Capital Gains Tax Liability on Sale of Property in favor of the Government

October 2, 1991 BIR RULING NO. 204-91 21 (e) 175-90 204-91 Gentlemen : This refers to your letter dated May 29, 1991 stating that your client, the Export Processing Zone Authority (EPZA) has brought to your attention the refusal of BIR Regional or Field Offices in Lapu-Lapu City to register lots acquired in the name of the Authority through expropriation proceedings if there is no "BIR Clearance of Authority to Transfer" evidencing payment of or exemption by the property owner from the capital gains tax; that under its Charter, P.D. 66, as amended, EPZA is empowered to expropriate the lots within the proclaimed boundaries, as defined by its organic law; that the lots referred to are undeniably within the proclamation area, some of which were acquired after the filing of expropriation cases while others were required extra-judicially with the owner's tacit recognition of EPZA's authority to expropriate; that the transactions involved are forced or compulsory acquisition of properties; that the landowners could not refuse EPZA's taking over their properties that in all those acquisitions judicial or otherwise the only issue to be resolved is the just compensation of the properties taken; that on its part, EPZA is not willing to pay just compensation at amounts higher than those judicially determined or fixed by EPZA on the basis of earlier determination by the courts or by EPZA itself; that on the whole, EPZA's buying price is very much lower than the prevailing market prices; that in most instances, if the landowners were made to pay the capital gains tax they would end up with just a few pesos; that you feel that if the government does not help the said landowners their payment of the said tax would in effect deprive them of their properties without just compensation; and that you are of the opinion that the transaction being forced sales should be exempted from the payment of capital gains tax. Based on the foregoing representation, you now request a ruling as to whether or not the afore described sale transactions are subject to the payment of capital gains tax. In reply, please be informed that under Section 21 (e) of the Tax Code, as amended, 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 trusts, shall be taxed at the rate of 5% based on the gross selling price or the fair market value (zonal value) prevailing at the time of the sale, whichever is higher. Provided, that the tax liability, if any, on gains from sales or other disposition 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 21 (a) or (e) of the Tax Code, at the option of the taxpayer. It is noted that the above-cited provisions of Section 21 (e) of the Tax Code is broad enough to embrace the aforesaid acquisition of realty by your client, EPZA, through expropriation filed by it and extra-judicially with the tacit recognition of the landowners of EPZA's authority to expropriate, hence, the said acquisition of realty by your client is therefore, subject to the 5% capital gains tax imposed under the above-cited section of the Tax Code. However, the tax liability of the landowner from the sale of their real property in favor of the government through your client shall be determined either under Section 21 (a) or (e) of the Tax Code, at their option. In case they elect the former, this Office shall issue the certification authorizing the transfer of title to the purchaser. (Section 7 (a) (5), Revenue Regulations No. 8-79). On the other hand, in case they elect the latter, this Office hereby allows the registration of the Deed of Sale with the Register of Deeds concerned and consequently, the transfer of the property in favor of the government. Thereafter, upon submission of a new certificate of title in the name of the government at which time payment of the property can be affected, the said landowners shall file the corresponding capital gains tax return within thirty (30) days from said submission of the certificate of title. The EPZA shall within the same period withhold the capital gains tax due from the landowner and remit the same to the Bureau. (BIR Ruling 044-84) In this connection, it may be noted that this ruling applies only to sales of property in favor of the government wherein the contract stipulates that the seller shall not be paid until title to the property is transferred to the government. Moreover, this Office realizing that it takes a considerable amount of sacrifice and fortitude on the part of the said landowners to part with and dispose of their real property specially at a price much lower than the current zonal valuation or market appraised value, and considering that the likelihood of understatement of consideration is remote in this case as the government, through the EPZA is the purchaser of the real properties of the said landowners, the use of the actual consideration as basis in determining the capital gains tax liability as consequence of the said sale of their realty, is hereby allowed as an exception to the policy of this Bureau, in relation to Section 21 (e) of the Tax Code. cdtech Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner Officer-in-Charge