BIR Ruling [DA-459-04]

August 30, 2004 BIR RULING [DA-459-04] Sec. 196; RR 2-98, as amended by RR 8-98 112-99; 013-2001 ESLA Land Developers, Inc . Unit 233 Chateau Verde Condominium Atis Corner Kaimito Sts. Valle Verde I, E. Rodriguez Jr. Ave. 1604 Pasig City Attention: Ms . Priscilla P . Sy Manager Gentlemen : This refers to your letter dated November 13, 2003 requesting for a ruling on the following: "1. What is the basis of the computation of documentary stamp tax to be paid upon transfer Selling Price or Zonal Valuation. "2. If the Seller has already declared the sales in its Financial Statements prior to the transfer of the property and has paid the income taxes due thereon for the year, can it be exempted from the payment of the creditable withholding taxes? It is represented that, in reference to the sales of real properties of ESLA Land Developers, Inc. for years ending December 31, 1995 to 1999, the Corporation has declared the entire sales for the year based on the selling price; that it has paid the corresponding income taxes due thereon for each and every year the transaction was done; that the individual buyers not engaged in trade or business, of the aforesaid properties did not withhold and pay the creditable withholding taxes on the said purchases; and that, in support of your request, you furnished this Office a copy of the Audited Financial Statements of ESLA Land Developers, Inc. and the Income Tax Returns filed and taxes paid for the years thus mentioned. BIR REPLY I. On the computation of the documentary stamp tax Pursuant to Section 196 of the Tax Code of 1997, a documentary stamp tax is imposed on the transfer of realty based on the consideration contracted to be paid for such realty or its fair market value determined in accordance with Section 6(E) of the same Tax Code, whichever is higher at the rate of P15.00 for every P1,000, or a fraction thereof. It is noted, however, that while the transactions were reported on deferred payment basis (cash sale) for years 1995 to 1999, ESLA Land failed to execute the corresponding deed of sale for each transaction. The presumption is that the corresponding deed of sale is not forthcoming until after the contracted price shall have been fully paid. As prescribed in Revenue Memorandum Circular No. 45-88, the time of accrual of the documentary stamp tax liability on the Deed of Sale shall be at the same time such act is done or transaction had. Consistent thereof, this Office has ruled that the execution of the Deed of Absolute Sale serves as a proof of the completion of the transaction so had. Such being the case, the documentary stamp tax shall attach at the time of the execution of the Deed of Absolute Sale 1 computed based on the gross selling price or zonal value of the property, whichever is higher, pursuant to the aforecited Section 196 of the Tax Code of 1997. II. On the liability of individual buyers not engaged in business to withhold the creditable expanded withholding tax when the transaction is a deferred payment sale not on installment plan (cash sale) In BIR Ruling DA-149-03, this Office held that rules obtaining at the time of the sales should apply. It is noted that there were sales made prior to the effectivity of the Tax Code of 1997, i . e ., from 1995 to 1997, as well as sales made during the effectivity of the present Tax Code, i . e ., from 1998 and 1999 . For sales made prior to the effectivity of the Tax Code of 1997, we apply Revenue Regulations (Rev. Regs.) No. 1-90, as amended (now Section 2.57.2(J) of Rev. Regs. No. 2-98, as amended by Rev. Regs. 8-98), the pertinent portion of which provides as follows, to wit: "Where the consideration or part thereof is payable on installment ,no withholding of tax is required to be made on the periodic installment payments where the buyer is an individual not engaged in trade or business. In such a case, the applicable rate of tax based on the entire consideration shall be withheld on the last installment or installments to be paid to the seller. " However, if the buyer is engaged in trade or business, whether a corporation or otherwise, the tax shall be deducted and withheld by the buyer on every installment ." (Emphasis supplied.) This provision presupposes that the mode of payment is on an installment plan , i . e .,when the payments made by the purchaser during the year of sale do not exceed 25% of the selling price .Likewise, the obligation to withhold from installment payments arises only where the buyer is engaged in business .Otherwise, if the buyer is an individual who is not engaged in trade or business and the sale is on the installment plan, i . e .,the payments in the year of sale does not exceed 25% of the selling price, no withholding of tax is required to be made on the periodic installment .In such case, the applicable rate of tax based on the gross selling price or total amount of consideration shall be withheld on the last installment. There is no question, however, that the transactions from 1995 to 1999 were duly reported by ESLA Land as "cash sales." [It is hereby noted that the gross sales