BIR Ruling [DA-460-04]

August 30, 2004 BIR RULING [DA-460-04] Sec. 196; RR 2-98, as amended by RR 8-98 112-99; 013-2001 ESLA Management and Consulting Corporation 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 June 15, 2000 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 Management and Consulting Corporation ("ESLA Mgt.") for the years ending December 31, 1990 to 1998, the Corporation has declared the entire sales for the year based on the gross selling price and paid the corresponding income taxes due thereon; that the individual buyers not engaged in trade or business, of the aforesaid properties did not withhold the creditable withholding taxes; and that, in support of your request, you furnished this Office a copy of the Audited Financial Statements of ESLA Management and Consulting Corporation 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 that while the transactions were reported on deferred payment basis (cash sale) from years 1990 to 1998, ESLA Mgt. failed to execute the corresponding deed of sale even after the contract price was 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. 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 1990 to 1997, as well as sales made during the effectivity of the present Tax Code, i.e. , 1998 . For sales made prior to the effectivity of the Tax Code of 1997, the applicable rule is the pertinent provision of Revenue Regulations (Rev. Regs.) No. 1-90, as amended (now Section 2-57.2(J) of Rev. Regs. No. 2-98, as amended), 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 or its equivalent paid to the seller, shall be withheld on the last installment. DACTSH There is no question, however, that the transactions of ESLA Mgt. from 1990 to 1998 were duly reported by ESLA Mgt. as "cash sales." [It is noted that the gross sales indicated in the Audited Income Statement for the applicable period corresponds to the total selling price of properties sold on a deferred payment cash basis. Further, as per list of buyers furnished to this Office, except for one (1) corporation, the subject buyers of the condominium units are individuals not engaged in trade or business.] 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. This 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 on the gross selling price or total amount of consideration or its equivalent paid to the seller, if the sale is on a deferred payment basis (cash sale). Aptly, except for the difficulties in determining the proper withholding tax base, this Office has consistently ruled on the propriety of subjecting the deferred payment sale to expanded creditable withholding tax. In BIR Ruling No. 013-2001 dated March 22, 2001, this Office cited BIR Ruling No. 078-94 as the applicable rule prior to February 20, 1996 in respect to the proper withholding of the CWT on sale of real property considered as "cash sales." In that case, the seller's income from sale transaction shall be taxable entirely in the year of sale. The buyer shall withhold the CWT based on the initial or down payment. The CWT shall be credited when the final income tax payable is computed at the end of the taxable year. However, subsequent installments shall still be subject to withholding by the buyer if the seller-real estate dealer did not report the entire income from such deferred payment sales in the year of sale and that the tax due thereon was not fully paid. 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 1990 to 1998, 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 1990 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 total amount of consideration or it equivalent paid to the seller. In view of the fact that the initial payments collected in the year of sale exceeded twenty percent (25%) and the entire gross selling price as income in the year of sale was reported and the taxes due for each and every year were accordingly paid by ESLA Mgt., 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") should not be liable to any deficiency expanded withholding tax on their payments amortization 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 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. However, since the sale is on deferred cash basis and therefore wholly taxable to the seller in the year of sale, no withholding shall be made by such buyer and the seller shall be the one to report and remit the expanded withholding tax required to be withheld pursuant to said Rev. Regs. No. 2-98, as amended by Rev. Regs. No. 8-98. THESAD Thus, if it shall be ascertained by the concerned RDO that the taxes paid in the year of sale for deferred cash sales did not cover the entire selling price as required under the existing regulations, the same shall be imposed with the corresponding penalties for failure to withhold the creditable withholding tax (CWT) on the entire selling price or on the fair market value, which ever is higher. Furthermore, 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. 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.