BIR Ruling [DA-022-03]

January 28, 2003 BIR RULING [DA-022-03] RR 1-90 112-99 dtd. 7/29/99 Swire Realty Development Corporation Swire Corporate Center 14 N. Domingo Street, Quezon City Attention: Ms. Elena Murillo-Licup Executive Vice-President Gentlemen : This refers to your undated letter concerning your request for a ruling that your installment buyers of condominium units during the years 1995 to 1997 may not be made liable to the expanded withholding tax nor may they be made liable to surcharge and interest for failing to withhold the creditable expanded withholding taxes on their respective payments of amortization for the condominium units which they purchased from you on installment plan. It is represented that SWIRE REALTY DEVELOPMENT CORPORATION (SWIRE) developed and constructed a condominium project in Makati City, otherwise known as the "Palace of Makati Condominium Corporation"; that during the period 1995 to 1997, the condominium units were sold to various clients on installment basis; that in some installment sales contracts, the buyers' initial payments in the year of the sale exceeded 25% of the selling price while in some other contracts, the initial payments in the year of the sale did not exceed 25%; that all these installment sales have already been fully paid by the installment buyers and SWIRE had duly reported these sales transactions in its income tax returns in accordance with its regularly employed accounting method; that these installment buyers did not withhold any creditable expanded withholding tax on their respective payments of amortization; that this case, which involved the period from 1995 to 1997, is governed by the Expanded Withholding Tax Revenue Regulations No. 1-90, as amended by Revenue Regulations No. 12-94; that, however, the said implementing regulations do not provide any rule on how the buyer, as withholding agent of the BIR, may withhold the creditable withholding tax in case the purchase of real property is on installment plan; that the only clarification issued by the BIR vis-a-vis the creditable withholding tax on the sale of real property on installment plan may be found in several BIR rulings and issuances, as follows: HCDaAS 1. If the buyer is engaged in trade or business, he shall withhold the tax upon each of his installment payments. If not engaged in trade or business, he shall withhold the tax on the last installment payment. (This rule appears in paragraph 6, Revenue Memorandum Circular (RMC) No. 7-90, January 16, 1990); 2. In BIR Ruling No. 088-94 dated March 18, 1994 issued to E.L. PUNSALAN & ASSOCIATES, it was held that in case of a sale of real property on installment plan, if the buyer's initial payments in the year of the sale exceed 25% of the selling price, the transaction shall be considered a "cash sale", in which case, the seller's income from the sale transaction shall be taxable entirely in the year of sale. Considering that the said income had already been reported by the seller in the year of the sale, the buyer was no longer required to withhold any creditable expanded withholding tax on the payments of amortization. This ruling, however, did not clarify how and when the installment buyer may withhold any creditable withholding tax; 3. In BIR Ruling No. 019-96 dated February 20, 1996, upon further query by E.L. PUNSALAN & ASSOCIATES about the basis of the creditable withholding tax that may be withheld by the installment buyer, the BIR advised that the tax shall be computed and withheld based "on the initial or down payment in the said units." It is your further contention that under the canon of "deferred payment sales of real property," it does not necessarily follow that the sale transaction shall automatically be treated as a "cash sale" simply because the buyer's initial payments in the year of sale exceed 25% of the selling price; that before such sale transaction may legally be treated as "cash sale," in which case, the income from the sale may be wholly taxable against the seller in the year of sale, it is a requisite that the balance of the selling price be covered by the buyer's delivery of "obligation" provided, however, that such "obligation" may legally be treated as the "equivalent of cash" in accordance with the equivalent of "cash doctrine" which is the underlying principle governing such deferred payment sale transaction; that such "obligation may only be legally treated the equivalent of cash provided, however, that it has fair market value and provided, further, that the same may legally be converted by the seller to cash; that none of the said installment buyers delivered to SWIRE any obligation which may legally be treated as the "equivalent of cash" since these buyers' commitments to pay the remaining balance on periodic amortization were simply evidenced by the contracts to sell; that such obligation of the buyer under the contract to sell is not the equivalent of cash following the "equivalent of cash doctrine" pertaining to deferred payment of sale transactions; and that, considering the foregoing, it is your opinion that; a. Deferred payment sales where the buyer's initial payments in the year of sale did not exceed 25% of the selling price. That your said installment buyers may not legally be imposed upon with any deficiency expanded withholding tax assessment since SWIRE already reported and paid these income taxes in its income tax returns filed for the years 1995 to 1997 and considering that no implementing Revenue Regulations have been promulgated by the Secretary of Finance governing deferred payment sales covering the years 1995 to 1997; b. Deferred payment sales where the buyer's initial payments in the year of sale exceed 25% of selling price. That your said installment buyers may be made liable to neither any deficiency expanded withholding tax nor any 25% surcharge or 20% interest for their non-withholding of the tax on any of their installment payments, considering that no implementing Revenue Regulations have so far been promulgated by the Secretary of Finance concerning this type of sale transaction. In reply, please be informed that this Office stated in BIR Ruling No. 112-99 that the implementing regulations governing sales of real property on installment basis are now provided under Section 2.57.2 (J) of Rev. Regs. No. 2-98, effective January 1, 1998. Since Revenue Regulations are only prospective in application, pursuant to Section 246 of the Code, the said rule does not apply to this case which pertains to the prior years 1995 to 1997. Considering that during the period covered by this case ( i.e., from 1995-1997), no specific regulations governed the time or the manner of withholding the tax on deferred or installment payment sales of real property (whether or not the initial payment is in excess of 25% of the setting price), fairness and equity dictate that individual buyers, most of whom were not engaged in trade or business and who did not make any such withholding on installment payments, should not be subjected to the corresponding penalties imposed for failure to withhold the tax. Besides, the government suffered no disadvantage considering that, in this particular case, the income from the aforesaid deferred payment/installment sale transactions have been reported and paid in your income tax returns for the years 1995 and 1997, in accordance with the accounting method employed by you. CTSAaH In the light of the foregoing and since the sales were already reported and income taxes thereon for the said years have been paid, this Office is of the opinion and hereby holds that no further deficiency expanded withholding tax, 25% surcharge or 20% interest shall be imposed against the aforementioned installment buyers of condominium units during the period from 1995 to 1997. This ruling shall serve as the basis of your installment buyers of condominium units during the years from 1995 to 1997 to secure from our concerned Revenue District Office the corresponding Certificate Authorizing Registration (CAR) covering their respective condominium unit in order that the ownership and title thereto may be recorded and transferred by the Register of Deeds in the name of the respective installment buyers. HIaSDc 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. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group