tax that may be imposed under the Tax Code can only be effected by an act of Congress through legislation, the Bureau of Internal Revenue merely enforces tax laws and cannot make the exemptions. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation it shall be disclosed or discovered that the facts are different, then this ruling shall be without force and effect insofar as the herein parties are concerned. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. BIR Ruling No. DA-243-96 dated January 16, 1996. 2. BIR Ruling No. 071-82 dated March 5, 1982. 3. BIR Ruling No. 036-02 dated October 9, 2002. 4. House v. Posadas , 53 Phil. 338; Asiatic Petroleum Co. vs. Llanes , 49 Phil. 466.