BIR Ruling [DA-167-01]

September 20, 2001 BIR RULING [DA-167-01] RR-2.57.2 (J) 078-94; 019-96; 013-2001 E. L. Punsalan and Associates G-104 Medical Plaza Makati Amorsolo corner Dela Rosa Streets, Legaspi Village Makati City, Metro Manila Attention: Atty. Eranio L. Punsalan Gentlemen : This refers to your letter dated March 9, 2001 requesting for and in behalf of your client, MERIDIEN DEVELOPMENT GROUP, INC. (MDGI), with principal office located at the Mezzanine Floor, West Ayala Condominium, Sen. Gil Puyat Ave., Makati City, for confirmation of your opinion that the last installment payment beyond the year 2000 for the full payment of the contract price is exempt from creditable withholding tax. It is represented that MDGI is a company incorporated under Philippine laws, duly registered with the Securities and Exchange Commission (SEC) and the Bureau of Internal Revenue (BIR); that inasmuch as the company commenced operations only in the second semester of 1996, it shall, for the first time, be subject to the Minimum Corporate Income Tax (MCIT) for the taxable year 2000; that, much as it would wish to comply, the company's financial situation has not only left the same with very limited options but has, in fact, resulted in the serious impairment of its capital structure; that the revenue reported in the financial statements is substantially derived from the sale of units on installment in 2000, wherein the entire sale was recognized although the initial payment collected was less than full but exceeded twenty-five percent (25%) of the total selling price, hence, no installment receivable has been reflected in the corporation's audited financial statements for the year ended December 31, 2000; that the completion of the installment payments is, however, beyond the year 2000; and that this accounting treatment of theoretical cash sales or deferred payment basis is and has been the accounting method consistently applied by MDGI through the years, in accordance with the generally accepted accounting principles (GAAP). We reply as follows: Since the sales in question were executed in the year 2000, the pertinent provisions of Revenue Regulations No. 2-98, as amended, shall apply. In this regard, Section 2.57.2(J) of the said regulations states in part: "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 a 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." Accordingly, the following rules obtaining at the time of the sale should apply in determining the withholding tax liabilities of the buyers: If the buyer is an individual not engaged in trade or business, and the sale is a sale of property on the installment plan, i.e., the payments in the year of sale does not exceed 25% of the selling price, no periodic withholding of tax is required to be made on the periodic installment. In such case, the applicable rate of tax based on the gross selling price or fair market value of the property, whichever is higher, shall be withheld in the last installment. On the other hand, if the sale is on a "cash basis" or is a "deferred-payment sale not on installment plan", i.e., the initial payments in the year exceed 25% of the selling price, the buyer shall withhold the tax based on the gross selling price or market value of the property, which ever is higher, on the first installment. IaAHCE If the buyer is a corporation, or an individual engaged in trade or business, it is required to withhold the appropriate amount of tax on each installment. However, this rule is to be clarified, depending on whether the sale is a sale of property on the installment plan, on the one hand, or a deferred payment sale not on the installment plan, on the other (such items being defined in the next succeeding discussion). Thus, if the sale is a sale of property on the installment plan, the buyer should withhold the appropriate amount of tax on each installment payment. On the other hand, if the sale is a deferred payment sale not on the installment plan, which is in effect treated as a cash sale, the withholding tax shall be withheld from the initial payment, based on the higher of the gross selling price or the fair market value of the property determined in accordance with Section 6(E) of the Tax Code. It is noted further that MDGI has treated the sales of its units in the year 2000 as cash sales, and although it reported a loss, it did not pay tax (not being subject to MCIT). On this assumption, it requests that its sales be exempted from withholding tax. In this regard, this Office hereby rules that although MDGI has reported its income from the sales of units to individuals who are not engaged in trade or business, in the year of sale but nonetheless, the individual buyer had failed to withhold the corresponding expanded withholding tax based on the gross selling price or fair market value of the property, whichever is higher, on the initial payments, for this purpose, the corresponding penalty and surcharges shall still be imposed. In this respect, MDGI, shall pay the corresponding penalties and surcharges based on the amount of the computed expanded creditable withholding tax. It shall not, however, be subject to the actual amount of the expanded creditable withholding taxes which were supposed to have been withheld but which the individual buyers failed to do. However, for purposes of issuing a tax clearance on each sale, the RDO having jurisdiction over MDGI should determine that income from each such sales has in fact been recognized in full. With respect to sales of units to corporations, and to individuals who are engaged in trade or business, no withholding tax is likewise due on the assumption that the income from such sale has been reported in full. However, the appropriate penalties for non-late/withholding and interest should be imposed up to the filing of the final income tax return. In this connection, Section 2.58.5 of RR No. 2-98 provides that: "Any income payment which is otherwise deductible under the Code shall be allowed as a deduction from the payor's gross income only if it is shown that the income tax required to be withheld has been paid to the Bureau in accordance with Secs. 57 and 58 of the Code. "Any deduction will also be allowed in the following cases where no withholding of tax was made: "(A) The payee reported the income and the withholding agent/taxpayer pays the tax, including the interest incident to the failure to withhold the tax, and surcharges, if applicable at the time of the original audit and investigation; "(B) The recipient/payee failed to report the income on the due date thereof, but the withholding agent/taxpayer pays the tax, including the interest incident to the failure to withhold the tax and surcharges, if applicable, at the time of the original audit and investigation; "(C) The withholding agent erroneously underwithheld the tax but pays the difference between the correct amount and the amount of tax withheld, including the interest, incident to such error, and surcharges, if applicable, at the time of the original and investigation." The RDO having jurisdiction over the place where the property is located and with which the application for tax clearance is filed, should determine that income from each such sale has been recognized in full. 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.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group