BIR Ruling [DA-061-02]

April 01, 2002 BIR RULING [DA-061-02] Logic Sun Corporation 1906-A East Tower Philippine Stock Exchange Centre Exchange Road, Ortigas Center Pasig City Attention: Ms. Natalie D. Que Pe-Ng Gentlemen : This refers to your letter dated October 1, 2001 relative to your letters dated September 3, 2001 and September 9, 2000 stating that realty firm Logic Sun Corporation (LOGIC) is planning to sell on installment a parcel of land to Natalie Que Pe-Ng, David Que Pe, Carolyn Pe-Ching and Dennis Que Pe (collectively referred to as Que Pes) in equal parts as co-owners; that the said realty has an area of 869 square meters and is registered with the Registry of Deeds for Mandaluyong City under TCT No. 15605; that LOGIC will sell the said realty for the collective consideration of P6,952,000.00; that LOGIC shall transfer the title of the above-mentioned property in favor of the Que Pes upon execution of the Deed of Absolute Sale; that the initial payment of P1,390,400.00 will be payable on the date of the execution of the Deed of Absolute Sale; that the balance shall be payable over four years in equal monthly installments at no interest; that LOGIC and the Que Pes are amenable to the full payment of all pertinent taxes due on the said sale upon payment of the said P1,390,400.00; that the Que Pes are not individually or collectively engaged in business; and that such installment sale affords LOGIC cheaper funds to finance its on-going development projects in the face of a shrinking market. TIHCcA In connection therewith, you now request for a ruling that the income realized from the sale on installment of realty considered as ordinary asset is reportable as income realized from the said transaction under the installment method and that the Que Pes be allowed to withhold the creditable withholding tax due on the transaction on its initial payment of P1,390,400.00. In reply thereto, please be informed that pursuant to Section 49(B) of the Tax Code of 1997, the installment basis or method is allowed in the case of sale of realty where the initial payment does not exceed 25% of the selling price. In such a case, the vendor may return as income from such transaction in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the property is paid for bears to the total contract price. ( Sec. 176, Revenue Regulations No. 2 ) "Initial payments" is defined as the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale or other disposition is made. In this respect, Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001, imposes a creditable withholding tax based on the gross selling price or the fair market value of the real property determined in accordance with Sec. 6(E) of the Tax Code of 1997, whichever is higher, paid to the seller/owner on any sale, exchange or transfer of realty classified as ordinary asset. The rate of withholding tax depends on whether the seller/transferor is habitually engaged in the real estate business, and the selling price. The withholding tax is imposable on all types of sale, whether cash sale, sale on installment basis and sale on a deferred payment basis, of realty classified as ordinary asset. The same regulations also states that, where the consideration or part thereof is payable on the installment plan, 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. What it requires is that the withholding tax based on the entire consideration be withheld by the buyer on the last installment or installments to be paid to the seller. However, it does not prohibit the seller and the buyer to agree that the withholding tax based on the entire consideration be withheld on the initial payment. Such an arrangement would, in fact, redound to the benefit of the government in the form of early collection of the withholding tax. In the instant case, since LOGIC will receive from the Que Pes an initial payment of P1,390,400.00, which is only 20% of the total contract price of P6,952,000.00, it may report the income it will realize from the transaction under the installment method. The Que Pes may also withhold the appropriate creditable withholding tax on the initial payment. They shall, however, remit the same to the BIR within ten (10) days after the end of the month in which the withholding was made. In order that the concerned Revenue District Officer (RDO) of the revenue district where the property being transferred is located can issue the corresponding Certificate Authorizing Registration (CAR) to effect transfer of title, the Que Pes shall present the creditable withholding tax return and the documentary stamp tax return with the corresponding bank validation official receipts evidencing full payment of the correct creditable withholding tax under Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001, and documentary stamp tax under Section 196 of the Tax Code of 1997. ( BIR Ruling No. DA-340-98 dated July 27, 1998 ) This ruling is being issued on the basis of the foregoing facts as represented and the representation that the property in question is an ordinary asset in the hands of LOGIC. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group