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Frequently Asked Questions

1) What is meant by capital asset?

Capital asset means property held by the taxpayer (whether or not connected with his trade or business), but does not include

a) stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the

close of the taxable year; or

b) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or

c) property used in the trade or business of a character which is subject to the allowance for depreciation provided in subsection (F) of Sec. 34 of

the Code; or

d) real property used in trade or business of the taxpayer.

2) What is meant by ordinary asset?

Ordinary asset refers to all properties specifically excluded from the definition of capital assets under Sec. 39 (A)(1) of the NIRC.

3) What is meant by real property?

Real property shall have the same meaning attributed to that term under Article 415 of Republic Ac t No. 386, otherwise known as the Civil Code of

the Philippines.

4) What does a real estate dealer refer to?

A real estate dealer refers to any person engaged in the business of buying and selling or exchanging real properties on his own account as a

principal and holding himself out as a full or part-time dealer in real estate.

5) What does a real estate developer refer to?

Real estate developer refers to any person engaged in the business of developing real properties into subdivisions, or building houses on

subdivided lots, or constructing residential or commercial units, townhouses and other similar units for his own account and offering them for sale

or lease.

6) What does a real estate lessor refer to?

Real estate lessor refers to any person engaged in the business of leasing or renting real properties on his own account as a principal and holding

himself out as a lessor of real properties being rented out or offered for rent.

7) Who are considered engaged in the real estate business?

Taxpayers who are considered engaged in the real estate business refer collectively to real estate dealers, real estate developers and/or real estate

lessors. A taxpayer whose primary purpose of engaging in business, or whose Articles of Incorporation states that its primary purpose is to engage

in the real estate business shall be deemed to be engaged in the real estate business.

8) Who are considered not engaged in the real estate business?

Taxpayers who are considered not engaged in the real estate business refer to persons other than real estate dealers, real estate developers

and/or real estate lessors.

9) Who are considered habitually engaged in the real estate business?

Real estate dealers or real estate developers who are registered with the Housing and Land Use Regulatory Board (HULRB) or HUDCC

10)How can you determine whether a particular real property is a capital asset or an ordinary asset?

a) Real properties shall be classified with respect to taxpayers engaged in the real estate business as follows:

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i) All real properties acquired by the real estate dealer shall be considered as ordinary assets.

ii) All real properties acquired by the real estate developer, whether developed or undeveloped as of the time of acquisition, and all real properties

which are held by the real estate developer primarily for sale or for lease to customers in the ordinary course of his trade or business or which

would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year and all real properties used in the trade or

business, whether in the form of land, building, or other improvements, shall be considered as ordinary assets.

iii) All real properties of the real estate lessor, whether land, building and/or improvements, which are for lease/rent or being offered for

lease/rent, or otherwise for use or being used in the trade or business shall l ikewise be considered as ordinary assets.

iv) All real properties acquired in the course of trade or business by a taxpayer habitually engaged in the sale of real property shall be considered as

ordinary assets.

Note: Registration with the HLURB or HUDCC as a real estate dealer or developer shall be sufficient for a taxpayer to be considered as habitually

engaged in the sale of real estate.

If the taxpayer is not registered with the HLURB or HUDCC as a real estate dealer or developer, he/it may nevertheless be deemed to be engaged in

the real estate business through the establishment of substantial relevant evidence (such as consummation during the preceding year of at least six

(6) taxable real estate sale transactions, regardless of amount; registration as habitually engaged in real estate business with the Local Government

Unit or the Bureau of Internal Revenue, etc.)

b) In the case of taxpayer not engaged in the real estate business, real properties, whether land, building, or other improvements, which are used

or being used or have been previously used in trade or business of the taxpayer shall be considered as ordinary assets.

c) In the case of taxpayers who changed its real estate business to a non-real estate business, real properties held by these taxpayer shall remain to

be treated as ordinary assets.

d) In the case of taxpayers who originally registered to be engaged in the real estate business but failed to subsequently operate, all real properties

acquired by them shall continue to be treated as ordinary assets.

e) Real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade

or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be

treated as ordinary assets. Provided however, that properties classified as ordinary assets for being used in business by a taxpayer engaged in

business other than real estate business are automatically converted into capital assets upon showing proof that the same have not been used in

business for more than two years prior to the consummation of the taxable transactions involving said properties

f) Real properties classified as capital or ordinary asset in the hands of the seller/transferor may change their character in the hands of the

buyer/transferee. The classification of such property in the hands of the buyer/transferee shall be determined in accordance with the following

rules:

i) Real property transferred through succession or donation to the heir or donee who is not engaged in the real estate business with respect to the

real property inherited or donated, and who does not subsequently use such property in trade or business, shall be considered as a capital asset in

the hands of the heir or donee.

ii) Real property received as dividend by the stockholders who are not engaged in the real estate business and who do not subsequently use such

property in trade or business, shall be considered as a capital asset in the hands of the recipients even if the corporation which declared the real

property dividends is engaged in real estate business.

iii) The real property received in an exchange shall be treated as ordinary asset in the hands of the case of a tax-free exchange by taxpayer notengaged in real estate business to a taxpayer who is engaged in real estate business, or to a taxpayer who, even if not engaged in real estate

business, will use in business the property received in exchange.

g) In the case of involuntary transfers of real properties, including expropriations or foreclosure sale, the involuntariness of such sale shall have no

effect on the classification of such real property in the hands of the involuntary seller, either as capital asset or ordinary asset as the case may be.

11) What is the basis in the valuation of property?

The value of the real property will be based on the selling price, fair market value as determined by the Commissioner (zonal value) or the fair

market value as shown in the schedule of values of the Provincial or City Assessor, whichever is higher.

If there is no zonal value, the taxable base is whichever is higher of the gross selling price per sales documents or the fair market value that appearsin the latest tax declaration.

If there is an improvement, the FMV per latest tax declaration at the time of the sale or disposition, duly certified by the City/Municipal Assessor

shall be used. No adjustments shall be added on the said value, provided that the tax declaration bears the upgraded fair market value of the said

property pursuant to Section 219 of R.A. No. 7160, otherwise known as the Local Government Code of 1991 and the last paragraph of the Local

Assessment Regulations No. 1-92 dated October 6, 1992.

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In case the tax declaration being presented was issued three (3) or more years prior to the date of sale or disposition of the real property, the

seller/transferor shall be required to submit a certification from the City/Municipal Assessor whether or not the same is still the latest tax

declaration covering the said real property. Otherwise, the taxpayer shall secure its latest tax declaration and shall submit a copy thereof duly

certified by the said Assessor. (RAMO 1-2001)

For shares of stocks, it will be based on the net capital gains realized from the sale, barter, exchange or other disposition of shares of stocks in a

domestic corporation, considered as capital assets not traded through the local stock exchange.

12) What are the applicable tax rates of Capital Gains Tax under the National Internal Revenue Code of 1997?

a) Real Properties - 6 %

b) For Shares of Stocks not Traded in the Stock Exchange, on the net Capital Gains

- Not over P100,000 - 5%

- Any amount in excess of P100,000 - 10%

13) Who are required to file the Final Capital Gains Tax return?

Every person, whether natural or juridical, resident or non-resident, including estates and trusts, who sells, transfers, exchanges or disposes realproperties located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales or shares of

stocks in domestic corporations not traded through the local stock exchange classified as capital assets.

14) What is the procedure in the filing of Final Capital Gains Tax return?

File the Final Capital Gains Tax return in triplicate (two copies for the BIR and one copy for the taxpayer) with the Authorized Agent Bank (AAB) in

the Revenue District where the seller or transferor is registered, for shares of stocks or where the property is located, for real property. In places

where there are no AAB, the return will be f iled directly with the Revenue Collection Officer or Authorized City or Municipal Treasurer.

15) Who/what are considered exempt from the payment of Final Capital Gains Tax?

Dealer in securities, regularly engaged in the buying and selling of securities An entity exempt from the payment of income tax under existing investment incentives and other special laws An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control A government entity or government-owned or controlled corporation selling real property If the disposition of the real property is gratuitous in nature Where the disposition is pursuant to the CARP law

16) Who are conditionally exempt from the payment of Final Capital Gains Tax?

Natural persons who dispose their principal residence, provided that the following criteria are met:

The proceeds of the sale of the principal residence have been fully utilized in acquiring or constructing new principal residencewithin eighteen (18) calendar months from the date of sale or disposition;

The historical cost or adjusted basis of the real property sold or disposed will be carried over to the new principal residencebuilt or acquired;

The Commissioner has been duly notified, through a prescribed return, within thirty (30) days from the date of sale ordisposition of the persons intention to avail of the tax exemption;

Exemption was availed only once every ten (10) years; and There is no full utilization of the proceeds of sale or disposition. The portion of the gain presumed to have been realized from

the sale or disposition will be subject to Capital Gains Tax.

In case of sale/transfer of principal residence, the Buyer/Transferee shall withhold from the seller and shall deduct from theagreed selling price/consideration the 6% capital gains tax which shall be deposited in cash or managers check in interest-

bearing account with an Authorized Agent Bank (AAB) under an Escrow Agreement between the concerned Revenue District

Officer, the Seller and the Transferee, and the AAB to the effect that the amount so deposited, including its interest yield, shall

only be released to such Transferor upon certification by the said RDO that the proceeds of the sale/disposition thereof has, in

fact, been utilized in the acquisition or construction of the Seller/Tr ansferors new principal residence within eighteen (18)

calendar months from date of the said sale or disposition. The date of sale or disposition of a property refers to the date of

notarization of the document evidencing the transfer of said property. In general, the term Escrow means a scroll, writing or

deed, delivered by the grantor, promisor or obligor into the hands of a third person, to be held by the latter until the happening

of a contingency or performance of a condition, and then by him delivered to the grantee, promise or obligee.

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17) What is a Certificate Authorizing Registration?

Certificate Authorizing Registration (CAR) is a certification issued by the Commissioner or his duly authorized representative attesting that the

transfer and conveyance of land, buildings/improvements or shares of stock arising from sale, barter or exchange have been reported and the taxes

due inclusive of the documentary stamp tax, have been fully paid.

CARs shall now have a validity of one (1) year from date of issue. In case of failure to present the same to the Registry of Deeds (RD) within the one

(1) year period, the same shall be presented for revalidation to the District Office where the CAR was issued. The revalidation, evidenced bystamping the phrase "revalidated on __________ to expire on ___________" in a conspicuous space in the CAR, shall be good for another one-year

period, after which the CAR losses its validity. (RMO 15-2003)

1) What are the types of Withholding Taxes?

There are two main classifications or types of withholding tax. These are:

a) Creditable Withholding Tax

- Withholding Tax on Compensation

- Expanded Withholding Tax

- Withholding of Business Tax (VAT and Percentage)

b) Final Withholding Tax

2) What is compensation?

It means any remuneration received for services performed by an employee from his employer under an employee-employer relationship.

3) What are the different kinds of compensation?

a) Regular compensation - includes basic salary, fixed allowances for representation, transportation

and others paid to an employee

b) Supplemental compensation - includes payments to an employee in addition to the regular

compensation such as but not limited to the following:

- Overtime Pay

- Fees, including director's fees

- Commission- Profit Sharing

- Monetized Vacation and Sick Leave

- Fringe benefits received by rank & file employees

- Hazard Pay

- Taxable 13th month pay and other benefits

- Other remunerations received from an employee-employer relationship

4) What are exempted from Withholding Tax on Compensation?

1. Remuneration as an incident of employment, such as the following:

a. Retirement benefits received under RA 7641

b. Any amount received by an official or employee or by his heirs from the employer due to

death, sickness or other physical disability or for any cause beyond the control of the said

official or employee such as retrenchment, redundancy or cessation of business

c. Social security benefits, retirement gratuities, pensions and other similar benefits

d. Payment of benefits due or to become due to any person residing in the Philippines under

the law of the US administered by the US Veterans Administration

e. Payment of benefits made under the SSS Act of 1954, as amended

f. Benefits received from the GSIS Act of 1937, as amended, and the retirement gratuity

received by the government official and employees

2. Remuneration paid for agricultural labor and paid entirely in products of the farm where the labor

is performed

3. Remuneration for domestic services

4. Remuneration for casual labor not in the course of an employer's trade or business

5. Compensation for services by a citizen or resident of the Philippines for a foreign government or

an international organization

6. Payment for damages

7. Proceeds of Life Insurance

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8. Amount received by the insured as a return of premium

9. Compensation for injuries or sickness

10. Income exempt under Treaty

11. Thirteenth (13th) month pay and other benefits (not to exceed P 30,000)

12. GSIS, SSS, Medicare and other contributions

13. Compensation Income of Minimum Wage Earners (MWEs) with respect to their Statutory

Minimum Wage (SMW) as fixed by Regional Tripartite Wage and Productivity Board

(RTWPB)/National Wage and Productivity Commission (NWPC), including overtime pay, holiday

pay, night shift differential and hazard pay, applicable to the place where he/she is assigned.

14. Compensation Income of employees in the public sector if the same is equivalent to or not

more than the SMW in the non-agricultural sector, as fixed by RTWPB/NWPC, including

overtime pay, holiday pay, night shift differential and hazard pay, applicable to the place where

he/she is assigned.

5) What are De Minimis Benefits?

-These are facilities and privileges of relatively small value and are offered or furnished by the employer to his employees merely as means ofpromoting their health, goodwill, contentment or efficiency. The following shall be considered "De Minimis" benefits not subject to income tax,

hence not subject to withholding tax on compensation income of both managerial and rank and file employees:

v Monetized unused vacation leave credits of private employees not exceeding ten (10) days during the year;

v Monetized value of vacation and sick leave credits paid to government officials and employees.

v Medical cash allowance to dependents of employees, not exceeding P750.00 per employee per semester or P125.00 per month;

v Rice subsidy of P1,500 or one (1) sack of 50 kg. rice per month amounting to not more than P1,500;

v Uniform and clothing allowance not exceeding P5,000 per annum;

v Actual medical assistance, e.g. medical allowance to cover medical and healthcare needs, annual medical/executive check-up, maternity

assistance, and routine consultations, not exceeding P10,000 per annum;

v Laundry allowance not exceeding P300.00 per month;

v Employees achievement awards, e.g., for length of service or safety achievement, which must be in the form of a tangible personal property

other than cash or gift certificate, with an annual monetary value not exceeding P10,000 received by the employee under an established

written plan which does not discriminate in favor of highly paid employees;v Gifts given during Christmas and major anniversary celebration not exceeding P5,000.00 per employee perannum;

v Daily meal allowance for overtime work and night/graveyard shift not exceeding twenty-five percent (25%) of the basic minimum wage on a

per region basis;

6) What is substituted Filing of income tax returns (ITR)?

Substituted Filing of ITR is the manner by which declaration of income of individuals receiving purely compensation income the taxes of which have

been withheld correctly by their employers. Instead of the filing of Individual Income Tax Return (BIR Form 1700), the employ ers annual

information return (BIR Form No. 1604-CF) duly stamped received by the BIR may be considered as the substitute Income Tax Return (ITR) of the

employee, inasmuch as the information provided therein are exactly the same information required to be provided in his income tax return (BIR

Form No. 1700). However, said employees may still file ITR at his/her option.

7) Who are qualified to avail of the substituted fi ling of ITR?

Employees who satisfies all of the following conditions:

a. Receiving purely compensation income regardless of amount;

b. Working for only one employer in the Philippines for the calendar year;

c. Tax has been withheld correctly by the employer (tax due equals tax withheld);

d. The employees spouse also complies with all three (3) conditions stated above.

e. The employer files the annual information return (BIR Form No. 1604-CF)

f. The employer issues BIR Form No. 2316 to each employee.

Note: For those employees qualified under the substituted filing, the employer shall furnish each employee with the original copy of BIR Form No.

2316 and file/submit to the BIR the duplicate copy not later than February 28 following the close of the calendar year.

8) What income payments are subject to Expanded Withholding Tax?

a) Professional fees / talent fees for services rendered by the following:

- Those individually engaged in the practice of professions or callings such as lawyers; certified

public accountants; doctors of medicine; architects; civil, electrical, chemical, mechanical,

structural, industrial, mining, sanitary, metallurgical and geodetic engineers; marine surveyors;

doctors of veterinary science; dentist; professional appraisers; connoisseurs of tobacco;

actuaries; interior decorators, designers, real estate service practitioners (RESPs), (i. e. real

estate consultants, real estate appraisers and real estate brokers) requiring government

licensure examination given by the Real Estate Service pursuant to Republic Act No. 9646 and all

other profession requiring government licensure examinations and/or regulated by the

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Professional Regulations Commission, Supreme Court, etc.

- Professional entertainers such as but not limited to actors and actresses, singers, lyricist,

composers and emcees

- Professional athletes including basketball players, pelotaris and jockeys

- Directors and producers involved in movies, stage, radio, television and musical productions

- Insurance agents and insurance adjusters

- Management and technical consultants

- Bookkeeping agents and agencies

- Other recipient of talent fees

- Fees of directors who are not employees of the company paying such fees whose duties are

confined to attendance at and participation in the meetings of the Board of Directorsb) Professional fees, talent fees, etc for services of taxable juridical persons

c) Rentals:

-Rental of real property used in business

-Rental of personal properties in excess of P 10,000 annually

-Rental of poles, satellites and transmission facilities

-Rental of billboards

d) Cinematographic film rentals and other payments

e) Income payments to certain contractors- General engineering contractors

- General building contractors

- Specialty contractors

- Other contractors like:

1. Filling, demolition and salvage work contractors and operators of mine drilling apparatus

2. Operators of dockyards

3. Persons engaged in the installation of water system, and gas or electric light, heat or power

4. Operators of stevedoring, warehousing or forwarding establishments

5. Transportation Contractors

6. Printers, bookbinders, lithographers and publishers, except those principally engaged in the

publication or printing of any newspaper, magazine, review or bulletin which appears at

regular intervals, with fixed prices for subscription and sale

7. Advertising agencies, exclusive of payments to media

8. Messengerial, janitorial, security, private detective, credit and/or collection agencies and otherbusiness agencies

9. Independent producers of television, radio and stage performances or shows

10. Independent producers of "jingles"

11. Labor recruiting agencies and/or labor-only contractors

12. Persons engaged in the installation of elevators, central air conditioning units, computer

machines and other equipment and machineries and the maintenance services thereon

13. Persons engaged in the sale of computer services, computer programmers, software

developer/designer, etc.

14. Persons engaged in landscaping services

15. Persons engaged in the collection and disposal of garbage

16. TV and radio station operators on sale of TV and radio airtime, and

17. TV and radio blocktimers on sale of TV and radio commercial spots

f) Income distribution to the beneficiaries of estates and trusts

g) Gross commissions of customs, insurance, stock, immigration and commercial brokers, fees of

agents of professional entertainers and real estate service practitioners (RESPs), (i. e. real

estate consultants, real estate appraisers and real estate brokers) who failed or did not take up

the licensure examination given by and not registered with the Real Estate Service under the

Professional Regulations Commission

h) Income payments to partners of general professional partnerships

i) Payments made to medical practitioners

j) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for

the sale, exchange or transfer of real property classified as ordinary asset

k) Additional income payments to government personnel from importers, shipping and airline

companies or their agents

l) Certain income payments made by credit card companies

m) Income payments made by the top 20,000 private corporations to their purchase of goods

and services from local/resident suppliers other than those covered by other rates of

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withholding

n) Income payments by government offices on their purchase of goods and services, from

local/resident suppliers other than those covered by other rates of withholding

o) Commission, rebates, discounts and other similar considerations paid/granted to independent

and exclusive distributors, medical/technical and sales representatives and marketing agents

and sub-agents of multi level marketing companies.

p) Tolling fees paid to refineries

q) Payments made by pre-need companies to funeral parlors

r) Payments made to embalmers by funeral parlors

s) Income payments made to suppliers of agricultural products (suspended per RR 3-2004)

t) Income payments on purchases of mineral, mineral products and quarry resources

u) On gross amount of refund given by MERALCO to customers with active contracts as classified by

MERALCO;

v) Interest income on the refund paid through direct payment or application against customers'

billing by other electric Distribution Utilities in accordance with the rules embodied in ERCResolution No. 8 series of 2008 dated June 4, 2008 governing the refund of meter deposits

which was approved and adopted by ERC in compliance with the mandate of Article 8 of the

Magna Carta for Residential Electricity Consumers and Article 3.4.2 of DSOAR exempting all

electricity consumers, whether residential or non-residential from the payment of meter deposit.

w) Income payments made by the top 5,000 individual taxpayers to their purchase of goods and

services from their local/resident suppliers other than those covered by other rates of

withholding

x) Income payments made by political parties and candidates of local and national elections of all

their campaign expenditures, and income payments made by individuals or juridical persons for

their purchases of goods and services intended to be given as campaign contribution to political

parties and candidates

y)Interest Income derived from any other debt instruments not within the coverage of deposit

substitutes and RR No. 14-2012

z) Income payments subject to Withholding Tax received by Real Estate Investment Trust (REIT)

(Sec.12 of RR No. 13-2011)

9) What income payments are subject to Final Withholding Tax?

a) Income Payments to a Citizen or to a Resident Alien Individual:

- Interest on any peso bank deposit

- Royalties

- Prizes [except prizes amounting to P10,000 or less which is subject to tax under Sec. 24(A)(1) of

the Tax Code]

- Winnings (except winnings from Philippine Charity Sweepstake Office and Lotto)- Interest income on foreign currency deposit

- Interest income from long term deposit (except those with term of five years or more)

- Cash and/or property dividends

- Capital Gains presumed to have been realized from the sale, exchange or other disposition of

real property

b) Income Payments to a Non-Resident Alien Engaged in Trade or Business in the Philippines

- On Certain Passive Income

- cash and/or property dividend

- Share in the distributable net income of a partnership

- Interest on any bank deposits

- Royalties

- Prizes (except prizes amounting to P10,000 or less which is subject to tax under Sec. 25(A)(1) of

the Tax Code.

- Winnings (except from Philippine Charity Sweepstake Office and Lotto)

- Interest on Long Term Deposits (except those with term of five years or more)

- Capital Gains presumed to have been realized from the sale, exchange or other disposition of

real property

c) Income Derived from All Sources Within the Philippines by a Non-Resident Alien Individual Not

Engaged in Trade or Business

- On gross amount of income derived from all sources within the Philippines

- On Capital Gains presumed to have been realized from the sale, exchange or disposition of real

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property located in the Philippines

d) Income Derived by Alien Individual Employed by a Regional or Area Headquarters and Regional

Operating Headquarters of Multinational Companies, Income Derived by Alien Individual

Employed by Offshore Banking Units and Income of Aliens Employed by Foreign Petroleum

Service Contractors and Subcontractors

e) Income Payment to a Domestic Corporation

- Interest from any currency bank deposits and yield or any other monetary benefit from deposit

substitutes and from trust fund and similar arrangements derived from sources within the

Philippines- Royalties derived from sources within the Philippines

- Interest income derived from a depository bank under the Expanded Foreign Currency Deposit

(FCDU) System

- Income derived by a depository bank under the FCDU from foreign transactions with local

commercial banks

- On 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 based on the gross selling price or fair market value as

determined in accordance with Sec. 6(E) of the NIRC, whichever is higher

f) Income Payments to a Resident Foreign Corporation

- Offshore Banking Units

- Tax on branch Profit Remittances

- Interest on any currency bank deposits and yield or any other monetary benefit from depositsubstitute and from trust funds and similar arrangements and royalties derived from sources

within the Philippines

- Interest income on FCDU

- Income derived by a depository bank under the expanded foreign currency deposits system from

foreign currency transactions with local commercial banks

g) Income Derived from all Sources Within the Philippines by a Non-Resident Foreign Corporation

