BIR Ruling [DA-248-99]

April 23, 1999 BIR RULING [DA-248-99] Burgundy Realty Corporation Suite 602-603 The Nobel Plaza Condominium 110 Valero St., Salcedo Village Makati City Attention: Mr . Rogelio T . Serafica President Gentlemen : This refers to your letter dated March 19, 1999 stating that Burgundy Realty Corporation (BRC) is a domestic corporation and the owner-developer of a commercial/residential condominium project known as the Burgundy Westbay Tower (BWT); that the BWT Project is being built on a parcel of land located at Manila and covered by Transfer Certificate of Title No. 230455; that BRC has entered into a purchase and sale Agreement with a buyer Corporation (Corporation); that the Agreement provides that the Corporation has offered to purchase several condominium units and parking spaces in the BWT project, which offer has been accepted by BRC in accordance with the terms and conditions set forth therein; that after the conditions stipulated in the Agreement have been met, deeds of absolute sale covering the condominium units and parking spaces will subsequently be executed by BRC and the Corporation; that the terms of the Agreement provide that the consideration for the transaction shall be paid in cash and shares of stock; that payment shall be on installment basis to be released to BRC upon compliance with the conditions as stated in the Agreement; that as the BWT project is seventy-seven percent (77%) completed as of date, the release of the first installment payment comprising twenty-five percent (25%) of the consideration is made dependent on the annotation of the Agreement on TCT No. 230455 pursuant to Section 54 of P.D. No. 1259; that you have requested the Registry of Deeds of Manila to annotate the Agreement on TCT No. 230455 but you were advised by the latter that prior to the registration and annotation of the Agreement, you must first secure a tax clearance certificate, which may be in the form of Certificate Authorizing Registration (CAR) or a certificate of tax clearance (TCL) issued by a duly authorized revenue official of this office. You further state that the first installment shall be payable only after the annotation of the Agreement on TCT No. 230455; that once the agreement is annotated on the title, the Corporation will pay BRC the first installment of the purchase price and remit to the BIR the corresponding creditable withholding tax; and that the installment payment which will be paid by the Corporation to the BRC within the taxable year will not exceed 25% of the entire consideration. Based on the foregoing, you are requesting for a Certificate of Exemption from the payment of creditable withholding tax and documentary stamp tax and at the same time a directive to the Registry of Deeds of Manila to allow the annotation of the Agreement on TCT No. 230455. In reply, please be informed that Section 4 of Revenue Regulations No. 8-98 provides that a "creditable withholding tax based on the gross selling price/total amount of consideration or the fair market value . . . paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the withholding agent/buyer . . ". In relation to this, Section 2.57.4 of Revenue Regulations No. 2-98 provides that the obligation of the payor to deduct and withhold the tax arises at the time an income is paid or payable, whichever comes first. Since, in the instant case the first installment had not yet been paid by the Corporation to BRC because the Agreement has not yet been annotated on TCT No. 230455, no income has been realized by BRC and, therefore, the Corporation is not required to deduct and withhold the creditable tax. As expressly provided by the regulations, the obligation of the Corporation to deduct and withhold the tax on the transaction arises on payment by BRC of the first installment of the agreed purchase price. Moreover, since as represented the installment payment which will be paid by the Corporation to BRC will not exceed 25% of the entire consideration, BRC is qualified to report the gains in installment basis in which case, the amount which may be reported during the taxable year is only that proportion of the installment payments actually received during the year which the gross profit realized or to be realized when payment is completed bears to the contract price (Sec. 49(B), Tax Code of 1997; BIR Ruling No. 161-84 dated September 26, 1984). Therefore, the Corporation which is obviously engaged in trade or business, is required to deduct and withhold the tax on every installment and not on the entire consideration. Finally, since the Agreement in question does not vest title to the Corporation over the condominium units and parking spaces, no documentary stamp tax is as yet due thereon. The documentary stamp tax will become due only upon full payment by the Corporation of the consideration and execution of the Deeds of Absolute Sale covering the condominium units and parking spaces (Sec. 186, Revenue Regulations No. 26; BIR Ruling No. 390-87 dated December 1987 and BIR Ruling No. 097-96 dated December 1996). Accordingly, since the requested annotation at the back of TCT No. 230455 is only for the purpose of complying with the prior conditions stated in the said Agreement/Contract of Sell and does not by itself constitute a disposition of real property requiring a Tax Clearance Certificate (TCL) or a Certificate Authorizing Registration (CAR) evidencing payment of creditable withholding tax, we therefore have no objection to such annotation even without presentation of TCL or CAR with the Register of Deeds of Manila. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the following facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue