Royal Ventures Property Managers, Inc.

March 19, 2008 BIR RULING [DA-186-08] RR 2-98; RR 17-03; DA-381-04; DA-229-02; DA-149-03 Royal Ventures Property Managers, Inc. CLK Bldg., McArthur Highway, Dolores Junction, City of San Fernando, Pampanga Attention: Col. Ramon L. Lugtu (Ret.) Chairman S i r : This refers to your letter received by this Office on October 31, 2007 requesting for a ruling on whether a Contract to Sell and a Deed of Assignment executed by and between Royal Ventures Property Managers, Inc./JCR Holdings Corporation, Union Bank of the Philippines, and a client/unit purchaser in your project Citta Del Sole' are subject to creditable withholding tax under Revenue Regulations (Rev. Regs. 2-98). It is represented that Royal Ventures Property Managers, Inc. ("Royal Ventures") is a corporation duly organized and existing under the laws of the Republic of the Philippines, with principal office address at G/F Rufina Bldg., Sindalan, San Fernando, Pampanga; that it is engaged in the real estate business; that Royal Ventures and Union Bank of the Philippines entered into a Memorandum of Agreement dated July 31, 2007 whereby Union Bank, as assignee, agreed to purchase the Contract to Sell receivables of the assignor, Royal Ventures, for various accredited subdivision projects; that the initial payments under the Contracts to Sell of Royal Ventures are sometimes less than twenty-five percent (25%) and on other times more than 25% with the balance payable in equal monthly installments plus interest; and that under the Contract to Sell, Royal Ventures shall execute the final deed of sale in favor of the vendee and deliver the owner's duplicate copy of the Transfer Certificate of Title upon complete payment of the vendee of all the obligations stipulated in the said Contract to Sell. In reply, please be informed as follows: AEIcTD Contract to Sell between Royal Ventures and the client/unit purchaser: Income payments subject to creditable withholding tax are enumerated under Sec. 3 of Rev. Regs. No. 17-2003 dated March 31, 2003 which further amended Sec. 2.57.2 (J) of Rev. Regs. No. 2-98, as amended, as follows: "SEC. 2.57.2. Income Payment Subject to Creditable Withholding Tax and Rates Prescribed Thereon. Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: xxx xxx xxx (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 classified as ordinary asset. xxx xxx xxx If the buyer is an individual not engaged in trade or business, the following rules shall apply: (i) If the sale is a sale of property on the installment plan ( i.e., payments in the year of sale do not exceed twenty five percent (25%) of the selling price), no withholding is required to be made on the periodic installment payments. In such a case, the applicable rate of tax based on the gross selling price or fair market value of the property at the time of the execution of the contract to sell, whichever is higher, shall be withheld on the last installment or installments immediately prior to such last installment, if the last installment is not sufficient to cover the tax due, to be paid to the seller until the tax is fully paid. (ii) . . . However, if the buyer is engaged in trade or business, whether a corporation or otherwise, these rules shall apply: (i) If the sale is a sale of property on the installment plan [ i.e., payments in the year of sale do not exceed twenty five percent (25%) of the selling price], the tax shall be deducted and withheld by the buyer from every installment which tax shall be based on the ratio of actual collection of the consideration against the agreed consideration appearing in the Contract to Sell applied to the gross selling price or fair market value of the property at the time of the execution of the Contract to Sell, whichever is higher. HIEASa The term 'consideration' refers to the selling price exclusive of interest. Interest earned as an incident of installment payment, if any, shall be subject to the ordinary income tax rate. Under both the old Tax Code as well as the Tax Code of 1997, a sale is considered to be on an installment basis for income tax purposes when the initial payments, in the year of sale, do not exceed twenty five percent (25%) of the selling price. In such a case where the buyer is engaged in trade or business, whether a corporation or otherwise, the appropriate amount of CWT should be deducted from each installment payment, including the downpayment. (BIR Ruling No. DA-229-02) However, if the buyer is an individual not engaged in trade or business, no withholding is required to be made on the periodic installment payments but the tax rate on the gross selling price or fair market value of the property at the time of the execution of the contract to sell, whichever is higher, shall be applied which tax shall be withheld on the last installment or installments immediately prior to such last installment. 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 whichever is 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. (BIR Ruling No. DA-149-03) In any case, no Certificate Authorizing Registration (CAR)/Tax Clearance Certificate (TCL), shall be issued to the buyer unless the withholding tax due on the sale, transfer, or exchange of real property has been fully paid. For sale of property on installment basis or deferred payment basis where the Contract to Sell is always executed before the execution of the Deed of Sale, the said Contract to Sell must be attached to the Deed of Absolute Sale executed upon completion of the payments and the duly notarized original duplicate copy of both documents must be presented to the RDO having jurisdiction of the place where the property is located for validation of the correctness of payment of all applicable taxes before the issuance of CAR/TCL. TAcCDI It is to be noted, however, that in case of sale of real property paid under installment payment or deferred payment basis, the payment of the documentary stamp tax (DST) shall accrue upon the execution of the Deed of Absolute Sale but the basis for the imposition thereof shall be the gross selling price or fair market value of the property, whichever is higher, at the time of the execution of the Contract to Sell. If upon completion of the payment of the purchase price of real property classified as ordinary asset, but before the execution of the Deed of Sale, the buyer decides to assign his right over the property to another person for a consideration, the assignment shall be considered a separate sale of real property and, therefore, subject to the creditable/expanded withholding tax (EWT) or final withholding of capital gains tax, as the case may be, which shall be withheld by the assignee of such property based on the consideration per Deed of Assignment or the fair market value of such property at the time of assignment, whichever is higher, and to the DST imposed under Sec. 196 of the same Code using the same basis. It is to be clarified, however, that sale of interest in real property (real property purchased on installment covered by Contract to Sell which was sold by the original buyer before it was fully paid) shall be taxable on the part of the original buyer (now seller) based on the realized gain thereon which is measured by the difference between the agreed consideration and the amount actually paid by the said original buyer. Assignment of Contract to Sell Receivables (or Accounts Receivable) to Union Bank In BIR Ruling No. DA-381-2004 dated July 7, 2004, which applies in this case, this Office opined: "SALE OF AR ON INSTALLMENT SALES (1) The transfer or assignment of the AR on installment sales to a bank or finance company will effectively result in the collection of the balance on the installment price of realty sold. For income tax purposes, the portion of the consideration paid for the AR on installment sales will be reported as income during the year the AR was sold and should no longer be reported on the installment basis for income tax purposes. Thus, in the case of Bibiano Baas, Jr. v. Court of Tax Appeals, et al., G.R. No. 102967 dated February 10, 2000 involving the sale of realty, the Supreme Court ruled: DCaEAS "Where an installment obligation is discounted at a bank or finance company, a taxable disposition results, even if the seller guarantees its payment, continues to collect on the installment obligation, or handles repossession of merchandise in case of default. This rule prevails in the United States. Since our income tax laws are of American origin, interpretations by American Courts on our parallel tax laws have persuasive effect on the interpretation of these laws. In applying the aforesaid interpretation by analogy in the case at bar a taxable disposition result when the discounting of the promissory note is done by the seller himself. Clearly, the indebtedness of the buyer is discharged, while the seller acquires money for the settlement of his receivables. Logically, then, the income should be reported at the time of the actual gain. When the petitioner had the promissory note covering the succeeding initial payments of the land issued by Ayala, discounted by Ayala itself, on the same day of the sale, he lost entitlement to report the sale as a sale on installment since, a taxable disposition resulted and petitioner was required by law to report in his returns the income derived from the discounting." (2) Considering that the sale of the AR is not one of those transactions subject to creditable withholding tax mentioned in Revenue Regulations No. 2 - 98, as amended, the payments made to the Realty Cos. by the bank or finance company, in consideration for the sale or assignment on a "without recourse" basis of the AR are not subject to the creditable withholding tax prescribed in the said regulations. Consequently, the bank or finance company cannot be constituted as a withholding agent over such payment. (3) The creditable withholding tax is imposed only to ensure advance partial remittance of income tax payments due from the income recipient. Since the Realty Cos. will be reporting for tax purposes the entire gain on the sale of its realty on installment sales upon the sale of the AR to the bank or finance company the Realty Cos. are no longer required to withhold the creditable withholding tax because they are no longer taxable on the installment payments that the buyers will remit under the original payment schedule to the bank or finance company to whom the AR will be sold or assigned. Accordingly, the objective of the creditable withholding tax under Revenue Regulations No. 2 -9 8, as amended, no longer exists when the AR are sold because the Realty Cos. have reported the income from the sale of the real property upon receipt of the proceeds of the sale of the AR. SHacCD xxx xxx xxx SALE OF AR ON DEFERRED-PAYMENT SALES, NOT ON INSTALLMENT PLAN (1) The proceeds of the sale pertaining to the AR on deferred-payment sales should no longer form part of the income that should be reported for tax purposes because the same are being treated as cash sales under Section 177 of Regulations No. 2, otherwise known as the Income Tax Regulations. Accordingly, the entire selling price would have been reported and subjected to income tax in the year of sale, regardless of the fact that there are subsequent or deferred payments to make the purchase price whole. (2) Inasmuch as the deferred-payment sales are treated as cash sales for tax purposes, the entire gain would have been reported, and consequently, the entire creditable withholding tax would have been paid, in the year of the sale. Such being the case, there should no longer be any creditable withholding tax due on the subsequent deferred payments. Moreover, the sale of AR on deferred-payment sales will not result in any taxable income for the Realty Cos. because the amounts received represent only an advance collection of previously taxed income. (BIR Ruling No. 076-96 dated July 11, 1996) (3) The buyers of the real property on deferred-payment plan are no longer required to withhold the 5% creditable withholding tax with respect to their subsequent payments to the bank or finance company because these are being paid not to the seller of the real property but only to the assignee or buyer of the AR. Besides, the Realty Cos. have already reported the entire taxable income on the deferred-payment sale at the time of the sale of realty." This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered null and void. DaEATc Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service