BIR Ruling No. 130-12

February 24, 2012 BIR RULING NO. 130-12 Secs. 27 (C) and 27 (D) (5) NIRC; BIR Ruling No. 081-10 dated July 27, 2010; BIR Ruling No. 099-99 dated July 9, 1999 Development Bank of the Philippines Cebu Branch, Osmea Blvd. Cebu City Attention: Bernardino E. Olayvar, Jr. AVP/Branch Head Gentlemen : This refers to your letter dated July 16, 2009 received by this Office on September 17, 2009 by way of 2nd Indorsement, dated August 17, 2009, from Revenue Region 13, Cebu City, requesting for exemption from the payment of capital gains tax and documentary stamp tax on the sale of real property made by the Development Bank of the Philippine (DBP) in favor of the spouses Jose Encabo and Rebecca Encabo. As represented and based on the documents submitted, it appears that DBP is the registered owner of a parcel of land covered by Transfer Certificate of Title (TCT) No. T-72868 of the Registry of Deeds of Cebu, situated at Saint Jude Acre Subdivision, Bulacao, Pardo, Cebu City and containing an area of two hundred thirty nine (239) square meters; that under the Conditional Sale Agreement dated December 5, 1978 and four (4) Supplemental Agreements thereto, DBP agreed to sell the said property to spouses Jose Encabo and Rebecca Encabo for a total purchase price of Php94,500.00; that the purchase price of the property shall be paid by the buyers in installment for a period of twenty five (25) years with stipulated interest thereon; and that the aforesaid transfer is one of an equitable mortgage which is exempt from capital gains tax and documentary stamp tax. In reply, please be informed as follows: Article 1602 of the New Civil Code, which introduced the concept of equitable mortgage, was discussed by the Supreme Court in the case of Santos v. Duata, G.R. No. L-20901, August 31, 1965, to wit: CaHAcT "Article 1602 is a new provision in the Civil Code designed primarily to curtail the evils brought about by contracts of sale with right of repurchase, such as the circumvention of the usury law and pactum commissorium. It particularly envisions contracts of sale with right of repurchase where the real intention of the parties is that the pretended purchase price is money loaned, and in order to secure the payment of the loan a contract purporting to be a sale with pacto de retro is drawn up." The Supreme Court further explained that an equitable mortgage is one which, although lacking in some formality, or form, or words, or other requisites demanded by a statute, nevertheless reveals the intention of the parties to charge real property as security for a debt, and contains nothing impossible or contrary to law. The essential requisites of an equitable mortgage are: (1) the parties enter into what appears to be a contract of sale, (2) but their intention is to secure an existing debt by way of mortgage. (Rockville Excel International Exim Corporation vs. Spouses Oligario Culla and Bernardita Miranda, G.R. No. 155716, dated October 2, 2009) It should be noted that in the instant case, Spouses Encabo did not sell or mortgage any real property to DBP in order to secure the payment of the purchase price of the lot. Spouses Encabo could not have sold or mortgaged the real property to the bank precisely because they did not own the same. Clearly, the transaction entered into by DBP and the Spouses Encabo is not an equitable mortgage. (BIR Ruling No. 081-10 dated July 27, 2010) Consequently, Section 27 (D) (5) of the 1997 Tax Code, as amended, provides that in the case of sale, exchange, or other disposition of lands and/or buildings which are not actually used in business and are treated as capital assets by domestic corporations, 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 the Tax Code, whichever is higher, is imposed upon capital gains presumed to have been realized therefrom. It must be noted that the capital gains tax mentioned under the aforementioned provision is an income tax, the burden of which rests upon the seller which, in this case, is the DBP. ASaTHc It is noteworthy to mention that DBP is subject to the capital gains tax of 6% imposed on its capital gains presumed to have been realized from the sale of the said parcel of land despite of its being a government financial institution. This is in accordance with the provision of Section 27 (C) of the Tax Code of 1997, which provides that all corporations, agencies or instrumentalities owned or controlled by the Government, except the Government Service Insurance System (GSIS), the Social Security System (SSS), the Philippine Health Insurance Corporation (PHIC) and the Philippine Charity Sweepstakes Office (PCSO), are now subject to such rate of tax upon their taxable income as are imposed upon corporations or association engaged in similar business, industry or activity (BIR Ruling No. 099-99 dated July 9, 1999) . Furthermore, the Deed of Absolute Sale is subject to the documentary stamp tax based on the actual consideration of the property sold pursuant to Sec. 196 of the Tax Code of 1997. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue