BIR Ruling No. 130-13

April 4, 2013 BIR RULING NO. 130-13 Tax Code of 1997, as amended, Sections 27 (D) (1); 196; Revenue Regulations No. 09-2012; BIR Ruling No. 521-2012 MGBC & Associates Law Firm Door 28, Madrazo Compound Ponciano Reyes Street 8000 Davao City Attention: Atty. Froilan R. Melendrez Managing Partner/Case Attorney Gentlemen : This refers to your letters dated 13 March 2012 and 27 November 2012 requesting on behalf of your client, PURAKAN EMPLOYEES UNION ("PEU"), exemption from capital gains tax (CGT) and documentary stamp tax (DST) on the transfer of a parcel of land, covered by Original Certificate of Title (OCT) No. P-86 of the Registry of Deeds for Lanao del Sur, levied and sold at a public auction to satisfy the money judgment awarded by the National Labor Relations Commission (NLRC) in favor of PEU. It is represented that on 09 December 2010, the Sheriff of the NLRC Regional Arbitration Branch (RAB) No. 12, Koronadal City, South Cotabato, conducted an auction sale and awarded the subject parcel of land in favor of PEU with a bid of Php24,995,515.19, the total amount obtained by PEU as judgment award in four (4) labor cases against PURAKAN PLANTATION CORPORATION ("PPC"); that on 5 January 2011, the Sheriff of NLRC RAB No. 12 issued a Certificate of Judicial Sale which was duly registered with the Register of Deeds for Lanao del Sur on January 19, 2011; and that for failure of PPC to redeem the subject property within the prescribed period, the Acting Executive Labor Arbiter of NLRC RAB No. 12 issued a Resolution/Order dated February 10, 2012 directing the Sheriff to issue a Final Certificate of Sale/Final Deed of Sale over the subject parcel of land. In reply, please be informed that under Section 24 (D) (1) of the 1997 Tax Code, as amended, it is provided that in the case of 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, 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. In the case of Salud vs. CIR, CTA EB Case No. 412 dated April 30, 2009, the Court of Tax Appeals had the occasion to rule that the 1997 Tax Code, as amended, does not define nor qualify the phrase "other disposition". It is clear, plain and therefore must be applied without attempted or strained interpretation. It shall be construed in its plain and simple meaning. "Disposition" means an act of disposing; transferring to the care or possession of another; the parting with, alienation of, or giving up property (Black's Law Dictionary, 6th Edition) . Applying the above ruling of the Court, it is therefore clear that the phrase "other disposition" includes within its purview all kinds of dispositions of real property under Section 24 (D) (1) of the 1997 Tax Code, unless specifically excluded therefrom or subject to another tax treatment pursuant to different provisions of the 1997 Tax Code. Thus, the sale of a real property to satisfy the money judgment of the court, in the absence of a specific law excluding it from the coverage of Section 24 (D) (1) of the 1997 Tax Code, is deemed included within the purview of the said provision. (BIR Ruling No. 521-2012 dated August 23, 2012) Moreover, Section 2 of Revenue Regulations (RR) No. 9-2012 dated May 31, 2012 provides for the tax treatment of unredeemed foreclosed/auctioned off properties sold during involuntary sales, to wit: "Section 2. Taxability of Owner's/Mortgagor's Failure to Redeem his Foreclosed/Auctioned Off Property within the Applicable Statutory Redemption Period. IaEASH 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 16-05, as amended; and the documentary stamp tax (DST) imposed under Section 196 of the Tax Code shall become due. 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 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. 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 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 & 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." ITaESD Based on the foregoing, it is clear that unredeemed foreclosed/auctioned off properties sold during involuntary sales, regardless of the type of the proceedings, including real properties sold pursuant to a court's order for the satisfaction of a money judgment, are subject to CGT/CWT/VAT, as the case may be, and DST. In view of the foregoing, your request for exemption from CGT and DST is hereby denied for lack of legal basis. (BIR Ruling No. 521-2012 dated August 23, 2012) Accordingly, the transfer of OCT No. P-86 in the name of the PEU shall be subject to CGT and DST, 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. Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue