BIR Ruling [DA-325-05]

July 22, 2005 BIR RULING [DA-325-05] Section 49 (B); UN-013-2001 Dodwell Holdings, Inc . 7/F Pacific Star Building, Makati Avenue cor Gil Puyat Ave.,Makati City Attention: Atty. Reginaldo L. Hernandez Gentlemen : This refers to your letter dated March 17, 2005 requesting for a confirmation of your opinion that the execution of a Deed of Absolute Sale pursuant to an Agreement to Sell and Purchase is not subject to creditable withholding tax inasmuch as the seller has previously reported the entire gain on the transaction for taxation purposes. It is represented that on May 15, 1996, DM Consunji, Inc. (Seller),an engineering and general builder firm and contractor, and Dodwell Holdings, Inc. (Buyer) entered into an Agreement to Sell and Purchase covering five parcels of contiguous properties in Pasig and Cainta; that having received in 1996 P320 million (i.e.,more than 25%) out of the P675 million total consideration for the Buyer's proposed purchase of the subject 8.4-ha properties, the Seller then reported the entire amount of P675 million as part of the Seller's income for the taxable year ended December 31, 1996; that the Buyer made additional installment payments to fully pay the Seller from January 30, 1998 until October 31, 1998 amounting to P130.344 million (principal component of the purchase price) bringing the total received thus far by the Seller to P450.344 million; that no other income taxes were paid by the Seller for these additional payments received as obviously, the income tax due on the entire consideration had already been declared and paid for in 1996; that due to the Asian financial crisis in 1997, the proposed project for the subject properties was held in abeyance; that the Seller's and the Buyer's proposed sale of the subject properties was certainly not the only one affected by the downturn of the country's real estate sector, and a lot of proposed real estate deals involving raw land for development were likewise put on hold; that sometime in 2000, after seeing the economic situation had not significantly improved from 1998, the parties decided to consummate the sale for a portion of the 8.4-ha properties, instead of waiting for the economic situation to improve before consummating the proposed sale of the entire 8.4-ha.;that a Deed of Sale was executed on October 1, 2000 for two out of five land parcels (2.8 ha out of the 8.4 ha were conveyed to the Buyer);that the titles of these two land parcels were subsequently transferred to the Buyer and the Revenue District Officer of Cainta issued a Certificate Authorizing Registration for the sale of the said 2.8 ha portion without Dodwell remitting any CWT considering that the RDO had established that the Seller DMCI had. declared and paid the income tax due on the sale for the entire 8.4 ha during the taxable year 1996; that the parties convened again in 2002/2003 to discuss how the closure of the transaction for the now remaining 5.6 ha can be realized; that the parties has agreed to just split between them the remaining 5.6 ha (i.e.,a second 2.8 ha is now being proposed to be transferred to buyer (Dodwell) through the execution of a Deed of Absolute Sale for the consummation of the transfer of 2.8 ha to Dodwell. SaICcT In reply, please be informed that pursuant to then Section 37 of the 1977 Tax Code, as amended (now Section 43 of the Tax Code of 1997), " the net 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 taxpayer; but if no such method of accounting has been so employed, or if the method employed does not clearly reflect the income, the computation shall be made in accordance with such method as in the opinion of the Commissioner of Internal Revenue does clearly reflect the income. If the taxpayer's annual accounting period is other than a fiscal year, as defined in section twenty or if the taxpayer has no annual accounting period, or does not keep books, or if the taxpayer is an individual, the net income shall be computed on the basis of the calendar year ". On the other hand, then Section 42(b)(2) of the same Tax Code (now Section 49(B)(2)) provides that " in the case ...(2) of a sale or other disposition of real property, if in either case the initial payment do not exceed twenty-five percent of the selling price, the income may under regulations prescribed by the Secretary of Finance, be returned on the basis and in the manner above prescribed in this section. As used in this section the term "initial payments" means the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made ". Thus the taxpayer may, at his option report the income on installment sales either under the aforequoted Section 37 or Section 42(b)(2) of the 1977 Tax Code if the initial payment does not exceed twenty five percent (25%) of the selling price. Considering that the initial payment made by the buyer is more than 25% of the selling price (i.e. P320 million),the transaction is considered a "deferred cash sale not an installment plan" or simply called a "deemed cash sale" transaction in which case, the seller's income derived therefrom shall be taxable entirely in the year of sale. 1 Clearly, this reporting of income from the deferred cash sale is sanctioned by Section 37 of the 1977 Tax Code, as amended. Further, the reporting of cash sale transaction and the payment of tax based on the full amount of the actual consideration or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1977 (then Sec. 16(e)) in the year of sale effectively complies with the rule requiring the withholding of CWT (whether classified as ordinary or capital assets) by corporations consummated after January 1, 1990 2 based on whichever is higher of the "selling price" or fair market value determined in accordance with Section 6(E) (BIR Ruling No. 019-96). In fine, since the income from such transaction has already been reported by the seller in the year of sale, the buyer shall no longer be required to withhold any creditable expanded withholding tax on his succeeding payments considering that the tax corresponding thereto has already been settled in the year of the sale, as in the instant case. It was noted however, that although the entire selling price/income has been reported by DM Consunji, Inc. in 1996, the corresponding instrument/document which would prove the consummation of the transaction it had with the buyer was not yet executed as of the time of recognition of the entire income from deferred sales. ACIDSc As consistently held by this Office, it is the execution of a Deed of Absolute Sale which would prove the consummated transaction between the seller and the buyer. And for purposes of taxation, the execution thereof is a taxable event. Thus, in the instant case, the Deed of Absolute Sale executed between DM Consunji, Inc. and Dodwell is merely a proof of a previous consummated transaction that the parties so had in 1996 for which the entire income from the said sale has been returned for income tax purposes in the year DM Consunji, Inc. has reported the transaction as cash sale. Accordingly, the subsequent execution of the Deed of Absolute Sale pursuant to an Agreement to Sell and Purchase by DM Consunji, Inc. in favor of Dodwell Holdings Inc. is not subject to CWT nor to any surcharge/interest inasmuch as the former has previously reported the entire gain in the transaction and the corresponding income tax due thereon paid. However, it shall be subject to the documentary stamp tax in accordance with Section 196 of the Tax Code of 1997 based on the actual consideration paid or selling price or fair market value of the property whichever is higher at the time the amount was entirely declared for income tax purposes, or in 1996. 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, this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG OIC-Commissioner of Internal Revenue Footnotes 1. BIR Ruling No. 078-94. 2. RMC No. 7-90 clarifying pertinent provisions of Rev. Regs. No. 12-89, as amended by Rev. Regs. No. 1-90.