BIR Ruling [DA-076-04]

February 19, 2004 BIR RULING [DA-076-04] RR 12-94 DA 172-03 ASB Realty Corporation ASB Center 114 Benavidez St., Legaspi Village Makati City Attention: Mr. Rolando P. Domingo Senior Vice-President Gentlemen : This refers to your letter dated February 11, 2004 requesting for a confirmation of your opinion that the expanded withholding tax, as well as the surcharges and interest may not be imposed on the buyers of condominium units sold on installment or deferred payment basis by ASB Realty Corporation (ASBRC) for the years 1996 to 1999. It appears that ASBRC is a corporation organized and existing under and by virtue of the laws of the Philippines, with principal office at ASB Center Building, Benavidez Street, Legaspi Village, Makati City; that ASBRC developed and constructed high-rise condominium projects located in Makati City and Pasig City; that the units were sold to various persons on installment basis; that most of these units were sold with the initial payments exceeding 25% during the year of sale; that the sales transactions are covered by Contract to Sell; that you are attaching herewith Annex "A" and Annex "B" which are the listings of the installment sales of various projects of ASBRC, where the buyers did not withhold the creditable withholding tax on the initial payments made; that nonetheless, the income from these sales transactions were reported by ASBRC and the corresponding income tax thereon were paid on the year of. sale; that these were reflected in the annual income tax returns and audited financial statements of ASBRC; and it is your opinion that when the income from the sale transactions were already reported in full in the year of sale and the corresponding income tax thereon were already paid under the deferred payment plan, the creditable withholding tax shall no longer be imposed on the buyers of the condominium units. In reply thereto, please be informed that pursuant to Revenue Regulations (RR) No. 12-94, any sale, exchange or transfer of real property whether capital or ordinary asset by a corporation, which is habitually engaged in the real estate business as certified by the Chamber of Real Estate Builders Association, Inc. (CREBA), the National Real Estate Association (NREA) or the Subdivision and Housing Developers Association, Inc. (SHDA), the selling price of which is over P500,000.00 but not over P2,000,000.00 shall be subject to a creditable withholding tax of 3%, while those whose selling price is over P2,000,000.00 the creditable withholding tax should be 5%, based on the entire gross selling price or total amount of consideration or its equivalent paid to the seller or the fair market value of the said properties, whichever is higher, pursuant to then Section 6(e) of the Tax Code, as amended. The aforestated RR covers all types of sale, whether cash sale, sale on installment basis and sale on a deferred-payment basis. It is noted however, that at the time the sales were made by ASBRC, the expanded withholding tax regulations governing sales of real property as covered by RR 12-94 does not provide any clear cut rules on when the installment buyers shall withhold and remit the creditable withholding tax, neither is there any definite procedures on how the installment buyers could possibly comply with then duty as withholding agents. The only clarification issued by the BIR relative to these issues on sale of real property on deferred-payment or installment plan may be perused on the following BIR Rulings: 1. If the buyer is engaged in trade or business, he shall withhold the tax upon each of his installment payment . If not engaged in trade or business, he shall withhold the tax only on his last installment payment . [Revenue Memorandum Circular (RMC) No. 7-90 dated January 16, 1990) (emphasis supplied) 2. In BIR Ruling No. UN 028-94 dated January 27, 1994 issued to Sycip, Gorres, Velayo & Co. in behalf of Cityland Development Corporation, City & Land Developments, Inc. and Cityland, Inc., the BIR ruled that "installment payments received by Cityland in 1990 and subsequent years on the sale of a condominium unit covered by the afore-described Contract to Sell executed in 1989 are not subject to the creditable withholding tax since said sale with initial payments exceeding 25% of the gross selling price has already been reported as a cash sale, or the income therefrom has already been reported in full for income tax purposes and the corresponding tax thereon has been paid even though it has not yet received the monthly amortization due for the succeeding years ." (emphasis supplied) 3. Under BIR Ruling No. 078-94 dated March 18, 1994 issued to E.L. Punzalan & Associates on behalf of Meridian East Realty and Development Corporation and Meridian Pacific Equities, Inc., the BIR held that in case of sale of real property on installment plan, if the buyer's initial payment in the year of sale exceeded 25% of the selling price, the sale transaction shall be treated a "cash sales on a deferred payment plan" in which case the seller shall recognize the entire gain in the year of sale. Considering that the said income has already been reported by the seller in the year of sale, the buyer was no longer required to withhold any creditable expanded withholding tax on his payments of amortization . This ruling, however, did not clarify how and when the installment buyer may withhold any creditable withholding tax. (emphasis supplied) 4. In Ruling No 019-96 dated February 20, 1996, upon further query by E.L. Punzalan & Associates on its request to clarify Ruling No. 078-94, the BIR held that the withholding tax payment under RR 1-90 as amended by RR 12-94 should not only be on the initial or down payment on said units but on the entire selling price . (emphasis supplied) Bearing in mind that during your sales transaction from 1996 to 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 selling price), reasons of fairness and equity dictate that the individual buyers 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. 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 have been notified of their obligation to withhold. 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 paid for the years in question. In BIR Ruling No. 078-94 wherein it was ruled that "in the case of sale of real property on installment plan where the initial payments in the year of sale exceed 25% of the selling price, the transaction is considered as 'cash sale', in which case, the seller's income from the sale transaction shall be taxable entirely in the year of sale", this Office required submission of the necessary documents which would otherwise disclose compliance of said income tax payments before the corresponding CAR may be issued, thus, among others, i) the Quarterly Income Tax Return (ITR) or Final ITR and receipts of payment of income tax on the year the specified condominium units were reported as part of the Gross Income; ii) the withholding tax payment under RR 1-90 on the initial or downpayment on said units ; iii) instrument of sales; and iv) breakdown of cash sales transaction during the quarter/year. The above rule, i.e. , the withholding of the credible withholding tax based on the initial payments was later modified and rectified in BIR Ruling No. 019-96 which held that the creditable withholding tax shall be based on the entire gross selling price or total amount of consideration or its equivalent paid to the seller or the fair market value, whichever is higher, pursuant to then Section 16(e) of the Tax Code, as amended, [now Sec 6(E) of the Tax Code of 1997] and in accordance with BIR Ruling Nos. 019-96 dated February 20, 1996 as published by RMC No 030-96 and BIR Ruling No 076-96 dated July 11, 1996. Finally, this rule which has been adopted in Sec 2.57.2(J) of Revenue Regulations No. 2-98, as amended, shall apply to all "deferred payment sales" made after December 31, 1997 and during the effectivity of the 1997 Tax Code. Furthermore, with the submission of the above documents, the BIR is assured that the income from such transaction has already been reported by the seller in the year of sale. Thus, the buyer was no longer required to withhold any creditable expanded withholding tax on his payments of amortization. Moreover, the foregoing rules have been clearly defined in Sec 2.57 2(J) of RR2-98, 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 price of more than five hundred thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000,000.00) 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 not 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." However, based on your representations most of the buyers of your condominium units in The Legaspi Place and ASB Malayan Tower 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. In view that the income from such sales or "deferred-payment basis" have been reported and the tax thereon have already been pair by ASBRC on the year of sale, the buyer is no longer required to withhold any creditable withholding tax on the final payment of amortization, the withholding of tax thereon would definitely be unnecessary. It is understood 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 where 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 sale and are not aware of the accounting method of the seller in reporting income from such sales transactions. In fact, they have no clear idea when a deferred payment sale be legally treated as a cash sales transaction or when it may only be treated as installment sale transaction. 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. DaTICc 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" and Annex "B" (composed of two (2) pages and four (4) pages, respectively, 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 1996 to 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, Annual Income Tax Returns and Audited Financial Statements in the year of 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. (BIR Ruling No. DA-172-03 dated June 2, 2003) 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