Sta. Lucia Realty and Development, Inc.

April 26, 2007 BIR RULING [DA-268-07] DA-373-2006; Sec. 108 (A), NIRC; RMC 7-2006, Sec. 4. 106-3, RR 16-2005 Sta. Lucia Realty and Development, Inc. 3rd & 4th Flrs. Bldg. II SLE Grand Mall Marcos Highway cor. Felix Ave. Cainta, Rizal Attention: Rose Ann Salonga Supervisor Gentlemen : This refers to your letter dated October 6, 2006 requesting this Office's opinion on several issues concerning the implementation of Republic Act (RA) No. 9337 with respect to real estate transactions. It is represented that Sta. Lucia Realty and Development, Inc. ("Sta. Lucia", for brevity) is engaged in the business of real estate development. Pursuant to RA 9337, Sta. Lucia sent notices to its lot purchasers increasing the VAT rate on their subsequent billing statements. In this regard, Sta. Lucia received the following queries from said purchasers: 1. When should Sta. Lucia start collecting the additional 2% VAT in case a lot buyer signed a Contract to Sell before February, 2006 or even before RA 9337 became effective? 2. How should the computation be made in case the purchasers started paying their fixed monthly amortizations even before RA 9337 became effective? 3. Does Sta. Lucia need to amend the provisions in the Contract to Sell so that the fixed monthly installment stipulated therein is modified in view of the 12% rate? 4. What is the ceiling for the imposition of the subject tax with respect to sale of real property? With respect to your first query, please be informed that under Revenue Memorandum Circular (RMC) No. 7-2006, effective February 1, 2006, the VAT rate was increased from 10% to 12% by order of the President of the Philippines. This 2% increase is in accordance with the conditions laid down under Section 108 (A) of the Tax Code of 1997, as amended by RA 9337, to wit: "SEC. 108. Value-added Tax on Sale of Services and Use or Lease of Properties. (A) Rate and Base of Tax . There shall be levied, assessed and collected, a value-added tax equivalent to ten percent (10%) of gross receipts derived from the sale or exchange of services, including the use or lease of properties: Provided, that the President, upon the recommendation of the Secretary of Finance , shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied. (i) Value-added tax collection as a percentage of Gross Domestic Product (GDP) of the previous year exceeds two and four-fifth percent (2 4/5%); or (ii) National government deficit as a percentage of GDP of the previous year exceeds one and one-half-percent (1 1/2%)." Thus, all Contracts to Sell involving the purchase of real property between Sta. Lucia and its buyers, executed on or after February 1, 2006, are subject to the new 12% VAT rate in accordance with the above provisions. With respect to contracts entered into prior to this date, the rule to be followed is that laid down under Items I and II of RMC 22-2006 which provide that: "I. Tax Treatment of Sale of Goods For the sale of goods, a value added tax (VAT) shall be imposed based on the gross sales for a given taxable period. Gross sales shall mean the total sales from consummated transactions whether paid or still payable or upon its accrual. Consummation of the transaction shall mean the delivery and acceptance of the goods with the corresponding issuance of the soles invoice. "II. Application of the 10% or the 12% VAT Consummated sales of goods prior to February 1, 2006 shall be subject to the 10% VAT while sale transactions entered into on or after the aforesaid date shall be subject to 12% VAT. Sale transactions which are entered into prior to February 1, 2006, even if already booked as a sale but delivery of the goods and issuance or dating of the sales invoice took place on or after February 1, 2006 shall be considered as sales on or after February 1, 2006 and shall be subject to the 12% VAT rate. As stated above, Part I of RMC 22-2006 considers transactions as consummated when the sold goods/properties are delivered to and accepted by the buyers and the corresponding sales invoice are issued to them for such goods/properties. Applied to the present issue, it is evident that any consummated sale by Sta. Lucia to its lot buyers of real properties before February 1, 2006 is subject to 10% VAT under Part II of RMC 22-2006. Conversely, even if these transactions occurred before February 1, 2006, if they did not comply with the requisites of delivery and invoicing before said date, they will be subject to the new 12% VAT rate or an additional 2% additional VAT rate to cover the increase in VAT rate from 10% to 12%. As regards installment payments covering the sale of real property, Sec. 4.106-3 of RR 16-2005 provides that: xxx xxx xxx "In the case of sale of real properties on the installment plan, the real estate dealer shall be subject to VAT on the installment payments, including interest and penalties, actually and/or constructively received by the seller." xxx xxx xxx From the above provision, it is clear that the basis for computation of the applicable VAT rate on sales of real property is when such payments are actually or constructively received by the seller. In cases where Sta. Lucia's clients already paid their monthly amortizations on installment sales before February 1, 2006, such payments will only be subject to 10% VAT. However, for monthly payments actually and/or constructively received by Sta. Lucia on or after February 1, 2006, such payments will be subject to 12% VAT, regardless of any prior monthly payments that were only taxed at the old 10% VAT rate. In cases where Sta. Lucia's sales of real property are on "deferred cash" basis, meaning the initial payments in the year of sale exceed 25% of the gross selling price, the transaction shall be considered as a cash sale and the entire selling price shall be taxable in the month of sale, in accordance with Section 4.106-3 of RR 16-2005. With respect to your third query, Section 105 of the same Tax Code provides that: the rule on the imposition of VAT shall apply to existing contracts of sale or lease of goods, properties or services at the time of the effectivity thereof. Thus, it is not necessary to amend the original Contracts to Sell to reflect any increase in the applicable VAT rate. AISHcD Furthermore, it is an elementary axiom in our jurisdiction that all existing laws are read into contracts in order to fix relations between parties. In fact, in the case of Tolentino vs. Secretary of Finance, et al. (G.R. No. 115455, Aug. 25, 1994), the Supreme Court held that: xxx xxx xxx "It is enough to say that the parties to a contract cannot, through the exercise of prophetic discernment, fetter the exercise of the taxing power of the State. For not only are existing laws read into contracts in order to fix obligations as between parties, but the reservation of essential attributes of sovereign power is also read into contracts as a basic postulate of the legal order. The policy of protecting contracts against impairment presupposes the maintenance of a government which retains adequate authority to secure the peace and good order of society." xxx xxx xxx From the foregoing, it can readily be seen that all pertinent laws with respect to an agreement between parties are automatically incorporated as part of any contract between them. It is not necessary to amend the terms of contracts to reflect the provisions of such laws in order to give them effect. This is particularly true in cases where taxation is the issue at hand. No less than the Supreme Court has declared that the Constitutional policy on the non-impairment of contracts may not be invoked against the sovereign power of the State to maintain itself through the exercise of the power of taxation. In this regard, the provisions of Section 105 of the Tax Code of 1997, RA 9337, RR 16-2005, and RMC 7-2006 covering the increase in the applicable VAT rate are all deemed as read into Sta. Lucia's Contracts to Sell with its clients and thus, have full force and effect even if they are not expressly stated or provided for in such contracts. Finally, Sec. 4.106-3 of RR 16-2005 provides that: "SEC. 4.106-3. Sale of Real Properties . Sale of real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business of the seller shall be subject to VAT. In the case of sale of real properties on the installment plan, the real estate dealer shall be subject to VAT on the installment payments, including interest and penalties, actually and/or constructively received by the seller. Sale of residential lot exceeding P1,500,000.00, residential house and lot or other residential dwellings exceeding P2,500,000.00, where the instrument of sale (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale or otherwise) is executed on or after July 1, 2005, shall be subject to 10% VAT." xxx xxx xxx It is evident that the ceiling provided under Sec 4.106-3 of RR 16-2005 only covers sales of real properties by taxpayers other than real estate dealers/developer's or lessors. Thus, sales of real property by Sta. Lucia, an entity regularly engaged in the business of developing and selling of such properties, are not covered under this ceiling and as such, these transactions will be subject to 12% VAT in accordance with the above provision. IDSaTE This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will 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