BIR Ruling No. 446-13

November 27, 2013 BIR RULING NO. 446-13 Secs. 24 (D) (1), 56 (A) (3); 196 of the Tax Code, as amended; Sec. 263 of R.A. 7160; Revenue Regulations No. 9-2012; BIR Ruling No. 224-11 Hon. Casimiro A. Ynares III, MD. Governor Rizal Provincial Government Antipolo City Sir : This refers to your letter dated January 6, 2012 duly indorsed by Assistant Secretary Peter L. Calimag of Revenue Operations and Legal Affairs Group of the Department of Finance requesting for possible exemption from payment of capital gains tax and documentary stamp tax of real properties forfeited by the Provincial Government of Rizal for nonpayment of real property tax. SDTaHc It appears that this Office issued BIR Ruling [DA-461-07] dated August 21, 2007 clarifying as to whether or not sale at public auction of tax-delinquent real properties by the Provincial Government of Rizal is exempt from the capital gains tax and documentary stamp tax. The pertinent portion of the said ruling is quoted as follows: "In reply, please be informed that pursuant to Section 24 (D) (1) of the Tax Code of 1997, capital gains presumed to have been realized from sale, exchange or other disposition of real property located in the Philippines classified as capital assets, including estates and trusts, shall be taxed at the rate of 6% based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. 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. The Province of Rizal, as the statutory seller, representing the owners of the tax-delinquent real properties, is liable to pay the capital gains tax due on such auction sale. However, it may get reimbursement or recovery of the capital gains tax payment from the said owners. Moreover, the Final Deed of Sale issued in favor of the buyer/purchaser is subject to the documentary stamp tax under Section 196 of the Tax Code of 1997, based on the consideration or value received or paid for the land i.e. , the bid price as stated on said Deeds pursuant to RMO No. 41-91 and Revenue Regulations No. 4-99. (BIR Ruling No. DA-484-2003 dated December 10, 2003)" In reply, please be informed that Section 263 of R.A. 7160 or the Local Government Code of 1991 provides that: "SEC. 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. ITADaE 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." 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). Section 24 (D) (1) 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: . . . ." 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. 224-11 dated July 12, 2011) In this case, while the Rizal Provincial 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 Rizal Provincial Government and 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. Hence, the Rizal Provincial 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. 224-11 dated July 12, 2011) CacTIE Moreover, Section 2 of Revenue Regulations No. 9-2012, 1 provides: Section 2. Taxability of Owner's/Mortgagor's Failure to Redeem his Foreclosed/Auctioned Off Property/ies within the Applicable Statutory Redemption Period. In case of non-redemption of properties sold during involuntary sales, regardless of the type of proceedings and personality of mortagagees/selling persons of entities, the Capital Gains Tax (CGT) imposed under Sections 24(D)(1) and 27(D)(5) of the Tax Code, in relation to Section 57 of the Tax Code and RR 2-98, as amended, if the property is the capital asset; or the Creditable Withholding Tax (CWT) imposed under Section 57 and RR 2-98, as amended if the property is an ordinary asset; the Value-added Tax (VAT) imposed under Section 106 of the Tax Code and RR 16-2005, as amended; and the Documentary Stamp Tax (DST) imposed under Section 196 of the Tax Code shall become due. The buyer of the subject property, who is deemed to have withheld the CGT or CWT due from the sale, shall then file the CGT return and remit the said tax to the Bureau within thirty (30) days from the expiration of the applicable statutory redemption period; or file the CWT return and remit the said tax to the Bureau within ten (10) days following the end of the month after expiration of the applicable statutory redemption period, provided that, for taxes withheld in December, the CWT return shall be filed and the taxes remitted to Bureau on or before January 15 of the following year. If the property sold through involuntary sale is under the circumstances which warrant the imposition of VAT, the said tax must be paid to the Bureau by the VAT-registered owner/mortgagor on or before the 20th day or 25th day, whichever is applicable, of the month following the month when the right of redemption prescribes. The DST return shall be filed and the said tax paid to the Bureau within five (5) days after the close of the month after the lapse of the applicable statutory redemption period. The CGT/CWT/VAT and DST shall be based on whichever is higher of the consideration (bid price of the highest bidder) or the fair market value of the zonal value as determined in accordance with Section 6(E) of the Tax Code. 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. IASTDE Under Section 27 (C) of the Tax Code of 1997, as amended, all corporations, agencies or instrumentalities owned or controlled by the Government, except the GSIS, the SSS, the PHIC, and the PCSO 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 possible exemption from payment of capital gains tax and documentary stamp tax of real properties forfeited by the Rizal Provincial Government for nonpayment of real property tax for lack of legal basis. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. Implementing Sections 24 (D) (1), 57, 106 and 196 of the National Internal Revenue Code of 1997 on non-redemption of properties sold during involuntary sales.