indicated in the Audited Income Statement for the applicable period corresponds to the total net selling price ( i . e .,gross selling price net of VAT) of properties sold on a deferred payment cash basis.] Further, as per list of buyers furnished to this Office, except for one (1) corporate buyer, the subject buyers of the condominium units are individuals not engaged in trade or business. DTAHSI Considering this, if the sale is on "cash basis" (or is a "deferred-payment sale not on installment plan"), i . e .,the initial payments in the year exceed 25% of the selling price, the buyer shall withhold the tax based on the gross selling price or total amount of consideration on the first installment. The foregoing rule shall also apply in case the buyer is a corporation, in which case, it is required to withhold the appropriate amount of tax on each installment payment if the transaction is on the installment plan, and from the initial payments based the gross selling price or total amount of consideration or its equivalent paid to the seller, if the sale is a deferred payment sale not on the installment plan (cash sale). Since the initial payments collected in the year of sale exceeded twenty-five percent (25%),and the amount of the entire sales were accrued and reported by ESLA Land in its Audited Financial Statements for the particular year covered from 1995 to 1997, the transactions fall within the purview of "deferred-payment sales not on the installment plan," hence, withholding of the tax should have been made in the year of sale, i . e .,from year 1995 to 1997 when the initial payment exceeding 25% of the selling price was made. Necessarily, the income tax of the seller in the said year of sale shall be fully paid based on the gross selling price or the total amount of consideration or its equivalent paid to the seller. In view of the fact that ESLA Land has reported the entire gross selling price as income in the year of sale for each year mentioned and the corresponding taxes due thereon were accordingly paid, in the absence of specific regulations which constitute an individual buyer not engaged in trade or business as duly authorized withholding agent for the government, this Office is of the opinion that since the sale is wholly taxable to the seller 2 in the year of sale, the buyer is no longer required to withhold any creditable expanded withholding tax on his subsequent payments of amortization pursuant to then Revenue Regulations No. 1-90 (now Sec. 2.57.2(J) of Revenue Regulations (Rev. Regs.) No. 2-98, as amended by Rev. Regs. 8-98). 3 Accordingly, since the sale is "deferred payment sale" the so-called "last installment payment" shall already be exempt from the creditable withholding tax. Consequently, the individual buyers on deferred installment plan (or "cash sale") shall not be liable to any deficiency expanded withholding tax on their payments of amortization (or on the last installment payment) nor to any surcharge or interest for their non-withholding of the tax on any of their subsequent periodic installment payments because the income on these transactions has already been reported and the tax thereon had been paid, making the withholding tax, a procedure for tax collection, utterly unnecessary. Finally, for sales of real properties made during the effectivity of the 1997 Tax Code, i . e ., 1998 and 1999 and thereafter, the transactions shall be subject to the provision of Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as amended by Rev. Regs. 8-98, in which case, an individual not engaged in trade or business ,not being a duly authorized withholding agent, shall not withhold any expanded withholding tax on his subsequent installment payments. Furthermore, since the sale is on deferred cash basis the same is wholly taxable to the seller in the year of sale. Thus, if it shall be ascertained by the concerned RDO that the taxes paid in the year of sale for deferred cash sales made to individual buyers not engaged in trade of business during the effectivity of the Tax Code of 1997 did not cover the entire selling price, the same shall be imposed with the corresponding penalties for failure to withhold the expanded creditable withholding tax on the entire selling price or total amount of consideration or its equivalent paid to the seller as required under the existing regulations. On the other hand, if the sale is on installment basis, an individual buyer engaged in trade or business or a corporate buyer shall deduct and withhold the CWT on every installment payment. Individual buyers who are not engaged in trade or business shall, however, withhold the CWT on the last installment as required under Sec. 2.57.2(J) of Rev. Regs. No. 2-98, as amended by Rev. Regs. 8-98. aETAHD 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, then this ruling shall be considered null and void. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group Footnotes 1. BIR Ruling No. 097-96 dated September 9, 1996. 2. Doctrine of Election, supra . 3. BIR Ruling DA-149-03 dated May 6, 2003, citing BIR Ruling No. 112-99 dated July 29, 1990.