Schedular Capital Gains Tax in Connection with Sale, Exchange or Other Disposition of Real Property; BIR Clearance for Transfer of Title to the Vendee Transferee

November 8, 1986 REVENUE MEMORANDUM CIRCULAR NO. 41-86 SUBJECT : Schedular Capital Gains Tax in Connection with Sale, Exchange or Other Disposition of Real Property; BIR Clearance for Transfer of Title to the Vendee Transferee TO : All Internal Revenue Officers, Registers of Deeds and Others Concerned There are complaints that some corporations are being invariably required to secure BIR clearance authorizing transfer of title to real property sold, exchanged or otherwise disposed allegedly because the said clearance is required under the schedular capital gains tax law (Batas Pambansa Blg. 37, as amended). The said alleged requirement has no basis in law. Accordingly, this Circular is being issued for the proper guidance of all concerned. 1. Requisites . The aforesaid law is applicable only (a) if the real property was a "capital asset" in the hands of the vendor/transferor; (b) if the said real property is located in the Philippines; (c) if the vendor/transferor is either an individual, estate or a trust; and (d) if the transaction is either a sale, exchange or disposition of the said kind of real property. 2. Meaning of terms . (a) Capital asset . For purposes of this law, this term applies only to real property which was not used in the trade or business of the vendor/transferor. This term does not apply to real property which, in the hands of the vendor/transferor, was used or offered for sale or for lease in the course of his trade or business. (b) Exchange or other disposition . These terms shall apply only to exchange or other disposition of the said real property for a consideration, in money or money's worth. Accordingly, these terms shall not apply to transmission of real property through donations or inheritance. 3. Tax base and tax rate . The tax shall be based on the selling price or the prevailing fair market value of the said real property at the time of the transaction, whichever is higher. The capital gains tax shall be equal to the five percent (5%) thereof. The said fair market value shall be determined in accordance with BIR implementing rules and regulations. 4. Taxable event . Pursuant to Presidential Decree No. 1994 which took effect on January 1, 1986, this tax shall be imposed if the transaction is a sale, exchange or other disposition of real property including pacto de retro sale and other forms of conditional sales. Accordingly, a conditional sale transaction like the mortgage foreclosure sale is embraced under this law. cdt 5. BIR Clearance . Batas Pambansa Blg. 37 provides "no registration of any document transferring real property shall be effected by the Register of Deeds unless the Commissioner of Internal Revenue or his duly authorized representatives has certified that such transaction has been reported and the tax herein imposed, if any, has been paid. (a) The said clearance is required only if the vendor/transferor is an individual, estate or a trust. Accordingly, such clearance is not required if the vendor/transferor is a corporation, regardless of whether or not the real property was a capital asset in the hands of the said corporation. If the vendor/transferor is a corporation, the Register of Deeds shall not require the said BIR clearance for purposes of recording the transaction and effecting transfer of title, provided, that the corresponding documentary stamp tax on the document of sale, exchange or disposition had been duly paid through the corresponding Revenue District Office and the official receipt number; amount of stamp tax paid and date of payment duly noted on all copies of the taxable instrument, pursuant to (then) Section 209 of the National Internal Revenue Code, as amended by Presidential Decree No. 1994. (b) The said BIR clearance is required only if the transaction is a sale, exchange or other disposition of real property for a consideration, in money or money's worth. Accordingly, the said BIR clearance shall not be competent if the transmission of the real property is occasioned by a donation or inheritance. For donation/inheritance of real property, the Register of Deeds may transfer title only after the Commissioner of Internal Revenue or his duly authorized representative has certified (i) that the corresponding donor's gift tax or estate tax had been duly paid; (ii) and that title thereto may accordingly be transferred in the name of the donee or the heir. (c) If the vendor/transferor is an individual, estate or trust, BIR clearance shall be required, regardless of whether or not the real property was a capital asset or an ordinary business asset in the hands of the said vendor/transferor. If the real property was a capital asset in the hands of the vendor/transferor, BIR clearance shall be issued after payment of the corresponding (i) capital gains tax; and (ii) documentary stamps tax. If the real property was an ordinary business asset in the hands of the said vendor/transferor, BIR clearance shall be issued after the vendor/transferor has filed a sworn statement that the said real property was held as ordinary business asset in accordance with Section 7 of Revenue Regulations No. 8-79 which took effect on September 7, 1979, otherwise known as the implementing regulations of Batas Pambansa Blg. 37. This transaction shall, however, be reported by the said person in his annual tax return. (d) The sworn statement referred in the preceding sub-paragraph 5 (c) hereof, which is in lieu of the capital gains tax return shall be filed with the corresponding Revenue District Office also in case where the vendor/transferor, although an individual, estate or trust, is however, exempted from the 5% capital gains tax under the national internal revenue code or under existing special law (e. g., vendee/transferee is an entity of the Philippine Government, in which case, the vendor/transferor has the option either to report his said transaction under the 5% capital gains tax law or to report his transaction in his annual income tax return under normal income tax procedures; or where he avails of exemption from the capital gains tax, pursuant to existing special law; etc.) aisa dc After filing of the sworn statement, BIR clearance shall be issued to the vendor/transferor, subject to condition that the corresponding documentary stamp tax had been duly paid and noted in the taxable document. (e) The thirty (30) days filing period is applicable only for capital gains tax return. This filing period does not apply to the said sworn statement. Accordingly, no penalty shall apply to the vendor/transferor even if the said sworn statement is not filed within the said filing period. 6. Enforcement . Strict enforcement of this Circular is enjoined. All concerned are also enjoined to give this Circular a wide publicity as possible. BIENVENIDO A. TAN, JR. Commissioner