BIR Ruling No. 305-2022

REPULLIC OFTHE PHILIPPINES

DEPARTMENT OF FINANCE BUREAU OF INTERNALREVENUE

Quezon City

BIR Ruling No. 083-99 Sections 24 (D(1),105,188 and 196 of the Tax Code; Sections 2.57.1(A 6) and 2.57.2 (F) of RR No. 02-98, as arended; RR No.7-2003; RR No.16- 2005, as amended OT.305 JUN 2 3 2022 2022

SM DEVELOPMENT CORPORATION Harbor Drive,Mati of Asia Complex Pasay City 15th Floor,TwoF-com Center

Attention: ATTY.DAVID P.TAN,R. Avthorized Representative

Gentlemen:

This refers to your request on behalf of SM Development Corporation (SMDC) for confirmation of your opinion that the assignment by SMDC of its rights, interest, and obligations under a Memorandum of Agreement (MOA) covering various parcels of land to its designated assignee is not subject to capital gains tax CGT,expanded withholding tax (EWT), value-added tax VAr) and documentary stamp tax (DST).

Background:

SMDC is a corporation duly organized and existing under the laws of the Philippines and with principal office address at 15th Floor,TwoE-com Center,Harbor Drive,Mall of Asia Complex,Pasay City.

In June 2021, SMDC executed three (3) separate Menoranda of Agreement over certain arcels of land (collectively, the "Properties") situated in I

as follows

Execution June 04. June 04. Date of June 29 2021 2021 2021 Heirs f Ricardo Capati Lorna Patiu, et.al. Original Sellers Bernal M.Patiu Lot No. 15 9 2 (m) Area of TiTCTNo. Trans er Certificate Purchase Price (in P"p)

The purchase price of each ot'the Properties is PhP10.000.00 per square meter inclusive of CGT,payable as follows:

1.25% shall be payable upoi1 signing of the MOA; and

2. 75% to be paid based on the following schedule: R

SM DEVELOPMENTCORPORATION T-.305-2022 JUN 2 3 2022

a. The first installment shall be paid after three (3) months from signing of Sellers of the docurnents enumerated under Paragraph 3(bof the MOA the MOA and only upon submission or compliance by the Original and

b. The balance shall be paid after four (4)months2 from the date of payment of the first installment and only upon turn-over of physical possession of Original Sellers of ceitain documents listed n the MOA. the subject properties to SMDC and submission or compliance by the

balance of the purchase price have rot yheen executed and released,respectively. requirements under the MOA, hence, the relevant deeds of absolute sale (DOAS) and the e CGT has already been fully paidEach of the Original Sellers have yet to comply with the As of date, SMDC has paid 62.5% of the purchase price to the Original Sellers, while

the Properties or a total of obligations uder each MOA in favor of Ms. Kathleen Grace M. Sonsing (theAssignee),in exchange for annount eauivalent to 62.5% of the purcha nrice naid hv SMDC for each of Pending the co:npliance of the Original Sellers, SMIC assigned3 its rights, interest and I, with detet's as louows:

Original Sellers Lot No. Area m Purchase Price(In PhP Amount Received by SMDC(in PhP) Heirs of Ricardo Capati 1 Bernal M.Patiu C Lorna Patiu, et.al. Total payment of SMDC

In reply, please be informed as follows:

I CGT/EWT

Section 24 (D)(D) of the National Internal RevenueCode of 1997, as amended Tax Code provides that a final withholding tax of six percent (6% is imposed on the gain presumed to have been realized on the sale, exchange or dissosition of real property located in the Philippines, classified as capita assets, including pactode retro sales and other forms of conditional sales, based on the grass selling price or fair market value as determined in accordance with Section 6 (E of the same Tax Code,which ever is higher, to wit

"SEC. 24. Rates of Income Tux on Domestic Corporuutions.

XXX XXX xXx

(D) Capital Gains from Sale of Real Property.

(1) In Gerral. -The provisions of Section 39 (B) no.withstanding.a final tax of six percent (6%) based on the gross selling price or (urrent fair market value as determined in accordance with Section 6 (E) of this code. whichever is higher. is hereby imposed upon capital gains presined to have been realized from the sale. exchange or other disposirion of real property located in the Philippines. classified as capital assets, including pacto de retro sales and other forms of

For the sale of property of Lorna Paitu, et. ai. the first installment shall be piid after four (4 months from the signing of

For the sale of property of Lorna Paitu, et.al., the second installment shall be paid after six (6 months from the date of the MOA

in accordance with Section 16 of each MOA, SMDC validly secured the cor sent of each of the Original Sellers. payment of the first installment.

PAGE2OF7

SM DEVELOPMENT CORPORATION CT-305-2022 JUN 2 32022

supplied) conditional sales, by individuals, including estates cnd trusts....."(Underscoring

the Original Sellers to SMLCFirst Transaction); and2) assignment of rights, interest and obligations over the Properties by SMDC to the Assignee pending full payment of the purchase price relating to the First Transaction (Second Transaction In the instant case, there were two (2) sets of transactions: () sale of the Properties by

the fuil purchase price of the Properties was already paid and remitted to the Bureau. SMDC of real properties that are classified as capital assets.Thus, the said sale is subject to CGT pursuant to Section 24D of the Tax Code.As represented,the CGT pertaining to It is indubitable that the First Transaction involves a sale by the Original Sellers to

that if the sale is on installment, the proce ures stated under Section 2.57.2(J [now Section tax on the former sha. be final whereas that on the latter shell be creditable, to wit: 2.57.2F] of RR No.02-98,as amended,shall apply with the exception that the withholding RR No.02-98,as amended,4 implerenting Section 24D1) of the Tax Code provides With regard to the Second Transaction, Section 2.57.1(A(6 of Revenue Regulations

forms of income shall be subject to final withholding tax at the rates 'erein specified: "Sec. 2.57.i. Income Payment Subject to Final Withholding Tax - The following

XXX XXX CXX

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

XXX XXX XX

(6) On capital gains presumad to have been realized from the sale,exchange or other disposition of real property located in the Philippines classified as capital

real property values), whichever is higher -- Six percent 6%). 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 Code (i.e., the authority of the Conimissioner to prescribe the

In case of sale on installment of real property classified as capital asset, the procedures stated under Section 2.57.2(J [now Section 2.57.2(F)] hereof on

exception that the withholding tax on the former shail be final whereas that on the sale of real property classified as ordinary asset shall apply with the the latter shall be creditable. " (Underscoring supplied)

Corollarily, Section2.57.2J)[now Section 2.57.2] of RR No.02-98, as amended states that:

"Sec.2.57.2.I.come Paymeni Subject to Creditable Withholding Tax and Rates

withheld.- reditable income tax at the rates herein specified for each class of Presced Thereon - Except as herein otherwise provided, there shall be

payee from the following itens of income payments to persons residing in the Philippines.

XXX XXX XXX

Implementing Republic Act No. 8424,An At Amending the National Inte al Revenue Code, as Amended"Relative to the Withholding on Income Subject to the Exp inded Withholding Tax and Final Withholding Tax, Withholding of Income Tax on Compensation, Withholding of Credit ble Value-Added Tax and Othicr Percentage Taxes, April 17,1998. Q

PAGE 3 OF T

OT305-222 SM DEVELOPMENT CORPORATION JUN 2 3 2022

to the sellerlowner for the sole, exchange or transfer of real property classified as ordinary asset.5 -- A creditable withholding tax based on the gross selling price/total amount of consideration or the fair market value determined in accordance with Section 6 (E) of the Code, whichever is higher,paid to the sellerlowner for th sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the withholding agent/buyer, in accordance (F) Gross selling price or total amount of considenution or its equivalent paid

with the following schedule:

XXX XXX XXX

However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply:

XXX XXX XXX

(ii) If, on the other hand, the sale 's on a 'cash basis ' or is a deferred-payment sale not on the installment plan' (inat is, paymenis in the year of sale exceed 25% of the selling price), the buver shall withholel:the tax based on the_gross sellir price or fair market value of the property whichever is higher. or: the first instal'ment.

XXX XXX XXX

If upon completion of thepayment of the purchese price of real property classified as ordinary asset, but before the execution of the Deed of Sale, the buyer decides to assign his right over the property to another person for a consideration, the assignment shall be considered a separate sale of real property and, therefore, subject to the creditable expanded withholding tax EWT) or final withholding of capital gains tax,as the case may be,which shall be withheld by the assignee of such property based on the consideration per Deed of Assignment or the fair market value of such property at the time of assignment, whichever is higher, and to the DST imposed under Sec.196 of the same Code using the same basis.

It is to be clarified, however,that sale of interest in teal property (real property purchased on installment covered by Contract to Sell which was sold by the original buver before it was fully paid) shall be iaxable on the part of the original buver (now seller) based on the realized gain thereon which is measured by the difference between the agreed consideration and the amount actually paid by the said original buver. " (Emphasis and underscoring supplied)

Based on the above provisions, it is clear that if the buyer decides to assign its interest m the real property subject of the sale, the following rules shall apply:

1) after full payment of the purc.ae price but before execution of the DOAS

the assignment shall be considered a separate sale of real property which is subject to CGT, or CWT/EWT, as the case may be; or

(2) befo:e :i was fully paid, the difference between the: (a) agreed consideration

between the buyerin this context, the assignor and the assignee;anb amount actually paid by the assignor o the original seller shall be subject to CGT or CWT/EWT, as the case may 5e.6

BIR Ruling [DA-(C-172) 449-09], August 10 2009; BIR Ruling [DA-377-08], June 24, 2008. As Amended by RR No. 08-98, RR No. 06-9and RR No. 17-03

PAGE4OF7

SM DEVELOPMENT CORPORATION 305-2022 JUN 2 3 2022

will not result in any realized gain.Hence,the same is not subject to CWT/EWT or CGT yet fully paid by SMDC;and(2 the amount actually paid by the Assignee is equivalent to the the rights,interest and obligations under each MOA covering the Properties to the Assignee amount paid by SMDC to the Original Sellers,this Office hereby rules that the assignment of Applying the above-quoted provisionconsidering that: the Original Sellers are not

I VAT

as amended, provides that: Section 105 of the Tax Code as implemented by Section 4.105-1 of RR No. 16-2005,8

Sections 106 to 108 of the said Code. sells. barters. exchanges. leases goods or properties. renders services, and any person who imports goods shall be subject to value-added tax (VAT) imposed in "Sec.l05.Persons Liable. ---Anv person who. in the course of trade or business.

XXX xxx XXx

pursuit of a commercial or an economic activitv, including transactions incidental thereto, bv an person regardless of whether or not the person engaged therein is "The phrase "in the course of tr -de or business" nieans the regular conduct or

a nor: stock, non-profit private organization (irrespective of the disposition of its net inccr" and whether or not it sells exclusively to members or their guests), or government entity'

concerned,VAT is imposed on the sale, barter or exchange thereof in the course of trade or It is clear from the above-cited provis ons that insofar as goods or properties are

business, including transactions incidental thereto.It must be emphasized that VAT is imposed once there is an actual sale transaction where ownership is passed to the buyer.

It bears stressing that in assignment of rights, the assignee merely steps into the shoes of the assignor without acquiring a better right than what the assignor had in the property to which the rights assigned pertain.

In BIR Ruling [DA-C-266 671-09],10 citing BIR Ruling No.83-1999,11 this Office has ruled that a deedof assignment of rights in real property does not equate to a sale and an assignment of rights in real property is not a sale of real property itself but the rights pertaining to such property.12, to wit:

"From the foregoing it is clear that only sales, exchanges or transfers of real properties are subject tothe final withholding tax imposed under Section 24 D)1 of the Tax Code of 1997,as amended,and cs implemented by RR No.2

property to which the rights assigned pertain. considering that in assignments of rights the assignee merely steps into the shoes of the assignor without acquiring a better right than what the assignor had in the 98.Hence,assignments of rights over realty although classified as real property under the Civil Code, are not included within the purview of the said regulations

residential condominium unii by Prestige Labels to La Vie under the Dee.i of Assignmert with Assumption of Obligations does not equate to a sale. A deed of Thus, the assignment of rights over the Contract to Sell involving a

June 22, 1999, signed by Beethoven L. Rualo. then Commissioner of Intern Revenue. BIR Ruling [DA-229-02], Decermber 3, 2002: BIR Ruling [DA-149-01], Septcmber 3, 2001 BIR Ruling [DA-C-266 671-09],November 15,2009; BIR Ruling [DA-504:05], December 16,2005; Solid Homes, Inc Id. v.Spouses Artemio Jurado and Consuelo O. Jurado,G.R.No.219673, Septinber 2,2019 November 15,2009 Consolidated Value-Added Tax Regulations cf 2005,Septerber l,2005

PAGE 5 OF T

SM DEVELOPMENT CORPORATION OT-305-2022 JUN 2 3 2N22

but the rights pertaining to such property (BIR Ruling No. DA-252-96 dated July assignment of rights in real property is not a deed of sale of real property itself 18, 1996

the imposition of the CGT or the VAT Ruling No.031-01, dated March 15,2001).In the same vein, there is no basis for withholding tax under Revenue Regulations (RR) No.2-98, as amended (BIR Since no sale is involved, there is no basis for the imposition of

In this regard, no DST can be imposed on said assignment (BIR Ruling No. DA- refers to the sale of real property, which is obviously not the case in this instance. Subject to DST under Section 196 of the 1997 Tax Code, as amended. Said section 240-01,dated November 16,2001Underscoring supplied Further the assignment of rights, not being a sale of real property is not

+xchange or lease of the subject Properties, there is no basis for the imposition of the VAT.is the Assignee cannot be considered as a sale. Consequently since there was no sale. barter Applied in this case, clearly,the assignment of rights over the Properties by SMDC to

IDST

donation of real properties to another person, to wit: Section 196 of the Tax Code states that DST shall be imposed on sale, conveyance or

"SEC. iso. Stanp Tax on Deeds of Sale, Conveyance and Donation of Real Property. -- on all conveyance, donations, deeds, instruments, or writings, her than grants, patents or original certi icates of adjudication issued by the Government, whereby any land, tenement or other re'alty sold shall be granted. assigned, transferred. donated or otherwise conveyed to the purchases or purchasers, or donee, there shall be collected a documentary stamp tax, at the rates herein below prescribed, based on the considerution contracted to paid for

parties is the Government, the tax herein imposed shall be based on the actual such realty or on its fair market value determined ini accordance with Section 6 E) of this Code, whichever is higher:Provided, That ivhen one of the contracting

consideration...xxx(Underscoring supplied

As discussed in item II above on VAT: in BIR Ruling [DA-(C-266) 671-09], citing BIR Ruling No. 83-1999, the assignment.of rights and interest. not being a sale of real property but merely rights pertaining to such property, is not subject to DST under Section 196 of the Tax Code,viz

refers to the sale of real property, which is obviously not the case in this instance. 240-01, dated November 16, 2001)(Underscoring supplied) subject to DST under Section 196 of the 1997 Tax Code, as amended. Said section In this regard, no DST can be imposed on said assigiment (BIR Ruling No. DA- "Further, the assignment of rights, not being a sale of real property, is not

to DST imposed under the Section 16 of the Tax Code. However, the notarial acknowledgment to the said Deeds is subject to the DST of P30.00 pursuant to Section 188 of the Tax Code.14 Accordingly,the Deeds of Assignment between SMDC and the Assignee is not subject

real property paid under installment payment or deferred payment basis, the payment of the It is howe.er important to note that, considering that the First Transaction was a sale of

BIR Ruling No.[DA-240-01],datedNovember16,2001;BIR Ruling [DA-C-266 671-09],November 15,2009;BIR 13BIR Ruling [DA-(C-266) 671-09], November 15, 2009 Ruling [DA-504-05],December 16,2005 Q

PAGE 6 OF

OT-.305-2022 SMDEVELOPMECORPORATION JUN 2 3 2U22

related MOA.15 Thus, the DST over the same shall be paid by the Assignee (to whom the rights. interest and obligations under each of the MOAs were transferred) upon execution of the respective Deeds of Absolute Sale. or fair market value of the property, whichever is higher, at the time of the execution of the DST imposed under Section 196 of the Tax Coae,accrues upon the execution of the respective Deeds of Absolute Sale but the basis for the imposition thereof shall be the gross selling price

investigation it shall be disclosed that the facts are different, then this ruling shall be considered null and void. This ruling is issued on the basis of the foregoing facts as represented. However, if upon

Very truly yours. Awaw

Comrissioner of Internal Revenue CAESAR R.DULAY 051950 K-1 C

BIR Ruling No.634-2019, October 17,2019; RR No. 17.2003 dated March 31,2003 amending RR No. 2-1998, as amended.

PAGE 7OF7