BIR Ruling [DA-451-03]

December 5, 2003 BIR RULING [DA-451-03] 2-98 DA-093-2001 and DA-445-98 Asiatic Development Corporation Asiatic Bldg., Phoenix Sun Business Park E. Rodriguez, Jr. Avenue, Libis Quezon City Attention: Mr. Paul H. Tanchi General Manager Gentleman : This refers to your letter dated June 23, 2003 requesting for a ruling on whether a Contract to Sell and a Deed of Assignment executed by and between Asiatic Development Corporation (ADC)/Basic Housing Solutions, Inc. (BHSI the Developers), Home Development Mutual Fund (HDMF), and a client/unit purchaser who is an HDMF member are subject to the creditable withholding tax under Revenue Regulations No. 2-98. It appears that ADC and BHSI are developers accredited by HDMF under its Contract-to-Sell (CTS) Program (Pag-ibig Homelending via the Modified Contract-to-Sell Scheme for Developer Accounts under HDMF Circular No. 176); that the following features are provided under the said scheme. 1. Housing loan applications are delivered to Pag-ibig/HDMF, documented by a CTS executed by and between ADC/BHSI and its buyers who are Pag-ibig/HDMF members; 2. HDMF releases housing loans secured by a CTS on the residential property and a Deed of Assignment in favor of HDMF to be annotated on the title of the property; 3. Title transfer is not a requisite in the granting of the loan application and only after a period of two (2) years from date of loan take-out and after receipt of formal notification from HDMF to convert the security of eligible accounts from a CTS to a Real Estate Mortgage (REM) that a title is transferred. In reply thereto, please be informed that Section 163 of Regulations No. 26, otherwise known as the Documentary Stamp Tax Regulations, provides: "SEC. 163. Contract for sale of land . If contract for the sale of land vests title on the land and improvements 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." The execution of a Contract to Sell by the developer in favor of a client/unit purchaser does not vest on the latter title over the subject property. Likewise, the execution of a Deed of Assignment by the developer in favor of HDMF, of the property subject to said Contract to Sell, does not vest title to the HDMF nor to a client/unit purchaser, since the purpose of executing said deed and annotating the same in the title is just to secure the housing loan contracted by a client/unit purchaser with HDMF. The operative act, therefore, in the perfection/consummation of a contract of sale of real property, which ultimately vests title to the vendee/transferee is the execution of the Deed of Absolute Sale. aTcHIC Such being the case, the execution by ADC/BHSI of a Contract to Sell in favor of a client/unit purchaser and subsequently its execution of a Deed of Assignment in favor of HDMF, in order to secure the housing loan of a client/unit purchaser, are not subject to the creditable withholding tax under Section 2.57.2 (J) of Revenue Regulations No. 2-98, implementing Section 57(B) of the Tax Code of 1997, nor to the documentary stamp tax under Section 196 of the same Code. However, the notarial acknowledgments of both documents are subject to the documentary stamp tax of P15.00 pursuant to Section 188 of the Tax Code of 1997. (BIR Ruling No. DA-445-98 dated October 5, 1998) On the other hand, upon execution by ADC and BHSI of a Deed of Absolute Sale in favor of a client/unit purchaser, which will take place not later than twenty-four (24) months from the date of a loan take-out, and after the CTS account of the client/unit purchaser shall have qualified into a Real Estate Mortgage (REM), a creditable income tax shall be withheld on the gross selling price or total amount of consideration or its equivalent, paid for the said sale of realty in accordance with Section 2.57.2 (J) of Revenue Regulations No. 2-98. Moreover, the above Deed of Absolute Sale is subject to the documentary stamp tax under Section 196 of the Tax Code of 1997, based on the consideration or value received or contracted to be paid for such realty or on its fair market value determined in accordance with Section 6(E) of the same Code, whichever is higher. Furthermore, the Real Estate Mortgage/Loan Agreement executed by and between the HDMF and the client/unit purchaser is subject to the documentary stamp tax under Section 195 of the same Code. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained 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 G. BUAG Deputy Commissioner Legal and Inspection Group