BIR Ruling [DA-229-02]

December 3, 2002 BIR RULING [DA-229-02] 27 (D) (5), 57, 188, 196; RR 2-98 83-99; DA-436-09-24 DA-107-00 SGV & Co. 6760 Ayala Avenue Makati City 1227 Attention: Atty. F. A. Balili Tax Division Gentlemen : This refers to your letters dated 20 November 2001 and 12 February 2002, on behalf of your client Marubeni Philippines Corporation (MPC), requesting confirmation of your opinion regarding the tax consequences of the transactions by, between and among Wynsum Realty Developer, Inc. (Wynsum), Fuji-Reynolds Fabrication Corporation (FRFC), and MPC. It is represented that Wynsum is a corporation duly organized and existing under the laws of the Republic of the Philippines, with office address at Room 2803D Tektite Tower 1, Ortigas Center, Pasig City; that it is engaged in the real estate business and is the registered owner of a thirty-four (34) storey reinforced commercial building known as the Wynsum Corporate Plaza (WCP condominium tower), located at Emerald Street, Ortigas Center, Pasig City; that on April 22, 1997, Wynsum and FRFC entered into a Contract to Sell, whereby Wynsum agreed to sell, transfer and convey to FRFC, on installment basis (the initial payments under the Contract to Sell amounting to P18,584,612.90 or about 22.9% of the total purchase price), the entire 24th Floor of WCP condominium tower consisting of 4 condominium units, namely: Units 24A, 24B, 24C and 24D, and 11 designated parking lots (Properties); that under the Contract to Sell, Wynsum shall execute or cause the execution of a Deed of Absolute Sale and issuance of the corresponding Condominium Certificates of Title (CCTs) in favor of FRFC, thereby conveying all rights, title and interests to the Properties as soon as the following shall have been accomplished: 1. Payment in full of the Purchase Price; 2. Payment in full of all advances made by Wynsum, such as advances for cost incurred for telephone, electrical and water connections, insurance premiums, condominium dues and other condominium charges; 3. Payment of value-added tax (VAT), documentary stamp tax, local transfer tax, registration fees and other necessary expenses connected with the Contract to Sell and the Deed of Absolute Sale. that as a matter of course, Wynsum has reported for income tax purposes the gain derived from the Contract to Sell in its 1997 Corporate Income Tax Return and has remitted the corresponding VAT to the Bureau of Internal Revenue (BIR); that as of June 30, 2000, by virtue of an offsetting agreement, FRFC has fully paid to Wynsum the consideration for the Properties in the total amount of Eighty One Million Ninety Six Thousand Four Hundred Ninety Two Pesos and 66/100 (Php81,096,492.66), inclusive of VAT in the amount of Seven Million Three Hundred Seventy Two Thousand Four Hundred Eight Pesos and 42/100 (Php7,372,408.42); that pursuant to the Contract to Sell, FRFC demanded from Wynsum the execution of the Deed of Absolute Sale; that Wynsum refused to execute the Deed of Absolute Sale pending FRFC's fulfillment of certain obligations under the Contract to Sell among which is the payment of certain advances made by Wynsum to FRFC one of which is the amount of Php1,768,370, representing outstanding condominium dues; that inspite of FRFC's full payment of the purchase price on June 30, 2000, it was legally impossible for Wynsum to simultaneously deliver the corresponding CCTs for the Properties since the specific CCTs for the 24th Floor of the Condominium Project have not yet been inscribed and registered in the name of Wynsum by the Registry of Deeds until November 28, 2000; that despite the issuance of the Registry of Deeds of the CCTs for the Properties in the name of Wynsum, Wynsum was prevented from absolutely conveying the Properties to FRFC on the ground that Properties subject of the Contract to Sell (CCT Nos. PT-31023, 31024, 31025 & 31026) were still mortgaged. It is further represented that due to financial constraints and with the consent of Wynsum, FRFC assigned, on July 10, 2001, its rights and interest in the Contract to Sell to MPC under a Deed of Assignment of Rights, whereby FRFC agreed to transfer its rights and interests in the Properties under the Contact to Sell; that among such rights is the right to enforce against Wynsum the execution of the Deed of Absolute Sale in favor of MPC provided all the conditions to be complied with by the parties under the Contract to Sell are satisfied; that it is only by way of Deed of Assignment of Rights that FRFC can transfer its rights and interest under the Contract to Sell to MPC as specifically provided under Section 12 of the Contract to Sell; that in consideration of the transfer of rights and interest under the Contract to Sell, MPC agreed to partially discharge FRFC from its existing loan and to assume all outstanding obligations of FRFC to Wynsum; and that subsequently, and as a result of the assignment by FRFC to MPC of its rights and interest over the Properties under the Contract to Sell and corresponding assumption and fulfillment by MPC of FRFC's obligations to Wynsum, a Deed of Absolute Sale was executed between Wynsum and MPC, whereby Wynsum conveyed the Properties in favor of MPC and the corresponding Documentary Stamp Tax (DST) imposed under Section 196 of the Tax Code of 1997 on the Deed of Absolute Sale was paid. It is your position that: 1. The full payment of the purchase price of the Properties under the Contract to Sell by FRFC to Wynsum has not automatically converted the contract into a Contract of Sale of Real Property when no transfer or conveyance of ownership over the Properties has been effected; 2. The Deed of Assignment of Rights between FRFC, MPC and Wynsum involving transfer of rights to the Properties under the Contract to Sell is not a Contract of Sale of Real Property. Based on the foregoing representations and documents submitted, you request confirmation that 1. The Deed of Assignment of Rights by, between and among FRFC, MPC and Wynsum involving transfer of rights to real property is not subject to income tax particularly the 6% capital gains tax under Section 27 (D) (5) and to the DST under Section 196 of the Tax Code of 1997; 2. The Deed of Absolute Sale between Wynsum and MPC is not subject to the 6% capital gains tax under Section 27 (D) (5) or to the 32% regular corporate income tax under Section 27 (A) of the Tax Code of 1997; 3. FRFC is not liable for the basic Creditable Withholding Tax (CWT) on income payments to Wynsum involving a contract to sell of real property since Wynsum has already sufficiently reported for income tax purposes, the income it has derived by virtue of the Contract to Sell . 4. Surcharge, interest and penalty incident to the failure to withhold the CWT due on the sale of real property may be properly waived considering substantial compliance with Revenue Regulations No. 02-98. 5. The ruling issued confirming the above tax consequences shall serve as sufficient basis for the Revenue District Office where the property subject of transfer is located to properly issue the Certificate Authorizing Registration (CAR) to MPC. Prior to our discussion of the issues in your request for ruling, we would like to discuss, at the outset, the tax consequences of the Contract to Sell between Wynsum and FRFC. 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, the appropriate amount of CWT should be deducted from each installment payment, including the downpayment. The instant case involves a sale on installment basis, given that the gross initial payments under the Contract to Sell amount to P18,584,612.90 or about 22.9% of the total gross purchase price of P81,096,492.66, inclusive of VAT. Since for income tax purposes, the Contract to Sell is a "sale of real property on installment plan", as described in Section 175 and 176 of Revenue Regulations No. 2, income payments made by FRFC to Wynsum under the Contract to Sell are subject to the appropriate CWT, pursuant to the expanded withholding tax regulations in force at the time of the downpayment and each installment payment thereafter. However, the Contract to Sell is subject to DST of one peso and fifty centavos (P1.50) on each two hundred pesos (P200.00), the rate imposed before the effectivity of the Tax Code of 1997. In addition, Wynsum is also required to report as its income from the sale of the real property under to the Contract to Sell that proportion of the installment payments actually received in each year which the total profit realized or to be realized when the property is paid for bears to the total contract price (Section 176, Revenue Regulations No. 2). Under the creditable withholding tax system, taxes withheld on certain income payments are intended to equal or at least approximate the tax due of the payee on said income. Under both the old Tax Code as well as the Tax Code of 1997, the income recipient (Wynsum, in this case) is still required to file an income tax return to report the income and/or pay the difference between the tax withheld, if any, and the tax due on the income. In this case, Wynsum is required to report its income from the sale of real property pursuant to the Contract to Sell, and FRFC is required to withhold the appropriate amount of withholding tax on its payments to Wynsum. This being said, we reply to your request for ruling as follows: 1. The Deed of Assignment of Rights by, between and among FRFC, MPC and Wynsum involving transfer of rights to real property is not subject to income tax particularly the 6% capital gains tax under Section 27 (D) (5) and to the DST under Section 196 of the Tax Code of 1997. It is, however, subject to the P15.00 DST on the notarial acknowledgment on said Deed. In BIR Ruling No. 083-99 dated June 22, 1999 , in which the taxpayer represented that the subject property has been fully paid, although no Deed of Absolute Sale was executed, this Office ruled ". . . it is clear that the sale of rights over realty although classified as real property under the Civil Code, is not the realty contemplated on the said Section considering that to be subject to the capital gains tax imposed under Section 24(D)(1) of the Tax Code of 1997, the realty in question must be located in the Philippines while right over real property may or may not be located in the Philippines since such kind of realty follows the owner thereof who may or may not be in the Philippines. Such being the case, this Office is of the opinion as it hereby holds that transfer of rights over realty, as in this case, is not subject to the capital gains tax . Thus, the sale of rights over real property, as in this case, what is actually being sold is the right which the seller has over the said realty, so much so that whomsoever buys the said rights merely steps into the shoes of the seller and acquires whatever right he may have over the realty concerned, but title thereto, remains with the seller (realty company). " (emphasis supplied) Similarly, in BIR Ruling No. DA-436-09-24-98 (undated) , this Office, in granting a request for exemption from payment of the capital gains tax and DST on Assignment of Rights with Assumption of Mortgage in a Contract to Sell, ruled that "In the instant case, however, your sale in favor (sic) the Mr. & Mrs. Alfredo Yambao was not a sale, exchange or disposition of real property classified as capital asset located in the Philippines but rather a sale of right pertaining to such property, hence, not included within the provision of Section 24(D)(1) of` the Tax Code of 1997. This is so, considering that in assignments of rights, the assignee merely steps into the shoes of the assignor without acquiring a better right than what the assignor had in the property to which the assigned right pertains. "Moreover, a Deed of Assignment of Right is not a Deed of Sale because what is conveyed by the assignor is not the property itself but the rights pertaining to such property. It is however understood that the gain derived by the assignor from and as a consequence thereof, is subject to income tax. (BIR Ruling No. 174-90 dated September 10, 1990) " (emphasis supplied) Further, in BIR Ruling No. DA-107-00 dated February 18, 2000 , this Office granted a taxpayer's request for exemption from the payment of the 6% capital gains tax in a case where there was an assignment of rights by a corporation-vendee in favor of certain individuals over a condominium unit while title to the same remained with the vendor-developer. It was ruled that in such sale of right over land/buildings, the vendor-developer is not subject to the capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997 and to the CWT imposed under Section 57(B) nor to the DST prescribed under Section 196 of the same Code. However, the Deed of Assignment of Rights is subject to the P15.00 DST on the notarial acknowledgment on said Deed. Therefore, on the basis of the foregoing BIR Rulings, the Deed of Assignment of Rights by, between and among FRFC, MPC and Wynsum involving transfer of rights to real property is not subject to the 6% capital gains tax under Section 27(D)(5), nor to the CWT under Revenue Regulations No. 2-98, as amended, nor to the DST under Section 196 of the Tax Code of 1997. The said Deed of Assignment of Rights is, however, subject to the P15.00 DST on the notarial acknowledgment on said Deed. 2. The Deed of Absolute Sale between Wynsum and MPC is not subject to the 6% capital gains tax under Section 27 (D) (5) or to the 32% regular corporate income tax under Section 27 (A) of the Tax Code of 1997 but is subject to DST under Section 196 of the Tax Code of 1997, based on the consideration contracted to be paid for the realty or its fair market value determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, at the time of the execution of the Contract to Sell. The Deed of Absolute Sale between Wynsum and FRFC is not an independent transaction from the Contract to Sell and the Deed of Assignment of Rights. It is the implementation of Wynsum's obligation to transfer ownership of the underlying property pursuant to the provisions of the said Contract to Sell, to FRFC or to any entity to which FRFC assigns its rights under the Contract to Sell. Provided that Wynsum does not receive any additional payment or income from FRFC, the Deed of Absolute Sale is not subject to the 6% capital gains tax or the expanded withholding tax. IHAcCS However, since the ownership of the underlying real property is transferred by Wynsum to FRFC, the Deed of Absolute Sale is subject to DST under Section 196 of the Tax Code of 1997, based on the consideration contracted to be paid for the realty under the Contract to Sell or its fair market value determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, at the time of the execution of the Contract to Sell. 3. FRFC is liable for basic CWT since it failed to withhold and no sufficient proof that Wynsum had reported its income from such sale, under the Contract to Sell, was submitted. MPC submitted a copy of Wynsum's income tax return (ITR) for the years 1997 and a certification by Wynsum but did not provide a clear breakdown of Wynsum's gross income which would make it possible for this Office to determine whether the income from the Contract to Sell was in fact reported by Wynsum. Likewise, no ITR was submitted for the years 1996, 1999, and 2000, the years in which the installment payments were allegedly made. Accordingly, a Certificate Authorizing Registration (CAR) may be issued transferring the property from Wynsum in favor of MPC only upon payment of the basic CWT, the corresponding penalties and interest due on the failure by FRFC to withhold, as well as the DST mentioned in No. 2 above. 4. In view of all the foregoing, there is no basis for the request for waiver of surcharge, interest and penalty incident to the failure to withhold the CWT due on the sale of the real property by virtue of the Contract to Sell. In sum, for its failure to withhold the CWT due on the sale of the properties under the Contract to Sell, FRFC is subject to pay the basic CWT, the appropriate penalties for non-withholding, including interests from the time FRFC failed to withhold, up to the time of actual payment of such CWT. Moreover, either MPC or Wynsum is liable to pay the DST on the Deed of Absolute Sale, based on Section 196 of the Tax Code of 1997. Upon such payment, the corresponding CAR may be issued by the Revenue District Office where the property subject of transfer is located. DIAcTE 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 void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group