Payment of Capital Gains Tax Prior to the Issuance/Transfer of Tax Declarations of Real Properties Conveyed Whether Previously Registered or Unregistered

December 20, 2004 BLGF MEMORANDUM CIRCULAR NO. 018-04 TO : All Regional Directors for Local Government Finance; Provincial, City and Municipal Assessors and Treasurers; and Others Concerned SUBJECT : Payment of Capital Gains Tax Prior to the Issuance/Transfer of Tax Declarations of Real Properties Conveyed Whether Previously Registered or Unregistered For the information and guidance of all concerned, quoted hereunder in toto is the opinion/ruling rendered by this Bureau as embodied in its letter dated October 27, 2004, copy attached, addressed to Mr. Peter D. Baluyan, OIC-Regional Director, BLGF Regional Office, Region I, re. request of Honorable Commissioner Guillermo L. Parayno, Jr., Bureau of Internal Revenue (BIR), Quezon City, to issue a directive concerning the issuances made by Mr. Orlando Mina (then OIC-Regional Director of Region I), that "Tax Declaration can be issued immediately without necessarily requiring the payment of Capital Gains Tax, upon compliance/submission of other reasonable requirements in order to facilitate collection of real property taxes," to wit: "This refers to the letter dated June 15, 2004 of Honorable Commissioner Guillermo L. Parayno, Jr., Bureau of Internal Revenue (BIR), Quezon City, requesting the Bureau of Local Government Finance (BLGF) to issue a directive concerning the letters both dated April 29, 2004, of Mr. Orlando Mina (then OIC-Regional Director thereat), addressed to the OIC-Provincial Assessor of Ilocos Sur for dissemination to all Municipal Assessors within his jurisdiction, and to the City Assessor of Urdaneta City, wherein he quoted the Decision of the Supreme Court (SC) Case promulgated on April 9, 2003, entitled Chua vs . Court of Appeals , G.R. No. 119255, which is reproduced hereunder: ' On Capital Gains Tax . 'The buyer has more interest in having the capital gains tax paid immediately since this is a pre-requisite to the issuance of a new Torrens title in his name. Nevertheless, as far as the government is concerned, the capital gains tax remains a liability of the seller since it is a tax on the seller's gain from the sale of the real estate. Payment of the capital gains tax, however, is not a pre-requisite to the transfer of ownership to buyer . The transfer of ownership takes effect upon the signing and notarization c f the deed of absolute sale. The recording of the sale with the proper Registry of Deeds and the transfer of the certificate of title in the name of the buyer are necessary only to bind third parties to the transfer of ownership. As between the seller and the buyer, the transfer of ownership takes effect upon the execution of a public instrument conveying the real estate. Registration of titles, does not confer ownership on the buyer. Such registration or issuance of a new certificate of title is not one of the modes of acquiring ownership. ( CHUA vs . COURT OF APPEALS , G.R. 119255, 9 April 2003)", IBP Journal, Vol. XXIX, No. I, 1st and 2nd Quarters 2003, p. 163.'" trdcd2004 "Based on the foregoing portion of the SC Decision, Mr. Mina made the following directive to the Provincial Assessor of Ilocos Sur: "From the aforequoted decision on Capital Gains Tax, it can be deduced very clearly that Tax Declaration can be issued immediately without necessarily requiring the payment of Capital Gains Tax, upon compliance/submission of other reasonable requirements in order to facilitate collection of real property taxes . (Emphasis supplied) "Relatedly, and in compliance with the same directive he issued, the Provincial Assessor of La Union issued a memorandum dated May 27, 2004 to all the Municipal Assessors under his jurisdiction, directing them, that: 'effective immediately, all transactions on unregistered properties involving transfer shall be acted upon with dispatch without the need of requiring Certificate Authorizing Registration (CAR) from the BIR nor registration with the Registry of Deeds.' "Hence, the Honorable Commissioner reacted with the following arguments, to wit: "1. There is no dispute that as a matter of civil law, the payment of the capital gains tax is not a pre-requisite to the transfer of ownership from the seller to the buyer. But that does not mean that the taxes attendant to that transfer will no longer be paid or that the government officials involved in the process of transfer of ownership no longer ensure the collection of taxes; "2. P.D. No. 1529 provides that no deed, conveyance, mortgage, lease or other voluntary instruments affecting untitled lands shall be valid, except as between the parties, unless the instrument shall have been entered in the Primary Entry Book and the Registration Book for properties covered by Act 3344 of the Registry of Deeds. Thus, no registration of any document transferring such untitled property shall be effected by the City or Municipal Assessor's Office unless proof is presented that the document of transfer has already passed through the Register of Deeds; and "3. Revenue Regulations No. 24-02 makes it a duty of City and Municipal Assessors to indicate at the back of newly issued Tax Declaration the information contained in the TCL/CAR such as the CAR Number, date of issuance of CAR, TIN of the transferor, name of transferor, type of taxes paid, the amount, official receipt number/validation number and their respective dates. The TIN of the transferee shall also be indicated on the face of the newly issued tax declaration. "We agree with the Honorable Commissioner. "A careful reading of the abovementioned SC Decision reveals that it pertains to the case involving the sale of real estate wherein the Court, among others, held that: "Payment of the capital gains tax, however, is not a pre-requisite to the transfer of ownership to the buyer ," which this Bureau believes has no bearing on the validity of the Deed of Sale effected by both parties. However, in reading the full text of the said SC Decision, it can be deduced that the Court likewise ruled that, in the transfer of title , the payment of capital gains tax is a pre-requisite in the issuance of new title. "The Court further clarified that: "Customarily, in the absence of a contrary agreement, the submission by an individual seller to the buyer of the following papers would complete a sale of real estate : (1) owner's duplicate copy of the Torrens title, (2) signed deed of absolute sale; (3) tax declaration; and (3) latest realty tax receipt. The buyer can retain the amount for the capital gains tax and pay it upon authority of the seller, or the seller can pay the tax, depending on the agreement of the parties . (Emphasis ours) "Evidently, after the sale of real estate, depending on the agreement between the buyer and the seller, it is necessary to pay the corresponding capital gains tax to the BIR for the issuance of the Certificate Authorizing Registration (CAR) for presentation to and as a requirement of the Register of Deeds for the transfer of the title of the subject property from the former owner to the new owner. "Relatedly, the BLGF under the 2nd Indorsement dated May 26, 1993, copy enclosed, treating on a similar subject matter, made the following clarification. 'Accordingly, unless the Deed of Sale executed . . ., conveying the . . . real properties . . . is finally registered with the Register of Deeds . . ., that Office could not effect the cancellation and transfer of the . . . tax declarations. 'It is understood that the . . . requirements . . ., should likewise be complied with, viz: '1. That the real property taxes due on the subject lot be fully paid; '2. That the corresponding tax on the transfer of ownership has been paid; '3. That the certification of payment of the capital gains tax issued by the Bureau of Internal Revenue is presented to that Office .' (Emphasis ours) "Clearly, therefore, the issuance/transfer of tax declarations of real properties conveyed, whether previously registered or unregistered would require the payment of the capital gains tax. "In view hereof, and although this Office recognizes the good intentions of Mr. Mina, of facilitating the immediate collection of local taxes, i.e., real property taxes, as expressed under your letter dated June 23, 2004 addressed to Atty. Jose Mario C. Bunag, Deputy Commissioner, Legal and Inspection Group, BIR, we believe that the issuance of tax declarations on the basis of deeds of conveyance not registered with the Registry of Deeds and without prior payment of the capital gains tax is BEREFT OF ANY LEGAL BASIS. "We would like to remind that internal revenues which include the capital gains tax being collected by the BIR are the very sources of the Internal Revenue Allotment (IRA) to which a great majority of the LGUs rely heavily. A considerable decline in the collection efficiency of the BIR will surely affect the IRA allocation of LGUs. "In view of the foregoing, you are hereby ADVISED TO RECALL the abovementioned letters dated April 29, 2004 and other similar issuances in this regard, of the then OIC-Regional Director, and TO ORDER the Provincial Assessor of La Union, San Fernando City TO DESIST from implementing the subject Memorandum dated May 27, 2004." Accordingly, issuance/transfer of tax declarations of real properties conveyed, whether previously registered or unregistered would require, aside from the payment of the corresponding realty tax and transfer tax, the payment of the capital gains tax, to the Bureau of Internal Revenue (BIR). The Provincial Assessors and Treasurers are hereby instructed to disseminate the contents of this Circular, including the attachments to the Municipal Assessors and Treasurers within their respective jurisdiction. (SGD.) MA. PRESENTACION R. MONTESA Executive Director ATTACHMENT October 27, 2004 Mr. Peter D. Baluyan OIC-Regional Director BLGF Regional Office-Region I 2/F Mabanag Justice Hall Bldg. Gov. Luna Street, San Fernando City La Union S i r : This refers to the letter dated June 15, 2004 of Honorable Commissioner Guillermo L. Parayno, Jr., Bureau of Internal Revenue (BIR), Quezon City, requesting the Bureau of Local Government Finance (BLGF) to issue a directive concerning the letters both dated April 29, 2004, of Mr. Orlando Mina (then OIC-Regional Director thereat), addressed to the OIC-Provincial Assessor of Ilocos Sur for dissemination to all Municipal Assessors within his jurisdiction, and to the City Assessor of Urdaneta City, wherein he quoted the Decision of the Supreme Court (SC) Case promulgated on April 9, 2003, entitled Chua vs. Court of Appeals , G.R. No. 119255, which is reproduced hereunder: " On Capital Gains Tax . 'The buyer has more interest in having the capital gains tax paid immediately since this is a pre-requisite to the issuance of a new Torrens title in his name. Nevertheless, as far as the government is concerned, the capital gains tax remains a liability of the seller since it is a tax on the seller's gain from the sale of the real estate. Payment of the capital gains tax, however, is not a pre-requisite to the transfer of ownership to buyer . The transfer of ownership takes effect upon the signing and notarization of the deed of absolute sale. The recording of the sale with the proper Registry of Deeds and the transfer of the certificate of title in the name of the buyer are necessary only to bind third parties to the transfer of ownership. As between the seller and the buyer, the transfer of ownership takes effect upon the execution of a public instrument conveying the real estate. Registration of titles, does not confer ownership on the buyer. Such registration or issuance of a new certificate of title is not one of the modes of acquiring ownership. (CHUA vs. COURT OF APPEALS, G.R. 119255, 9 April 2003)", IBP Journal, Vol. XXIX, No. I, 1st and 2nd Quarters 2003, p. 163.'" SCaEcD Based on the foregoing portion of the SC Decision, Mr. Mina made the following directive to the Provincial Assessor of Ilocos Sur: "From the aforequoted decision on Capital Gains Tax, it can be deduced very clearly that Tax Declaration can be issued immediately without necessarily requiring the payment of Capital Gains Tax, upon compliance/submission of other reasonable requirements in order to facilitate collection of real property taxes ." (Emphasis supplied) Relatedly, and in compliance with the same directive he issued, the Provincial Assessor of La Union issued a memorandum dated May 27, 2004 to all the Municipal Assessors under his jurisdiction, directing them, that: "effective immediately, all transactions on unregistered properties involving transfer shall be acted upon with dispatch without the need of requiring Certificate Authorizing Registration (CAR) from the BIR nor registration with the Registry of Deeds ." Hence, the Honorable Commissioner reacted with the following arguments, to wit: 1. There is no dispute that as a matter of civil law, the payment of the capital gains tax is not a pre-requisite to the transfer of ownership from the seller to the buyer. But that does not mean that the taxes attendant to that transfer will no longer be paid or that the government officials involved in the process of transfer of ownership no longer ensure the collection of taxes; 2. P.D. No. 1529 provides that no deed, conveyance, mortgage, lease or other voluntary instruments affecting untitled lands shall be valid, except as between the parties, unless the instrument shall have been entered in the Primary Entry Book and the Registration Book for properties covered by Act 3344 of the Registry of Deeds. Thus, no registration of any document transferring such untitled property shall be effected by the City or Municipal Assessor's Office unless proof is presented that the document of transfer has already passed through the Register of Deeds; and IDETCA 3. Revenue Regulations No. 24-02 makes it a duty of City and Municipal Assessors to indicate at the back of newly issued Tax Declaration the information contained in the TCL/CAR such as the CAR Number, date of issuance of CAR, TIN of the transferor, name of transferor, type of taxes paid, the amount, official receipt number/validation number and their respective dates. The TIN of the transferee shall also be indicated on the face of the newly issued tax declaration. We agree with the Honorable Commissioner. A careful reading of the abovementioned SC Decision reveals that it pertains to the case involving the sale of real estate wherein the Court, among others, held that: "Payment of the capital gains tax, however, is not a pre-requisite to the transfer of ownership to the buyer ," which this Bureau believes has no bearing on the validity of the Deed of Sale effected by both parties. However, in reading the full text of the said SC Decision, it can be deduced that the Court likewise ruled that, in the transfer of title , the payment of capital gains tax is a pre-requisite in the issuance of new title. The Court further clarified that: "Customarily, in the absence of a contrary agreement, the submission by an individual seller to the buyer of the following papers would complete a sale of real estate : (1) owner's duplicate copy of the Torrens title; (2) signed deed of absolute sale; (3) tax declaration; and (3) latest realty tax receipt. The buyer can retain the amount for the capital gains tax and pay it upon authority of the seller, or the seller can pay the tax, depending on the agreement of the parties . (Emphasis ours) Evidently, after the sale of real estate, depending on the agreement between the buyer and the seller, it is necessary to pay the corresponding capital gains tax to the BIR for the issuance of the Certificate Authorizing Registration (CAR) for presentation to and as a requirement of the Register of Deeds for the transfer of the title of the subject property from the former owner to the new owner. HICcSA Relatedly, the BLGF under the 2nd Indorsement dated May 26, 1993, copy enclosed, treating on a similar subject matter, made the following clarification: "Accordingly, unless the Deed of Sale executed . . ., conveying the . . . real properties . . . is finally registered with the Register of Deeds . . ., that Office could not effect the cancellation and transfer of the . . . tax declarations. "It is understood that the . . . requirements . . ., should likewise be complied with, viz: "1. That the real property taxes due on the subject lot be fully paid; "2. That the corresponding tax on the transfer of ownership has been paid; "3. That the certification of payment of the capital gains tax issued by the Bureau of Internal Revenue is presented to that Office ." (Emphasis ours) Clearly, therefore, the issuance/transfer of tax declarations of real properties conveyed, whether previously registered or unregistered would require the payment of the capital gains tax. In view hereof, and although this Office recognizes the good intentions of Mr. Mina, of facilitating the immediate collection of local taxes, i.e., real property taxes, as expressed under your letter dated June 23, 2004 addressed to Atty. Jose Mario C. Bunag, Deputy Commissioner, Legal and Inspection Group, BIR, we believe that the issuance of tax declarations on the basis of deeds of conveyance not registered with the Registry of Deeds and without prior payment of the capital gains tax is BEREFT OF ANY LEGAL BASIS. EDHCSI We would like to remind that internal revenues which include the capital gains tax being collected by the BIR are the very sources of the Internal Revenue Allotment (IRA) to which a great majority of the LGUs rely heavily. A considerable decline in the collection efficiency of the BIR will surely affect the IRA allocation of LGUs. In view of the foregoing, you are hereby ADVISED TO RECALL the abovementioned letters dated April 29, 2004 and other similar issuances in this regard, of the then OIC-Regional Director; and TO ORDER the Provincial Assessor of La Union, San Fernando City TO DESIST from implementing the subject Memorandum dated May 27, 2004. Very truly yours, (SGD.) MA. PRESENTACION R. MONTESA Executive Director October 27, 2004 The Honorable Commissioner Bureau of Internal Revenue Quezon City S i r : This refers to your letter dated June 15, 2004, requesting this Bureau to issue a directive to Dir. Orlando L. Mina, OIC-Regional Director, BLGF Regional Office, Region I, San Fernando City, La Union, concerning his letters both dated April 29, 2004, addressed to the OIC-Provincial Assessor of Ilocos Sur for dissemination to all Municipal Assessors within his jurisdiction, and to the City Assessor of Urdaneta City, re. payment of Capital Gains Tax as contained under the Supreme Court (SC) Decision entitled Chua vs . Court of Appeals , G.R. No. 119255. In this connection, enclosed is a copy of our letter of same date, addressed to Mr. Peter D. Baluyan, current OIC-Regional Director of Region I, which reads in part, as follows: "A careful reading of the abovementioned SC Decision reveals that it pertains to the case involving the sale of real estate wherein the Court, among others, held that: "Payment of the capital gains tax, however, is not a pre-requisite to the transfer of ownership to the buyer ," which this Bureau believes has no bearing on the validity of the Deed of Sale effected by both parties. However, in reading the full text of the said SC Decision, it can be deduced that the Court likewise ruled that, in the transfer of title , the payment of capital gains tax is a pre-requisite in the issuance of new title. ". . . "In view hereof, and although this Office recognizes the good intentions of Mr. Mina, of facilitating the immediate collection of local taxes, i.e., real property taxes, as expressed under your letter dated June 23, 2004 addressed to Atty. Jose Mario C. Bunag, Deputy Commissioner, Legal and Inspection Group, BIR, we believe that the issuance of tax declarations on the basis of deeds of conveyance not registered with the Registry of Deeds and without prior payment of the capital gains tax is BEREFT OF ANY LEGAL BASIS. "We would like to remind that internal revenues which include the capital gains tax being collected by the BIR are the very sources of the Internal Revenue Allotment (IRA) to which a great majority of the LGUs rely heavily. A considerable decline in the collection efficiency of the BIR will surely affect the IRA allocation of LGUs. "In view of the foregoing, you are hereby ADVISED TO RECALL the abovementioned letters dated April 29, 2004 and other similar issuances in this regard of the then OIC-Regional Director; and TO ORDER the Provincial Assessor of La Union, San Fernando City TO DESIST from implementing the subject Memorandum dated May 27, 2004." We regret such misinterpretation of the abovementioned SC Decision. Cordial regards. Very truly yours, (SGD.) PRESENTACION R MONTESA Executive Director