BIR Ruling No. 388-11

October 20, 2011 BIR RULING NO. 388-11 Secs. 24, 27, 106 & 196 of the NIRC, as amended; Revenue Regulations 2-98, 6-01, 7-03, 16-05 & 4-07; Revenue Memorandum Order 41-91; 144-96; BIR Ruling No. 091-89; BIR Ruling No. 144-96; BIR Ruling No. DA-186-00; BIR Ruling No. DA-(C-038) 145-09 Atty. Jose Jobel V. Belarmino Legal Department, Light Rail Transit Authority Administration Bldg.,LRTA Compound Aurora Blvd.,Pasay City Dear Atty. Belarmino : This refers to your letter dated January 18, 2011 stating that the Light Rail Transit Authority (LRTA) is a government owned and controlled corporation created under Executive Order 603 tasked to alleviate the worsening traffic situation and to provide an efficient, affordable and convenient mode of transportation. As the implementing agency of the LRT Line 2 Project which traverses the line from Recto, Manila to Santolan, Pasig, LRTA identified two parcels of land registered in the name of the Banco Filipino Savings and Mortgage (Banco Filipino) (eventually, Bangko Sentral ng Pilipinas became the owner by way of dacion en pago ) as among those affected by the Project; that in the exercise of the government's power of eminent domain, LRTA instituted an action for expropriation proceeding against Banco Filipino and Bangko Sentral ng Pilipinas on the affected parcels of land before the Regional Trial Court, Branch 42, Manila. The trial court rendered its decision determining the just compensation which has become final and executory. From the foregoing, it is your view that the transfer of ownership to LRTA is exempt from the payment of the capital gains tax, documentary stamp tax and any other taxes related to the issuance of Certificate Authorizing Registration (CAR). In reply, please be informed that this Office on several occasions ruled that involuntary transfers of real properties, including expropriation sale, are subject to applicable taxes, depending on whether the subject properties are classified as capital assets or ordinary assets. TcHCIS Section 24 (D) (1) of the Tax Code of 1997, as amended, provides: "(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: ..." Thus, in BIR Ruling No. 144-96 dated December 24, 1996 addressed to Hon. Manuel "Lito" Lapid, which refers to the expropriation by the Provincial Government of Pampanga, with the assistance of the National Government of a number of properties which were adversely affected by the construction of FVR megadike and similar structures to prevent further destruction from lahar and floodwaters especially in the high risk areas in the province, this Office ruled that "expropriation sale is subject to the capital gains tax regardless of whether any gain or profit was derived therefrom since the aforecited law is comprehensive enough to cover not only voluntary sale but also involuntary sale". Both the capital gains and documentary stamp taxes, however, were computed based on the actual consideration or "just compensation" stated in the Deed of Sale, for expropriation done through negotiated sale, or in the document pertaining to the expropriation if taking of property was made through an expropriation proceedings (BIR Ruling No. DA-(C-038) 145-09 dated March 10, 2009, Revenue Memorandum Order (RMO) No. 41-91). TcIAHS Pursuant to Section 2.57.1 (A) (6) of RR No. 2-98, 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, shall be subject to a 6% final withholding tax. As above-mentioned, the foregoing proviso is comprehensive enough to include therewith an expropriation or negotiated sale resulting in the exercise by the government of its power of eminent domain. As such, the LRTA is constituted as a withholding agent to withhold the said 6% final withholding tax (BIR Ruling No. DA-186-00 dated March 30, 2000, BIR Ruling No. 091-89 dated May 2, 1989) However, if the owner of the affected property of the LRT Line 2 Project is an individual, then he may opt to report the gain realized in the expropriation sale in the manner provided for under Section 24 (A) (1) of the Tax Code, as amended. Under Section 24 (D) (1) of the Tax Code, as amended, an individual taxpayer has the option to report his tax liabilities, if any, on gains realized on dispositions of real property to the government or any of its political subdivisions or agencies either as a transaction subject to capital gains tax of 6% under Section 24 (D) (1) of the Tax Code, as amended, or under Sec. 24 (A) (1) thereof. Accordingly, if said individual taxpayer opts to report the gain realized in the expropriation sale in the manner provided for under Section 24 (A) (1) of the Tax Code, then the 6% tax withheld by the LRTA shall be credited