Ayala Land, Inc.

December 12, 2008 BIR RULING [DA-(C-170) 525-08] RR 2-98, 6-01 & 17-03; DA-335-06 Ayala Land, Inc. Tower One, Ayala Triangle Ayala Avenue, Makati City Attention: Atty. Mildo F.C. Sison Division Manager Gentlemen : This refers to your letter dated April 29, 2008 stating that Ayala Land, Inc. (ALI) and its subsidiaries (collectively, the ALI Group) are corporations organized and existing under the laws of the Philippines and engaged in the development and sale of real estate; that members of the ALI Group sell real properties on cash basis, on deferred basis, or on installment basis; that for sales of real properties on deferred payment basis or on installment basis, the selling price includes, among others, interest on amounts due after the downpayment; and that in the processing of Tax Clearances (TCLs) or Certificates Authorizing Registration (CARs) for real property transactions on deferred payment basis or on installment basis, there exists confusion as to whether or not interest is included for purposes of computing the creditable withholding tax (CWT). Based on the foregoing, you are requesting confirmation of your opinion that interest should be excluded in determining the amount subject to CWT on the sale of real properties by members of the ALI Group in accordance with Section 2.57.2 (J) of Revenue Regulations No. 2-98, as amended by RR No. 6-2001, and further amended by RR No. 17-2003. In reply, please be informed that Section 2.57.2 (J) of Revenue Regulations (RR) No. 2-98, as amended by RR No. 6-2001, and further amended by RR No. 17-2003, provides as follows: "(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange, or transfer of real property classified as ordinary asset. . . . cAHDES xxx xxx xxx If the buyer is an individual not engaged in trade of 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." Gross selling price is defined under Section 2.57.2 (J) of RR No. 2-98, as amended by RR No. 6-2001, as the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Tax Code, whichever is higher. The term "selling price" as used in the regulations is not to be construed to be limited only to the amount so stated as consideration in the document of sale. Thus, if in the Contract to Sell it is agreed that the buyer will assume some liabilities, i.e., taxes and other charges, the foregoing shall be considered in the computation of the actual consideration in the sale transaction. On the other hand, the term "initial payments" or "payments" as used in the above cited regulations and as defined under Section 49 (B) of the 1997 Tax Code, means "the payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made". Further, in RR No. 17-2003 the term "consideration" is clearly defined as follows: "The term 'consideration' refers to the selling price exclusive of interest. Interest earned as an incident of installment payment, if any, shall be subject to the ordinary income tax rate." From the foregoing, it is understood that the actual selling price of real properties comprises the aggregate of the amount of the purchase price as stated in the document of sale, but with the exclusion of the interest charged on the amortizations (amounts due) after the downpayment(s) in sales transactions on "deferred basis" or on "installment basis". 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. EACIcH Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service