BIR Ruling No. 224-11

July 12, 2011 BIR RULING NO. 224-11 Secs. 24 (D) (1), 56 (A) (3); 196 of NIRC; Sec. 263 of R.A. 7160; BIR Ruling No. 036-00; BIR Ruling No. 045-01; BIR Ruling No. 011-2006; BIR Ruling No. DA-401-07; BIR Ruling No. DA-461-07; BIR Ruling No. 009-10 Office of the Assistant City Administrator for Operations Quezon City Hall, Elliptical Road, Diliman, Quezon City Attention: Mr. Manuel N. Sabalza Assistant City Administrator/ Head, QC Auctioned Properties Task Force Gentlemen : This refers to your letters dated October 26, 2010 requesting exemption from payment of capital gains tax and documentary stamp tax of real properties sold on public auction to the Quezon City Government. This further relates to the letter subsequently received by this Office from Hon. Mayor Herbert M. Bautista dated February 23, 2011 requesting legal opinion that the forfeiture of real properties by the Quezon City Government due to delinquency in real property taxes is exempt from payment of capital gains tax and documentary stamp tax. Documents submitted disclose that the Quezon City Government has the following inventory of real properties forfeited by the city due to tax delinquency in real property taxes pursuant to Section 263 of the Local Government Code (LGC): Registered Owner TCT Tax Area Date of Certificate No. Declaration (Sq. M.) Public of Sale Auction Issue Date Benjamin Salonga, Jr. 168093 D-067-00297 1,394 12-16-05 2-27-06 Cristi C. Augusto 81749 E-023-05400 1,374 6-21-07 7-14-10 Conrado L. Averion 118346 D-023-12285 50,005 12-16-05 2-27-06 Filinvest Land, Inc. 313933 E-008-04281 5,311 6-21-07 7-9-10 Filinvest Land, Inc. 288249 E-008-04990 5,508 6-21-07 7-9-10 Gonzalo L. Rialp 116100 E-139-03406 1,800 6-21-07 7-9-10 Filinvest Land, Inc. 246126 E-008-05998 5,914 9-27-07 7-9-10 Marenir Dev. Corp. 271132 E-005-03295 2,149 9-27-07 8-17-10 Estrella Mapa 348291 E-081-00234 245,091 6-21-07 7-9-10 Hobart Realty & 367644 E-067-05690 1,642 6-21-07 7-9-10 Dev. Corp. Teodoro Buenaventura, 27697 D-069-04880 24,610 9-15-05 11-23-05 et al. Eufemia de Guzman 30372 D-069-04873 14,733 12-16-05 2-27-06 & Julia de Guzman Pacifico Villaluz 145763 D-139-00215 2,274 9-15-05 11-25-05 Medina Food 22058 D-078-01071 6,976 12-16-05 2-27-06 Industries, Inc. Luis Dolor & 290117 D-139-18450 1,969 12-16-05 2-27-06 Faustino Dolor Development Bank 91807 D-069-03130 1,918 9-15-05 11-23-05 of the Philippines CJ Yulo & Sons, Inc. 221100 D-081-13615 45,112 4-7-06 2-23-07 that the city seeks to register in its name with the Register of Deeds said forfeited properties but is hampered by the supposed requirement of proof of payment of capital gains tax and documentary stamp tax; that the Offices of the Assistant City Administrator and City Mayor are of the position that forfeiture by the city government of foregoing real properties due to delinquency is not subject to capital gains tax (CGT) since the transfer does not involve "sale, exchange, or other disposition" of capital assets but an exercise by city government's governmental function and power of taxation; that the Declaration of Forfeiture of real property is not one of those listed under the Tax Code of 1997, as amended, as being subject to documentary stamp tax (DST); and that it is particularly requested that the following issues be resolved: EcTDCI 1) The forfeiture of real properties by the city government due to tax delinquency is not subject to CGT; 2) The document of Declaration of Forfeiture of real property is not subject to DST; and 3) The presentation of this Ruling, in lieu of proof of payment of CGT and DST, be deemed sufficient for registration of said forfeited properties in the name of the city government. In reply, please be informed that Section 263 of R.A. 7160 or the Local Government Code of 1991 provides that: "SECTION 263. Purchase of Property By the Local Government Units for Want of Bidder. In case there is no bidder for the real property advertised for sale as provided herein, or if the highest bid is for an amount insufficient to pay the real property tax and the related interest and costs of sale the local treasurer conducting the sale shall purchase the property in behalf of the local government unit concerned to satisfy the claim and within two (2) days thereafter shall make a report of his proceedings which shall be reflected upon the records of his office. It shall be the duty of the Registrar of Deeds concerned upon registration with his office of any such declaration of forfeiture to transfer the title of the forfeited property to the local government unit concerned without the necessity of an order from a competent court. Within one (1) year from the date of such forfeiture, the taxpayer or any of his representative, may redeem the property by paying to the local treasurer the full amount of the real property tax and the related interest and the costs of sale. If the property is not redeemed as provided herein, the ownership thereof shall be vested on the local government unit concerned. " (Emphasis supplied) From the foregoing provision, it is clear that when there are no bidders of a real property advertised for sale in the public auction, the local treasurer conducting the sale shall purchase the property in behalf of the local government unit (LGU). Sections 24 (D) (1) and 196 of the Tax Code of 1997, as amended, on the other hand provides: "SEC. 24. Income Tax Rates. xxx xxx xxx (D) Capital Gains from Sale of Real Property. (1) In General. The provisions of Section 39(B) notwithstanding, 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 this Code, whichever is higher, is hereby imposed upon 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: . . . ." (Emphasis supplied) In the case of a public auction, sale of the realty of the delinquent taxpayer is the enforcement by the LGU of its tax lien for unpaid real property taxes and is being conducted through public bidding or public auction sale. However, CGT is usually paid by the seller considering that it is imposed upon 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 such