Computation of Capital Gains Tax for Transfer of Property by Way of Dacion en Pago

July 29, 1999 BIR RULING NO. 114-99 114-99 Belo Gozon Parel Asuncion & Lucila Attorneys at Law 15 th Floor, Sagittarius Condominium H.V. Dela Costa Street, Salcedo Village Makati City Attention: Atty . Felipe L . Gozon Gentlemen : This Refers to your letter dated July 23, 1999 requesting for a ruling as to the correct basis for the computation of the capital gains tax in relation to the transfer of a certain parcel of land by a Consortium which you represent by way of dacion en pago in favor of Metrobank. As per representation, the facts of the case are outlined as follows: 1. In the latter part of 1996, an unincorporated consortium consisting of 7 individual members, purchased a parcel of land (Property) with an area of 6.8 hectares (68,029 sq.m.),now covered by TCT No. 60428 and TCT No. 60429, at a cost of P350 million. 2. The land is situated in Barangay Talon 3, Las Pias, Metro Manila, has a frontage of 150 x 30 meters along Alabang-Zapote Road, while the rest of the area extends westward away from the Alabang-Zapote Road, encompassing vacant, cogonal area; 3. The Consortium obtained a loan from Metrobank for P750 million and subsequently, it mortgaged the Property to the bank to secure payment of their loan obligation; 4. Despite reasonable efforts, the Consortium was not able to find any buyer for the Property since the time it was acquired up to the present time; 5. As the Consortium is not unable to repay the principal and service the astronomically high interest rate of 30% now prevailing on its loan of P750 million with Metrobank, the Consortium is now forced to propose the transfer, surrender or exchange of the Property by way of Dacion en Pago to Metrobank in order to extinguish its obligation to the extent of its loan of P750 million; 6. That having decided on the above course of action, the Consortium shall become liable to pay the capital gains tax and documentary stamp tax on the dacion transaction; 7. However, upon verification of the current Zonal Value of the Property from which the above taxes are to be based, the Consortium was surprised to find out that the BIR increased the zonal valuation of lands located at Alabang-Zapote Road, which now stands at P19,900 per square meter and that since the frontage of the Property is located along Alabang-Zapote Road, the entire stretch of the land might be considered to have a fair market value of P19,900 per sq. m. for taxation purposes; 8. That if the said zonal valuation is used as basis, the entire Property would be placed at an outrageously high, unrealistic and confiscatory valuation of P1.2 billion for tax purposes, notwithstanding that (i) only a small portion of the Property is located along Alabang-Zapote Road; (ii) the market price of the Property at the time it was bought was only at P350 million and there has been no improvements introduced to the Property at all; (iii) the prices of real estate have either remained flat or even decreased as a result of the financial crisis that occurred in the middle part of 1997. 9. That after a considerable time and effort, the Consortium was finally able to make Metrobank agree to a valuation of P750 million for the entire property, so that under a dacion en pago arrangement, Metrobank now agrees to take possession of the property in exchange for the extinguishment of the loan obligation for an equal amount. Such valuation was already on the high side and agreed to rather reluctantly by the bank after a strict arms length determination. 10. That in the valuation of urban lands, the regulation governing the classification, appraisal and assessment of all real property pursuant to Section 201 of R.A. No. 7160, should be persuasive insofar as valuation of this particular property is concerned. Thus, local governments follow the following guideline in real property assessment of urban land: "1. Appraisal of Urban Lands The base unit market value per square meter is multiplied to the area of the land to arrive at its market value. Where, the depth of the lot is deeper than the standard depth, area of lot beyond the standard depth is valued lower than the frontage area . The modification is but a recognition of the fact that as depth of lot increases, the unit value decreases . Other modifications like street frontage, street corner, sunken or abnormally low land and shape of lot shall be also considered as what is obtaining in the locality." (a) As a general rule, the 100% rate per square meter fixed in the schedule shall be applied to the area of residential, commercial and industrial lands within the standard area fronting the street or road with normal elevation or level. The remaining portion thereof shall be considered as interior lots and the standard depth/area percentage of adjustments corresponding to the second strip, third strip and so on, shall be applied thereon . Land beyond the standard depth, i.e. 25 meters for commercial and industrial lands, and 20 meters for residential land, if any shall be valued 80% for the second strip, 60% for the 3 rd strip, 40% for the 4 th strip and 20% of the base value fixed to the street or road for the remaining area .Provided, however, that in case the parcels of land abutting two streets or roads with different base value, the stripping and valuation thereof shall be based on the principal street or road with the higher base value, but not lower than the Schedule of Value of the other street." 