BIR Ruling No. 476-13

December 18, 2013 BIR RULING NO. 476-13 Secs. 24 (A) (1), 24 (D) (1) & 196 of the NIRC, as amended; Revenue Memorandum Order 41-91; Sec. 2.57.1 (A) (7) of RR No. 2-98, as amended; BIR Ruling No. 388-2011 Pureza R. Juan 2107 Apolonia St. Ugong, Valenzuela City Madam : This refers to your letter dated September 2, 2011 requesting for a ruling on whether or not the expropriation by the DPWH is taxable. It is represented that Department of Public Works and Highways (DPWH) is a sovereign political entity vested with power and authority 1 to condemn private property for public use upon payment of just compensation; that the DPWH is implementing the construction of C-5 Northern Link Road Segment 8.1 from Mindanao Avenue in Quezon City to the Northern Luzon Expressway, Valenzuela City, to provide faster and comfortable travel to the motoring public going to, or coming from, Northern Luzon thru Metro Manila. On the other hand, Gerundio Juan is the registered owner of a parcel of land located in Ugong, Valenzuela City covered by Transfer Certificate of Title No. T-31921 containing an area of twenty two thousand thirty three square meters (22,033.00 sq.m.). DPWH instituted an action for expropriation proceeding against Gerundio Juan on the affected area comprising the seven thousand seventy one square meter (7,071.00 sq.m.) out of the total twenty two thousand thirty three square meters (22,033.00 sq.m.) before the Regional Trial Court, Branch 172, Valenzuela City. The trial court rendered its decision determining the just compensation which has become final and executory. 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. HIACac 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 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 proceeding. (BIR Ruling No. 388-2011 dated October 20, 2011) Just compensation in case of expropriation by the National Government of property for infrastructure projects is determined on the basis, among others, of the fair market value or zonal value of the property. (Section 5, R.A. 8974) Pursuant to Section 2.57.1 (A) (7) 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 DPWH is constituted as a withholding agent to withhold the said 6% final withholding tax. (BIR Ruling No. 388-2011 dated October 20, 2011) However, if the owner of the affected property of the C-5 Northern Link Road Segment 8.1 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. Accordingly, if Gerundio Juan 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 DPWH shall be credited against his tax liabilities determined at the close of the taxable year when the expropriation took place. TIDHCc Accordingly, the expropriation sale of your property by DPWH is subject to the capital gains tax based on the actual consideration or "just compensation". You have the option to report your tax liabilities, if any, on gains realized on dispositions of real property 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. (BIR Ruling No. 388-2011 dated October 20, 2011) Please be guided accordingly. Very truly yours, (SGD.) KIM S. JACINTO-HENARES Commissioner of Internal Revenue Footnotes 1. By virtue of Section 7, Executive Order No. 1035 dated July 25, 1985.