against his tax liabilities determined at the close of the taxable year when the expropriation took place. IcHTAa Moreover, if the property affected by the LRT Line 2 Project is a principal residence of an individual, said individual taxpayer may avail the exemption granted under Section 24 (D) (2) of the Tax Code of 1997, as amended. Pertinent portion of Section 24 (D) (2) of the Tax Code provides as follows: "(2) Exception. The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons, the proceeds of which is fully utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of sale or disposition, shall be exempt from the capital gains tax imposed under this Subsection: Provided, That the historical cost or adjusted basis of the real property sold or disposed shall be carried over to the new principal residence built or acquired: Provided, further, That the Commissioner shall have been duly notified by the taxpayer within thirty (30) days from the date of sale or disposition through a prescribed return of his intention to avail of the tax exemption herein mentioned: ..." EcTaSC However, considering that the LRTA will have to withhold the 6% tax on the presumed gain realized by the owner of the affected property, then the said owner, upon compliance of all the conditions on the availment of the exemption granted under Section 24 (D) (2) of the Tax Code, as implemented by RR No. 14-2000, as amended, shall have no other recourse but to file a claim for refund of the amount so withheld. On the other hand, if the property affected by the LRT Line 2 Project is owned by a corporation, and the said property is considered as its capital asset, then the capital gains presumed to have been realized by the said corporation from the expropriation or sale via negotiation of its capital asset, shall be subject to the 6% final withholding tax imposed under Section 2.57.1 (G) of RR No. 2-98, as amended. 1 The tax herein imposed shall be based on the amount that will be received by the corporate owner of the affected property as "just compensation", the same being considered as the actual consideration or consideration contracted to be paid in accordance with RMO No. 41-91. THAECc If the property affected, however, is considered as an ordinary asset, whether owned by an individual or a corporation, its transfer to LRTA shall be subject to the creditable withholding tax imposed under Section 2.57.2 (J) of RR No. 2-98, as amended by RR No. 6-01. The rate to be imposed therewith shall depend on the value of the property to be expropriated or subjected to a negotiated sale, 2 and to be consistent, the basis of the withholding tax herein imposed shall be the just compensation or the consideration contracted to be paid, in accordance with RMO No. 41-91. Furthermore, it is subject to DST at the rate of P15.00 for each P1,000.00 or fractional part thereof in excess of P1,000.00, or 1.5% of the just compensation as actual consideration pursuant to Section 196 of the Tax Code of 1997, as amended. The gross value in money derived by an owner of a property, classified as an ordinary asset, and forming part of the assets primarily held for sale to customers or held for lease in the ordinary course of business, subjected to a negotiated sale or expropriation sale with the LRTA, is subject to the 12% VAT imposed under Section 106 (A) of the Tax Code, as amended. Likewise, the transfer of the affected property, classified as an ordinary asset, but not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the owner, although involuntary and forced upon only on the owner by virtue of the exercise of the government's power of eminent domain, and therefore it cannot be said to have been conducted in the course of the taxpayer's trade or business, nevertheless, is subject to the value-added tax (VAT) imposed under Section 106 (A) of the Tax Code of 1997, as amended. Section 4.109.1 (p) of RR No. 16-05, as amended by RR No. 4-07, provides, viz. : "(p) The following sales of real properties are exempt from VAT, namely: (1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. ISDCaT Thus, even if the real property is not primarily held for sale to customers or held for lease in the ordinary course of trade or business but the same is used in the trade or business of the seller, the sale thereof shall be subject to VAT being a transaction incidental to the taxpayer's main business. IDEScC Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. RR No. 7-2003 provides for the guidelines in the classification of assets, whether capital or ordinary. 2. Sec. 3 of RR 6-01, amending Sec. 2.57.2 (J) of RR 2-98, provides the applicable rate on sales of ordinary assets.