Basis of Expanded Creditable Withholding and Documentary Stamp Taxes on Transfer of Real Estate

January 16, 1998 BIR RULING NO. 003-98 50 (b) 173, 196 000-00-003-98 Philippine Deposit Insurance Corporation 2228 Pasong Tamo Street Makati City Attention: Atty . Eulogia M . Cueva Acting Chief Legal Counsel Gentlemen : This refers to your letter dated July 23, 1997 requesting that the expanded creditable withholding and documentary stamp taxes on the sale to Arcya Commercial Corporation (ARCYA) of the three (3) floors of the condominium building of Echelon Tower Condominium then owned by the Pacific Banking Corporation (PaBC) be based on the dates when the sales were consummated. You have represented a chronology of events surrounding the subject sale transactions, as follows: On September 21, 1990, then Central Bank (CB) liquidator placed the Echelon Tower's 5th and 6th floor units for public sale at a minimum bid of around P25.459 million. There was a failed bidding; then CB liquidator considered and agreed to sell them to ARCYA at P18.851 million. LibLex On May 8, 1991, then CB liquidator offered for sale through public auction the Echelon ground floor units at a minimum bid price of P13.776 million. No bids were made; then CB liquidator agreed to sell the same to ARCYA for P10.0 million. On May 17, 1991, the Monetary Board (MB) in Resolution No. 537 designated the President of the Philippine Deposit Insurance Corporation (PDIC) as the new liquidator of PaBC. Actual turnover happened only sometime in July, 1991. On December 23, 1991 and January 6, 1992, after paying several monthly installment payments which started on May 28, 1991 and July 5, 1991, respectively, ARCYA remitted the full purchase price for the 5th and 6th floor units, and the ground floor units, respectively, to PaBC. Also on January 6, 1992, ARCYA requested that Deeds of Sale of the subject condominium units be executed in favor of the following: G/F ARCYA Commercial Corporation P10.000 Million 5/F Marichris Development Corporation 13.780 Million 6/F ARCYA Trading Corporation 5.071 Million Total P28.851 Million ============ On December 17, 1992, then PDIC liquidator submitted a memorandum questioning the aforementioned sale of Echelon units pursuant to PDIC Board Resolution No. 92-012-109. In a letter dated November 16, 1995, the Bangko Sentral ng Pilipinas (BSP) General Counsel informed PDIC about the MB Resolution No. 1253 dated October 25, 1995 of "Bangko Sentral's inability to approve or reject the aforementioned sale transactions of the former PaBC liquidator" since "it has been the consistent position of the Bangko Sentral that a liquidator, once designated and having assumed office, acts independently and is no longer subject to the direction and control of the Bangko Sentral." Thus, the liquidator's decisions and official actions in the discharge of its functions are not subject to examination or review by the Bangko Sentral. In view of the foregoing decision of the Monetary Board (MB) of the BSP, and considering the ARCYA has fully paid the purchase price in December, 1991 and January, 1992, respectively, PDIC, the present liquidator of PaBC, was left with no recourse but to execute and sign the subject Deeds of Sale pursuant to PDIC Board Resolution No. 96-06-054. In December, 1996, PDIC, as liquidator of PaBC, executed and signed the subject Deeds of Sale. Said Deeds of Sale provide that the Vendee had already withheld the required creditable withholding tax in the total amount of P1,442,552 (5% x P28.852 million) for and on behalf of the Vendor. The Vendee likewise agreed to assume payments of documentary stamp tax and other taxes that the Government shall impose on the sale. prLL On January 15, 1997, PDIC received a letter dated January 10, 1997 from the Legal Counsel of ARCYA advising the liquidator of PaBC that ARCYA was being assessed by the Bureau of Internal Revenue with a P10.35 million creditable withholding tax and P2.07 million as documentary stamp tax to effect the registration of the subject Deeds of Sale. The supposed increase of creditable withholding tax from the original amount of P1.442 million that had already been withheld from the payments to the Vendor is due to the appreciation for the last five (5) years of the zonal value of the Malate area where the Echelon Tower Condominium is located vis-a-vis the zonal valuation of the properties sold at the time of the consummation of the contract of sale on May 28, 1991 and July 5, 1991, respectively. Nonetheless, the delay in the execution of the Deeds of Sale was due to an inquiry made by then President of PDIC on the concessional prices obtained by then CBP liquidator. This matter was brought to the attention of the MB of the CBP in a letter dated November 16, 1995 when the BSP General Counsel advised PDIC of its 'inability to approve or reject the aforementioned sale transactions of the former PaBC liquidator." It was only on October 22, 1996 that the PDIC Board finally decided that the subject Deeds of Sale should be executed but which documents were actually executed and signed in December, 1996. It should be emphasized, however, that when PDIC was prevailed upon by this Office to present any other registrable document evidencing the sale transactions where the Bureau can legally base the documentary stamp tax, it could not present any such document except the aforementioned Deeds of Sale executed and signed in December, 1996. The vital issue to be resolved in this instant case is the determination of the reckoning period as to when the expanded creditable withholding and the documentary stamp taxes should be imposed to the Vendee considering that it assumed the said tax obligations as per the subject sales documents. In reply, please be informed as follows: (1) On the matter of remittance of the creditable withholding tax . Sections 3 and 5 of Revenue Regulations No. 6-85, as amended, otherwise known as the "Revised and Consolidated Expanded Withholding Tax Regulations" provide as follows: "SEC. 3. Time of withholding . The obligation of the payor to deduct and withhold under these Regulations arises at the time an income which is subject to withholding under Sec. 1 hereof is payable or paid . "xxx xxx xxx" "SEC. 5. Monthly return and payment of taxes withheld at source . "(a) The taxes herein deducted and withheld shall be paid upon filing a return in duplicate under BIR Form No. ____ with the Revenue District Officer or the Collection Agent of the City or duly authorized Treasurer of the Municipality where the withholding agent has his legal residence or principal place of business, except in cases when the Commissioner of Internal Revenue allows otherwise. The required return shall be filed within ten (10) days after the end of each month " (Emphasis supplied) Based on your representations and the documents presented properly supported by Official Receipts issued by the Pacific Banking Corporation to ARCYA, the latter started paying by installment beginning July 5, 1991 and May 28, 1991, respectively, the subject condominium units of Echelon Tower Condominium Corporation then owned by PaBC until it had fully paid it on January 6, 1992 and December 23, 1991, respectively, as follows: I. GROUND FLOOR: DEDUCTIONS Date Or No. Amount Due WHT (5%) Condo Dues Amount Paid 05 Jul 91 883528 P2,800,000 P P P2,800,000 06 Aug 91 883540 1,200,000 1,200,000 05 Sep 91 883548 1,200,000 1,200,000 04 Oct 91 841505 1,200,000 1,200,000 05 Nov 91 841513 1,200,000 1,200,000 05 Dec 91 841521 1,200,000 1,200,000 06 Jan 92 841525 1,200,000 500,00 136,453 563,547 ======== ======== ======== ======== II. FIFTH & SIXTH FLOORS: 28 May 91 883513 P4,851,040 P P P 4,851,040 25 Jun 91 883524 2,000,000 2,000,000 24 Jul 91 883535 2,000,000 2,000,000 21 Aug 91 883544 2,000,000 2,000,000 20 Sep 91 841502 2,000,000 2,000,000 21 Oct 91 841510 2,000,000 2,000,000 21 Nov 91 841516 2,000,000 2,000,000 23 Dec 91 841523 2,000,000 942,552 1,057,448 P18,851,040 P 942,552 P17,908,488 TOTAL P28,851,040 P1,442,552 P 136,453 P27,272,035 ========= ========= ========= ========= In view of all the foregoing, it is only but fair and just that the basis for the expanded creditable withholding taxes on the said sale of the three (3) floors of Echelon Tower Condominium to ARCYA should be the price agreed upon by the contracting parties and which have been fully paid for by the Vendee OR the zonal value prevailing on July 5, 1991 and May 28, 1991, respectively, whichever is higher. However, the remittance of the subject expanded creditable withholding taxes should have been fully completed as far back as August 10 and July 10, 1991, respectively, the said sale being considered as " sale of real property on a deferred payment basis not on the installment plan " since the initial payments made in the year of sale exceed twenty-five percent (25%) of the gross selling price. Considering, however, that to date, it is implied from the facts of the case, as represented, that no remittance of the creditable withholding tax whatsoever has ever been made yet to the Bureau by the subject Vendee, it shall be liable to the ad valorem penalties provided for under Section 8 of RR 6-85, as amended, such as, 25% surcharge for failure to render returns within the time prescribed, 25% surcharge for non-payment of the taxes withheld within the prescribed time, plus interest at the rate off 20% per annum from the date the same became due until paid, and the corresponding specific penalties for such failure to file the withholding tax returns. The payment of the aforestated expanded creditable withholding tax, plus the corresponding penalties thereto, however, does not preclude the Bureau from assessing PaBC, thru its liquidator, of whatever deficiency corporate income tax which could have been due to it, if any, for the subject taxable year as a result of the subject sale transactions. (2) On the matter of the payment of the documentary stamp tax . Revenue Memorandum Circular No. 34-91 dated April 8, 1991 was issued primarily to stop further losses of the Bureau due to some malpractices of ante-dating Deeds of Sale involving real properties in order to avoid the imposition of income tax or the creditable withholding tax or reduce their tax liabilities on these transactions. Thenceforth, public instruments transferring real properties presented to the appropriate revenue officials beyond three (3) months from the date of notarization are presumed to be ante-dated and the tax liabilities of the parties are determined in accordance with the rules and regulations obtaining at the time such documents are presented to the BIR. This Circular, however, was nevertheless subsequently clarified by RMC No. 43-91 dated May 27, 1991 to prevent irritations between revenue officers and taxpayers due to conflicting interpretations and to achieve uniform application of the rules prescribed in RMC 43-91, the pertinent provisions of which read as follows: "In order to remove doubts as to what rules to apply and when to impose penalties for late filing of tax return and payment of tax, the following rules are hereby prescribed: "(a) When there is only a delay in the presentation of sales document, the rules on the kind of tax, rate of tax, zonal or fair market value obtaining at the date of notarization shall be applied but the penalties for late filing of return and payment of tax shall be imposed. There is a delay in the presentation of sales document when the taxpayer submits said document to the BIR after thirty (30) days from the date of notarization. The delay could be in terms of days, months or even years. For this purpose, taxpayers have the burden of proving by the submission of other documents, such as cancelled checks , official receipts , contract to sell , or certification of the archive official , to show that there is no ante-dating of public instrument. When the document is presented to the BIR after three (3) months from date of notarization and the taxpayer cannot present additional receipts or documents to show that the same is not ante-dated, then the rules applicable at the time of presentation of the document shall be applied but no penalty shall be imposed. . .". prcd In relation to this, Revenue Memorandum Circular No. 57-91 provides further clarificatory guidelines regarding the payment of documentary stamp tax on Deeds of Sale, where it says in part as follows: "Payment of the documentary stamp tax is effected by the purchase, affixture and subsequent cancellation of documentary stamps (. . .) on the documents at the time such ACT IS DONE or TRANSACTION HAD, meaning ON THE DATE OF EXECUTION OR SIGNING OF THE DOCUMENT BY THE PARTIES thereto , and not at the time of its notarization." Accordingly, it is the opinion of this Office that since, as per your allegations and as per PDIC Board Resolution No. 96-06-054, it was only on October 22, 1996 that the PDIC Board finally decided that the Deeds of Sale should be executed, and the subject Deeds of Sale were finally executed and signed only in December, 1996, and the contracting parties have not executed any other registrable sales document prior to that date where the Bureau can legally base the imposition of the documentary stamp tax, then the law and the rules applicable at the time or date of the execution of the contract or the signing of the documents by the parties shall be applied. Thus, the said Deeds of Sale shall be subject to the documentary stamp tax imposed under Sec. 196 of the Tax Code, as amended, at the time of the execution of the contracts of sale by the contracting parties in December, 1996, plus 25% surcharge of such unpaid amount, which shall be in lieu of the interest prescribed in Section 249: Provided, That when the amount is not paid within the time prescribed in the notice and demand, there shall be collected on the total unpaid amount, including the surcharge, the interest prescribed in Sec. 249(a) from the due date prescribed in the notice and demand until the amount is fully paid, which interest shall form part of the tax. (Section 248(d), Tax Code, as amended) It should be emphasized, however, that for reasons already stated, this opinion is an exception to the general rule that in cases involving sale, exchange, or any disposition of real property, the tax base for documentary stamp tax purposes shall be the same as the tax base used in the computation of the capital gains tax, expanded creditable withholding tax or corporate income tax, as the case may be, which means gross selling price, fair market value, or zonal value of the real property, whichever is higher, at the time of sale or conveyance. This ruling is being issued based on your representations. However, if upon investigation, it will be revealed that the facts are different from what have been represented, then this ruling shall be rendered null and void from the date of issuance. cdll Very truly yours, (SGD.) LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue