Bureau of Local Government Finance Opinion

December 26, 1996 BUREAU OF LOCAL GOVERNMENT FINANCE OPINION 2nd Indorsement Respectfully returned to the In-charge of Office. Office of the City Treasurer, Makati City, the herein letter-request of Romulo, Mabanta, Buenaventura, Sayoc and De Los Angeles Law Office, in behalf of their client, Katuparan Realty Corporation (KRC), for a cash refund of the transfer tax allegedly paid under protest to that Office. Representations are made that KRC is wholly owned by the IBM Retirement Fund (IBM). it was dissolved and its corporate existence was terminated pursuant to a Securities and Exchange Commission Certificate of Dissolution dated June 18, 1996. As a legal consequence of the dissolution, the sole stockholder of KRC, the IBM, surrendered its shares of stock in exchange for liquidating dividends consisting of four parcels of land with a total area of Five Thousand Six Hundred Sixteen (5,616) square meters and with a building constructed thereon. It is represented further, that the total number of issued and outstanding shares of KRC at the time of dissolution was 56,244 with a total book value of P2,249,760.00. The Deed of Conveyance and Transfer was entered into by KRC and Far East Bank and Trust Company (FEBTC), as trustee for IBM. Thereafter, a Deed of Absolute Sale was executed between FEBTC and Megaworld Properties and Holdings, Inc. for the sale of the four (4) parcels of land. The aforecited transfer to the IBM by KRC of its remaining assets including the property, as a result of its dissolution prompted that Office to impose transfer tax against KRC. The Counsel for KRC contends that the conveyance of real property by said Corporation to its stockholder by way of liquidating dividends is not subject to transfer tax for reason that the subject conveyance is without any monetary or value consideration. Thus, it is not taxable within the purview of Section 2D.01 of the Makati Revenue Code. dctai He contends further that any transfer tax, if due, should be computed by that Office on the basis of the total shares book value of P2,249,760.00 and, therefore, the amount due should be P11,248.80 only and not the erroneously assessed and collected amount of P1,965,600.00 which was based on the zonal value of the property as determined by the BIR. On the other hand, that Office claims that while there exists no consideration for the conveyance by KRC of the properties by way of liquidating property dividends, the imposition of the transfer tax should not be based on the book value of the 56,244 shares at the time said shares were acquired. Rather, the tax should be based on the book value of the shares at the time the FEBTC sold the four (4) parcels of prime lots to Megaworld Properties & Holdings, Inc. for and in behalf of the IBM Retirement Fund. In addition, that Office holds that the 56,244 shares which had an original book value of P2,249,760.00 are now worth P1,100,000,000.00. Hence, it is the contention of that Office that the imposition of a transfer tax of P1,965,000.00, based on the zonal value of P393,120,000.00, should be upheld as valid. The questions to be resolved, therefore, are whether or not KRC is liable to the payment of the transfer tax and what should be the basis thereof. Sections 135 and 199 (1) of the Local Government Code of 1991 (LGC) provide as follows: "SEC. 135. Tax on Transfer of Real Property Ownership . (a) The province may impose a tax on the sale, donation, barter, or on any other mode of transferring ownership or title of real property at the rate of not more than fifty percent (50%) of one percent (1%) of the total consideration involved in the acquisition of the property or the fair market value in case the monetary consideration involved in the transfer is not substantial , whichever is higher . The sale, transfer or other disposition of real property pursuant to RA 6657 shall be exempt from this tax." "xxx xxx xxx" "SEC. 199. Definitions . When used in this Title: "(a) . . . "(1) 'Fair Market Value' is the price at which a property may be sold by a seller who is not compelled to sell and bought by a buyer who is not compelled to buy; "xxx xxx xxx" On the other hand, Section 2D.01 of the Makati Revenue Code provides: "SEC. 2D.01. Imposition of tax . There is hereby levied a tax on the sale, donation, barter, or on any other mode of transferring ownership or title of real property at the rate of fifty percent (50%) of one percent (1%) of the total consideration involved in the acquisition of the property or the fair market value in case the monetary consideration involved in the transfer is not substantial, whichever is higher. For purposes of determining the fair market value of lands, the zonal values established by the Bureau of Internal Revenue shall be used ." (Emphasis supplied.) The aforequoted Section 135 of the LGC, however, should be read in relation with Section 151 of the said Code, quoted hereunder, with respect to cities: "SEC. 151. Scope of Taxing Powers . Except as otherwise provided in this Code, the city may levy the taxes, fees, and charges which the province or municipality may impose: Provided, however , That the taxes, fees and charges levied and collected by highly urbanized and independent component cities shall accrue to them and distributed in accordance with the provisions of this Code. "The rates of taxes that the city may levy may exceed the maximum rates allowed for the province or municipality but not more than fifty percent (50%) except the rates of professional and amusement taxes." Thus, whatever tax a province may impose, a city may likewise impose. To resolve the issues on hand, it may be pointed out that the transfer tax may be levied on "any mode of transferring ownership or title of real property." Hence, the transfer in complete liquidation by KRC of its real properties to IBM, the sole stockholder, is subject to the payment of transfer tax which in this case is being imposed by the City of Makati. However, under the same Section 135, it is clear that the tax base should only be either the total consideration involved in the acquisition of the property, or its fair market value which, it may be presumed, is the market value of the subject property reflected or indicated in the prevailing Schedule of Market Values prepared by the City Assessor and duly-enacted by the Sangguniang Panlungsod. It must be borne in mind that local government affairs and operations are governed by the LGC and, therefore, unless there are express and explicit provisions that a local tax shall be based on zonal values prescribed by the BIR or any valuation determined by a national agency, the same may not serve or be utilized as basis for determining a local tax. This Bureau, therefore, is of the view that Section 2D.01 of the Makati Revenue Code which provides that the BIR zonal values should be used as basis for determining the fair market value of lands for purposes of the transfer tax partakes the nature of an amendment to the LGC and, thus, beyond the authority of the Sangguniang Panlungsod of Makati City which enacted the Makati Revenue Code. Accordingly, that Office is hereby instructed to make representations with the City Mayor and the Sangguniang Panlungsod towards the amendment of the pertinent portion of Sec. 2D.01 of the Makati Revenue Code in order to conform with the provisions of Sec. 135 of the LGC. That Office is further instructed to recompute the transfer tax collected from KRC and to communicate with its Counsel for the purpose of settling their claim for refund of the excess amount paid to that Office. However, be reminded that refunds, if any, of amounts paid to the local treasury should be in the form of tax credits. Cash refunds may only be allowed if the taxpayer concerned has no tax delinquencies and/or will not be subject to any tax or other imposition of the local government during the current and ensuing years. The KRC counsel is being furnished a copy of this indorsement for his information and guidance. prcd Advice of action taken hereon is requested. (SGD.) LORINDA M. CARLOS Executive Director