(Article published in the Aug 11,2003 issue of TODAY, Business Section)
Finance Secretary Jose Isidro Camacho and Revenue Commissioner Guilermo
Parayno Jr. would help ease a bit the general feeling that the present
administration is unequal to the job of properly implementing our laws by
taking a good second look at the regulations they recently issued relating
to the capital gains tax exemption of the sale of one’s principal
residence, Section 2 of Revenue Regulations 17-2003, effective June 1,
The law, Section 24 (D)(2) of the Tax Code is simple enough.
The “capital gains presumed to have been realized by natural
persons, the proceeds of which is fully utilized in acquiring or
constructing a new principal residence within 18 months from the date of
sale or disposition, shall be exempt from the capital gains tax” of 6
percent of the higher of the gross selling price or fair market value.
To prevent abuse the historical cost or adjusted basis of the sold
residence is carried over to the new one; the tax payer is required to
notify the Commissioner within 30 days, which is the same period for
paying the capital gains tax if the transaction had not been exempted,
that he intends to avail himself of the exemption; the exemption can be
availed of by the same tax payer only once every 10 years; and, if there
is no full utilization of the proceeds in the construction or purchase of
a new principal residence, then tax, plus penalties, falls on the portion
that is not so utilized.
For this reason, the law insists in “full utilization” of the
selling price. The seller, to
qualify for the capital gains tax exemption, must use all of the proceeds
of the sale of his old residence in constructing or acquiring a new one.
If he does not use all of the sales proceeds, then he is charged
the 6-percent on the amount he failed to devote to buying or constructing
a new residence, and not for any other purpose.
Section 2 of RR 17-2003 subverts that intention of the law. Obviously wanting to ensure collection of the capital gains
tax, just incase the seller fails to use the proceeds in building or
buying a new residence, the revenue authorities, without benefit of any
enabling legislation, require, under the regulations, the withholding of
the 6-percent tax from the proceeds and return the withheld portion to the
seller only after he shows that he has used, within the time allowed, the
proceeds as intended by the law.
Ensuring the payment of the tax is achieved by requiring the buyer
or the transferee to withhold from the seller 6-percent of the selling
price or consideration and to deposit the same in cash or manager’s
check in an interest-bearing account with an authorized agent bank (AAB).
An “escrow agreement” is required to be executed between the
“concerned Revenue District Officer [why he should be “concerned”
and not just “proper” is beyond me], the Seller and the Transferee
[why he should be part of the agreement, when he has got nothing to do
after putting in the deposit, is also beyond me] and the AAB.
The escrow agreement is supposed to provide that the amount in
escrow, plus interest, will be released to the Seller only upon the
certification by the Revenue District Officer that the proceeds have in
fact been utilized in building or buying of the Seller’s new principal
residence within 18 months from the date of sale or disposition.
After making the deposit in escrow, the Buyer/Transferee and the
Seller are to jointly file within 30 days of the sale with the Revenue
District Officer (who by this time, because he has participated in the
execution of the escrow agreement, already knows of the transaction)
Bureau of Internal Revenue Form 1706, which is the standard form for the
Final Capital Gains Tax Return for other real estate transactions
generating the capital gains tax. There
will be no computation of tax due (after all, there is no tax due) but
there is a statement that the supposed-tax due is in an escrow account
which will be used to satisfy future tax liability on the transaction.
within 30 days after the lapse of 18 months after the sale, the Seller
fails to submit documentation that he had in fact utilized the proceeds to
build or buy a new principal residence, he will be treated as deficient in
the payment of the required capital gains tax and his liability will be
computed and assessed as of the 31st day after the sale.
The amount in the escrow will be fortified and so much as is needed
will be used to pay for the capital gains tax and its penalties.
If insufficient, the deficiency will be charged against the Seller.
If there is an excess, such amount will be returned to the Seller
by the AAB upon written authorization of the Commissioner of his duly
authorized representative’s participation, both of whom are not parties
to the escrow agreement, is required
in the settlement of the amount in escrow is beyond me, too.
escrow agreement set up in Section 2 of RR 17-2003 is peppered by
technical inaccuracies and failings.
For instance, the definition of “escrow” in the regulations
cites the traditional meaning of escrow as “a scroll, writing or deed”
in the hands of a third person. But
in this case, the traditional meaning is not relevant since what is in
escrow is money, not document. Furthermore,
the buyer, who ceases to have any interest in the proceeds after making
his payment, is nevertheless made a party to the agreement.
Actually, he is not a party in interest and is simply an
involuntary agent of both the government and the seller.
Moreover, the AAB is made to take orders form the Commissioner or
his representative, both whom are not signatories to the agreement. Finally, the amount is deposited with a bank.
In many cases, this amount exceeds the insurance coverage extended
by Philippine Deposit Insurance Corp. to depositor who bears the loss
should be bank fail while the deposit is in escrow?
over and beyond these technical deficiencies is the fact that the escrow
of the 6-percent capital gains tax ensures that the Seller is not able to
fully utilize the proceeds in constructing and buying the new principal
residence to the extent, precisely, of the 6-percent withheld from him.
He cannot utilize all of the sales proceeds because the regulations
prevent him from even seeing it before he builds or buy his new principal
enforced reduction of the sales proceeds in his hands gives rise to
important questions of tax enforcement: Will he be then taxed, as the law
itself states, on the 6 percent? After
all, the law requires “full utilization.”
Or will the Commissioner, because the inability of the seller to
fully utilize the proceeds is of the Commissioner’s own doing, accept
documentation of the use of the proceeds up to 94 percent only?
If so, on what is the legal authority for the Commissioner to do
so? Or would the taxpayer, in
order to be tax-free, have to advance the 6 percent from the other
sources? In that case, the regulations taketh what the law giveth.