BIR Ruling [DA-508-03]

December 16, 2003 BIR RULING [DA-508-03] RR No. 12-89; DA-195-2000 Atty. Antonio H. Garces 184 Int. Capt. Socrates F. Rojas Addition Hills, San Juan 1500 Metro Manila S i r : This refers to your letter dated September 15, 2003 requesting in behalf of your client, Raul Ludovico, for a clarification on the following issues: 1. Whether or not the execution of the Deed of Sale over a condominium unit at this time by the company in favor of the complainants Ludovico would result in a capital gains tax or expanded withholding tax considering that the unit sold is an ordinary asset; 2. In the event that this transaction is subject to the expanded withholding tax, what would be the basis or the amount to be used in computing the same, the agreed purchase price or its fair market value at present, considering that the Deed of Absolute Sale would be executed only now by the company; and 3. What would be the rate of documentary stamp tax? It is represented that Raul Ludovico (Client, for brevity) entered into a Contract to Buy and Sell on December 29, 1982 with Urban Planners & Developers, Inc. (Company, for brevity) for the purchase of a condominium unit of the Sta. Mesa Gardenville Condominium known as Unit No. 102 Building S-A, three (3) bedroom flat with an area of approximately 78.72 square meters; that according to the contract, the purchase price of the unit is P300,800.00; that a down payment of P100,000.00 was paid on January 20, 1983; that the balance was payable in Sixty (60) monthly installments at 18% interest per annum on diminishing balance or P5,099.00 to start 30 days after turnover date; that your client was religiously paying his monthly amortizations on the unit; that a letter dated June 5, 1985, was sent to him by the Company stating that due to the unprecedented increase in the cost of money, hike in taxes, and extraordinary tight credits, the Company offered two(2) options: 1). A reasonable increase in the monthly amortization; and 2). Maintain the present amortization but a corresponding increase in the number of installment months; that the Client requested that he be allowed to pay the balance in full based on his unadjusted balance; that the Company was amenable to his request but with the condition that his balance be paid on or before July 31, 1985, otherwise, it will have no other recourse but to adjust his account; that the Client paid in full the balance of the purchase price of his unit in the amount of P27,190.93 on July 31, 1985 and was issued Official Receipt No. 9104 dated July 31, 1985; that under our tax laws, the tax accrues at the time the transaction took place or consummated, which in this case is July 31, 1985; that according to the Assessment Service of this Office, there was no capital gains tax or expanded withholding tax on sales of real property in 1985 by either an individual or corporation as said taxes were not being enforced yet in 1985; that whatever gain or profit that may be derived from the sale of the condominium unit to your Client forms part of the income of the Company for which the tax is held liable; that on February 5, 1986, the Company, thru Mr. Herminigildo S. Lara, Credit and Collections Manager, issued a certification to the Client that he has fully paid his unit; that the Company failed to deliver to the Client the Deed of Absolute Sale and the Certificate of Title thereof in his favor; that the Client filed a complaint with the Housing and Land Use Regulatory Board (HLURB) against the Company, which subsequently found for your Client; that the case was also dismissed on appeal; that the Company filed another appeal with the Office of the President, which was also dismissed on March 5, 2003 for lack of merit; that the decision has become final and executory; that a writ of execution has been issued by the HLURB on August 8, 2003; and that at most, the only tax that may be imposed on the transaction is the documentary stamp tax although at that time there was as yet no deed of absolute sale over the unit and the basis of said tax would be the purchase price at the rate then prevailing in 1985. We proceed to rule on the particular issues raised for our consideration: As to the first and second issues, it should be emphasized that it is a well-settled rule that the law or BIR issuance at the time of the transaction should be applied. The execution of the Deed of Absolute Sale in the year 2003, pursuant to the Order of the HLURB on a transaction which took place and was actually consummated in 1985 is merely a confirmation of title. The Credit and Collections Manager of the Company has already issued a certification that your Client has fully paid the condominium unit as of July 31, 1985. Accordingly, the sale of the condominium unit to your Client in 1985 is not subject to the expanded withholding tax nor to the creditable withholding tax. It is however subject to the ordinary income tax if the seller is a corporation. In this connection, the creditable withholding tax on sale of properties was first introduced in Section 1 of Revenue Regulations No. 12-89, amending Revenue Regulations No. 6-85. Thus, "SEC. 1. Section 1 of Revenue Regulations No. 6-85, as amended, is hereby further amended by adding paragraph (j). Sale of real property other than capital asset. A creditable withholding tax shall be withheld on the gross selling price or the total amount of money or its 'equivalent which the purchaser pays to the vendor at rates prescribed herein below; (i) by the corporations on the amount paid 10% (ii) by the individuals on the amount paid 15% (iii) on taxpayers not falling under (i) or (ii) above, such as estate, trust, trust funds and pension funds among others 15%" (Emphasis supplied.) On that basis, at the time of the perfection of the sale of the condominium unit, no withholding tax was yet due. The gains derived by a corporation from the sale of real property were subject to the tax rate of 35% as prescribed by Section 24 of the Tax Code of 1977, as amended. The computation of the gain from the sale of the said condominium unit should be based on the gross selling price. Therefore, if the initial payments made by the Client exceeded 25% of the gross selling price, as what happened in this transaction, the sale is deemed to be on deferred payment basis and the gain derived by the defendant corporation should have been reported and paid by it during the year of the sale. ASDCaI However, since the sale was fully consummated in 1985, the tax base in the computation of the documentary stamp tax shall be the actual consideration as stated, in the Contract to Buy and Sell executed by the parties in 1985. The Deed of Absolute Sale which was executed in 2003, shall be subject to the rates prescribed under Section 196 of the Tax Code of 1997. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall 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 C. BUAG Deputy Commissioner Legal and Inspection Group