The Regalia Group Corporation

May 16, 2008 BIR RULING [DA-295-08] RR Nos. 2-98 & 8-98; 078-94; 019-96 The Regalia Group Corporation 150 P. Tuazon Avenue Cubao, Quezon City Attention: Artemio Buquiren, Jr. EVP-Operations Gentlemen : This refers to your letter dated May 6, 2008, requesting a confirmation of your opinion that BIR Ruling No. DA-620-2004, which applied to your sales in 1998, 1999, to 2003 and onwards would likewise apply equally to your sale of condominium units during the years 2005, 2006, 2007 and onwards under essentially the same facts and circumstances as those presented in obtaining aforesaid ruling. However, we are treating your letter as a request for a repeat ruling for the above taxable years. Documents submitted disclosed that the Regalia Group of Companies is a corporation duly organized and existing under the laws of the Philippines, with principal office address located at the Regalia Park Towers, 150 P. Tuazon Ave., Cubao, Quezon City, Philippines; that it is engaged in the business of developing and constructing condominium units; that sometime in 1997, Regalia has developed and constructed one condominium project in P. Tuazon St., Cubao, Quezon City, known as "The Regalia Park Tower"; that in the same year, Regalia was able to sell one hundred forty four (144) condominium units to various individuals on deferred payment sale not on installment basis; that the remaining condominium units were sold from January 1, 1998 and onward; that in almost all of these sales, the buyers' initial payments in the year of sale exceeded 25% of the selling price; that in all instances, the income from these sale transactions has been duly recorded and reported by Regalia in its income tax returns in accordance with its accounting method employed and that the periodic taxes on the said income were already paid; that in the meantime, some of these individual buyers continue to pay their monthly installments, however, they do not withhold any creditable expanded withholding tax on their respective payments of the amortization to Regalia, for which the BIR had issued Ruling No. DA-620-2004 on December 07, 2004, to this effect. However, in years 2005, 2006 and 2007, you were able to sell nine (9) out of the remaining unsold units, for which you believed that you don't need another ruling anymore since DA-620-2004 has already included the years ONWARD from taxable year 2003, which means further sales ahead (2004-2008 onwards). In reply, please be informed that the individual installment buyers of condominium units of Regalia Park Towers in 2005, 2006 and 2007 and onwards are not required to withhold the creditable expanded withholding taxes on their respective periodic payments of amortization for the purchase of condominium unit on deferred payments not on installment plan considering that the corresponding income on the said sales has already been reported by Regalia in the year of sale. Section 43 of the Tax Code of 1997 prescribed that the taxpayer's taxable income "shall be computed upon the basis of [the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayers . . . ." Section 49 of the same Tax Code further provides that income derived from sale of real property on installment basis, "may", under rules and regulations prescribed by the Secretary of Finance, upon recommendation of the Commissioner, be reported for income tax purposes in proportion to the installment payments actually received in that year, which the gross profit realized or to be realized when payment is computed, bears to the total contract price. Section 49 was lifted from the old Federal Income Tax law of the United States. In previous BIR rulings, this Office has applied the interpretation of the US court on the subject matter, the provision being of American origin. According to the U.S. Jurisprudence, the said law on installment reporting of income from deferred sale is a mere option or privilege granted by law to the seller (MERTENS 15.05). Thus, if the taxpayer-seller does not opt to report his income from deferred payment sale transaction on installment basis as provided under Section 49 of the Tax Code, then he may report the same in accordance with the accounting method regularly employed in keeping his books of accounts as prescribed in Section 43 of the same Code. This rule is apparent and patent in Section 49 of the Code which used the word "may" vis--vis reporting of income from deferred or installment payment sales, regardless of whether or not the buyer's initial payments in the year of sale exceed or do not exceed 25% of the selling price. The subject matter of Section 49 regarding sales on "installment plan" and "deferred payment sales not on the installment plan" has long been clarified by Section 175 of Revenue Regulations (RR) No. 2 and been discussed in our previous ruling issued in Regalia's favor. Hence, we will proceed to rule on your request without restating said Section 175 of RR No. 2. Based on your representation, from year 1998 onwards, including 2005, 2006 and 2007, almost all of the remaining condominium units of Regalia Park Power were sold to individuals on a "deferred payment sale" or "cash basis". This Office has previously ruled that the "initial payments in an amount exceeding 25% of the selling price" is the criterion in ascertaining that the transaction is a "cash sale", otherwise, it is a "sale on installment". Pertinent portion of Section 2.57.2 (J) of RR No. 2-98, as amended by RR 8-98, provides for the withholding of expanded creditable withholding tax on sales of real property on installment basis, to wit: "Where the consideration or part of thereof is payable on installment, no withholding of tax is required to be made on the periodic installment payments where the buyer is an individual not engaged in trade of business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld on the last installment or installment to be paid to the seller. "However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and withheld by the buyer on every installment." (Emphasis supplied) This provision presupposes that the mode of payment is on installment plan, i.e., when the payments made by the purchaser during the year of sale do not exceed 25% of the selling price. It also provides that when an individual buyer is not engaged in trade or business and the sale is on installment plan (the payments in the year of sale do not exceed 25% of the selling price), no periodic withholding tax is required to be made on the periodic installment. In such case, the applicable rate of tax based on the gross selling price or fair market value of the property, whichever is higher, shall be withheld in the last installment. In the instant case, since the covered transactions were recorded as sales on "deferred payment cash basis" the foregoing rules will not apply considering that almost all of the buyers are individuals not engaged in trade or business. Rather, this Office hereby reiterates previous BIR rulings wherein the CIR has ruled that, "in case of sale of real property on installment plan, if the buyer's initial payments in the year of sale exceed 25% of the selling price, the transaction shall be considered 'cash sale', in which case, the seller's income from the sale transaction shall be taxable entirely in the year of sale. Considering that the said income had already been reported by the seller in the year of sale, the buyer was no longer required to withhold any creditable expanded withholding tax on his payments of amortization". However, where the buyer is engaged in trade or business, the foregoing provision of Section 2.57.2 (J) of RR 2-98, as amended by RR 8-98 is required to be applied. Therefore, the buyer on "cash basis" (deferred-payment sale not on installment plan) shall withhold the appropriate amount of tax from the initial payment based on the higher of the gross selling price or fair market value of the property determined in accordance with Section 6 (E) of the Tax Code. The individual buyers are not liable to pay any deficiency expanded withholding tax on their payments of amortization nor any surcharge or interest for their non-withholding thereof considering that there is yet no implementing Revenue Regulations promulgated by the Secretary of Finance concerning "Deferred Payment Sales not on Installment Plan". As earlier discussed, sale on "deferred payment not on the installment plan" is treated as "cash sale". In short, although there is no actual full payment yet and the balance of the gross selling price is made payable in succeeding periodic installments by the buyer, from the point of view of the seller, where the initial payments collected in the year of sale exceeded twenty-five percent (25%), the entire amount of the gross selling price is accrued and reported in the year of sale. Thus, "deferred payment sales" to individual buyers not engaged in trade or business were deemed to have been subjected to creditable withholding tax in the year initial payments have been made. Necessarily, the income tax of the seller in the said year of sale shall be fully paid based on the gross selling price or the total amount of consideration or the FMV, whichever is higher pursuant to Sec. (E) of the 1997 Tax Code. Hence, the subsequent installment payments and the so-called "last installment payments" beyond the year of the sale i.e. , 2005, 2006, 2007, in the instant case, and onward shall already be exempt from the creditable withholding tax. Accordingly, since Regalia has treated the sales of Regalia Park Tower units in the aforementioned years as "cash sales" and the income therefrom have been accrued and already reported in the corresponding year of sale (which were all prior to the "last installment payments" paid by the buyers) and the taxes thereon already paid, the individual buyers not engaged in trade or business are no longer required to withhold the expanded tax on their final payments pursuant to aforecited Sec. 2.57.2 (J) of RR 2-98, as amended by RR 8-98. Consequently, individual buyers are not liable to pay any deficiency expanded withholding tax on their periodic and last payments of amortization not to any surcharge or interest for their non-withholding thereof considering that there is yet no implementing Revenue Regulations promulgated by the Secretary of Finance which covers "Deferred Payment Sales not on Installment Plan" to individuals not engaged in trade or business. However, for purposes of issuing a tax clearance on each sale, the RDO having jurisdiction over Regalia should determine that the income from such sale has in fact been recognized in full. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclose that the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service