BIR Ruling [DA-015-05]

January 19, 2005 BIR RULING [DA-015-05] RR No. 12-89; DA-508-2003 Ms. Imelda G. Razal No. 3 Falcon Street, St. Jude Subd. Novaliches, Quezon City M a d a m : This refers to your letter dated February 23, 2004 requesting for a clarification as to whether you are required to pay capital gains tax on a purchase made in 1975. It is represented that you (Buyer, for brevity) bought on installment a parcel of land of three hundred square meters from St. Jude's Subdivision (Interpal Industries, Inc.), (Seller, for brevity) for Eighteen Thousand Six Hundred (P18,600.00) Pesos on September 11, 1975 covered by Contract to Sell No. 199 (Q.C.); that the monthly amortization was paid through a real estate broker; that the last amortization was paid on September 1990 covered by an Official Receipt No. 4413 dated September 29, 1990; that you are being required to pay the capital gains tax first before being issued that Absolute Deed of Sale; that it is your opinion that the only taxes you are required to pay are the transfer tax and documentary stamp tax; and that the capital gains tax is the sole obligation of the seller. In reply, please be informed that Section 24 of Commonwealth Act No. 446, as amended, which was the law at the time of the execution of the Contract to Sell provides: "SEC. 24. Rates of tax on corporations. (a) Tax on domestic corporations. A tax is hereby imposed upon the taxable net income received during the taxable year from all sources by every corporation organized in, or existing under the laws of the Philippines, and partnerships, no matter how created or organized, but not including general professional partnerships, in accordance with the following: Twenty-five percent upon the amount by which the taxable net income does not exceed one hundred thousand pesos; and Thirty-five percent upon the amount by which the taxable net income exceed one hundred thousand pesos." Subsequently, the foregoing provision was retained when CA 446 was superseded by the Tax Code of 1977. Anent the above, Revenue Regulations No. 2 implements the provision on the prescribed accounting methods for sales on installment basis provided under Section 43 of the 1977 Tax Code (now Section 49 of the Tax Code of 1997). Thus, if the initial payments made by the Buyer exceeded 25% of the gross selling price, the sale is deemed to be on deferred payment sale transaction and the gain derived by the Seller should have been reported and paid by it during the year of the sale. In this situation, since the duration of the payments made by the buyer was fifteen years, it is presumed that the sale was on installment basis. For this purpose, the taxpayer's "taxable income shall be computed upon the basis of the taxpayers annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the accounting methods employed in keeping the books of accounts" pursuant to then Section 37 of the Tax Code of 1977, as amended (now Section 43 of the Tax Code of 1997) or "may under the rules and regulations prescribed by the Department of Finance), be reported for income tax purposes in proportion to the installment payments actually received in that year, which the gross profit realized or to be realized when payment is completed bears to the total contract price" as provided for in then Section 42 of the Tax Code of 1977, as amended (now Section 49 of the Tax Code of 1997). The foregoing provisions were lifted from the old Federal Income Tax Law of the United States. Under Section 42, (now Section 49) the installment reporting of income from deferred sale is a mere option granted by law to the seller. In both instances, the law is clear that the seller is the one liable to pay the tax on the sale of real property. Based on the foregoing, the taxpayer's taxable income is presumed to have been reported for income tax purposes, in proportion to installments actually received in the years that the regular amortizations were being paid. The gross profit realized from the transaction when payment was completed would have bear the total contract price. In fine, since the transaction had transpired in 1975 and the total contract price was ascertained to have been fully paid in 1990, it bears to consider that the seller had duly paid the corresponding income tax when its reported its gross taxable income for years 1978 to 1990. With regard to the documentary stamp tax, it shall be computed based on the actual consideration as stated in the Contract to Sell executed by the parties in 1975 and which amount shall be reflected in the Deed of Absolute Sale. Considering however, that to date, the Deed of Absolute Sale has yet to be executed, the corresponding documentary stamp tax due on the transaction shall be collected based on the gross selling price actual consideration paid by the buyer at the applicable rate prescribed under Section 196 of the Tax Code of 1997. Further, the payment of the capital gains tax is never a condition precedent for the execution of the Deed of Absolute Sale. The Deed of Absolute Sale is the evidence of the transaction so had between the seller and the buyer, in compliance with the Statute of Fraud for purposes of transferring ownership over the subject property. Incidentally, it is also the instrument required by the BIR before it can levy the documentary stamp tax. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be ascertained that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group