BIR Ruling [DA-335-06]

May 22, 2006 BIR RULING [DA-335-06] RR No. 2-98; 6-2001 & 17-2003 Mr. Jonathan T. Tomagan 775-N Sevilla Street Binondo, Manila S i r : This refers to your letter dated September 15, 2005 stating that you bought a residential lot located at Green Valley Subdivision, San Nicolas, Bacoor, Cavite through a public auction made by the United Coconut Planters Bank (UCPB) on June 30, 2004; that the purchase price of the above-mentioned property is P126,000.00, with a term of payment as follows: 1) Down-payment of P25,200.00 payable on or before execution of the Contract to Sell; 2) The remaining balance of P100,800.00 shall be paid in 120 monthly installments plus interest computed at 11% per annum fixed for 10 years commencing on July 9, 2004; that the aggregate installments made for the duration of six (6) months beginning July 2004 up to December 2004, exclusive of interest, per schedule of payment attached to the Contract to Sell is P2,836.21; that the zonal value of the subject property is P937,500.00; that UCPB included in its computation of the payments made in the year of sale the corresponding interest imposed for the six months period from July to December 2004 thereby increasing the amount of payments made resulting in the classification of the subject sale transaction as a "cash basis" sale; that it is provided in the Contract to Sell that the creditable withholding tax (CWT) based on the purchase price shall be the liability of the vendor and that any CWT based on any amount in excess over the purchase price shall be for the account of the vendee; that in a letter dated August 18, 2005, UCPB requested you to pay the amount of P48,690.00 as your share or liability in the payment of the CWT; that accordingly, UCPB has already paid the CWT, hence, it is now collecting from you your share in the said burden as stated in the Contract to Sell; that UCPB is compelling you to settle within five (5) days starting from September 13, 2005, the CWT due on the transaction otherwise it will take necessary actions as stated in the Contract to Sell; that you disagree with the computation made by UCPB as well as the period within which the CWT should be paid; that it is your contention that since you are an individual not engaged in trade or business and that the periodic installment payments you made in the year of sale, exclusive of interest, do not exceed 25% of the selling price, no CWT shall be withheld in the year of sale but rather the withholding of tax should be made on the last installment or installments to be paid to UCPB until the CWT is fully paid. Based on the foregoing, you are requesting confirmation of your opinion that since you are an individual not engaged in trade or business and that the periodic installment payments you made in favor to UCPB in the year of sale do not exceed 25% of the selling price, the CWT shall be withheld only at the last installment or installments to be paid to UCPB until the CWT is fully paid in accordance with Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended by RR No. 6-2001, and further amended by RR No. 17-2003. In reply, please be informed that Section 2.57.2(J) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001, and further amended by RR No. 17-2003, provides as follows: "(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange, or transfer of real property classified as ordinary asset. . . . xxx xxx xxx If the buyer is an individual not engaged in trade of business, the following rules shall apply: (i) If the sale is a sale of property on the installment plan (i.e., payments in the year of sale do not exceed twenty five percent (25%) of the selling price ), no withholding is required to be made on the periodic installment payments. In such a case, the applicable rate of tax based on the gross selling price or fair market value of the property at the time of the execution of the contract to sell, whichever is higher, shall be withheld on the last installment or installments immediately prior to such last installment, if the last installment is not sufficient to cover the tax due, to be paid to the seller until the tax is fully paid." (Emphasis supplied) Gross selling price is defined under Section 2.57.2(J) of RR No. 2-98, as amended by RR No. 6-2001, as the consideration stated in the sales document or the fair market value determined in accordance with Section 6(E) of the Tax Code, whichever is higher. The term "selling price" as used in the regulations is not to be construed to be limited only to the amount so stated as consideration in the document of sale. Thus, if in the Contract to Sell it is agreed that the buyer will assume some liabilities, i.e., taxes and other charges, the foregoing shall be considered in the computation of the actual consideration in the sale transaction. On the other hand, the term "initial payments" of "payments" as used in the above cited regulations and as defined under Section 49(B) of the 1997 Tax Code, 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". Further, in RR No. 17-2003 the term "consideration" is clearly defined as follows: "The term 'consideration' refers to the selling price exclusive of interest. Interest earned as an incident of installment payment, if any, shall be subject to the ordinary income tax rate." From the foregoing, it is understood that the actual selling price of the subject property comprises the aggregate of the amount of the purchase price as stated in the document of sale and the balance of the CWT to be assumed by you, as the buyer, with the exclusion of the 11% interest per annum charged in the remaining balance of the purchase price that is amortized on a monthly basis for 120 monthly installments. Thus, for purposes of determining whether the subject sale transaction is on a "cash basis" or on an "installment basis" the following computations are hereby made: Actual Payments Made in the Year of Sale Actual Selling Price 1) Down payment P25,200.00 Purchase Price P126,000.00 2) Total installment payments made for the six Assumed CWT P48,690.00 months period from July to December 2004 (The assumed CWT was computed P8,331.12 breakdown as follows: by UCPB as follows: Principal Interest P56,250.00 CWT based on the 477.18 911.34 gross selling price 451.26 937.26 Less, 455.47 933.05 489.69 898.83 P7,560.00 CWT based on the 464.30 924.22 purchase price 498.31 890.21 2,836.21 5,494.91 P48,690.00 Assumed CWT Total Payments = P33,531.12 Total Selling Price = P174,690.00 Twenty-five percent (25%) of the selling price is equal to P43,672.50 . Comparing the total payments you made in the year of sale with the amount representing the 25% of the selling price, the sale made by UCPB in your favor, therefore, is deemed as a sale on installment basis. Consequently, your opinion that you are required only to make the withholding of the CWT only on the last installment or installments immediately prior to such last installments is hereby confirmed. This letter therefore serves as your authority to deduct and withhold the CWT on the last installment or installments immediately prior to such last installment, if the last installment is not sufficient to cover the tax due to be paid to UCPB until the tax is fully paid. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service