BIR Ruling No. 216-15

June 19, 2015 BIR RULING NO. 216-15 Sections 24 (D) (1), 188 & 196 of the Tax Code of 1997, as amended; BIR Ruling No. 360-11 Reynaldo E. Reyes No. 138 N. Pascual Street, Gregoria Heights Subdivision Brgy. San Isidro, Taytay, Rizal Sir : This refers to your letter dated November 21, 2013, requesting tax ruling on the Deed of Exchange executed by the Heirs of Miguel B. Borja (the Heirs) and the Republic of the Philippines (the Republic). It is represented that sometime in 1981, the Republic through the initiative of then Metro Manila engineering District II, Ministry of Public Works and Highways filed an expropriation proceedings with the Court of First Instance of Rizal, Branch XI on several parcels of land located at Brgy. San Juan, Taytay, Rizal for use in the Mangahan Floodway Project and one of the said parcels of land involved is covered by Tax Declaration No. 8947 containing an area of five thousand three hundred seventy six square meters (5,376 sq.m.).However, the said tract of land was not used but instead the parcel of land covered by Tax Declaration No. 04-5692 containing an area of four thousand three hundred fourteen square meters (4,314 sq.m.) belonging to the Heirs. It is for this reason that the Heirs are requesting that the lot covered by Tax Declaration No. 8947 be re-conveyed in substitution of the lot covered by Tax Declaration No. 04-5692; that on October 1, 2013, the Heirs and the Republic executed a Deed of Exchange of Real Property; and that said Deed of Exchange of Real Property provides that: "1. That the First Party (the Republic) hereby transfer, cedes and conveys by way of exchange to the Second Party (the Heirs),free from all liens, charges or encumbrances, the 5,376 square meter property under Tax Declaration No. 8947 belonging to the First Party. 2. In consideration of the transfer, the Second Party agrees to pay and/or return to the First Party the amount of Php10,752.00 representing the purchase price received for the sale of the property under Tax Declaration No. 8947, with interest at the rate of 12% from the time the Deed of Absolute Sale was executed in 1981 until full payment is made by the Second Party. 3. That the Second Party likewise transfer, cedes and conveys by way of exchange unto the First Party, free from all liens, charges or encumbrances, the 1,062 square meter portion of the property under Tax Declaration No. 04-5692. 4. In consideration for such transfer, the First Party will pay the Second Party the amount of Php8,628.00 representing the value at the time of taking of the 1,062 square meter portion of the Tax Declaration No. 04-5692 actually taken and used by the First Party for the Mangahan Floodway Project, with interest thereon at the rate of 12% from the time as that stated in paragraph 2 hereof. aDSIHc 5. The parties may choose to simply offset the amounts due from each one and just pay the difference of the purchase price to the party entitled to the same." In reply, we regret to inform you that your request for tax exemption cannot be granted for lack of legal basis. Section 24 (D) of the Tax Code of 1997, as amended, provides, viz. : "Section 24 (D). Capital Gains from Sale of Real Property . (1) In General . The provisions of Section 39 (B) notwithstanding, a final tax of 6% based on the gross selling price or current market value as determined in accordance with Section 6 (E) of this Code, whichever is higher, is hereby imposed upon the capital gains presumed to have been realized from the sale, exchange and other dispositions 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: ..." The exchange of the said properties is covered by the clause "other dispositions of real property" under Section 24 (D) of the Tax Code of 1997, as amended, and therefore subject to the capital gains tax imposed therein. The conveyance being a disposition of real property under Section 24 (D) of the Tax Code, as amended, is likewise subject to the documentary stamp taxes imposed in Section 188 and Section 196 of the Tax Code, as amended. (BIR Ruling No. 360-11 dated September 30, 2011) Such being the case, both exchanging parties, i.e ., the Heirs and the Republic are subject, separately and distinctly, to the 6% capital gains tax based on the fair market value or zonal value of the properties, whichever is higher, as imposed under Sections 24 (D) (1) and 27 (D) (5) of the Tax Code of 1997, as amended. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue