BIR Ruling No. 290-13

July 29, 2013 BIR RULING NO. 290-13 Secs. 27, 196 NIRC; Art. 1475 Civil Code; BIR Ruling No. DA-339-00 Facunla Law Office 31st St. Phase II, Melencio Extension, Kapitan Pepe Subdivision, Cabanatuan City Attention: Atty. Sabino Jose C. Facula Legal Counsel Gentlemen : This refers to your letter dated September 26, 2011, requesting on behalf of your client, SAN MIGUEL BREWERY, INC. ("SMB" for brevity), exemption from imposition of capital gains tax on the assignment of rights over certain real properties covered by different titles to BREWERY PROPERTIES, INC. (BPI). TEAICc Documents submitted disclose that SMB, with TIN 006-807-251-000, is a domestic corporation duly registered under the laws of the Philippines with principal office address located at 40 San Miguel Ave., Ortigas Centre, Mandaluyong City; that pursuant to the Petition for Extra-Judicial Foreclosure filed by SMB, a public auction was held on December 21, 2009 in Tarlac City over the real properties covered by Transfer Certificate of Title (TCT) Nos. 362299, 362300, 372661, and 372662 registered in the name of Zenaida F. Arao, and TCT No. 328482, registered in the name of Felipe Arao, all issued by the Tarlac City Register of Deeds; that in the public action, SMB was declared the highest and winning bidder as evidenced by the Certificate of Sale (COS) dated March 2, 2010 issued by the Regional Trial Court of Tarlac City under File No. 2125 for Extra-Judicial Foreclosure of Mortgaged Properties, and Request for Amendment of Certificate of Sale dated March 18, 2011 to correct the name of SMB; that the COS was registered with the Register of Deeds for Tarlac City under the following dates: TCT Nos. Date of Registration of the COS Entry No. 362299 March 24, 2010 2010001536 362300 March 24, 2010 2010001536 372661 March 24, 2010 2010001536 372662 March 24, 2010 2010001536 328482 March 24, 2010 2010001536 * Amendment in the COS to correct the name of SMB was annotated on the TCTs on April 15, 2011 that on March 23, 2011, a Deed of Assignment was executed between SMB and BPI wherein all the rights and interest of SMB in and to the above COS were irrevocably conveyed, transferred and assigned to BPI for a consideration of Three Million Six Hundred Fifteen Thousand Eight Hundred Eight Pesos (P3,615,808.00) broken down as follows: HAICET TCT Nos. Amount 362299, 362300 755,328.00 372661, 372662 991,200.00 328482 1,869,280.00 Total P3,615,808.00 =========== that after the lapse of the one (1) year redemption period, Zenaida F. Arao and Felipe Arao did not exercise their right of redemption over the subject properties, consequently, absolute ownership was consolidated by BPI on March 29, 2011; that after the expiration of capital gains tax (CGT) on the sale of the properties from Zenaida F. Arao and Felipe Arao to SMB in the amount of Two Hundred Sixteen Thousand Nine Hundred Forty Eight and 48/100 Pesos (P216,948.48) was paid on April 1, 2011; that documentary stamp tax (DST) on the transaction between Zenaida F. Arao and Felipe Arao and SMB in the amount of Fifty Four Thousand Two Hundred Thirty Seven and 12/100 Pesos (P54,237.12) was paid on April 1, 2011; that DST on the transaction between SMB and BPI in the amount of Fifty Four Thousand Two Hundred Thirty Seven and 12/100 Pesos (P54,237.12) was paid on April 4, 2011; and that it is your position that since the CGT on the transfer of the subject properties was already paid, SMB could no longer be held liable to pay for CGT on the assignment of its rights to BPI. In reply, please be informed that Section 27 (D) (5) of the Tax Code of 1997, as amended, imposes a final tax of six percent (6%) on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price of fair market value as determined in accordance with Section 6 (E) of this Code, whichever is higher, of such lands and/or buildings. In view of the above provision, the issue at hand is whether or not SMB's assignment of rights over the COS prior to the expiration of the redemption period is still subject to CGT notwithstanding that CGT has been already paid on the sale between Zenaida F. Arao and Felipe Arao and that only rights on properties were assigned and thus not subject to CGT imposed in the above Section 27 (D) (5). There are two transactions in this case the foreclosure sale and the assignment of rights. CGT and DST on the foreclosure sale have been settled. On the other hand, DST on the assignment by SMB in favor of BPI has also been settled. Liability for CGT on the assignment is discussed hereunder. DASCIc By way of the Deed of Assignment, SMB had irrevocably conveyed, transferred and assigned to BPI, for valuable consideration, all its rights and interest over the subject foreclosed properties whose redemption period has not yet lapsed. It appears however that the assignment of rights included the right to consolidate title to the properties in the event of non-redemption by the mortgagors, Zenaida F. Arao and Felipe Arao. This is evidenced by the execution of the Affidavit of Consolidation of Ownership by BPI's representatives on March 29, 2011 after the lapse of the one year redemption period without the subject properties being redeemed. In BIR Ruling No. DA-339-00 dated September 11, 2000 , 1 this Office has opined on the assignment of rights which includes the right to consolidate title over foreclosed properties as follows: "In reply thereto, please be informed that Article 1624 of the New Civil Code of the Philippines provides that an assignment of credits and other incorporeal rights shall be perfected in accordance with the provisions of Article 1475 of the said Code provides as follows: Article 1624 of the Civil Code of the Philippines provides that an assignment of credits and other incorporeal rights shall be perfected in accordance with the provisions of Article 1475 of the said Code provides as follows: "Art. 1475. The contract of sale is perfected at the moment there is a meeting of minds upon the thing which is the object of the contract and upon the price. "From that moment, the parties may reciprocally demand performance, subject to the provisions of the law governing the form of contracts." There can be no uncertainty that the contract of sale or the assignment of right as in this particular case is perfected from the moment the parties have agreed upon a determinate thing, i.e. , the object of the contract and a price certain therefore, even if neither is delivered. Thus, delivery of the thing sold is not necessary for the perfection of the contract. In the case at bar, the Deed of Assignment of Right was executed by Vicente Abadilla on June 28, 1990 in favor of Rolando S. Abadilla, Jr. whereby the former assigned and transferred to the latter all his rights, inclusive of his right to consolidate the title over the afore-described foreclosed property of Spouses Tan, for and in consideration of P450,100.00 although at that time, delivery cannot be effected yet because of a pending case between Vicente Abadilla and Spouses Tan until no less than the Supreme Court has resolved the case in favor of Vicente Abadilla, as the highest and successful bidder during the foreclosure sale held on June 26, 1985, but from that time on, Rolando S. Abadilla, Jr. is subrogated to the right of the former to have the title to the property consolidated under his name where it not for the Civil Case filed later by Spouses Tan against Vicente Abadilla. SDHITE Thus, since the Deed of Assignment of Right with the right to consolidate the title under his name executed on June 28, 1990 is indeed a perfected contract and can be treated as a contract of sale because of the exceptional circumstances surrounding the case, then the law, rules and regulations prevailing at the time of its execution shall be applied. Consequently, the fair market value of the foreclosed property as of June 28, 1990 or the gross selling price ( i.e. , P450,100.00), whichever is higher, shall be the basis in computing the capital gains tax and the corresponding documentary stamp tax." In view of the foregoing, the Deed of Assignment executed by SMB to BPI can be treated as contract of sale notwithstanding that the former had only inchoate rights over the subject properties and the latter merely steps into the shoes of the assignor without acquiring a better right than what the assignor had in the property to which the assigned right pertains. Upon the expiration of the redemption period, SMB's inchoate rights and interest over the foreclosed properties had ripened to a right of ownership and possession over the same. The consolidation of ownership by BPI over the foreclosed properties on March 29, 2011 effectively conveyed ownership of the properties to it from SMB. Accordingly, the assignment by SMB to BPI over the said property is subject to the CGT imposed under Section 27 (D) (5) of the Tax Code of 1997, and to the DST prescribed under Section 196 of the same Code. The notarial acknowledgment of the deed however, is subject to P15.00 DST pursuant to Sec. 188 of the Tax Code of 1997. It is noted that the DST on the assignment had already been paid on April 4, 2011. Upon presentation of the capital gains and documentary stamp tax returns duly validated by an authorized agent bank (AAB) evidencing full payment of the CGT and DST due, the RDO concerned shall issue the Certificate Authorizing Registration (CAR) in favor of the assignees, BPI, as the successors-in-interest of the highest bidder, SMB. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, and/or any of the requirements imposed in this letter is not complied with, then this ruling shall be considered as null and void. ACTISD Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Signed by then Commissioner Dakila B. Fonacier.