- Gross income from all sources within the Philippines such as interest, dividends, rents, royalties,

salaries, premiums (except re-insurance premiums), annuities, emoluments or other fixed

determinable annual, periodic or casual gains, profits and income or capital gains;

- Gross income from all sources within the Philippines derived by a non-resident cinematographic

film owner, lessor and distributor

- On the gross rentals, lease and charter fees derived by a non-resident owner or lessor of vessels

from leases or charters to Filipino citizens or corporations as approved by the Maritime IndustryAuthority

- On the gross rentals, charter and other fees derived by a non-resident lessor of aircraft,

machineries and other equipment

- Interest on foreign loans contracted on or after August 1, 1986

h) Fringe Benefits Granted to the Employee (except Rank and File)

- Goods, services or other benefits furnished or granted in cash or in kind by an employer to an

individual employee (except rank and file) such as but not limited to the following:

- Housing

- Vehicle of any kind

- Interest on loans

- Expenses for foreign travel

- Holiday and vacation expenses

- Educational assistance to employees or his dependents- Membership fees, dues and other expense in social and athletic clubs or other

- similar organizations

- Health insurance

i) Informers Reward

j) Cash or property dividends paid by a Real Estate Investment Trust (REIT) pursuant to Section 13

of RR 13-2011

10) Aside from the required withholding of income tax by government agencies and instrumentalities on their payments to their suppliers of

goods and services, what other tax types must be withheld by them.

a) Value Added Tax on all income payments subject to VAT

b) Percentage Tax on all payments subject to percentage tax such as payments to the following:

- Any person engaged in business whose gross sales or receipts do not exceed P1,919,500

(RR 3-2012) and who are not VAT-registered persons. (Persons exempt from VAT under Sec.

109V of the Tax Code)

- Domestic carriers and keepers of garages, except owners of bancas and owners of animal drawn

two wheeled vehicle

- Operators of international carriers doing business in the Philippines.

- Franchise grantees of electric, gas or water utilities

- Franchise grantees of radio and/or television broadcasting companies whose gross annual

receipts of the preceding year do not exceed Ten Million (P10,000,000.00) Pesos and did not opt

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to register as VAT Taxpayers

-Communication providers with regards to overseas dispatch, messages or conversation from the

Philippines

- Banks and non-bank financial intermediaries and finance companies

- Life insurance companies

- Agents of foreign insurance companies

- Proprietor, lessee, or operator of cockpits, cabarets, night or day clubs, videoke/karaoke bars,

karaoke television, karaoke boxes, music lounges and other similar establishments, boxing

exhibitions, professional basketball games, jai-alai and race tracks

- Winners in horse races or owner of winning race horses

- Every stock broker who effected a sale, barter, exchange or other disposition of shares of stocklisted and traded through the Local Stock Exchange (LSE) other than the sale by a dealer in

securities

- A corporate issuer/stock broker, whether domestic or foreign, engaged in the sale, barter,

exchange or other disposition through Initial Public Offering (IPO) /secondary public offering of

shares of stock in closely held corporations

11) Who is a withholding agent?

A withholding agent is any person or entity who is required to deduct and remit the taxes withheld to the government.

12) What are the duties and obligations of the withholding agent?

The following are the duties and obligations of the withholding agent:

a) To Register - withholding agent is required to register within ten (10) days after acquiring such

status with the Revenue District office having jurisdiction over the place where the business is

located

b) To Deduct and Withhold - withholding agent is required to deduct tax from all money payments

subject to withholding tax

c) To Remit the Tax Withheld - withholding agent is required to remit tax withheld at the time

prescribed by law and regulations

d) To File Annual Return - withholding agent is required to file the corresponding Annual

Information Return at the time prescribed by law and regulations

e) To Issue Withholding Tax Certificates - withholding agent shall furnish Withholding Tax

Certificates to recipient of income payments subject to withholding

13) Who are considered TOP 20,000 Corporate Taxpayers?

Top twenty thousand (20,000) private corporations shall include a corporate taxpayer who has been determined and notified by the Bureau of

Internal Revenue (BIR) as having satisfied any of the following criteria:

a) Classified and duly notified by the Commissioner as a large taxpayer under Revenue Regulation

No. 1-98, as amended, or belonging to the top five thousand (5,000) private corporations under

RR 12-94, or to the top ten thousand (10,000) private corporations under RR 17-2003, unless

previously de-classified as such or had already ceased business operations (automatic

inclusion);

b) VAT payment or payable whichever is higher, of at least P100,000 for the preceding year;

c) Annual income tax due of at least P200,000 for the preceding year;

d) Total percentage tax paid of at least P100,000 for the preceding year;

e) Gross sales of P10,000,000 and above for the preceding year;

f) Gross purchases of P5,000,000 and above for the preceding year;

g) Total excise tax payment of at least P100,000 for the preceding year.

14) What are the obligations of Top 20,000 Corporate Taxpayers?

a) In addition to the above responsibilities of a withholding agent, Top 20,000 private corporations

shall withhold the one percent (1%) creditable expanded withholding tax on the purchase of

goods and two percent (2%) on the purchase of services (other than those covered by other

withholding tax rates) from local suppliers where it regularly makes purchases. However, casual

purchase of goods shall not be subject to withholding tax unless the amount of purchase at any

one time involves P10,000 or more, in which case, it shall then be required to withhold the tax.

The same rule apply to local/resident supplier of services other than those covered by separate

rates of withholding tax. Provided, however, that for purchases involving agricultural products in

their original state, the tax required to be withheld shall only apply to purchases in excess of the

cumulative amount of P300,000 within the same taxable year. For this purpose, agricultural

products in their original state shall only include corn, coconut, copra, palay, rice cassava, sugar

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cane, coffee, fruits, vegetables, marine food products, poultry and livestocks.

b) Taxes withheld shall be remitted using BIR Form 1601-E on a monthly basis thru the use of the

Electronic Filing and Payment System (EFPS) on the dates prescribed for e-filers. Filing shall be

done on a staggered basis provided under RR 26-2002 and payment shall be made every 15th

day following the end of the month for Jan-Nov and Jan. 20 of the following year for the month

of December.

c) Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) shall be issued to the

payees within twenty (20) days following the close of such payees taxable quarter or upon

demand of the payees;

d) A list of regular supplier of goods and/or services shall be submitted on a semestral basis

through e-submission facility or as an attachment under Electronic Filing and Payment System

(EFPS). Deadline for submission of the list is not later than July 31 and January 31 of each year.

However, initial list of regular suppliers should be submitted within fifteen (15) days from actual

receipt hereof.

15) Who are considered TOP 5,000 Individual Taxpayers?

Top 5,000 Individual Taxpayers shall refer to individual taxpayers engaged in trade or business or exercise of profession who have been determined

and notified by the Bureau of Internal Revenue (BIR) as having satisfied any of the following criteria:

a) VAT payment or payable whichever is higher, of at least P100,000 for the preceding year;

b) Annual income tax due of at least P200,000 for the preceding year;

c) Total percentage tax paid of at least P100,000 for the preceding year;

d) Gross sales of P10,000,000 and above for the preceding year;

e) Gross purchases of P5,000,000 and above for the preceding year;

f) Total excise tax payment of at least P100,000 for the preceding year.

16) What are the obligations of Top 5,000 Individual Taxpayers?

a) In addition to the obligations of a withholding agent, Top 5,000 Individual Taxpayers shall

withhold the one percent (1%) creditable expanded withholding on the purchase of goods andtwo percent (2%) on the purchase of services (other than those covered by other withholding tax

rates) from local suppliers where it regularly makes purchases. However, casual purchase of

goods shall not be subject to withholding tax unless the amount of purchase at any one time

involves P10,000 or more, in which case, it shall then be required to withhold the tax. The same

rule apply to local/resident supplier of services other than those covered by separate rates of

withholding tax. Provided, however, that for purchases involving agricultural products in their

original state, the tax required to be withheld shall only apply to purchases in excess of the

cumulative amount of P300,000 within the same taxable year. For this purpose, agricultural

products in their original state shall only include corn, coconut, copra, palay, rice cassava, sugar

cane, coffee, fruits, vegetables, marine food products, poultry and livestocks.

b) Taxes withheld shall be remitted under BIR Form 1601-E on a monthly basis thru the Electronic

Filing and Payment System (EFPS) facility within the prescribed period.

c) Certificate of Creditable Tax Withheld at Source (BIR Form No. 2307) shall be issued to the

payees within twenty (20) days following the close of such payees taxable quarter or upon

demand of the payees;

d) A list of regular supplier of goods and/or services shall be submitted on a semestral basis

through e-submission facility or as an attachment under Electronic Filing and Payment System

(EFPS). Deadline for submission of the list is not later than July 31 and January 31 of each year.

However, initial list of regular suppliers should be submitted within fifteen (15) days from actual

receipt hereof.

17) Who are the responsible officials in the government offices charged with the duty to deduct, withhold and remit withholding taxes?

The following officials are duty bound to deduct, withhold and remit taxes:

a) For Office of the Provincial Government-province- the Chief Accountant, Provincial Treasurer and

the Governor;

b) For Office of the City Government-cities- the Chief Accountant, City Treasurer and the City

Mayor;

c) For Office of the Municipal Government-municipalities- the Chief Accountant, Municipal Treasurer

and the Mayor;

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d) Office of the Barangay-Barangay Treasurer and Barangay Captain

e) For NGAs, GOCCs and other Government Offices, the Chief Accountant and the Head of Office

or the Official holding the highest position.

Tax advantages of booking real estate in a corporation

You may have heard of people putting real estate in the name of corporations instead of their own names, and wondered how exactly that helps

them.

Fair warning, this will be a long discussion, but I will attempt to explain this in laymans terms. Please take note that thi s will be an overly simplified

version for information purposes only. Consult your lawyer for legal advice about your particular circumstances.

Before RR 6-2013

Previously, the fair market value of a share of stock not traded in the stock exchange was based on the corporations book value per share.

In accounting for real estate, the asset is recorded at acquisition cost. Meaning, if you bought a piece of land fifty years ago at P5,000.00 and put it

in a corporation, the book value of that land will still be P5,000.00 today (unless an appraisal increase was recorded). If instead of land it was a

house and lot, technically, the book value will be lower because of depreciation on the house.

What are the taxes if you want to sell the land?

Since the land is booked in the corporation (and it is possible that the corporation has no other asset other than the land), you have a choice of

either a) having the corporation selling the land or b) selling the shares of the corporation which holds the land.

Under a), if the land is an ordinary asset of the corporation, the corporation will be subject to 12%VAT, plus income tax which shall be based on the

difference between the highest among the selling price, BIR zonal value, and tax declaration value, and the cost (which we expect to be high since

the historical cost is so low).

If the land is a capital asset, the corporation will be subject to capital gains tax on the sale of land, which shall be 6% of the highest among the

selling price, BIR zonal value, and tax declaration value, without taking the cost into consideration as a deduction.

[Note: You may want to revisit myprevious post on the difference between an ordinary and a capital asset.]

Under b), instead of having the corporation sell the land, you will sell the shares of the stock of the corporation which holds the real estate (and the

shares are not traded in the stock exchange).

The owner of the shares will then be subject to capital gains taxon the sale of shares not listed in the stock exchange, which is 5% on the first

P100,000.00 gain and 10% on the gain in excess of P100,000.00.

Since the tax is on the gain (meaning selling price less acquisition cost), the tax will be less compared to capital gains tax on the sale of real estate

which is based on presumed gain.

If a person has an intent of evading the payment taxes, the selling price may be understated to be just a l ittle over the book value of the shares, so

the gain will be lower and consequently, the taxes will be lower as well.

Plugging the tax loophole

Under RR 6-2013, the fair market value of shares not sold on the stock exchange is now determined using the Adjusted Net Asset Method. Under

this method, all assets and liabilities are adjusted to fair market values. The value of the share shall be the adjusted asset value minus the liability.

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RR 6-2013 specifically stated that the appraised value of real property at the time of sale shall be the higher of

1. The fair market value as determined by the Commissioner, or2. The fair market value as shown in the schedule of valued fixed by the Provincial and City Assessors, or3. The fair market value as determined by Independent Appraiser.

Note that based on RR 6-2008, the net capital gain is computed as selling price less acquisition cost. Selling price was further defined as (among

others) in the case of cash sale, the selling price shall be the total consideration per deed of sale. It was defined further that, In case the fair

market value of the shares of stock sold, bartered, or exchanged is greater than the amount of money and/or fair market value of the property

received, the excess of the fair market value of the shares of stock sold, bartered or exchanged over the amount of money and the fair

market value of the property, if any, received as consideration shall be deemed a gift subject to thedonors taxunder Sec. 100 of the Tax Code, as

amended.

What are the implications?

Taxes make a man sad

The effect of this regulation is to raise the fair market value of the shares while maintaining its cost. Thus, in order to avoid donors tax in situations

where the fair market value is higher than the selling price, the selling price should be at least the same as the fair market value this in turn raises

the taxable net capital gain.

Furthermore, since there is a specific mention of real property, I foresee that the evaluation of requests for Certificates Authorizing Registration

(CAR) on the sale of shares of stock of corporations with real estate assets will be stricter.

Will this have an effect on estate tax?

Some people put their real estate assets in corporations forestate taxpurposes. This is partly because it is easier to transfer shares of stock

compared to real estate.

The net estate shall be based on the fair market value of the properties at the time of death. The definition of fair market value of shares not

traded in the stock exchange for purposes of estate tax (as stated inRR 2-03) has not changed, to wit:

In the case of shares of stocks, the fair market value shall depend on whether the shares are listed or unlisted in the stock exchanges. Unlisted

common shares are valued based on their book value while unlisted preferred shares are valued at par value. In determining the book value of

common shares, appraisal surplus shall not be considered as well as the value assigned to preferred shares, if there are any.

Thus, this regulation should have no effect on estate tax.

http://www.foreclosurephilippines.com/2013/01/donation-estate-planning-donors-tax.htmlhttp://www.foreclosurephilippines.com/2013/01/donation-estate-planning-donors-tax.htmlhttp://www.foreclosurephilippines.com/2013/01/donation-estate-planning-donors-tax.htmlhttp://www.foreclosurephilippines.com/2012/11/death-real-estate-and-estate-tax.htmlhttp://www.foreclosurephilippines.com/2012/11/death-real-estate-and-estate-tax.htmlhttp://www.foreclosurephilippines.com/2012/11/death-real-estate-and-estate-tax.htmlftp://ftp.bir.gov.ph/webadmin1/pdf/1898rr02_03.pdfftp://ftp.bir.gov.ph/webadmin1/pdf/1898rr02_03.pdfftp://ftp.bir.gov.ph/webadmin1/pdf/1898rr02_03.pdfftp://ftp.bir.gov.ph/webadmin1/pdf/1898rr02_03.pdfhttp://www.foreclosurephilippines.com/2012/11/death-real-estate-and-estate-tax.htmlhttp://www.foreclosurephilippines.com/2013/01/donation-estate-planning-donors-tax.html

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What about donors tax?

As previously mentioned, in cases where the fair market value of the shares not traded in the stock exchange exceeds the sell ing price, the

difference shall be subjected to donors tax.

With regard to shares not traded in the stock exchange which are donated, there is no clear definition of fair market of value. It may be argued that

the definition of fair market value as applied to estate tax should be applied (that is, book value), since transfer via liberality and inheritance are

similar.

Is there any other tax planning solution?

Definitely, for future transactions, there are still ways to get around this (trust the tax practitioners to come up with something). However, for

those who did not see this coming, this will have an effect on the tax plan.

I wonder though if there would be anyone willing to contest this RR. What about you? What are your thoughts?

Determining the capital gain from sale of shares of stockby Catherine C. Quilantang

This is a sequel to the article published last week discussing the newly issued Revenue Regulations (RR) No. 6-2008 which consolidates the income

tax rules for shares of stock classified as capital asset.