as mortgage foreclosure sales whether it is done judicially or extra-judicially. (BIR Ruling No. 045-01 dated September 26, 2001) In BIR Ruling No. DA-401-07 dated July 20, 2007, this Office had the occasion to rule on the issue of whether or not sale at public auction of tax-delinquent real properties is exempt from the capital gains tax and documentary stamp tax and the tax base for its computation, thus: "In reply, please be informed that since the sale of the realty of the delinquent taxpayer is the enforcement by the Province of Antique of its tax lien for unpaid real estate taxes and is being conducted through public bidding or on public auction sale, this office is of the opinion as it hereby holds that the tax base in computing the capital gains tax and the documentary stamp tax on such sale transaction should, as in the case of mortgage foreclosure sale under Act 3135, as amended, be likewise on the highest bid price. Hence, the capital gains tax and the documentary stamp tax due on the said sale of the realty your client purchased in the public auction sale by the Province of Antique should be computed on the highest bid price, which shall be for the account of the delinquent taxpayer since the sale by the Province of Antique is for and in behalf of the former, and it is just enforcing a tax lien for the unpaid real property taxes. The statutory seller in this particular case is the Provincial Government of Antique. However, although under the Tax Code, the person liable to pay the CGT is the owner of the property, the CGT though is ( sic ) required to be paid upon consolidation of title over the property by the highest bidder which shall be made after the lapse of 1-year redemption period. If redeemed, there is no CGT due. But, if the owner fails to redeem the property, the highest bidder who, in most cases is the statutory seller, pays the CGT and DST, in order that a property may be registered under its name upon the registration of the Certificate of Sale. There is no exemption from taxes in case of foreclosure sale. The Tax Code requires payment of CGT/DST even on conditional sales of real property." (Emphasis supplied) DaIAcC The same issue was settled in BIR Ruling No. DA-461-07 dated August 21, 2007 involving the Province of Rizal, to wit: ". . . This rule also applies to sales effected through public auction. In other words, the sale of tax-delinquent real properties effected through public bidding or auction , and as a consequence of the enforcement by the Province of Rizal through the Office of the Governor of its tax lien for the unpaid real estate taxes against the said properties, is subject to the capital gains tax. However, the basis for computing the capital gains tax on such sale transaction shall be the total selling price or the highest bid price pursuant to Section 3(2) of Revenue Regulations No. 4-99 since public auction sale is similar to a mortgage foreclosure sale." (Emphasis supplied) Applying the foregoing in this case, while the Quezon City Government is the statutory seller of the properties on public auction, the CGT and DST due on the said sale of the realty are for the account of the real property owner. However, since no redemptions were made by the owners of the subject properties after the issuance of "Certificates of Sale of Delinquent Properties" to Quezon City Government and that upon the Declaration of Forfeiture in its favor, ownership of such real properties shall be transferred in the name of said LGU pursuant to Section 263 of R.A. 7160, the Quezon City Government is the one liable to pay the CGT and DST in order for the properties to be registered in its name. (BIR Ruling No. 009-10 dated June 3, 2010) As for the tax base in computing the CGT and DST on such sale transaction, it should, as in the case of mortgage foreclosure sale under Act No. 3135, as amended, be likewise on the highest bid price. (BIR Ruling No. 036-00 dated September 11, 2000) Then again, there is no "highest bid price" in situation where the LGU purchases the property for want of bidder in the public auction. The tax base may then be based on the bid price in the auction sale or the zonal value of the forfeited property, whichever is higher. (BIR Ruling No. 011-2006 dated October 20, 2006) Thus, under Section 27 (C) of the Tax Code of 1997, all corporations, agencies or instrumentalities owned or controlled by the Government, except the GSIS, the SSS, the PHIC, the PCSO and the PAGCOR shall pay such rate of tax upon their taxable income as are imposed upon corporations or associations engaged in a similar business, industry or activity. Likewise, under P.D. No. 1177, all units of government, including government owned or controlled corporations, are subject to income taxes, customs duties and other taxes and fees as are imposed under revenue laws. IN VIEW OF THE FOREGOING, this Office regrets to deny your request for exemption for lack of legal basis and hereby holds as follows: 1) The forfeiture of or purchase by the Quezon City Government in the public auction of the aforementioned listed properties is subject to CGT based on the bid price in the auction sale or the zonal value of the foreclosed property, whichever is higher; and 2) The Declaration of Forfeiture is subject to DST under Section 196 of the Tax Code of 1997, as amended, since upon registration of this document with the Office of the Registry of Deeds, the Registrar of Deeds is duty bound to transfer the title of the forfeited property to the Quezon City Government pursuant to Section 263 of R.A. 7160. 3) Finally, no registration of any document transferring real property shall be effected by the Registry of Deeds unless the Commissioner or his duly authorized representative has certified that such transfer has been reported, and the tax herein imposed has been paid. (Section 56 [A] [3] of the Tax Code of 1997) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts as represented are different, then this ruling shall be considered null and void. HTSaEC Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue