Application of the Capital Gains Tax

November 6, 1981 BIR RULING NO. 217-81 34-h 000-00 217-81 The Regional Director Revenue Region No. XI-B Davao City S i r : This refers to your letter dated July 11, 1980 requesting a ruling on the application of the capital gains tax to a sale with right to repurchase ( pacto de retro ) where the vendor a retro ("A") sells for P100,000.00 a piece of land to the vendee a retro ("B") with a right to repurchase within five (5) years, deriving therefrom a profit of P50,000.00 and paying therefor a capital gains tax of P5,000.00 and where said vendor a retro repurchases the land in the fifth year by paying back the amount of P100,000.00. cdt Specifically, you want to be informed on the following questions: 1) Must the non-exercise of the right to repurchase be awaited up to the expiry date before the capital gains tax can be collected from "A"? 2) Since "A" paid P5,000.00 as capital gains tax under Revenue Memorandum Order No. 21-80, will he get a refund after the repurchase, inasmuch as his profit of P5,000 is nullified by the return of the P100,000, purchase price? 3) Is the refund not barred by the 2-year statutory period of limitation under the Tax Code? In reply, please be informed as follows: 1. A sale with right to repurchase (pacto de retro) is one where the vendor reserves the right to repurchase the thing sold, with the obligation to return to the vendee, the price of the sale, and in addition (1) the expenses of the contract, and any other legitimate payments made by reason of the sale; (2) the necessary and useful expenses made on the things sold; and (3) other stipulations which may have been agreed upon (Articles 1601 and 1616, Civil Code). Instruments covering a sale with right to repurchase may be captioned or labelled as such however, when any one or more of the circumstances enumerated under Article 1602, Civil Code, obtain in this sale contract, said contract shall be presumed as an equitable mortgage. A variation of sale characterized by conventional redemption or right to redeem as its main feature, a genuine sale with pacto de retro , in the sense that it is not convertible into an equitable mortgage, is nonetheless a sale to which the provisions of Batas Pambansa Blg. 37, amending Section 34 of the Tax Code apply. If therefore at the time of sale con pacto de retro, "A" realizes capital gains, he becomes liable to pay capital gains tax based on the net capital gain or profit. Accordingly, since the capital gains tax accrues once "A" sells his real property, there is no need to wait for the lapse of the period for conventional redemption for purposes of ascertaining whether the said vendor buys back his property or not, before the capital gains tax becomes due and collectible. 2. There is no legal basis for the claim for refund even if A seasonably paid the capital gains tax after the sale and, pursuant to the agreement, repurchases his land on the fifth year because: a) the payment of the tax is not erroneous nor illegally collected; and b) there is no law authorizing the return or reimbursement to the taxpayer of capital gains tax paid under the above described situations, either as a tax refund or a tax credit. Reply to the query on whether or not the refund is barred by the two-year statutory period is unnecessary because of No. 2-(a). cdtech Very truly yours, RUBEN B. ANCHETA Acting Commissioner