BIR Ruling [UN-188-94]

June 28, 1994 BIR RULING [UN-188-94] Hon. Edmundo V. Mir Undersecretary, Department of Public Works and Highways Bonifacio Drive, Port Area, Manila S i r : This refers to your letter indorsed to this office by the Department of Finance, relative to the query posed by the landowners as to who should pay the capital gains tax on the sale of their properties to the Government through the Department of Public Works and Highways to give way for the construction of the South Luzon Expressway Extension Project, considering that the said sale is a forcible one (expropriation). In reply, please be informed that under Section 21(e) of the Tax Code, 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, by individuals, including estates and trust, shall be taxed at the rate of 5% based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher, provided, that the tax liability, if any, on gains from sales or other dispositions of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations shall be determined either under Section 21(a) or (e) of the same Code, at the option of the taxpayer. Such being the case, the expropriation by the government through the Department of Public Works and Highways, of the landowners' properties affected by the construction of the expressway is therefore, subject to the 5% capital gains tax imposed under Section 21(e) of the Tax Code, as amended. However, their tax liability from the said sale shall be determined either under Section 21(a) or (e) of the Tax Code, as amended at their option. In case they elect the former, this Office shall issue the certification authorizing the transfer of title to the purchaser. [Sec. 7(a) (5), Revenue Regulations No. 8-79] On the other hand, in case they elect the latter this Office hereby allows the registration of the deed of sale with the Register of Deeds concerned and consequently, the transfer of the property in favor of the government. Thereafter, upon submission of a new certificate of title in the name of the government at which time payment of the expropriated property can be effected, they shall file the corresponding capital gains tax return within thirty (30) days from said submission of the certificate of title. The Department of Public Works and Highways shall within the same period, withhold the capital gains tax due from them and remit the same to this Bureau. (BIR Ruling No. 044-84) In this connection, it may be noted that this ruling applies only to sales of property in favor of the government wherein the contract stipulates that the seller shall not be paid until title to the property is transferred to the government. Moreover, this Office, realizing that it takes a considerable amount of sacrifice and fortitude on the part of the landowners to part with and dispose their real properties, especially at a price much lower than the current zonal valuation or market appraised value, and considering that the likelihood of understatement of consideration is remote in this case as the government, through the Department of Public Works and Highways, is the purchaser of the said affected properties, the use of the actual consideration as basis in determining their capital gains tax liability as a consequence of the said sale, is hereby granted as an exception to the policy of this Bureau, in relation to Section 21(e) of the Tax Code. cdi Very truly yours, ALICIA P. CLEMENO Acting Assistant Commissioner (Legal Service)