BIR Ruling [DA-423-03]

November 21, 2003 BIR RULING [DA-423-03] 106 #060-90 Atty . Joaquin E . San Diego 28 N. Domingo Street, New Manila Quezon City Gentlemen : This refers to your letter dated July 18, 2003 requesting for confirmation of your opinion that the Deeds of Absolute Sale to be executed by the University Center Foundation, Inc. in favor of your clients, the Lourdes Rosario Realty Development Corporation and Maurillo L. Garcia, are not subject to creditable withholding tax and to the value-added tax. It is represented that the University Center Foundation, Inc. (UCF Inc.) is a non-stock, non-profit foundation that offers supplementary educational programs for university students. In 1989, it purchased a 792.29 square meter lot along Scout Albano Street (now Eugenio Lopez, Sr. Avenue) for the construction of its student center and youth club in Quezon City, a four (4) storey building named "Timog Building". The whole building was made into a condominium. The first and second floors were divided into office units to be sold to cover the cost of the third and fourth floors. On August 31, 1989 UCF Inc. executed a contract to sell in favor of Lourdes Rosario Realty Development Corporation (Lourdes Corporation) and Maurillo Garcia over the second floor condominium units Unit 2-1, 2-2 and 2-3 for P656,000.00 and P878,000.00, respectively. Thirty percent (30) of the purchase price were paid upon the execution of the foregoing contracts. In its income tax return for taxable year 1989, UCF Inc. declared as part of gross income the entire purchase price of the condominium units and paid the income taxes due. Lourdes Corporation and Maurillo L. Garcia have now fully paid the contract price and intends to transfer the title to the foregoing condominium units in their names respectively. Based on the foregoing facts, it is your position that the Deeds of Absolute Sale to be executed in their favor is subject to documentary stamp tax but not to the value-added tax considering that the sale took place prior to the effectivity of the value-added tax law. In reply, please be informed that this Office finds merit in your position that the deeds of sale is not subject to the value-added tax but it is subject to documentary stamp tax plus surcharge and interest from 1989, the year the deeds were executed. I. Whether or not the Sale is subject to Documentary Stamp Tax. In BIR Ruling No. 060-90 dated April 17, 1990, this Office ruled that the documentary stamp tax should be paid at the time the taxable document is executed, to wit: "In reply, please be informed that the assessment of P581.25 represents the civil penalty of 25% for failure to pay the documentary stamp tax imposed under Section 196 of the Tax Code within the time prescribed under Section 173 of the same Code on the aforesaid Deed of Sale executed in your favor on January 8, 1990. Under said Section 173, documentary stamp tax shall be paid at the time the "act is done or transaction had." The implication is that the documentary stamp tax on the taxable document shall be paid at the time it is issued or executed. Accordingly, since the aforesaid Deed of Sale was executed on January 8, 1990, the documentary stamp tax should have been paid on or about said date. aTSEcA Such being the case, and inasmuch as there was in fact no payment of the tax at the time fixed by law, there was failure to pay the same, in which case, the 25% civil penalty should be paid, in addition to the documentary stamp tax due thereon, pursuant to Section 248(d) of the Tax Code." As the initial payments in the case under consideration exceeded 25% of the purchase price, the sales shall be considered as cash sales. Accordingly, the documentary stamp tax should have been paid in 1989 when the Deeds of Absolute Sale were executed. As the documentary stamp tax due on the said deeds of sale were not paid, the 25% surcharges and 20% interest should be paid in addition to the tax due. II. Whether or not the Sale is subject to the Value-Added Tax. The sale of the foregoing condominium units is not subject to value-added tax. It is a well-settled rule that the law or BIR issuance at the time of the transaction should be applied. Under Executive Order (E.O.) No. 273 (Old VAT Law) the sale of property is not subject to value-added tax. The imposition of VAT on the sale of real property was promulgated under Republic Act (RA) No. 7716 (Expanded VAT), as implemented by Revenue Regulations No. 7-95, "Consolidated Value-Added Tax Regulations". Considering that the sales under consideration were consummated under the old VAT Law, the same are not subject to value-added tax. II. Whether or not the Sales are subject to the Expanded Withholding Tax Generally, income from the sale of real property may be reported either on installment basis, or on the deferred payment basis. The sale of real property is considered to be on installment basis if the initial payments in the year of the sale do not exceed 25% of the selling price. On the other hand, if the initial payments in the year of sale exceed 25% of the selling price, the sale is deemed to be on deferred payment basis (Section 43 of the Tax Code as implemented by Section 175 and 176 of the Income Tax Regulations.). If the sale is on the installment basis, the seller should 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 (Section 176 of Income Tax Regulations, BIR Ruling No. 161-84 dated September 26, 1984). If the sale is on the deferred payment basis, the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash (Section 177, Income Tax Regulations). The taxable gain returnable during the year of sale is the difference between the selling or contract price and the cost of the real property determined in accordance with Section 34(a) and (b) of the Tax Code, as amended, even though the entire purchase price have not been actually received (BIR Ruling No. 422-88 dated August 31, 1988). As represented, the University Center Foundation, Inc. treated the sales as cash transactions and reported receipt of the entire selling price for the year 1989 and paid the corresponding income taxes for that year. Accordingly, the Deeds of Absolute Sale to be executed by the University Center Foundation, Inc. in favor of Lourdes Rosario Realty Development Corporation and Maurillo L. Garcia, are not anymore subject to creditable withholding tax. This ruling is issued on the basis of the foregoing facts as represented. However, if upon investigation, it is disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group