Manila Jockey Club, Inc.

July 2, 2008 BIR RULING [DA-(C-001) 003-08] Sec. 49; RR 17-03 & 15-05; DA-002-08 dtd 2/8/08 Manila Jockey Club, Inc. Ortigas Center Office 14th Floor, Strata 100 Building, Emerald Avenue, Ortigas Center, Pasig City Attention: Ferdinand A. Domingo General Counsel This refers to your letter dated April 2, 2008, requesting confirmation of your opinion that the buyers in a deferred payment sale of house and lot packages by Manila Jockey Club, Inc. (MJCI) and Century Communities Corporation (CCC) are not required to withhold the creditable withholding tax on their payment of amortizations, particularly on their last installment payments, because the income tax on the transactions is already paid by the seller in the year of sale. EaHDcS It is represented that MJCI is a domestic corporation engaged in the business of horse racing while CCC is a domestic corporation engaged in the business of real estate development. MJCI and CCC entered into a Joint Venture Agreement (JVA) for the construction and development of a residential subdivision in Carmona, Cavite known as the Canyon Ranch Residential Project (Canyon Ranch). Pursuant to the terms of the JVA, MJCI contributed the land, which is registered in its name, and CCC developed it into a residential subdivision. CCC also constructed the houses on the lots of Canyon Ranch. As also agreed upon by the parties, the sale of the completed house and lot packages to third-party buyers was undertaken exclusively by CCC and the proceeds from said sale have been divided between the parties as follows: a. CCC - 100% of the selling price of the house - 50% of the selling price of the lot b. MJCI - 0% of the selling price of the house - 50% of the selling price of the lot The sale of the house and lot packages commenced in 2005 and is still underway. Majority of the house and lot packages were sold to individuals who are not engaged in trade or business and are not aware of the technical distinction between a deferred payment sale and an installment sale. Accordingly, the initial payments and the periodic amortizations were not subjected to withholding tax. MJCI has reported the income on its share in the proceeds of the sales in 2005, 2006 and 2007 consistent with the method of accounting employed by it and in accordance with generally accepted accounting principles, treating each sale as cash sale. The entire amount of the sale was recognized in the year of sale although the initial payment collected was less than full, but exceeded twenty five percent (25%) of the total selling price, and the completion of the installment payments is beyond 2005, 2006 and 2007, respectively. In reply, please be informed that the requirement imposed upon the buyers of real property, who are not engaged in trade or business, to withhold the creditable withholding tax on the last installment applies only to installment sales as defined under Section 49 of the Tax Code of 1997, as amended. This is clear from the provisions of Section 2.57.2 (J) of Revenue Regulations (Rev. Regs.) No. 17-2003, which stated, to wit: "xxx xxx xxx" "If the buyer is an individual not engaged in trade or business, the following rules shall apply: (i) If the sale is a sale of property on the installment plan ( i.e. , payments in the year of sale do not exceed twenty five percent (25%) of the selling price), no withholding is required to be made on the periodic installment payments. In such a case, the applicable rate of tax based on the gross selling price or fair market value of the property at the time of the execution of the contract to sell, whichever is higher, shall be withheld on the last installment or installments immediately prior to such last installment, if the last installment is not sufficient to cover the tax due, to be paid to the seller until the tax is fully paid." DHcESI The foregoing rule will not apply if the sale does not qualify as an installment sale. Since the sales of houses and lots have an initial payment of more than twenty five percent (25%) of the contract price, MJCI is, therefore, correct in recognizing the entire sales in the year of sale and no withholding tax is required of the buyers on their amortizations and last installment payment. This does not mean however, that a deferred payment sale is not subject to creditable withholding tax. The withholding should have been properly made on the initial payment or down payment. (BIR Ruling No. 019-96 dated February 20, 1996) . It seems that the failure of the withholding tax regulation on real estate transactions under Rev. Regs. Nos. 1-90, 2-98 and 17-2003 to provide for a clear distinction between an installment sale and deferred payment sale obviously confused the non-business buyers on the manner of withholding. In an earlier ruling, this Office held that "In the absence of a well-defined, duly promulgated and publicized regulations on the subject, ordinary individual buyers on installment sales, particularly those who are not engaged in trade or business, can not be said to be notified on an obligation to withhold, much less be expected to know the fine lines of distinction in taxation, as delineated in private rulings, in respect of when to treat deferred payments as cash sales or installment sales transaction for the purpose of requirement of withholding. At any rate, the government suffered no disadvantage considering that, in this particular case, the income from the aforesaid deferred payment/installment sale transactions have already been reported and the tax thereon paid in your tax returns for the years in question." (BIR Ruling No. 112-99 dated July 29, 1999) . In fine, the buyers, who in good faith believed that the transaction they have entered into qualifies as an installment sale, cannot be faulted for their failure to withhold and remit the tax on their initial payments. Accordingly, no further deficiency withholding tax, 25% surcharge or 20% interests shall be imposed against the buyers considering that the tax was eventually paid on all these transactions via the filing of the income tax returns by the seller. We want to emphasize that there are two (2) ways of collecting the income tax on a sale transaction. One is the voluntary compliance system wherein the income tax is paid by filing the income tax return after the close of the taxable period; and, two is the withholding tax system wherein the buyer is required to withhold and remit the income tax on the sale. Withholding tax is not a tax but a procedure by which the government collects the tax. While it is true that the buyers failed to withhold the tax, the entire amount of income tax, with respect to MJCI's share in the proceeds, is nevertheless collected when MJCI filed its income tax return for taxable years 2005, 2006 and 2007. In light of the foregoing, this Office hereby confirms your position that the buyers on deferred payment scheme are no longer required to withhold the creditable withholding tax from these consummated sales, including on their last installment payment of the contract price. ADSTCa The corresponding Certificate Authorizing Registration (CAR) and/or Tax Clearance (TCL) shall be issued upon submission by MCJI of the following: 1) Quarterly ITR and receipt of payment of income tax on the year the specified house and lots were reported as part of the Gross Income; 2) Instruments of Sale (Contract to Sell and Deed of Absolute Sale); 3) Proof of Payment of the Documentary Stamp tax on conveyance of real property on every sale, as prescribed under Section 196 of the Tax Code of 1997, as amended; and 4) Schedule of sales (with specific identification of each unit sold) during each quarter/year. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it shall be disclosed that the facts are different, then this ruling shall be considered null and void. CAaDSI Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service