5% Expanded Withholding Tax on the Proceeds of Sales of Certain Housing Units

July 2, 1990 BIR RULING NO. 124-90 50 (b) 000-00 124-90 Gentlemen : This refers to your letter dated February 20, 1990 stating that you are a domestic corporation organized sometime last September 1987 by a group of Filipino investors with substantial participation by Indonesian Nationals, although the former still enjoys the controlling interest; that the main purpose of incorporation is to engage in general merchandising business, imports, exportation, agency, shipping or trading; that you purchased several housing units in the Philippines to accommodate your foreign executives, but because they turned down their foreign assignments you are now compelled to dispose of these housing units; that inasmuch as the acquisition of these residential units was financed thru bank loans, the carrying charges particularly the interest on loans have resulted to the incurrence of yearly net losses on your part; that the capital gains tax law was originally conceived as applicable only to individual taxpayers and not to corporations, pursuant to Batas Pambansa Blg. 37, as amended, and implemented by Revenue Regulations No. 8-79 and Revenue Memorandum Circular No. 41-86; that the rationale for exempting corporations is that whatever gain may be derived therefrom has to be reported quarterly or yearly due to closer supervision of corporate activities by various government agencies, in addition to the fact that the withholding of a final schedular tax on capital gains of corporations might result to numerous claims for tax refund or credits, in the event the year-end result of operations is a net loss; that similarly, the creditable expanded withholding tax law, as contemplated under Presidential Decree No. 1351 is only applicable to income payments and never intended to impose tax on return of capital, in conformity with conventional income taxation; and that you are of the view that regardless, therefore, as to whether or not the aforementioned housing units purchased by you fall under the classification of capital or ordinary assets, to impose the final capital gains tax or the withholding tax on the gross sales thereof and to collect the tax before the year-end results of operations, would certainly be without legal sanction and contrary to the provisions of the basic law or enabling act governing the two schemes of income tax collections. Based on the foregoing considerations, you now request in effect a ruling confirming your opinion that the proceeds of sales of certain housing units purchased by you and originally intended for your foreign executives but who later on backed out from their foreign assignments because of the last December coup and the perceived political instability as perceived political instability as perceived by the foreign nationals will not be subject to the expanded withholding tax. In reply, please be informed that your request is hereby denied for lack of legal basis. Section 1 for Revenue Regulations No. 1-90 amending Section 1(J)(iii) of Revenue Regulations No. 6-85, as amended by Revenue Regulations No. 12-89 implementing Section 50(b) of the Tax Code, as amended, otherwise known as the Expanded Withholding Tax Regulations provides, viz: "Sec. 1. Income Payments Subject to Creditable Withholding Tax and Rates Prescribed Thereon . Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee from the following items of income payments to persons residing in the Philippines: "(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of (i) . . . (ii) . . . (iii) real property, other than capital assets, by an individual, estate, trust, trust fund or pension fund or real property, whether capital or ordinary asset, by a corporation who is not habitually engaged in real estate business five percent (5%)." Accordingly, the proceeds of sales of certain housing units purchased by you and originally intended for your foreign executives but who later on backed out from their foreign assignments because of the last December coup and the perceived political instability is subject to the 5% expanded withholding tax imposed by Revenue Regulations No. 1-90. Very truly yours, (SGD.) JOSE U. ONG Commissioner