BIR Ruling [DA-093-01]

May 16, 2001 BIR RULING [DA-093-01] 27 (D) (5); RR 2-98 Sec. 163, Reg. No. 26 DA-445-98 Benson Realty Development Corporation No. 24 Rigor Street, Project 4, Quezon City Attention: Mrs . Cristina T. Ching Treasurer Gentlemen : This refers to your letter dated July 6, 2000 requesting for a ruling on whether a Contract to Sell and/or a Deed of Assignment executed by and between Benson Realty Development Corporation (the developer), the Home Development Mutual Fund (HDMF), and its client/unit purchaser who is an HDMF member, are subject to the creditable withholding tax under Revenue Regulations No. 2-98, implementing Section 57 (B) of the Tax Code of 1997. Documents submitted disclosed that the HDMF is accepting housing loan applications delivered by developers under HDMF Circular No. 176, re: "Implementing Guidelines on the PAG-IBIG Homelending Via the Modified Contract-to-Sell (CTS) Scheme for Developers Accounts", and by their respective Memorandum of Agreement (MOA); that under said Circular and the MOA particularly, entered into by and between Benson Realty Development Corporation and HDMF, HDMF housing loan shall be secured by a CTS on the residential property to which the loan proceeds are applied at point of loan take-out; that it is not a requisite in the granting of the loan application that the title of the residential property be transferred first in the name of the client/unit purchaser; that instead, it is required that the Deed of Assignment executed by the developer in favor of HDMF with attached CTS, executed by and between the client/unit purchaser and the developer, be annotated on the title which will still be in the name of the developer; that the transfer of title is required only after the account of the client/unit purchaser shall have qualified for conversion to Real Estate Mortgage not later than twenty-four (24) months from the date of loan take-out; that the Deed of Absolute Sale executed by the developer in favor of the client/unit purchaser shall be delivered to HDMF together with the Loan and Mortgage Agreement and the Promissory Note duly signed and executed by the client/unit purchaser in favor of the latter; and that the said Deed of Absolute Sale and Loan and Mortgage Agreement shall be registered with the Register of Deeds. In reply thereto, please be informed that pursuant to Section 163 of Regulations No. 26, or Revised Documentary Stamp Tax Regulations which provides: "SEC. 163. Contract for sale of land . If contract for the sale of land vests title on the land and improvements thereon, it would be subject to taxation as a conveyance. If it does not vest title but contains only certain provisions for the giving of a deed in the future upon compliance with conditions precedent, it is not subject to tax ." (Emphasis supplied) The execution of a Contract to Sell (CTS) by the developer in favor of the client/unit purchaser does not vest on the latter title over the subject property. Likewise, the execution of a Deed of Assignment by the developer in favor of HDMF, of the property subject to said Contract to Sell, does not vest title to the HDMF nor to the client/unit purchaser since the purpose of executing said deed and annotating the same in the title is just to secure the housing loan contracted by the client/unit purchaser with HDMF. The operative act, therefore, in the perfection/consummation of a Contract of Sale of real property, which will ultimately vest title to the vendee/transferee, is the execution of the Deed of Absolute Sale. Such being the case, the execution by Benson Realty Development Corporation of a Contract to Sell in favor of its client/unit purchaser and its execution of a Deed of Assignment in favor of HDMF, in order to secure the housing loan of its client/unit purchaser, are not subject to the creditable withholding tax under Section 2.57.2 (J) of Revenue Regulations No. 2-98, implementing Section 57 (B) of the Tax Code of 1997, nor to the documentary stamp tax under Section 196 of the same Code. However, the notarial acknowledgments of both documents are subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-445-98 dated October 5, 1998) TSEHcA On the other hand, upon execution by Benson Realty Development Corporation of a Deed of Absolute Sale in favor of its client/unit purchaser, which will take place not later than twenty-four (24) months from the date of loan take-out, and after the CTS account of the client/unit purchaser shall have qualified into a Real Estate Mortgage (REM), a creditable income tax shall be withheld on the gross selling price or total amount of consideration or its equivalent paid for the said sale of realty in accordance with Section 2.57.2 (J) of Revenue Regulations No. 2-98. Moreover, the above Deed of Absolute Sale is subject to the documentary stamp tax under Section 196 of the Tax Code of 1997, based on the consideration or value received or contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of the same Code, whichever is higher. Furthermore, the Real Estate Mortgage/Loan Agreement executed by and between the HDMF and the client/unit purchaser is subject to the documentary stamp tax under Section 195 of the same Code. This ruling is being issued on the basis of the foregoing facts as represented. 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, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group