E.L. Punsalan and Associates Certified Public Accountants

January 8, 2008 BIR RULING [DA-002-08] Sec. 49 of the Tax Code of 1997, as amended; Rev. Regs. Nos. 17-03 & 16-05; BIR Ruling Nos. 019-96 & 112-99 E.L. Punsalan and Associates Certified Public Accountants G-104 Medical Plaza Makati Amorsolo corner Dela Rosa Sts. Legaspi Village, Makati City Attention: Atty. Eranio L. Punsalan Tax Partner Gentlemen : This refers to your letter dated January 3, 2008, requesting confirmation of your opinion that the buyers in a deferred payment sale of houses and lots by your client, Century Communities Corporation (CCC), are not required to withhold the creditable withholding tax on their payment of amortizations, particularly, on their last installment payments, because the income tax on the transactions is already paid by the seller in the year of sale. Likewise, you request a confirmation of your opinion that the sales were exempt from the value-added tax since the average selling price is P2,500,000.00. CEASaT It is represented that CCC is a domestic corporation engaged in the business of real estate development, known as Canyon Ranch. Almost all of the developed houses and lots are residential properties and the sale thereof commenced sometime in 2005. The sales reported in the 2005, 2006 and 2007 financial statements were substantially derived from the sales during each respective year treating each sale as cash sale. The entire amount of the sale was recognized in the year of sale although the initial payment collected was less than full, but exceeded twenty five percent (25%) of the total selling price, and the completion of the installment payments is beyond 2005, 2006 and 2007, respectively. This accounting treatment of theoretical cash sales or deferred payment basis is and has been the accounting method consistently applied by CCC through the years, in accordance with the generally accepted accounting principles. The majority of the units were sold to individuals who are not engaged in trade or business and are not aware of the technical distinction between a deferred payment sale and an installment sale. Accordingly, the initial payments and the periodic amortizations were not subjected to withholding tax. With respect to the last payment/amortization, you maintain the position that the same is no longer subject to withholding tax considering that the tax has already been paid in the year of sale by your client, CCC, when it filed its income tax return for the year that the deferred payment sales were made. THaCAI In reply, please be informed that the requirement imposed upon the buyers of real property, who are not engaged in trade or business, to withhold the creditable withholding tax on the last installment applies only to installment sales as defined under Section 49 of the Tax Code of 1997, as amended. This is clear from the provisions of Section 2.57.2 (J) of Revenue Regulations (Rev. Regs.) No. 17-2003, which stated, to wit: "xxx xxx xxx" "If the buyer is an individual not engaged in trade or business, the following rules shall apply: (i) If the sale is a sale of property on the installment plan ( i.e., payments in the year of sale do not exceed twenty five percent (25%) of the selling price), no withholding is required to be made on the periodic installment payments. In such a case, the applicable rate of tax based on the gross selling price or fair market value of the property at the time of the execution of the contract to sell, whichever is higher, shall be withheld on the last installment or installments immediately prior to such last installment, if the last installment is not sufficient to cover the tax due , to be paid to the seller until the tax is fully paid." The foregoing rule will not apply if the sale does not qualify as an installment sale. Since all of CCC's sales of houses and lots have an initial payment of more than twenty five percent (25%) of the contract price, it is therefore correct in recognizing the entire sales in the year of sale and no withholding tax is required of the buyers on their amortizations and last installment payment. cASIED This does not mean however, that a deferred payment sale is not subject to creditable withholding tax. The withholding should have been properly made on the initial payment or down payment. ( BIR Ruling No. 019-96 dated February 20, 1996 ). It seems that the failure of the withholding tax regulation on real estate transactions under Rev. Regs. Nos. 1-90, 2-98 and 17-2003 to provide for a clear distinction between an installment sale and deferred payment sale obviously confused the non-business buyers on the manner of withholding. In an earlier ruling, this Office held that "In the absence of a well-defined, duly promulgated and publicized regulations on the subject, ordinary individual buyers on installment sales, particularly those who are not engaged in trade or business, can not be said to be notified on an obligation to withhold, much less be expected to know the fine lines of distinction in taxation, as delineated in private rulings, in respect of when to treat deferred payments as cash sales or installment sales transaction for the purpose of requirement of withholding. At any rate, the government suffered no disadvantage considering that, in this particular case, the income from the aforesaid deferred payment/installment sale transactions have already been reported and the tax thereon paid in your tax returns for the years in question." ( BIR Ruling No. 112-99 dated July 29, 1999 ). aTADCE In fine, the buyers, who in good faith believed that the transaction they have entered into qualifies as an installment sale, cannot be faulted for their failure to withhold and remit the tax on their initial payments. Accordingly, no further deficiency withholding tax, 25% surcharge or 20% interests shall be imposed against the buyers considering that the tax was eventually paid on all these transactions via the filing of the income tax returns by the seller. We want to emphasize that there are two (2) ways of collecting the income tax on a sale transaction. One is the voluntary compliance system wherein the income tax is paid by filing the income tax return after the close of the taxable period; and, two is the withholding tax system wherein the buyer is required to withhold and remit the income tax on the sale. Withholding tax is not a tax but a procedure by which the government collects the tax. While it is true that the buyers failed to withhold the tax, the entire amount of income tax is nevertheless collected when CCC filed its income tax return for taxable years 2005, 2006 and 2007. TICAcD In light of the foregoing, this Office hereby confirms your position that your client's buyers on deferred payment scheme are no longer required to withhold the creditable withholding tax from these consummated sales, including on their last installment payment of the contract price. Anent the second issue raised for resolution on whether or not your client's sales are subject to VAT, please be informed that Section 4.109-1 (B) (p) (4) of Rev. Regs. No. 16-2005, as amended, provides, viz .: ATICcS "SEC. 4.109-2. VAT-Exempt Transactions . xxx xxx xxx (B) Exempt transactions. (1) Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from VAT: xxx xxx xxx (p) The following sales of real properties are exempt from VAT, namely: HASTCa (4) Sale of residential lot valued at One Million Five Hundred Thousand Pesos (P1,500,000.00) and below, or house and lot and other residential dwellings valued at Two Million Five Hundred Thousand Pesos (P2,500,000.00) and below where the instrument of sale/transfer/disposition was executed on or after July 1, 2005; Provided, that not later than January 31, 2009 and every three (3) years thereafter, the amounts stated herein shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office (NSO); Provided, further, that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year; If two or more adjacent residential lots are sold or disposed in favor of one buyer, for the purpose of utilizing the lot as one residential lot, the sale shall be exempt from VAT only if the aggregate value of the lots do not exceed P1,500,000.00. Adjacent residential lots, although covered by separate titles and/or separate tax declarations, when sold or disposed to one and the same buyer, whether covered by one or separate Deed of Conveyance, shall be presumed a sale of one residential lot." cHaICD Inasmuch as CCC is primarily engaged in the development and sale of residential units, almost all of which have an average selling price of Two Million Five Hundred Thousand Pesos (P2,500,000.00), we now rule as follows: 1) Sale of lot valued for not more than One Million Five Hundred Thousand Pesos (P1,500,000.00) shall be exempt from VAT; 2) Sale of house and lot values for not more than Two Million Five Hundred Thousand Pesos (P2,500,000.00) shall be exempt from VAT. Section 4.109-1 of Rev. Regs. No. 16-2005, implementing Section 109 (w) of the Tax Code of 1997, as amended by Republic Act No. 9337; BIR Ruling DA-298-2006) Accordingly, all sales exceeding the above thresholds shall be subject to the VAT. Finally, the corresponding Certificate Authorizing Registration (CAR) and/or Tax Clearance (TCL) shall be issued upon submission of your client of the following: STaCIA 1) Quarterly ITR and final ITR and receipt of payment of income tax on the year the specified house and lots were reported as part of the Gross Income. 2) Instruments of Sale (Contract-to-Sell and Deed of Absolute Sale). 3) Proof of Payment of the Documentary Stamp Tax on conveyance of real property on every sale, as prescribed under Section 196 of the Tax Code of 1997, as amended. 4) Schedule of sales (with specific identification of each unit sold) during each quarter/year. aSTECI This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. ECaSIT Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service