Correct Withholding Tax Base on Installment Sales

March 20, 1992 BIR RULING NO. 100-92 50 (b) 000-00 100-92 Benguet Management Corporation 391 J. Rizal St., Bo. Namayan Mandaluyong, Metro Manila Attention: Ms . Lina G . Fernandez Gentlemen : This refers to your letter dated August 21, 1991 stating that you are a company habitually engaged in selling townhouse units in Baguio City; that some of said townhouse units were sold on installment over a period of one year or more; that being a CREBA member, you advised your buyers to use the 2.5% withholding tax rate on the installment payments (principal plus interest) to you starting 1990; that the higher amount between the zonal value and selling price was disregarded in computing the withholding tax on these installment sales; and that the Contracts to Purchase and Sell were executed and installment payments started prior to 1990. Based on the foregoing representations, you now in effect request a ruling on the following queries: "1. In accordance with RR 1-90, which is the correct withholding tax base on installment sales as in the above case-total selling price or zonal value, whichever is higher, or installment payments (principal plus interest) starting 1990? "2. In securing the Certificates Authorizing Registration from the BIR and to effect the transfer of titles, would copies of the Official Receipts showing all the installment payments and Contract/s to Purchase and Sell be sufficient to support the basis of withholding (assuming we are correct as to the basis of withholding)? "3. Is there a need to presents to the BIR any or both of the Official Receipts covering the entire installments and Contract/s to Purchase and Sell BEFORE Securing the Certificates Authorizing Registration and to effect the transfer of titles? When (what point of installment period)?" In reply, please be informed that your queries are answered as follows: 1. Under Revenue Memorandum Circular No. 7-90 clarifying some pertinent provisions of Revenue Regulations No. 12-89 as amended by Revenue Regulations No. 1-90 implementing Section 50(b) of the Tax Code, as amended, only such installment payments (principal plus interest) made beginning in January, 1990 shall be subject to the creditable withholding tax prescribed in the said regulations. For example, if the last two installments of P1,000.00 per month are payable in January and February 1990, the withholding tax to be collected should only be P50.00 (P2000 x 2.5%) if you could present a sworn statement stating that you have sold so many number of real properties and total amount of sales for the preceding year and a Certification of Accreditation or memberships with any of its affiliated associations issued by CREBA and a Certificate of Registration with the Housing and Urban Development Coordinating Council (HUDCC)/ Housing and Land Use Regulatory Board (HLURB). However, beginning March 1, 1990 to be entitled to the lower withholding tax rate of 0% or 2.5%, the presentation of the copies of the Certificate of Registration and License to Sell for subdivision or condominium project issued by HLURB shall be sufficient proof for the purposes of the required HUDCC/HLURB certification in the regulations. (RMC No. 16-90) On the other hand, if any of the above conditions for the application of 2.5% is not met, the sale is subject to 5% creditable withholding tax and therefore in the above example you shall be liable to pay P100.00 (P2,000.00 x 5%). This is in consonance with the rule that regulations shall apply prospectively. Thus, past installment payments made before 1990 should not be subject to the expanded withholding tax provision because the requirement was imposed only in January, 1990. (RMC No. 7-90) 2. Aside from the aforementioned proof required to be entitled to the lower rate of 2.5% creditable withholding tax, it is likewise required to attach to the capital gains tax return, a copy of the Contract to Sell and official receipts in securing the Certificates Authorizing Registration from this Office to effect the transfer of titles to support the basis of withholding so that the BIR would know how much installment payments have been paid beginning in 1990. (RMC No. 7-90). 3. Under Revenue Memorandum Circular No. 80-89 where the buyer is an individual not engaged in trade or business, the creditable withholding tax is to be deducted by him on the last installment payment(s). However, sellers are allowed to determine their income tax liability on the basis of their gross profit realized on installments received during the quarter (Section 42 of the Tax Code). There is therefore no matching of income tax and tax credits. The seller receives the tax credits after he has previously paid the income tax due on the transaction. The situation appears to be anomalous for the vendor. It may seem that way but if the vendor is a going concern and it can be safely assumed that there would be other transactions during the year, the tax credits available to it upon payment-of the last installment(s) can be credited against its income tax due for the quarter/year. On the other hand, where the buyer is an individual taxpayer engaged in trade or business and is thus constituted as a withholding agent, every time he makes an installment payment to the seller, he deducts the corresponding amount of tax and remits the same to this Office within 10 days after the end of the month. He shall also furnish a copy of BIR Form 1743 to the seller plus a copy of the CR/PO or ROR evidencing payments of the creditable withholding tax, so that when the seller-corporation files its income tax return for the quarter, the tax withheld is creditable against its income tax due for the same quarter. The buyer, however, has the burden of proving that the withholding taxes on the installment payments paid beginning in January, 1990 in accordance with the terms of the Contract to Sell, have been properly withheld and remitted to the BIR. (Questions and Answers on RR No. 12-89 as amended by RR No. 1-90). atdc Very truly yours, JOSE U. ONG Commissioner of Internal Revenue