E.L. Punsalan and Associates, CPA's

April 18, 2007 BIR RULING [DA-244-07] Sec. 49; R.R. 17-2003; 019-96; 011-99 E.L. Punsalan and Associates, CPA's G-104 Medical Plaza Makati Amorsolo corner Dela Rosa Street Legaspi Village, Makati City Attention: Atty. Eranio L. Punzalan Gentlemen : This refers to your letter dated April 16, 2007 requesting confirmation of your opinion that the buyers in a deferred payment sale of condominium units by your client, Meridien Development Group, Inc. (MDGI), are no longer required to withhold the creditable withholding tax on their payment of amortizations, particularly on their last installment payments, because the income tax on the transactions is already paid by the seller in the year of sale. It is represented that MDGI is a domestic corporation engaged in the development of a high-rise condominium project, known as Soho Central. The sale of the condominium units commenced sometime in 2006. Almost all of the condominium units developed are residential, except for three (3) commercial units located on the ground floor. The average selling price of about fifty (50%) percent of the total number of units in the project is two million five hundred thousand (Php2,500,000.00) pesos and below. The revenue reported in the year 2006 financial statements is substantially derived from the sales during the year. The entire sale was recognized in the year of sale although the initial payment collected was less than full, but exceeded twenty five (25%) of the total selling price, and the completion of the installment payments is beyond 2006. TAacCE 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. The majority of the condominium units were sold to individual persons not engaged in trade or business who are not aware of the technical distinction between a deferred payment sale and an installment sale. Accordingly, their initial payments and periodic amortizations were not subjected to withholding tax although they have manifested their intention to withhold on the last installment pursuant to Section (3) (j) of Revenue Regulations No. 17-2003. Despite the manifestation made by your client's buyers, you maintain the position that the last amortization is no longer subject to withholding tax considering that the tax has already been paid in the year of sale by your client, MDGI, when it filed the income tax return for the year that the deferred payment sales were made. EcHTDI In reply, please be informed that the requirement imposed upon buyers of real property, who are not engaged in trade or business, to withhold the creditable withholding tax on the last installment applies only to installment sales as defined under Section 49 of the Tax Code. This is clear from the provisions of Section 2.57.2(J) of Revenue Regulations No. 17-2003 when it said: "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 real property on 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." The foregoing rule will not apply if the sale does not qualify as an installment sale. Since all of your sales of condominium units have an initial payment of more than twenty five percent (25%) of the contract price, you are therefore correct in recognizing the entire sales in the year of sale and no withholding is required of the buyers on their amortizations and last installment payment. This does not mean however, that a deferred payment sale is not subject to creditable withholding tax. The withholding should have been properly made on the initial payment or down payment (BIR Ruling No. 019-96 dated February 20, 1996) . It seems that the failure of the withholding tax regulations on real estate transactions (RR No. 1-90, RR No. 2-98 and RR No. 17-2003) to provide for a clear distinction between an installment sale and a deferred payment sale obviously confused the non-business buyers on the manner of withholding that is why they manifested their intention to withhold on the last amortization believing that all sales subject to staggered payments are installment sales. In an earlier ruling this Office held "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 be notified on an obligation to withhold, much less be expected to know the fine lines of distinction in taxation, as delineated in private rulings, in respect of when to treat deferred payments as cash sales or installment sales transaction for the purpose of the requirement of withholding. 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 in your income tax returns for the years in question." (BIR Ruling No. 11-99 dated July 29, 1999) . In fine, the buyers, who in good faith believed that the transaction they have entered into qualifies as an installment sale, cannot be faulted for their failure to withhold and remit the tax on their initial payments. Accordingly, no further deficiency withholding tax, 25% surcharge or 20% interest shall be imposed against the buyers considering that the tax was eventually paid on all of these transactions via the filing of the income tax returns by the seller. We want to emphasize that there are two ways of collecting the income tax on a sale transaction. One is the voluntary compliance system wherein the income tax is paid by filing the income tax return after the close of the taxable period; and two is the withholding tax system wherein the buyer is required to withhold and remit the income tax on the sale. Withholding tax is not a tax but it is only a procedure by which the government collects the tax. While it is true that the buyers failed to withhold, the entire amount of income tax due is nevertheless collected when MDGI filed its income tax return for taxable year 2006. aTcSID In the light of the foregoing, this Office hereby confirms your position that your client's buyers on the deferred payment scheme are no longer required to withhold any creditable expanded withholding tax on their payment of amortizations after the year of sale, including their last installment payment of the contract price. Accordingly, the corresponding Certificate Authorizing Registration (CAR) and/or the Tax Clearance (TCL) shall be issued upon submission of your clients of the following: (1) Quarterly ITR or final ITR and receipts of payment of income tax on the year the specified condominium units were reported as part of Gross Income. (2) Instruments of Sale (Contract-to-Sell and Deed of Absolute Sale). (3) Proof of payment of the Documentary Stamp Tax on conveyance of real property on every sale. (4) Schedule of sales (with specific identification of each unit sold) during each quarter/year. 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, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service