Tax Consequences of Sales on Deferred Payment Basis

March 22, 2001 BIR RULING NO. 013-01 Sec. 49 (B) 078-94; 019-96; 112-99; 182-99 Cityland Development Corporation 2/F & 3/F Cityland Condominium 10 Tower I, 6815 H.V. dela Costa Street Attention: Mr . Rudy Go Vice President Gentlemen : This refers to your letter dated February 4, 1999 and supplemental letters dated October 3 & 5, 2000 requesting for a confirmatory ruling on the following: 1. That for sales on a "deferred payment bases" effected prior to February 20, 1996, the creditable withholding tax shall be based on the initial payments made within the year of sale in accordance with BIR Ruling No. 78-94 dated March 18, 1994; and for sales on a "deferred payment basis" effected after February 20, 1996, the creditable withholding tax shall be based on the entire selling price in accordance with BIR Ruling Nos. 019-96 dated February 20, 1996 as published by RMC 30-96 and BIR Ruling No. 076-96 dated July 11, 1996. TDSICH 2. On Deferred payment sales where the buyer's initial payments in the year of sale exceed 25% of the selling price , the installment buyers may neither be made liable to any deficiency expanded withholding tax nor to any 25% surcharge nor 20% interest, for withholding the CWT based on initial payments since no implementing Revenue Regulations has so far been promulgated by the Secretary of Finance. Moreover, since the income from such sale is wholly taxable and was likewise declared by the seller in its annual income tax return in the year of sale, there is compliance of Revenue Regulations No. 1-90. It is represented that Cityland Development Corporation ("Corporation") developed and constructed condominium projects in Makati, Mandaluyong, Pasig and Manila; that these condominium units were sold to various persons on installments basis; that in some installment sale contracts, the buyers' initial payments in the year of sale exceeded 25% of the selling price while in the other contracts, the initial payments in the year of sale did not exceed 25% of the selling price; that deferred payment sales (i.e., sale the initial payments of which exceed 25%) made by Cityland to its various clients prior to February 20, 1996 were subjected to the creditable withholding tax based on the initial payments made within the year of sale; that Cityland already duly reported the income from these installment sales based on gross selling price, which is the basis in computing for the income tax due, in its income tax returns in accordance with its accounting method employed and the CWT withheld based on initial payment were credited against the tax due in the payments of its periodic income taxes on the said income to the BIR as shown in the herein attached photocopy of ITR; that while, during the period of sale, the governing regulation on Expanded Withholding Tax is Revenue Regulations No. 1-90, as amended by Revenue Regulations No. 12-94, Cityland, however, contended that the said regulations did not provide on how the buyer, as withholding agent of the BIR, may withhold the creditable withholding tax in case the purchase of real property is on installment plan; that, as narrated in Primetown ruling, i.e., BIR Ruling No. 112-99, "the only clarification issued by the BIR vis-a-vis the creditable withholding tax on the sale of real property on installment plan may be found under the following BIR rulings: 1. If the buyer is engaged in trade or business, he shall withhold the tax upon each of his installment payment. If not engaged in trade or business, he shall withhold the tax only on his last installment payment. (Revenue Memorandum Circular (RMC) No. 7-90 dated January 16, 1990) 2. In BIR Ruling No. 078-94 dated March 18, 1994 issued to E.L. Punsalan & Associates, it was held that, in case of a sale of real property on installment plan, if the buyer's initial payments in the year of sale exceeded 25% of the selling price, the transaction shall be considered "cash sale", in which case, the seller's income from the sale transaction shall be taxable entirely in the year of sale. Considering that the said income has already been reported by the seller in the year of sale, the buyer was no longer required to withhold any creditable expanded withholding tax on his payments of amortization . This ruling, however, did not clarify how and when the installment buyer may withhold any creditable withholding tax. 3. In BIR Ruling No. 019-96 dated February 20, 1996, upon further query by E.L. Punsalan & Associates, on how and when any creditable withholding tax may be withheld by the installment buyer, the BIR advised that the tax shall be computed and withheld based 'on the initial or down payment on the said units'." that, likewise in 1994, the BIR has issued BIR Ruling No. UN-28-94 to Cityland stating that " installment payments received by Cityland in 1990 and subsequent years for the sale (deferred sale) of real properties are not subject to creditable withholding tax since the sales have been considered and reported in full for income tax purposes during the initial year of the contract even though Cityland has not yet received the monthly amortization due for the succeeding years ; that parallel to said ruling, Cityland also invoked BIR Ruling No. 78-94 dated March 18, 1994 wherein the RDO concerned may issue the CAR to the seller upon submission, among others, of the following: (1) Quarterly ITR or Final ITR and receipts of payment of income tax on the year specified condominium units were reported as part of the gross income; (2) the withholding tax payment under RR No . 1-90 on the initial downpayment on said units ; (3) Instrument of Sales; (4) Breakdown of cash (sales) transaction during the quarter/year; that on January 4, 1996, the BIR issued RMC No. 30-96 publishing the modification of said BIR Ruling No. 78-94, thus, stating that the withholding tax payments under Rev. Regs. No. 1-90 shall be based on the gross selling price and not merely on the initial downpayment in case of deferred cash sales; that on July 11, 1996, the BIR also issued BIR Ruling No. 76-96 stating that RMC No . 30-96 shall have prospective application since it is prejudicial to the taxpayer who relied on BIR Ruling No . 78-94 and shall apply to transactions effected on or after February 20, 1996 ; and that notwithstanding the aforesaid ruling, the RDO of Mandaluyong City is requiring the payment of the creditable withholding tax on the entire selling price on sales on a deferred payment bases even for sales transactions prior to February 20, 1996 . TAScID In reply thereto, please be informed of the following: I. In BIR Ruling No. 078-94 wherein it was ruled that " in the case of sale of real property on installment plan where the initial payments in the year of sale exceed 25% of the selling price, the transaction is considered as 'cash sale', in which case, the seller's income from the sale transaction shall be taxable entirely in the year of sale ", this Office required submission of the necessary documents which would otherwise disclose compliance of said income tax payments before the corresponding CAR may be issued, thus, among others, i) the quarterly ITR or final ITR and receipts of payment of income tax on the year the specified condominium units were reported as part of the Gross Income; ii) the withholding tax payment under RR 1-90 on the initial or downpayment on said units; iii) instrument of sales; and iv) breakdown of cash sales transaction during the quarter/year . The above rule, i.e., the withholding of the CWT based on the initial payments was later modified and rectified in BIR Ruling No. 019-96 which held that the basis of the CWT shall be on the amount of the entire "selling price" or fair market value of the property as defined in Sec. 6(E) of the Tax Code of 1997, whichever is higher, rather than on the "initial or down payment". This later ruling has been circularized in Revenue Memorandum Circular No. 30-96. Considering, however, the non-retroactivity of BIR rulings, the sales entered into prior to the issuance of BIR Ruling No. 019-96 are deemed covered by the rule established in BIR Ruling No. 078-94. (BIR Ruling No. 182-99 dated November 24, 1999) Furthermore, with the submission of the above documents, the BIR is assured that the income from such transaction has already been reported by the seller in the year of sale. Thus, the buyer was no longer required to withhold any creditable expanded withholding tax on his payments of amortization. In addition to the above, while RMC No. 7-90 which clarified some pertinent provisions of Revenue Regulations No. 12-89, as amended by Rev. Regs. No. 1-90, requires that " all sales, exchanges, or transfers of real properties (whether classified as ordinary or capital assets) by corporations, consummated on or after January 1, 1990 are subject to the creditable withholding tax imposed under the aforesaid Rev. Regs. 1-90 based on the gross selling price or the total amount of the consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of the real property , this Office, in BIR Ruling UN 028-94 issued to the Cityland through SGV & Co., has ruled otherwise, i.e., the " installment payments received by Cityland in 1990 and subsequent years on the sale of a condominium unit covered by the aforedescribed Contract to Sell executed in 1989 are not subject to the creditable withholding tax since the sale has already been reported as a cash sale, or the income therefrom has already been reported in full for income tax purposes and the corresponding tax thereon has been paid even though it has not yet received the monthly amortization due for the succeeding years ". Furthermore, under the aforesaid BIR Ruling UN 028-94, the term "gross selling price" means the consideration stated in the sales document or the fair market value/zonal value, whichever is higher. Moreover, the foregoing rules have been clearly defined in Sec. 2.57.2(J) of Rev. Regs. No. 2-98, thus "(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, other than capital assets, sold by an individual, corporation, estate, trust fund or pension fund and the seller/transferor is habitually engaged in the real estate business in accordance with the following schedule "Those which are exempt from a withholding tax at source as prescribed in Sec. 2.57.5 of these regulations Exempt "With a selling price of five hundred thousand pesos (P500,000.00) or less 1.5% "With selling price of more than five hundred thousand pesos (P500,000.00) but not more than two million pesos (P2,000,000,000.00) 3.0% With selling price of more than two million pesos (P2,000,000,000.00) 5.0% "A seller must show proof of registration with HLURB or HUDCC to be considered as habitually engaged in the real estate business. "Real property, other than capital assets, by an individual, estate, trust, trust fund or pension fund or by a corporation who is not habitually engaged in the real estate business Seven and one-half percent (7.5%) IASEca "xxx xxx xxx "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 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." In the light of the foregoing, since the deferred payment sales of real property at issue were made prior to and after February 20, 1993, a distinction should be made if the payment was made prior to or after February 20, 1996. Thus, in the case of deferred payments sales of real property not on installment plan and made prior to February 20, 1996 the income from which is wholly taxable to the seller in the year of sale, the buyer shall withhold the CWT based on the initial or down payment . (BIR Ruling No. 078-94). The CWT shall be credited when the final income tax payable is computed at the end of the taxable year. 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. On the other hand, if the sale was made after February 20, 1996, the basis of the CWT shall be the amount of the "selling price" or fair market value (FMV), whichever is higher, rather than on the initial or down payment. (BIR Ruling No. 019-96). Accordingly, as we see no reason to deviate from the foregoing pronouncement where your company is concerned, the creditable withholding tax on your sales on "deferred payment basis" effected prior to February 20, 1996 , shall be based on the initial payments made within the year of sale in accordance with BIR Ruling No. 78-94 dated March 18, 1994. "Initial payments" as defined under Section 49(B) of the 1997 Tax Code means the payment 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. It is to be emphasized, however, that tax shall still be withheld on the subsequent installments or payments if you (Cityland) cannot present evidence to prove that the entire income from such sale under deferred payment basis was reported in the income tax return filed in the year of sale and that the tax due thereon was fully paid upon filing the said Income Tax Return. II. On the other hand, for sales on a "deferred payment basis" effected after February 20, 1996 , the creditable withholding tax shall be based on the entire gross selling price or total amount of consideration or its equivalent paid to the seller or the fair market value, whichever is higher, pursuant to then Section 16(e) of the Tax Code, as amended, [now Sec. 6(E) of the Tax Code of 1997] and in accordance with BIR Ruling Nos. 019-96 dated February 20, 1996 as published by RMC No. 30-96 and BIR Ruling No. 076-96 dated July 11, 1996. Finally, this rule which has been adopted in Sec. 2.57.2(J) of Rev. Regs. 2-98, as amended, shall apply to all "deferred payment sales" made after December 31, 1997 and during the effectivity of the 1997 Tax Code. Such being the case, the aforementioned buyers of condominium units sold in the year 1995 under a deferred payment sale not on installment plan, hence, treated as the equivalent of "cash sale" transaction, are deemed to have fully withheld and remitted the corresponding CWT, the same having been deducted, withheld and remitted to the BIR, based on the 'initial or down payment', pursuant to BIR Ruling No. 078-94, the applicable ruling prior to February 20, 1996 provided Cityland has reported the entire amount of income from such deferred payment sales in the year of sale and that the taxes due thereon were fully paid upon filing the income tax return. Hence, the installment buyers may either be made liable to any deficiency expanded withholding tax or to any 25% surcharge nor to the 20% interest for withholding the CWT based on initial payments. TSHcIa On the other hand, if Cityland has not reported the entire amount of income from such deferred payment sales in the year of sale and that the taxes due thereon were not yet fully paid, the buyers are still required to withhold and remit the withholding tax thereon based on subsequent installments unless the buyers are not engaged in business, in which case the applicable rate of the tax based on the fair market value of the real property or consideration, whichever is higher, shall be withheld on the last installment or installments to be paid to the seller. 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.) RENE G. BAEZ Commissioner of Internal Revenue