As mentioned, the new regulation did not merely consolidate the existing income tax rules but also introduced new rules intended to clarify once

and for all the treatment of certain transactions. This issue focuses on the changes in the determination of the selling price of shares of stock.

Under the new regulations, the following rules shall apply in determining the selling price of the shares disposed:

In case of cash sale the selling price is the total consideration as indicated in the deed of sale; If the consideration is partly in money and partly in kind the selling price is the cash or money received plus the fair market value of the property

received;

In case of exchanges the selling price is the fair market value of the property received. If the fair market value of the shares of stock disposed is higher than the amount of amount and/or fair market value of the property received, the

excess of the fair market value of the shares of stock disposed over the amount of money and the fair market value of the property, i f any, received

as consideration shall be deemed a gift subject to the donors tax.

Although the rule on the imposition of the gift tax on sales for less than the fair market value is already provided in the Tax Code (Sec. 100), this

had not been applied on sale of shares because RR No. 2-82, as amended (Taxation of Sales of Shares of Stocks Classified as Capital Asset), already

provides that the selling price of the shares of stock shall not be less than the fair market value of the shares of stocks transferred or exchanged.

As defined in the new regulations, the fair market value in the case of listed shares not traded through the Local Stock Exchange shall be the closing

price on the day when the shares are sold, transferred, or exchanged. When no sale is made in the Local Stock Exchange, the closing price on the

day nearest to the date of sale, transfer or exchange of the shares is taken. In the RR 2-82, amended, the fair market value is the highest closing

price.

For shares of stock not listed and traded through the Local Stock Exchange, it was clarified in the new regulation that the fai r market value is the

book value of the shares of stock as shown in the financial statements duly certified by an independent certified public accountant nearest to the

date of sale.

The regulation illustrated the case of a corporation using calendar year as accounting period. When its shares were sold on March 31, 2008, the

audited financial statements for calendar year 2007 have not yet been issued. The regulations rule that the book value of the shares sold shall be

based on the unaudited financial statements for taxable year 2007. However, once the audited 2007 financial statements is issued, adjustment to

the book value shall be made for any difference.

The new regulation, however, did not retain the condition under RR 2-82 allowing for a fair market value lower than the book value under certain

conditions. Under RR 2-82, a lower fair market value may be justified based on various factors affecting the valuation of shares of stock of closed

corporations as enumerated in the regulation. Sufficient evidence should however be submitted to support such lower fair marke t value.

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On the other hand, the cost basis for determining the capital gains or losses if acquired by purchase is still the same. However, aside from the

shares acquired by purchase, the new regulation has specifically provided for the cost basis for shares of stock acquired by devise, bequest or

inheritance, acquired by gift and those acquired for inadequate co nsideration.

T here were no changes introduced on the rules on the determination of the substituted basis of shares in tax-free exchanges pursuant to Section

40(C)(2) of the Tax Code.

Taxpayers should be aware that RR 6-08 did not merely consolidate the existing income tax rules on the sale, exchange or disposition of shares of

stocks held as capital assets. There were new rules that were introduced. As these supersede the rules provided in the previously issued

regulations, these should be followed.

(The author is a senior tax manager at Punongbayan & Araullo, a member firm within Grant Thornton International Ltd. For comments and

inquiries, please e-mail theauthoror call 886-5511.)

FACTS:

Supreme Transliner took out a loan from respondent and was unable to pay. The respondent bank extrajudicially foreclosed the collateral and,

before the expiration of the one-year redemption period, the mortgagors notified the bank of its intention to redeem the property.

ISSUE:

Is the mortgagee-bank liable to pay the capital gains tax upon the execution of the certificate of sale and before the expiry of the redemption

period?

HELD:

NO. It is clear that in foreclosure sale there is no actual transfer of the mortgaged real property until after the expiration of the one-year period and

title is consolidated in the name of the mortgagee in case of non-redemption. This is because before the period expires there is yet no transfer of

title and no profit or gain is realized by the mortgagor.

SUPREME TRANSLINER, INC., MOISES C. ALVAREZ and

PAULITA S. ALVAREZ,

Petitioners,

- versus -

BPI FAMILY SAVINGS BANK, INC.,

Respondent.

G.R. No. 165617

x- - - - - - - - - - - - - - - - - - - - - - - - - -x

BPI FAMILY SAVINGS BANK, INC.,

Petitioner,

- versus -

SUPREME TRANSLINER,

INC., MOISES C. ALVAREZ

and PAULITA S. ALVAREZ,

Respondents.

G.R. No. 165837

Present:

BRION,*J.,

Chairperson,

BERSAMIN,

ABAD,**

VILLARAMA, JR., and

SERENO,JJ.

Promulgated:

February 25, 2011

x- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -x

DECISION

VILLARAMA, JR.,J.:

This case involves the question of the correct redemption price payable to a mortgagee bank as purchaser of the property in a foreclosure

sale.

On April 24, 1995, Supreme Transliner, Inc. represented by its Managing Director, Moises C. Alvarez, and Paulita S. Alvarez, obtained a loan in

the amount of P9,853,000.00 from BPI Family Savings Bank with a 714-square meter lot covered by Transfer Certificate of Title No. T-79193 in the

name of Moises C. Alvarez and Paulita S. Alvarez, as collateral.[1]

mailto:Catherine.DelaCruz@pna.phmailto:Catherine.DelaCruz@pna.phmailto:Catherine.DelaCruz@pna.phhttp://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn1http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn1http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn1http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn2http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn2http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn2http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn3http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn3http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn3http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn3http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn2http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn1mailto:Catherine.DelaCruz@pna.ph

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For non-payment of the loan, the mortgage was extrajudicially foreclosed and the property was sold to the bank as the highest bidder in the

public auction conducted by the Office of the Provincial Sheriff of Lucena City. On August 7, 1996, a Certificate of Sale[2]

was issued in favor of the

bank and the same was registered on October 1, 1996.

Before the expiration of the one-year redemption period, the mortgagors notified the bank of their intention to redeem the

property. Accordingly, the following Statement of Account[3]

was prepared by the bank indicating the total amount due under the mortgage loan

agreement:

x x x x

Balance of Principal

Add: Interest Due

Late Payment Charges

MRI

Fire Insurance

Foreclosure Expenses

P 9,551,827.64

1,417,761.24

155,546.25

0.00

0.00

155,817.23

Sub-total

Less: Unapplied Payment

P 11,280,952.36

908,241.01

Total Amount Due As Of 08/07/96 (Auction

Date)

10,372,711.35

Add: Attorneys Fees (15%) 1,555,906.70

Liquidated Damages (15%) 1,555,906.70Interest on P 10,372,711.35

from 08/07/96 to 04/07/97 (243 days) at

17.25% p.a. 1,207,772.58

x x x x

Asset Acquired Expenses:

Documentary Stamps 155,595.00

Capital Gains Tax 518,635.57

Foreclosure Fee 207,534.23

Registration and Filing Fee 23,718.00

Addl. Registration & Filing Fee 660.00 906,142.79

Interest on P 906,142.79

from 08/07/96 to 04/07/97 (243 days)

at 17.25% p.a. 105,509.00

Cancellation Fee 300.00

Total Amount Due As Of 04/07/97 (Subject to

Audit) P 15,704,249.12

x x x x

The mortgagors requested for the elimination of liquidated damages and reduction of attorneys fees and interest (1% per month) but thebank refused. On May 21, 1997, the mortgagors redeemed the property by paying the sum of P15,704,249.12. A Certificate of Redemption

[4]was

issued by the bank on May 27, 1997.

On June 11, 1997, the mortgagors filed a complaint against the bank to recover the allegedly unlawful and excessive charges

totaling P5,331,237.77, with prayer for damages and attorneys fees, docketed as Civil Case No. 97 -72 of the Regional Trial Court ofLucena City,

Branch 57.

In its Answer with Special and Affirmative Defenses and Counterclaim, the bank asserted that the redemption price reflecting the stipulated

interest, charges and/or expenses, is valid, legal and in accordance with documents duly signed by the mortgagors. The bank further contended

that the claims are deemed waived and the mortgagors are already estopped from questioning the terms and conditions of their contract.

On September 30, 1997, the bank filed a motion to set the case for hearing on the special and affirmative defenses by way of motion to

dismiss. The trial court denied the motion on January 8, 1998 and also denied the banks motion for reconsideration. The bank elevated the

matter to the Court of Appeals (CA-G.R. SP No. 47588) which dismissed the petition for certiorari on February 26, 1999.

On February 14, 2002, the trial court rendered its decision[5]

dismissing the complaint and the banks counterclaims. The trial court held that

plaintiffs-mortgagors are bound by the terms of the mortgage loan documents which clearly provided for the payment of the following interest,

http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn4http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn4http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn4http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn5http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn5http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn5http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn6http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn6http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn6http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn7http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn7http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn7http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn7http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn6http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn5http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn4

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charges and expenses: 18% p.a. on the loan, 3% post-default penalty, 15% liquidated damages, 15% attorneys fees and collection and legal

costs. Plaintiffs-mortgagors claim that they paid the redemption price demanded by the defendant bank under extreme pressure was rejected by

the trial court since there was active negotiation for the final redemption price between the banks representat ives and plaintiffs-mortgagors who

at the time had legal advice from their counsel, together with Orient Development Banking Corporation which committed to finance the

redemption.

According to the trial court, plaintiffs-mortgagors are estopped from questioning the correctness of the redemption price as they had freely

and voluntarily signed the letter-agreement prepared by the defendant bank, and along with Orient Bank expressed their conformity to the termsand conditions therein, thus:

May 14, 1997

ORIENT DEVELOPMENT BANKING CORPORATION

7th

Floor Ever Gotesco Corporate Center

C.M. Recto Avenue corner Matapang Street

Manila

Attention: MS. AIDA C. DELA ROSA

Senior Vice-President

Gentlemen:

This refers to your undertaking to settle the account of SUPREME TRANS LINER, INC. and spouses MOISES C. ALVAREZ

and PAULITA S. ALVAREZ, covering the real estate property located in the Poblacion, City of Lucena under TCT No. T-79193

which was foreclosed by BPI FAMILY SAVINGS BANK, INC.

With regard to the proposed refinancing of the account, we interpose no objection to the annotation of your mortgage

lien thereon subject to the following conditions:

1. That all expenses for the registration of the annotation of mortgage and other incidental registration and

cancellation expenses shall be borne by the borrower.

2. That you will recognize our mortgage liens as first and superior until the loan with us is fully paid.

3. That you will annotate your mortgage lien and pay us the full amount to close the loan within five (5) working daysfrom the receipt of the titles. If within this period, you have not registered the same and paid us in full, you will

immediately and unconditionally return the titles to us without need of demand, free from liens/encumbrances

other than our lien.

4. That in case of loss of titles, you will undertake and shoulder the cost of re-issuance of a new owners titles.

5. That we will issue the Certificate of Redemption after full payment of P15,704,249.12. representing the

outstanding balance of the loan as of May 15, 1997 including interest and other charges thereofwithin a

period of five (5) working days after clearance of the check payment.

6. That we will release the title and the Certificate of Redemption and other pertinent papers only to your

authorized representative with complete authorization and identification.

7. That all expenses related to the cancellation of your annotated mortgage lien should the Bank be not fully paid onthe period above indicated shall be charged to you.

If you find the foregoing conditions acceptable, please indicate your conformity on the space provided below and

return to us the duplicate copy.

Very truly yours,

BPI FAMILY BANK

BY:

(SGD.) LOLITA C. CARRIDO

Manager

C O N F O R M E :

ORIENT DEVELOPMENT BANKING CORPORATION

(SGD.) AIDA C. DELA ROSA

Senior Vice President

C O N F O R M E :

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SUPREME TRANS LINER, INC.

(SGD.) MOISES C. ALVAREZ/PAULITA S. ALVAREZ

Mortgagors[6]

(Underscoring in the original; emphasis supplied.)

As to plaintiffs-mortgagors contention that the amounts representing attorneys fees and liquidated damages were already included in

the P10,372,711.35 bid price, the trial court said this was belied by their own evidence, the Statement of Account showing the breakdown of the

redemption price as computed by the defendant bank.

The mortgagors appealed to the CA (CA-G.R. CV No. 74761) which, by Decision[7]

dated April 6, 2004 reversed the trial court and decreed

as follows:

WHEREFORE, foregoing considered, the appealed decision is hereby REVERSED and SET ASIDE. A new one is hereby

entered as follows:

1. Plaintiffs-appellants complaint for damages against defendant-appellee is hereby REINSTATED;

2. Defendant-appellee is hereby ORDERED to return to plaintiffs-appellees (sic) the invalidly collected amount of

P3,111,813.40 plus six (6) percent legal interest from May 21, 1997 until fully returned;

3. Defendant-appellee is hereby ORDERED to pay plaintiffs-appellees (sic) the amount of P100,000.00 as moral

damages, P100,000.00 as exemplary damages and P100,000.00 as attorneys fees;

4. Costs against defendant-appellee.

SO ORDERED.[8]

The CA ruled that attorneys fees and liquidated damages were already included in the bid price ofP10,372,711.35 as per the recitals in

the Certificate of Sale that said amount was paid to the foreclosing mortgagee to satisfy not only the principal loan but also interest and penalty

charges, cost of publication and expenses of the foreclosure proceedings. These penalty charges consist of 15% attorneys fees and 15%

liquidated damages which the bank imposes as penalty in cases of violation of the terms of the mortgage deed. The total redemption price thus

should only be P12,592,435.72 and the bank should return the amount of P3,111,813.40 representing attorneys fees and liquidated damages. The

appellate court further stated that the mortgagors cannot be deemed estopped to question the propriety of the charges because from the very

start they had repeatedly questioned the imposition of attorneys fees and liquidated damages and were merely constrained to pay the demanded

redemption price for fear that the redemption period will expire without them redeeming their property.[9]

By Resolution[10]

dated October 12, 2004, the CA denied the parties respective motions for reconsideration .

Hence, these petitions separately filed by the mortgagors and the bank.

In G.R. No. 165617, the petitioners-mortgagors raise the single issue of whether the foreclosing mortgagee should pay capital gains tax upon

execution of the certificate of sale, and if paid by the mortgagee, whether the same should be shouldered by the redemptioner. They specifically

prayed for the return of all asset-acquired expenses consisting of documentary stamps tax, capital gains tax, foreclosure fee, registration and filing

fee, and additional registration and filing fee totaling P906,142.79, with 6% interest thereon from May 21, 1997.[11]

On the other hand, the petitioner bank in G.R. No. 165837 assails the CA in holding that

1. the Certificate of Sale, the bid price of P10,372,711.35 includes penalty charges and as such for purposes of

computing the redemption price petitioner can no longer impose upon the private respondents the penalty charges in the form

of 15% attorneys fees and the 15% liquidated damages in the aggregate amount of P3,111,813.40, although the evidence

presented by the parties show otherwise.

2. private respondents cannot be considered to be under estoppel to question the propriety of the aforestated

penalty charges despite the fact that, as found by the Honorable Trial Court, there was very active negotiation between the

parties in the computation of the redempt ion price culminating into the signing freely and voluntarily by the petitioner, the

private respondents and Orient Bank, which financed the redemption of the foreclosed property, of Exhibit 3, wherein they

mutually agreed that the redemption price is in the sum of P15,704,249.12.

3. petitioner *to+ pay private respondents damages in the aggregate amount of P300,000.00 on the ground that the

former acted in bad faith in the imposition upon them of the aforestated penalty charges, when in truth it is entitled thereto as

the law and the contract expressly provide and that private respondents agreed to pay the same .[12]

http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn8http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn8http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn8http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn9http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn9http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn9http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn10http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn10http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn10http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn11http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn11http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn11http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn12http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn12http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn13http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn13http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn13http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn14http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn14http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn14http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn14http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn13http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn12http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn11http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn10http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn9http://sc.judiciary.gov.ph/jurisprudence/2011/february2011/165617.htm#_ftn8

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On the correct computation of the redemption price, Section 78 of Republic Act No. 337, otherwise known as the General Banking Act,

governs in cases where the mortgagee is a bank.[13]

Said provision reads:

SEC. 78. x x x In the event of foreclosure, whether judicially or extrajudicially, of any mortgage on real estate which is

security for any loan granted before the passage of this Act or under the provisions of this Act, the mortgagor or debtor whose

real property has been sold at public auction, judicially or extrajudicially, for the full or partial payment of an obligation to any

bank, banking or credit institution, within the purview of this Act shall have the right, within one year after the sale of the real

estate as a result of the foreclosure of the respective mortgage, to redeem the property by paying the amount fixed by the

court in the order of execution, or the amount due under the mortgage deed, as the case may be, with interest thereon at the

rate specified in the mortgage, and all the costs, and judicial and other expenses incurred by the bank or institution

concerned by reason of the execution and sale and as a result of the custody of said property less the income received from

the property. x x x x (Emphasis supplied.)

Under the Mortgage Loan Agreement,[14]

petitioners-mortgagors undertook to pay the attorneys fees and the costs of registration and

foreclosure. The following contract terms would show that the said items are separate and distinct from the bid price which represents only the

outstanding loan balance with stipulated interest thereon.

23. Application of Proceeds of Foreclosure Sale. The proceeds of sale of the mortgaged property/ies shall be applied

as follows:

a) To the payment of the expenses and cost of foreclosure and sale, including the attorneys fees as herein provided;

b) To the satisfaction of all interest and charges accruing upon the obligations herein and hereby secured.

c) To the satisfaction of the principal amount of the obligations herein and hereby secured.

d) To the satisfaction of all other obligations then owed by the Borrower/Mortgagor to the Bank or any of its

subsidiaries/affiliates such as, but not limited to BPI Credit Corporation; or to Bank of the Philippine Islands or any of its

subsidiaries/affiliates such as, but not limited to BPI Leasing Corporation, BPI Express Card Corporation, BPI Securities

Corporation and BPI Agricultural Development Bank; and

e) The balance, if any, to be due to the Borrower/Mortgagor.

x x x x

31. Attorneys Fees:In case the Bank should engage the services of counsel to enforce its rights under this

Agreement, the Borrower/Mortgagor shall pay an amount equivalent to fifteen (15%) percent of the total amount claimed by

the Bank, which in no case shall be less than P2,000.00, Philippine currency, plus costs, collection expenses and disbursements

allowed by law, all of which shall be secured by this mortgage.[15]

Additionally, the Disclosure Statement on Loan/Credit Transaction[16]

also duly signed by the petitioners-mortgagors provides:

10. ADDITIONAL CHARGES IN CASE CERTAIN STIPULATIONS ARE NOT MET BY THE BORROWER

a. Post Default Penalty 3.00% per month

b. Attorneys Services 15% of sum due but not less than P2,000.00

c. Liquidated Damages 15% of sum due but not less than P10,000.00

d. Collection & Legal Cost As provided by the Rules of Courte. Others (Specify)

As correctly found by the trial court, that attorneys fees and liquidated damages were not yet included in the bid price ofP10,372,711.35 is

clearly shown by the Statement of Account as of April 4, 1997 prepared by the petitioner bank and given to petitioners-mortgagors. On the other

hand, par. 23 of the Mortgage Loan Agreement indicated that asset acquired expenses were to be added to the redemption price as part of costs

and other expenses incurred by the mortgagee bank in connection with the foreclosure sale.

Coming now to the issue of capital gains tax, we find merit in petitioners-mortgagors argument that there is no legal basis for the inclusion of

this charge in the redemption price. Under Revenue Regulations (RR) No. 13-85 (December 12, 1985), every sale or exchange or other disposition

of real property classified as capital asset under Section 34(a)[17]

of the Tax Code shall be subject to the final capital gains tax. The term sale

includespacto de retro and other forms of conditional sale. Section 2.2 of Revenue Memorandum Order (RMO) No. 29-86 (as amended by RMO

No. 16-88 and as further amended by RMO Nos. 27-89 and 6-92) states that these conditional sales necessarily include mortgage foreclosure sales

(judicial and extrajudicial foreclosure sales). Further, for real property foreclosed by a bank on or after September 3, 1986, the capital gains tax

and documentary stamp tax must be paid before title to the property can be consolidated in favor of the bank.[18]

Under Section 63 of Presidential Decree No. 1529 otherwise known as the Property Registration Decree, if no right of redemption exists, the

certificate of title of the mortgagor shall be cancelled, and a new certificate issued in the name of the purchaser. But where the right of redemption

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exists, the certificate of title of the mortgagor shall not be cancelled, but the certificate of sale and the order confirming the sale shall be registered

by brief memorandum thereof made by the Register of Deeds upon the certificate of title. In the event the property is redeemed, the certificate or

deed of redemption shall be filed with the Register of Deeds, and a brief memorandum thereof shall be made by the Register of Deeds on the

certificate of title.

It is therefore clear that in foreclosure sale, there is no actual transfer of the mortgaged real property until after the expiration of the

one-year redemption period as provided in Act No. 3135 and title thereto is consolidated in the name of the mortgagee in case of non-

redemption. In the interim, the mortgagor is given the option whether or not to redeem the real property. The issuance of the Certificate of Saledoes not by itself transfer ownership.

[19]

RR No. 4-99 issued on March 16, 1999, further amends RMO No. 6-92 relative to the payment of Capital Gains Tax and Documentary

Stamp Tax on extrajudicial foreclosure sale of capital assets initiated by banks, finance and insurance companies.

SEC. 3. CAPITAL GAINS TAX.

(1) In case the mortgagor exercises his right of redemption within one year from the issuance of the certificate of sale,

no capital gains tax shall be imposed because no capital gains has been derived by the mortgagor and no sale or transfer of

real property was realized. x x x

(2) In case of non-redemption, the capital gains [tax] on the foreclosure sale imposed under Secs. 24(D)(1) and 27(D)(5)

of the Tax Code of 1997 shall become due based on the bid price of the highest bidder but only upon the expiration of the one-

year period of redemption provided for under Sec. 6 of Act No. 3135, as amended by Act No. 4118, and shall be paid within

thirty (30) days from the expiration of the said one-year redemption period.

SEC. 4. DOCUMENTARY STAMP TAX.

(1) In case the mortgagor exercises his right of redemption, the transaction shall only be subject to the P15.00

documentary stamp tax imposed under Sec. 188 of the Tax Code of 1997 because no land or realty was sold or transferred for a

consideration.

(2) In case of non-redemption, the corresponding documentary stamp tax shall be levied, collected and paid by the

person making, signing, issuing, accepting, or transferring the real property wherever the document is made, signed, issued,

accepted or transferred where the property is situated in the Philippines. x x x (Emphasis supplied.)

Although the subject foreclosure sale and redemption took place before the effectivity of RR No. 4-99, its provisions may be given

retroactive effect in this case.

Section 246 of the NIRC of 1997 states:

SEC. 246. Non-Retroactivity of Rulings. Any revocation, modification, or reversal of any of the rules and regulations

promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner

shall not be given retroactive application if the revocation, modification, or reversal will be prejudicial to the taxpayers ,

except in the following cases:

(a) where the taxpayer deliberately misstates or omits material facts from his return or in any document required of

him by the Bureau of Internal Revenue;

(b) where the facts subsequently gathered by the Bureau of Internal Revenue are materially different from the facts

on which the ruling is based; or

(c) where the taxpayer acted in bad faith.

In this case, the retroactive application of RR No. 4-99 is more consistent with the policy of aiding the exercise of the right of

redemption. As the Court of Tax Appeals concluded in one case, RR No. 4-99 has curbed the inequity of imposing a capital gains tax even before

the expiration of the redemption period [since] there is yet no transfer of title and no profit or gain is realized by the mortgagor at the time of

foreclosure sale but only upon expiration of the redemption period.[20]

In his commentaries, De Le