BIR Ruling [DA-340-98]

July 27, 1998 BIR RULING [DA-340-98] Centennary Holdings, Inc. JCS Building, 119 Dela Rosa St. cor. C. Palanca Legaspi Village, Makati Attention: Mr . Fernando C . Cojuanco Corporate Secretary Gentlemen : This refers to your letter dated May 27, 1998 stating that Centennary Holdings, Inc. (CHI) is planning to sell 300 hectares of land in Tarlac, Tarlac to Luisita Industrial Park Corporation (LIPCO); that under the terms and conditions of the Deed of Absolute Sale, LIPCO will pay CHI in five (5) equal installments (i.e., 20% of the total selling price) per year provided that CHI will transfer title to the property immediately upon execution of the Deed of Absolute Sale; and that the transfer of the certificate of title over the property to LIPCO immediately upon execution of the Deed of Absolute Sale is necessary because LIPCO plans to use it as collateral to secure funds with which to partly finance land development for the implementation of its industrial estates. cdti Based on the foregoing, you are requesting for confirmation of your opinion that the title to the property may be transferred from CHI to LIPCO upon execution of the Deed of Absolute Sale and that CHI is qualified to report the income realized from the transaction under the installment method. In reply, please be informed that pursuant to Section 49(B) of the Tax Code of 1997, the installment basis or method is allowed in the case of sale of realty where the initial payment does not exceed 25% of the selling price. The vendor may return as income from such transaction in any taxable year that proportion of the installment payments actually received in that year which the total profit realized or to be realized when the property is paid for bears to the total contract price. ( Sec. 176, Rev. Regs. No. 2) Since the initial payment to be made by CHI to LIPCO is only 20% of the total selling price, it is qualified to report the income it will realize from the transaction under the installment method. Pursuant to Revenue Regulations No. 1-90, as amended by Revenue Regulations No. 12-94, as last amended by Rev. Regs. No. 2-98, any sale, exchange or transfer of real property considered as ordinary asset by a corporation, which is habitually engaged in the real estate business as certified by the HLURB or HUDCC the selling price of which is over P2,000,000.00 shall be subject to a creditable withholding tax of 5% based on the gross selling price or the fair market value of the real property, whichever is higher, paid to the seller/owner. Revenue Regulations No. 2-98 covers all types of sale, whether cash sale, sale on installment basis and sale on a deferred payment basis, of the ordinary assets of a seller habitually engaged in the real estate business. Thus, sales on installment basis are subject to the creditable withholding tax under Revenue Regulations No. 2-98 based on their gross selling price or fair market value, whichever is higher. The Certificate Authorizing Registration (CAR) or a Tax Clearance Certificate, (TCL) as the case may be, is issued upon presentation by the seller of proof of actual full payment of capital gains tax/or by the proof of remittance of the buyer of the expanded withholding tax and documentary stamp tax due on the sale of real property. However, in sales on installment basis under Section 49 (B) of the Tax Code of 1997, the CAR or the TCL may be issued upon submission of the following: (1) Instrument of sale; (2) The withholding of tax payments with bank validation based on the gross selling price or fair market value of the property, whichever is higher, on installment payments made; (3) Evidence of payment of the documentary stamp tax due on the sale of the real property; (4) That a Notice of Tax Lien must be annotated at the back of the TCT to be issued in the name of the purchaser representing the balance of the creditable withholding payable on installments based on the gross selling price of the property or fair market value, whichever is higher; and (5) The CAR or the TCL must specifically state that the transaction is a sale on the installment basis; and that the creditable withholding tax based on the gross selling price or fair market value of the property, whichever is higher, is being paid also on the installment basis, if the buyer is a corporation or otherwise, engaged in trade or business, as in the instant case. aisadc This will serve as an authority for the Revenue District Officer of RDO No. 47, East Makati to issue a CAR or TCL on the aforesaid transaction upon presentation/submission of the aforesaid documents/proofs. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue