Tax Liabilities of Installment Buyers of Condominium Units

July 29, 1999 BIR RULING NO. 112-99 RR 1-90-011-99-112-99 Primetown Property Group, Inc. 22/F Multinational Bancorporation Centre 6805 Ayala Avenue, Makati City Attention: Mr . Kenneth Y . Yap Chairman and Chief Executive Officer Gentlemen : This refers to your letter of December 10, 1998 and your supplemental letter dated May 17, 1999 concerning your request for a ruling to the effect that your installment buyers of condominium units during the years 1991 to 1996 may not be made liable to the expanded withholding tax nor may they be made liable to surcharge and interest for failing to withhold the creditable expanded withholding taxes on their respective payments of amortization for the condominium units which they purchased from you on installment plan. It is represented that your company (PRIMETOWN) developed and constructed three condominium projects in Makati City, to wit: The Makati Prime City, Makati Prime Citadel and the Makati Prime Tower; that these condominium units were sold to various persons on installment basis; that in some installment sale contracts, the buyers' initial payments in the year of sale exceeded 25% of the selling price while in some other contracts, the initial payments in the year of sale did not exceed 25% of the selling price; that PRIMETOWN already duly reported the income from these sale transactions in its income tax returns in accordance with its accounting method employed and accordingly paid its periodic income taxes on the said income; that all these installment sales have already been fully paid for by these installment buyers; that these installment buyers did not withhold any creditable expanded withholding tax on their respective payments of the amortization; that, this case, which involves the period from 1991 to 1996, is governed by the Expanded Withholding Tax Revenue Regulations No. 1-90, as amended by Revenue Regulations No. 12-94; that, however, the said implementing regulations do not provide any rule 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 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 BIR rulings, as follows: 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. (This rule appears in Paragraph 6, Revenue Memorandum Circular (RMC) No. 7-90, 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 exceed 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 had 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." It is your further contention that under the canon of "deferred payment sales of real property," it does not necessarily follow that the sale transaction shall automatically be treated as a "cash sale" simply because the buyer's initial payments in the year of sale exceed 25% of the selling price; that before such sale transaction may legally be treated as a "cash sale;" in which case, the income from the sale may be wholly taxable against the seller in the year of sale, it is a requisite that the balance of the selling price be covered by the buyer's delivery of "obligation" provided, however, that such "obligation" may legally be treated as the "equivalent of cash" in accordance with the "equivalent of cash doctrine" which is the underlying principle governing such deferred payment sale transaction; that such ''obligation" may only be legally treated the equivalent of cash provided, however, that it has fair market value and provided, further, that the same may legally be converted, by the seller, to cash; that, none of the said installment buyers delivered to PRIMETOWN any obligation which may legally be treated as the "equivalent of cash" since these buyers' commitment to pay the remaining balance on periodic amortization were simply evidenced with the Contract to Sell; that such obligation of the buyer under the Contract to Sell is not the equivalent of cash following the "equivalent of cash doctrine" pertaining to deferred payment sale transactions; and that, considering the foregoing, it is your opinion that: 1. Deferred payment sales where the buyer's initial payments in the year of sale did not exceed 25%, of the selling price . That, your said installment buyers may not legally be imposed with any deficiency expanded withholding tax assessment since PRIMETOWN already reported and paid these income taxes in its income tax returns filed for the years 1991 to 1996 and considering that no implementing Revenue Regulations has been promulgated by the Secretary of Finance governing deferred payment sales covering the years 1991 to 1996; 2. Deferred payment sales where the buyers initial payments in the year of sale exceed 25% of the selling price . That, your said installment buyers may neither be made liable to any deficiency expanded withholding tax nor any 25% surcharge or 20% interest for their non-withholding of the tax on any of their installment payments, considering that no implementing Revenue Regulations has so far been promulgated by the Secretary of Finance concerning this type of installment sale transactions. In reply, please be informed that Section 43 of the Tax Code of 1997 (then Sec. 37. of the Tax Code, as amended) prescribes that the taxpayer's taxable income " shall be computed upon the basis of the taxpayer's annual accounting period (fiscal year or calendar year, as the case may be) in accordance with the method of accounting regularly employed in keeping the books of such taxpayer . . .". Section 49 of the same Tax Code (then Sec. 42 of the Tax Code, as amended) further provides that income from installment sales, " may " be reported for income tax purposes in the manner provided for under the said Section. This law was lifted from the old Federal Income Tax law of the United States. Being of American origin, the doctrine is that the interpretation that it received in the United States is persuasive in the Philippines. According to U.S. jurisprudence, the said law on installment reporting of income from deferred payment sale is a mere option or privilege granted by law to the seller (MERTENS 15.05). Thus, if the taxpayer-seller does not opt to report his income from deferred payment sale transaction on installment basis as provided under Section 49 of the Code, then, he may report the same in accordance with the accounting method regularly employed in keeping his books of accounts, pursuant to Section 43 of the said Code. This rule is apparent and patent in Section 49 of the Code which used the word " may " vis-a-vis reporting of income from deferred or installment payment sales, regardless of whether or not the buyer's initial payments in the year of sale exceed or do not exceed 25% of the selling price. Since most of the condominium units were sold to individual persons not engaged in trade or business, such installments payments/amortization were, therefore, not subjected to withholding tax during the paying period. At the outset, however, the income for these installment sales was duly reported by Primetown Property Group in accordance with the accounting method which they employed such that the income taxes for the period covered from 1991 to 1996 which were required by the BIR to be collected from Primetown Property were actually paid and fully settled. cdlex Considering therefore that during the period covered by this case (i.e., from 1991-1996), no specific regulations govern the time or the manner of withholding the tax on deferred or installment payment sales of real property (whether or not the initial payment is in excess of 25% of the selling price), reasons of fairness and equity dictate that individual buyers who did not make any such withholding on installment payments, not be subjected to the corresponding penalties imposed for failure to withhold the tax . 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 of 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 payment as cash sales or installment sales transaction for the purpose of the requirements 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 paid in your income tax returns for the years in question. In the light of the foregoing and since the sales were already reported and income taxes thereon for the said years have been paid, this Office is of the opinion and hereby holds that no further deficiency expanded withholding tax, 25% surcharge or 20% interest shall be imposed against the aforementioned installment buyers of condominium units during the period from 1991 to 1996. However, please be informed that the implementing regulations governing sales of real property on installment basis are now provided under Section 2.57.2 (J) of Rev. Regs. No. 2-98, effective January 1, 1998. Since Revenue Regulations are only prospective in application, the said rule does not apply to this case which pertains to the prior years 1991 to 1996. This ruling modifies and further clarifies BIR Ruling No. 11-99 dated January 22, 1999 and shall serve as the basis of your installment buyers of condominium units during the years from 1991 to 1996 to secure from our concerned Revenue District Office the corresponding Certificate Authorizing Registration (CAR) covering their respective condominium unit in order that the ownership and title thereto may be caused to be recorded and transferred, by the Register of Deeds, in the name of the respective installment buyers. Finally, 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. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue