Amending Sections 3E.05, 3O.04 and 3I.03 of the Revised Revenue Code of 2022

July 30, 2009 BIR RULING [DA-(C-156) 419-09] RR 2-98; DA-460-2004; DA-258-2003; DA-197-2003; DA-149-2003; DA 172-2003; 11-99 St. Francis Square Land, Inc. 4th Fl., St. Francis Square Doa Julia Vargas Ave. cor. Bank Drive Ortigas Center, Mandaluyong City Attention: Atty. Rolando P. Domingo Senior Vice-President Gentlemen : This refers to your letter dated December 10, 2008 stating that St. Francis Square Land, Inc. (formerly ASB Land, Inc. and SFSLI for brevity) is a corporation organized and existing under and by virtue of the laws of the Philippines. SFSLI originally developed and constructed high rise condominium projects located at E. Rodriguez Ave., Quezon City. The units were sold to various persons on installment basis. Most of the units were sold with the initial payments exceeding twenty five percent (25%) during the year of sale. The sales transactions are covered by Contracts to Sell. The income from these dealings was reported by SFSLI and the corresponding income tax thereon was paid in the year of sale. These were reflected in the annual income tax returns and audited financial statements of the company. The aforestated buyers are not engaged in trade or business and generally are not aware of or familiar with the expanded withholding tax rules on installment sales and deferred payment sales. The only time that they get to know their obligation to withhold is after full payment of their installments when eventually notified by the BIR that they should show proof of compliance with the withholding tax rules. They are not aware about the hairline distinction between installment sales and deferred payment sale and are not aware of the accounting method of the seller in reporting income from such sales transaction ( i.e., because of the equipment cash doctrine) or when it may only be treated as installment sale transaction ( i.e., because of the non-applicability of the equivalent cash doctrine). Thus, it can only be expected that they may not be able to comply with the strict rules of the expanded withholding tax on installment or deferred payment sales of real property. Based on the above condition, you now would like to request for a ruling to confirm your opinion that no further expanded withholding tax as well as surcharges and interest shall be imposed on the buyers of condominium units as listed in Annex A, who purchased their properties on installment plan during the period of 1997-1999, inasmuch as these deferred payment sales and the income therefrom were already paid. In reply, please be informed that rules have been clearly defined in Sec. 2.57.2 (J) of Revenue Regulations (RR) No. 2-98, that there shall be withheld a creditable income tax at the rates herein below stated on sale of ordinary assets, thus "(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, other than capital assets, sold by an individual, corporation, estate, trust, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule: Those which are exempt from a Withholding tax at source as prescribed in Sec. 2.57.5 of these regulations Exempt With a selling price of five hundred thousand pesos (P500,000.00) or less 1.5% With selling of more than five hundred thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000.00) 3.0% With selling price of more than two million pesos (P2,000,000.00) 5.0% A seller must show proof of registration with HLURB or HUDCC to be considered as habitually engaged in the real estate business. Real property, other than capital asset, by an individual, estate, trust, trust fund or pension fund or by a corporation who is note habitually engaged in the real estate business Seven and one-half percent (7.5%) [now 6.0% pursuant to Revenue Regulations No. 6-2001]. xxx xxx xxx Where the consideration or part thereof is payable on installment, no withholding of tax is required to be made on the periodic installment payments where the buyer is an individual not engaged in trade or business. In such case, the applicable rate of tax based on the entire consideration shall be withheld on the last installment or installments to be paid to the seller. However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and withheld by the buyer on every installment." It is more important therefore, that distinction must first be cleared, if the transaction in any given case is a cash sale or deferred payment sale or a sale on installment basis. The criterion used in determining as such is whether the initial payment made in the year of sale exceeds 25% of the selling price. A sale of property is deemed as a cash sale or deferred-payment sale if the payment made by the buyer in the year of sale exceeds 25% of the selling price, while it is considered as installment sale, if the payment during the taxable year in which the sale is made does not exceed 25% of the selling price. Thus if the buyer is an individual not engaged in trade or business and the sale is a sale of property on installment plan, no withholding of tax is required to be made on the periodic installments. In such case, the applicable rate of tax will be based on the gross selling price or fair market value of the property, whichever is higher and the withholding of tax thereof should be made on the last installment. Conversely, if the sale is on a cash basis or is a deferred-payment sale not on installment plan, and the buyer is likewise not engaged in trade or business, said buyer shall withhold the tax based on the gross selling price or market value of the property, whichever is higher on the first installment. But if the buyer is a corporation, or individual engaged in trade or business and the transaction is a sale of property on installment, the buyer should withhold the appropriate amount of tax on each installment payment. On the other hand, if the sale is a deferred-payment sale not on the installment plan, which is in effect treated as a cash sale, the withholding tax shall be withheld from the initial payment, based on whichever is higher of the gross selling price or the fair market value of the property, determination accordance with Section 6 (E) of the Tax Code. (BIR Ruling No. DA-149-03 dated May 6, 2003) However, based on your representation most of the buyers of your condominium units in the Garden Heights are individuals not engaged in trade or business and that most of the units were sold with payment exceeding 25% of the selling price during the year of sale. Considering that the income from such sales on "deferred-payment basis" have been reported and the tax thereon have already been paid by SFSLI on the year of sale, the buyer is no longer required to withhold any creditable expanded withholding tax on the final payment of amortization, the withholding of tax thereon would definitely be unnecessary. It is noted that buyers who are not engaged in trade or business are generally not aware of or familiar with the expanded withholding tax rules on installment sales and deferred-payment sales. The only time that they get to know their obligation to withhold is after full payment of their installments when eventually notified by the BIR that they should show proof of compliance with the withholding tax rules. Moreover, they are not aware about the hairline distinction between installment sales and deferred-payment sales and were not aware of the accounting method of the seller in reporting income from such sales transaction. In fact, such buyers have no clear idea when a deferred-payment sale be legally treated as a cash sale transaction or when it may only be treated as installment sale transaction. Henceforth, it can only be expressed that they may not able to comply with the strict rules of the expanded withholding tax on installment or deferred-payment sales of real property. It shall be understood that your individual buyers on deferred installment plan or "cash sale" shall not be liable to any deficiency expanded withholding tax nor to any surcharge or interest for their non-withholding of the tax on any of their subsequent periodic installment payments. Based on the foregoing, this Office confirms your opinion that no further expanded withholding tax as well as surcharges and interest shall be imposed on the buyers of condominium units as listed in Annex "A" (composed of five (5) pages each page bearing the initial/signature of the herein signatory) which forms part of this ruling, who purchased the same on installment plan during the period 1998 and 1999, inasmuch as these deferred-payment sales and the income therefrom were already reported in full in the year of sale and the income taxes thereon for the said years were already paid. Furthermore, upon presentation of this Ruling, together with the copy of Contract to Sell, Deed of Absolute Sale, breakdown of deferred cash sales transactions during the year of sale and proof of payment of documentary stamp tax on the deed of sale, the Revenue District Officer concerned shall then issue the Certificate Authorizing Registration (CAR) and BIR Tax Clearance for the transactions. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service