BIR Ruling [DA-319-99]

May 21, 1999 BIR RULING [DA-319-99] San Miguel Corporation 40 San Miguel Avenue Mandaluyong City Attention: Atty. P. Clinton L. Laudencia, Jr. Tax Lawyer Gentlemen : This refers to your letter dated October 9, 1997, requesting in behalf of your subsidiary, Legacy Homes, Inc. (LHI), for a ruling confirming your opinion that the documentary stamp tax becomes due not on the execution of "Contract to Sell" of real property but only upon the execution of the Deed of Absolute Sale; that payment of income tax on the sale of real property by the seller is in substantial compliance with the creditable withholding tax requirement; that the Revenue District Office No. 41, be instructed to immediately issue the corresponding tax clearance; and that LHI be allowed to apply the creditable withholding tax paid on the transactions to its 1997 income tax indebtedness. It is represented that LHI is a domestic corporation with principal address at 24th Floor, SMPPI Center, St. Francis St., Mandaluyong City; that it is primarily engaged in the development and marketing of real properties for residential purposes; that one of its projects is the residential subdivision Primavera Hills Subdivision which is located in Cebu City; that in 1995, most of the subdivision's lots were committed to be sold to individual buyers; that upon full payment by the buyers, LHI executed "Deeds of Absolute Sale"; that on April 15, 1996, LHI declared in its 1995 Income Tax Return the gross selling prices of the lots covered by the contracts to sell and paid the corresponding income taxes; that although LHI is fully aware of the fact that it is the sole responsibility of the buyers to withhold taxes stipulated in the contract to sell and pursuant to Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, it paid and remitted to the BIR, for and in behalf of the buyers, the amount corresponding to the creditable withholding taxes and the documentary stamp taxes due on the transactions; that LHI paid the said taxes upon execution of the deeds of absolute sale, most of which were in 1997; that this is to facilitate the procurement of the tax clearance for the transfer of the title to the buyers who are mostly from Cebu City; and that notwithstanding the above, BIR Revenue District Office No. 41 refused to issue the tax clearance and has threatened to make a proposed assessment imposing penalties for late payments on the ground that the documentary stamp tax and the creditable withholding tax should have been paid at the time the "contract to sell" was executed and not on the execution of the "deed of sale". In reply, please be informed that Section 163 of the Revised Documentary Stamp Tax Regulations reads: "SEC. 163. Contract for sale of land . If contract for sale of land vests title on the land and improvement thereon, it would be subject to taxation as a conveyance. If it does not vest title but contains only certain provisions for the giving of a deed in the future upon compliance with conditions precedent, it is not subject to tax . (Emphasis supplied)" From the above-quoted provision of Section 163 of the Revised Documentary Stamp Tax Regulations, it is clear that contract to sell is not subject to the documentary stamp tax imposed under then Section 196 of the Tax Code, as amended, since the same does not vest title and contains provisions for the giving of a Deed in the future upon compliance with condition precedents, usually upon full payment of the contract price. Accordingly, your opinion that the documentary stamp tax imposed under then Section 196 of the Tax Code, as amended, becomes due not on the execution of contract to sell of real property but only upon the execution of the Deed of Absolute Sale, is hereby confirmed. However, the notarial acknowledgment on the said contract to sell is subject to the documentary stamp tax imposed under then Section 188 of the Tax Code, as amended. Moreover, since LHI, for and in behalf of the buyers of its residential lots in its Primavera Hills Subdivision Project in Cebu City, paid and remitted to this Office the creditable withholding taxes and documentary stamp taxes due on said transactions upon execution of the deeds of absolute sale, most of which were executed in 1997, inorder to facilitate the procurement of the corresponding tax clearance for the transfer of title in the name of the buyers thereof, your opinion that LHI's payment of the aforesaid taxes in 1997 is in substantial compliance of the withholding of creditable income tax requirement under Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-94, implementing then Section 50(b) [now Section 57(B)] of the Tax Code, as amended, is likewise hereby confirmed. Such being the case, the concerned RDO can now issue the corresponding Certificate Authorizing Registration (CAR), for non-computerized Revenue District Office or Tax Clearance Certificate (TCL), for computerized Revenue District Office, as the case may be, without the buyer being required to pay the creditable withholding tax on said sale transactions. (BIR Ruling No. 179-96 dated July 24, 1996) Furthermore, LHI may apply its payment of the creditable withholding tax for the year 1997 on consummated sale transaction in its aforesaid project to its 1997 income tax liability. aESTAI 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, (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal & Enforcement Group)