Urban Settlements Office City of Manila

November 23, 2009 BIR RULING [SH-(115) 729-09] 20 RA 7279; DA-151-07 Urban Settlements Office City of Manila Room 569 5th Floor, Manila City Hall Manila Attention: Ms. Victoria S. Clavel City Gov't Dept. Head III Gentlemen : This refers to your letter dated December 3, 2007 which was received by this Office by way of 2nd Indorsement dated January 24, 2008, Revenue Region No. 6, Manila requesting for exemption from the payment of project-related income taxes, capital gains tax/expanded withholding tax, value-added tax (VAT) and other taxes on the sale of parcels of land pursuant to Republic Act (R.A.) No. 7279, otherwise known as the "Urban Development and Housing Act of 1992". Documents submitted disclosed that a Memorandum of Agreement was executed by the City of Manila and the Philippine National Railways ("PNR") stating that PNR is the owner of a prime property, popularly known as the Tutuban Mall which was being leased to Tutuban Properties, Inc.;that PNR had an outstanding obligation to the City of Manila representing unpaid realty taxes from 1992 up to 2001 which PNR had failed to settle; that the Tutuban Mall was among those declared delinquent properties, which were auctioned by the City of Manila on December 4, 2002, there being no bidder, the Tutuban Mall was sold in favor of the City of Manila; that due to serious financial losses, the PNR proposed to settle its real property tax liabilities by offering to the City of Manila several of its real estate properties, among them, the Santibanez Property covered by Transfer Certificates of Title No. 4234, 4833, and 21741 consisting of 3,721,71 * square meters, located at Cristobal Street corner West Berlin, Paco, Manila; and that the subject property shall be developed into socialized housing project per Manila Resolution No. 19 series of 2004. In reply, please be informed that under the foregoing circumstances, the transfer via dacion en pago of Santibanez property by PNR shall be treated as a sale of capital assets subject to capital gains tax of 6% under Section 27 (D) (5) in relation to Section 39 (A) (1) of the Tax Code of 1997. (BIR Ruling No. 166-81 dated September 3, 1981; DA217-99 dated April 12, 1999; DA397-2000 dated November 20, 2000; DA010-02 dated January 29, 2002; DA009-2002 dated January 28, 2002) It is necessary to first determine the character of the real property being sold. Thus, if the real property is a land or building which is not actually used in the business of the seller-corporation and is treated as a capital asset, as that term is defined in Section 39 (A) of the Tax Code of 1997, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building based on the gross selling price or fair market value as determined in accordance with Section 6 (E) of the Tax Code of 1997, whichever is higher of such land and/or building. (Section 27 (D) (5) Tax Code of 1997) This rule applies, whether or not the seller-corporation is engaged in real estate business. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, shall apply. The rate of withholding tax will depend on first, whether the seller is exempt or taxable, second, whether the seller is habitually engaged in the real estate business or not; and third, if the seller is habitually engaged in real estate business, the gross selling price, as prescribed in the above-mentioned Revenue Regulations. (BIR Ruling No. 027-02 dated July 3, 2002) DCTHaS The Santibanez property which PNR conveyed to the City of Manila by way of a dacion en pago as full payment of its outstanding tax liabilities are not primarily held for sale or for lease in the ordinary course of its business. Thus, the same are properly classified and taxed as capital assets pursuant to Sections 27 (D) (5) and 39 (A) (1) of the Tax Code of 1997. Dacion en pago is a special mode of payment recognized under Article 1245 of the New Civil Code. Under the same provision of law, this undertaking partakes of the nature of a sale. In dacion transactions and for tax purposes, the outstanding balance of the loan must be considered as the selling price for purposes of computing the taxes due thereon. (BIR Ruling No. 459-88 dated September 19, 1988 and BIR Ruling No. 123-86 dated July 23, 1986) Accordingly, the dacion of the lots is subject to capital gains tax at the rate of 6% based on the balance of the loan obligation or the fair market value of the property, whichever is higher. Likewise, pursuant to Section 196 of the Tax Code of 1997, as amended the Deed of Dacion en Pago, embodying the dacion transaction, is subject to documentary stamp tax (DST) based on the consideration or value received or paid for the property, which in effect is the amount of obligation that is extinguished, or on its fair market value whichever is higher. This tax is payable by either party to the said sale. (BIR Ruling Nos. 459-88 dated September 19, 1988 and DA049-2000 dated January 21, 2000) Finally, inasmuch as the Santibanez Property is not primarily held for sale or lease nor used in the ordinary course of PNR's trade or business the dacion en pago is not subject to the 12% VAT, as provided for pursuant to Section 109 (w) of the Tax Code of 1997, as amended by R.A. No. 9337, as implemented by Section 4.109-1 (B) (1) (p) of Revenue Regulations No. 16-2005. As regards the subsequent conversion/development of the Santibanez property into a socialized housing by the City of Manila, please be informed that pursuant to Section 20 of R.A. No. 7279, as implemented by Revenue Regulations No. 11-97, pertinent portion of which reads: "Sec. 20. Incentives for Private Sector Participating in Socialized Housing. To encourage greater private sector participation in socialized housing and further reduce the cost of housing units for the benefit of the underprivileged and homeless, the following incentives shall be extended to the private sector: xxx xxx xxx (d) Exemption from the payment of the following: (1) Project-related income taxes; (2) Capital gains tax on raw lands used for the project; (3) Value-added tax for the project contractor concerned; xxx xxx xxx" the owners of the raw land are exempt from the payment of capital gains tax on the conveyance of the said properties for use in the aforesaid socialized housing project. Thus, if subsequent to transfer by way of dacion en pago of the Santibanez property, the new owner, City of Manila, will use the property in its socialized housing project, it shall be exempt from the capital gains tax. aDECHI You are also advised that upon application for exemption, a lien on the titles of the land shall be annotated by the Register of Deeds having jurisdiction over the properties, to the effect that the same are to be applied or are being applied to socialized housing project pursuant to R.A. No. 7279. Furthermore, under Revenue Regulations No. 11-97, within six (6) months after this issuance of tax exemption from the capital gains tax or creditable withholding tax, the buyer/developer of raw land shall apply with the HLURB or Local Government Unit (LGU) concerned for a permit to develop the property and shall start the development of the socialized housing project within one (1) year after the approval of the Development Permit and issuance of permit. Otherwise, the exemption from the capital gains tax or creditable withholding tax becomes automatically null and void, and the buyer/developer shall be held liable for the payment of taxes that should otherwise have been paid, plus the penalties incident to late payment. Provided, further, that in case of misrepresentation, an additional penalty equivalent to one hundred percent (100%) of the capital gains tax or creditable withholding tax due shall be imposed and paid by the buyer/developer. On the other hand, once registered with and certified by the HLURB as engaged in socialized housing project pursuant to R.A. No. 7279, the developer of the properties used for the aforementioned socialized housing projects, the sale of the socialized housing units (house and lot or lots only) shall be exempt from project-related income taxes, and creditable expanded withholding tax prescribed under Revenue Regulations No. 2-98 implementing Section 57 (B) of the Tax Code of 1997. It shall be understood that to be tax-exempt, the selling price per lot or house and lot shall not exceed P300,000.00 by virtue of Memorandum Circular No. 03, Series of 2005 dated June 10, 2005 signed by HUDCC Chairman, Vice President Noli L. de Castro. In this connection, any sale made by the developer to interested parties other than the principal target beneficiaries under Sections 3 (t) and 16 of R.A. No. 7279, shall not be entitled to the foregoing tax exemption should there be non-compliance with any of the sine-qua-non terms and conditions as aforestated, for tax exemption purposes. It is, however, understood that the Certificate Authorizing Registration (CAR) shall only be issued after it is established upon proper verification by the Revenue District Officer (RDO) concerned that, considering the rules on valuation of real property, the actual selling price per sale transaction of the units in this case does not really exceed P300,000.00. Thus, sale of a unit above the maximum amount shall be subject to the corresponding internal revenue taxes. However, it is observed that documentary stamp tax is not one of the taxes covered by the tax exemption clause in Section 20 of R.A. No. 7279. Such being the case, the project developer/seller shall be liable to pay the documentary stamp tax on the documents conveying the property imposed under Section 196 of the Tax Code of 1997, based on the consideration contracted to be paid for such realty or on its fair market value determined in accordance with Section 6 (E) of the said Code, whichever is higher. On the other hand, the contractor of the socialized housing units under R.A. No. 7279 is exempt from the payment of value-added tax pursuant to the aforecited provision. However, purchases of goods/articles by the project contractor shall be subject to value-added tax, even if the said purchases are to be used for the socialized housing project. 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, then this ruling shall be considered null and void. ESDcIA Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service