BIR Ruling [DA-172-03]

June 2, 2003 BIR RULING [DA-172-03] 49 (B), RR1-90; 112-99, 011-99, 013-2001 State Land Investment Corporation & Central Land, Inc. 3rd Floor, State Centre Building, 333 Juan Luna St., Binondo M a n i l a Attention: Mr. Bienvenido S. Uy Senior Vice President Gentlemen : This refers to your letter dated November 23, 2001 requesting confirmation of your opinion that your installment buyers of realties, that is, townhouses, subdivision lots and housing units for the years 1990 to 1996 may not be held 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 the initial payments made in the year of sale. It is represented that State Land Investment Corporation (SLIC) and its wholly owned subsidiary, Central Land, Inc. (CLI) are corporations duly organized under Philippine laws with principal offices at the 3rd Floor, State Centre Building, 333 Juan Luna St., Binondo Manila; that SLIC and CLI developed and constructed townhouses/subdivision projects located in Manila, Quezon City, Cavite and Bulacan; that realties were sold to various persons on installment basis; that some of these realties were sold where the buyer's initial payment during the year of sale exceeded 25% of the selling price while others were sold where the buyer's initial payments in the year of sale did not exceed 25% of the selling price; that the buyers did not withhold the creditable withholding tax on the initial payments made; that SLIC and CLI, however, reported the income arising from these installment sales and fully paid the corresponding income tax thereon; that these facts are reflected in SLIC and CLI annual income tax returns and substantiated with its annual financial statements, duly audited and certified by its independent auditor, SGV & Co.; that at the time these sales were made, the expanded withholding tax regulations governing sales of real property which were not embraced in the capital gains tax law were covered by Revenue Regulations No. 1-90, as amended by Revenue Regulations No. 12-94; that, however, all these Regulations did not provide any rule when and how the installment buyer shall withhold and remit the creditable withholding tax; 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 under BIR rulings, as follows: "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. (This rule appears in Paragraph 6, Revenue Memorandum Circular [RMC] No. 7-90, January 16, 1990) "2. Under BIR Ruling No. UN-028-94 dated January 27, 1994 issued to Sycip Gorres Velayo & Co, in behalf of Cityland Development Corporation, City & Land Developers, Inc. and Cityland Incorporated, the BIR ruled that "installment payments received by Cityland in 1990 and subsequent years on the sale of a condominium unit covered by the aforedescribed 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 amortizations due for the succeeding years." "3. Under BIR Ruling No. 078-94 dated March 18, 1994 issued to E.L. Punsalan & Associates in behalf of Meridien East Realty and Development Corporation and Meridien 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 as "cash sale 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 had 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. "4. In BIR Ruling No. 019-96 dated February 20, 1996, upon further query by E.L. Punsalan & 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 downpayment on said units but on the entire selling price." That it is your further contention that the aforesaid regulations or rulings did not define the procedure on how the installment buyers could possibly comply with their duty as withholding agents; that in fact up to this time no such regulations was ever issued by the Department of Finance to clarify this issue; that at this point, however, you point out that the burden lodged upon your installment buyers, as withholding agents of the BIR, appears to be onerous and inequitable insofar as installment sales are concerned; that these buyers are not engaged in trade or business and generally are not aware of or familiar with the expanded withholding tax rules on installment sales and deferred payment sales; that the only time that they get to know about their obligation to withhold is after full payment of the installment, i.e. , when eventually notified by the BIR that they should show proof of compliance with the withholding tax rules; that 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; that in fact they have no clear idea when a deferred payment sale can be legally treated as a cash sale transaction ( i.e. , because of the equivalent cash doctrine) or when it can only be treated as an installment sale transaction ( i.e. , because of the non-applicability of the equivalent cash doctrine); and that it can only be expected that they can not be able to comply with the strict rules of the expanded withholding tax on installment or deferred payment sales of real property. In reply, please be informed that since as represented, most of the realties were sold to individual persons not engaged in trade or business, such installment payments were not subjected to withholding tax during the payment period. At the outset, however, the income from these installment sales were duly reported by those corporations in accordance with the accounting method which they employed such that the income taxes for the period covered from 1990 to 1996 which were required by the BIR to be collected from said corporations were actually paid and fully settled. Considering, therefore, that during the period covered by this case ( i.e. , from 1990 to 1996), 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. TIEHDC 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 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 CWT based on the initial payments was later modified and rectified in BIR Ruling No. 019-96 which held that the basis of the CWT shall be on the amount of the entire "selling price" or fair market value of the property as defined in Sec. 6(C) of the Tax Code of 1997, whichever is higher, rather than on the "initial or down payment". This later ruling has been circularized in Revenue Memorandum Circular No. 30-96. Considering, however, the non-retroactivity of BIR rulings, the sales entered into prior to the issuance of BIR Ruling No. 019-96 are deemed covered by the rule established in BIR Ruling No. 078-94. ( BIR Ruling No. 182-99 dated November 24, 1999 ) 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. In addition to the above, while RMC No. 7-90 which clarified some pertinent provisions of Revenue Regulations No. 12-89, as amended by Rev. Regs. No. 1-90, requires that "all sales, exchanges, or transfers of real properties (whether classified as ordinary or capital assets) by corporations, consummated on or after January 1, 1990 are subject to the creditable withholding tax imposed under the aforesaid Rev. Regs. 1-90 based on the gross selling price or the total amount of the consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of the real property , this Office, in BIR Ruling UN 028-94 issued to Cityland through SGV & Co., has ruled otherwise, i.e. , the "installment payments received by Cityland in 1990 and subsequent years on the sale of a condominium unit covered by the aforedescribed Contract to Sell executed in 1989 are not subject to the creditable withholding tax since the sale 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 amortizations due for the succeeding years ". Furthermore, under the aforesaid BIR Ruling UN 028-94, the term "gross selling price" means the consideration stated in the sales document or the fair market value/zonal value, whichever is higher. Moreover, the foregoing rules have been clearly defined in Sec. 2.57.2(J) of Rev. Regs. No. 2-98, 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%) 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." In the light of the foregoing, since the deferred payment sales of real property at issue were made prior to and after February 20, 1996, a distinction should be made if the payment was made prior to or after February 20, 1996. Thus, in the case of deferred payment sales of real property not on installment plan and made prior to February 20, 1996 the income from which is wholly taxable to the seller in the year of sale, the buyer shall withhold the CWT based on the initial or down payment . ( BIR Ruling No. 078-94 ). The CWT shall be credited when the final income tax payable is computed at the end of the taxable year. Subsequent installments shall still be subject to withholding by the buyer if the seller- real estate dealer did not report the entire income from such deferred payment sales in the year of sale and that the tax due thereon was not fully paid. On the other hand, if the sale was made after February 20, 1996, the basis of the CWT shall be the amount of the "selling price" or fair market value (FMV), whichever is higher, rather than on the initial or down payment. ( BIR Ruling No. 019-96 ). Accordingly, as we see no reason to deviate from the foregoing pronouncement where your company is concerned, the creditable withholding tax on your sales on "deferred payment basis" effected prior to February 20, 1996 , shall be based on the initial payments made within the year of sale in accordance with BIR Ruling No. 78-94 dated March 18, 1994. "Initial payments" as defined under Section 49(B) of the 1997 Tax Code means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made. It is to be emphasized, however, that tax shall still be withheld on the subsequent installments or payments if you (SLIC and CLI) cannot present evidence to prove that the entire income from such sale under deferred payment basis was reported in the income tax return filed in the year of sale and that the tax due thereon was fully paid upon filing the said Income Tax Return. On the other hand, for sales on a "deferred payment basis" effected after February 20, 1996 , 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. 30-96 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. Such being the case, since, as represented, the deferred-payment sales per attached Annex "A" (composed of thirteen (13) pages, each page bearing the initial/signature of the herein signatory) which forms part of this ruling were already reported and the income taxes thereon for the said years were already paid considering that to date they are all fully settled contracts or transactions, 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 realties during the period 1990 to 1996. However, please be informed that the implementing regulations governing sales of real property on installment basis as well as deferred payment basis are now provided under Revenue Regulations No. 2-98, effective January 1, 1998 and as amended by Revenue Regulations No. 6-2001 and 12-2001. Since Revenue Regulations are only prospective in application, the said rule does not apply to this case which pertains to prior years 1990 to 1996. This ruling, together with the copy of the Contract to Sell, Deed of Absolute Sale, Income Tax Returns and Audited Financial Statements in the Year of Sale, breakdown of cash sales transaction during the year of sale, and the proof of payment of documentary stamp tax on the transfer, shall serve as the basis of your installment buyers of realties during the years from 1990 to 1996 to secure from our concerned Revenue District Office the corresponding Certificate Authorizing Registration (CAR) covering their respective realty in order that the ownership and title thereto may be caused to be recorded and transferred by the Register of Deeds in the name of the respective installment buyers. ( BIR Ruling No. 112-99 dated July 29, 1999 ) 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. DAETHc Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group