11. That applying the above guidelines to the Property in question, the following would be derived: Standard Area: 150 meters x 25 meters (standard depth) = 3,750 sq. m Base Value fixed to the Road (Alabang-Zapote Road) = P19,900.00 Hence: % Adjusted Market Area in Unit Value Adjustment Unit Value Sq. M Value (P) 1st Strip 3,450 19,900 100% 19,900 68,655,000 2nd Strip 4,520 19,900 80% 15,920 71,958,000 3rd Strip 5,900 19,900 60% 11,940 70,446,000 4th Strip 5,855 19,900 40% 7,960 46,605,800 Remainder 48,304 19,900 20% 3,980 192,249,920 TOTAL 68,029 CURRENT MARKET VALUE 449,925,120 Based on the foregoing facts and stipulations, you now come to us for confirmation of your opinion that the Property in question should not be valued on the basis of the current zonal value of the BIR of P19,900 per square meters for lots within the Alabang-Zapote Road, and to ask confirmation that the basis for the payment of the capital gains tax and documentary stamp tax is the amount of P750 million, which is the dacion price agreed upon between the Consortium and Metrobank. In reply, please be advised that under Department Order No. 10-97 of the Department of Finance entitled "Revised Zonal Values of Real Properties in Las Pias and Muntinlupa under Revenue District No. 53 for Internal Revenue Tax Purposes (Las Pias 20 Barangays) (Muntinlupa 8 Barangays),the most recent valuation of lands covering your area is as follows: "BARANGAY:TALON TRES CLASSIFICATION 6TH REVISION 5TH REVISION STREET/SUBDIVISION VICINITY FIXATION ZV/SQ.M. ZV/SQ.M. ADMIRAL PARK ARISTOCRAT SUBD RR 2,600.00 1,950.00 ARISTOCRAT SUBD ADMIRAL IIIIV RR 2,600.00 1,950.00 BAUTISTA CPD ADMIRAL SUBD RR 2,900.00 2,200.00 BAYANIHAN SUBD GOLDEN GATE SUBD RR 2,600.00 1,950.00 CARMENCITA VILL ADMIRAL IV RR 2,600.00 1,950.00 DONA PURISIMA BF HOMES RR 2,950.00 1,950.00 EMAPALICO HOMES CASIMIRO VILL RR 2,900.00 2,300.00 GOLDEN GATE SUBD SOUTH ROAD RR 2,850.00 2,300.00 PELAYO SUBD PARAMOUNT VILL RR 2,350.00 1,950.00 PARAMOUNT SUBD EMAPALICO HOMES RR 2,350.00 1,950.00 RAMOS CPD GOLDEN GATE SUBD RR 2,350.00 1,950.00 SOUTHLAND ADMIRAL SUBD RR 3,800.00 3,150.00 TALON GARDEN EMAPALICO HOMES RR 3,500.00 3,150.00 ZAPOTE ALABANG RD CECILES MONWLK CR 19,900.00 16,250.00 ALL OTHER STREETS RR 2,200.00 1,825.00 CR 3,700.00 3,175.00 GP 1,900.00 1,600.00" It is undisputed that the zonal value or fair market value of lots located along the Zapote-Alabang Road is at P19,900.00. However, this Office recognizes that to extend such zonal valuation not only to the frontage area but to the rest of the Property would be inequitable and unjustified under the premises. According to the rules of valuation under the above-quoted Department Order No. 10-97 and considering the guidelines in the valuation of urban lands, the following are in order: (a) Only lots located along the Alabang-Zapote Road and vicinity (Ceciles R. Moonwalk) are valued at P19,900 for tax purposes; (b) If the area cannot be classified under any particular street/subdivision of vicinity, the area would be lumped under the "All Other Streets" category; (c) The valuation of lands under the "All Streets' category are as follows: i) Residential - Residential P2,200.00 ii) Commercial - Residential 3,700.00 iii) General Purpose 1,900.00 Applying therefore the foregoing rules, with the exception of the frontage area, the remaining are of the Property consisting of vacant, cogonal and undeveloped portion with an area of 68,529 sq.m.,would be properly classified as General Purpose lot. General Purpose lot is defined to mean "rawland, undeveloped and underdeveloped area which has potential for development into residential, commercial, industrial, institutional, etc.". Hence, since the frontage area would consist of 4,500 sq. m. (150 meters x 30 meters),applying the zonal value of P19,900, the fair market value of this particular portion is P85,500,000. The remaining property would be General Purpose lot with an assigned zonal value of P1,900.00. But even using the highest value of the Commercial lot of P3,700 to the remaining area consisting of 68,529 sq.m.,its resulting fair market value would be about P253,557,300. All in all, the total fair market value would be P339,057,300 which is still way below the consideration of P750 million in your dacion agreement. Since the consideration of P750 million, equivalent to the dacion price agreed upon between the Consortium and Metrobank, is still higher than that determined under current zonal valuation, and considering that this is not disadvantageous to the government, this Office hereby holds that the same can serve as the basis in computing the capital gains tax and documentary stamp tax relative to the said dacion en pago transaction. LLpr It is not amiss at this point to state that due to strong clamor from the government and private sectors in view of the depressed condition of the real estate market, this Office is currently undergoing a review of the existing zonal valuation to align the same within a realistic market range. This ruling is being issued on the basis of the facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue