BIR Ruling No. 182-99

November 24, 1999 BIR RULING NO. 182-99 182-99 JP Properties & Ventures Corp . 6th Floor, Jollibee Centre, San Miguel Avenue Pasig City Attention: Ms . Esther S . Ang President Gentlemen : This refers to your letter dated September 24, 1999 requesting confirmation of your opinion that you are no longer liable for the payment of increments incident to alleged late payment in connection with your remittances of Expanded Withholding Tax (EWT) for the year 1995. It is represented that JP Properties & Ventures Corp. (JPPVC) is a domestic corporation which developed and owns a condominium building known as the Jollibee Plaza; that in 1995 it sold a number of units to various persons the initial payments of which exceeded twenty five per cent (25%) of the gross selling price; that the expanded withholding tax (EWT) on the initial payments made in 1995 in the aggregate amount of P15,991,822.00 was remitted to the BIR, that in your annual income tax return for the year ended December 31, 1995, you declared the entire selling price for the above units as part of Gross Income and, accordingly, paid a corporate income tax of P20,367,094.00 against which the EWT amounting to P15,991,822.00 on the initial payments was credited; that with respect to the unpaid portion of the purchase price as of December 31, 1995, the applicable EWT were withheld and remitted to the BIR as soon as they were subsequently paid by the respective buyers; that as of this date, the purchase price for the above units were already paid and the EWT were completely remitted; that the bases for the EWT are the respective selling prices considering that they are higher than the zonal values. Accordingly, you applied with Revenue District No. 43 (Pasig City) for the issuance of Certificate Authorizing Registration (CAR) of the deeds of absolute sale covering some of the above-referred transactions, but you were informed that no CAR will be issued unless the increments incident to late payment, i.e., 25% surcharge, interest and compromise fee are paid first. In other words, it is the contention of RDO 43 that the withholding and remittance of the EWT on the balances of the purchase price, which were remitted at the times they were paid, as it became payable then, were made late. The sole issue, therefore, is when should the withholding agent make the deduction and remittance of the EWT on the gross selling price in the case of sale of real property on the deferred payment plan so as to pave the way for the issuance of the CAR. Conversely, whether the withholding and remittance of the EWT should be made in the initial year or at the time payments are made by the withholding agent/payor. In reply, please be informed that during the year 1995, the Creditable Withholding Tax (CWT) in respect of sales of real property was governed by Revenue Regulations No. 12-89, as amended by Revenue Regulations No. 1-90, as further amended by Revenue Regulations No. 12-94. But none of these implementing regulations provided the rules on how the purchaser may withhold the CWT in case he purchased real property if, by the terms of the contract, he shall pay the selling price thereof on a periodic amortization over a period in excess of one (1) year. Wherefore, Paragraph No. 3 of Revenue Memorandum Circular No. 80-89, issued on Dec. 26, 1989, ruled that if the buyer is an individual who is not engaged in trade or business, he shall withhold the CWT only when he pays the last installment. However, if the Buyer is a corporation or an individual engaged in trade or business, he shall withhold the CWT. RMC 80-89 was, however, silent how the latter shall withhold the tax, specifically on whether the withholding is also based on the last installment paid or on each and every installment payment made. cdlex The pertinent provision of the said Circular reads as follows: "3. Where the consideration or part thereof is payable on installments, no withholding of tax is required to be made on the installment payments where the buyer is an individual not engaged in any trade or business. In such a case, the withholding of tax shall be made on the last installment(s) paid to the seller and the basis of the withholding tax shall be the consideration appearing on the Deed of Sale or the zonal value prescribed at the time the Contract to Sell, duly notarized, was executed by the contracting parties. On the other hand, the applicable rate of withholding shall be deducted and withheld by the buyer of the real property, whether in corporate form or otherwise, who is constituted as a withholding agent, if he is engaged in any trade or business. He is presumed to have previously registered as such with the appropriate district office." Under Subsection (B), in relation to Subsection (A), Section 49 of the National Internal Revenue Code of 1997 (formerly Section 43 of C.A. No. 466, otherwise known as the first National Internal Revenue Code), as implemented by Sections 175 to 177 of Revenue Regulations No. 9, otherwise known as the Income Tax Regulations, income from sale of real property in which the selling price shall be paid by the buyer on a periodic amortization extending beyond one taxable year (whether calendar or fiscal year) may be reported by the seller in his/its annual income tax returns on installment basis if the buyer's initial payments in the year of sale do not exceed twenty-five percent (25%) of the selling price. If, however, the buyer's initial payments in the year of sale exceed 25% of the selling price, the same shall be treated as a "deferred payment sale not on installment plan", in which case, " the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash ." (See Sec. 177, Rev. Regs. No. 2, supra) In general, such deferred payment sale not on installment plan is treated as the equivalent of a cash sale transaction, hence, the vendor's income therefrom is treated wholly taxable in the year of sale, even if full payment of the amortization have not as yet been actually received from the purchaser as the same are payable over the years. In such a case, the vendor's income from a deferred payment sale, taxable as a cash sale transaction, is, fully imposed with income tax in the year of sale, hence, his receipts of amortization from the purchaser, after the year of sale, are no longer treated as "income" but instead considered as a "mere return of capital". (See meaning of the term "income" in the en banc decision of the Supreme Court in the case of FREDERICK C. FISHER, plaintiff-appellant, vs. WENCESLAO TRINIDAD, Collector of Internal Revenue, defendant-appellee, G.R. No. 17518, October 30, 1922) Consequently, it is necessary to distinguish the taxability of the Seller in respect of sales of real property if the selling price thereof is payable by the Buyer in periodic amortization covering a period of more than one (1) year, whether he may report his income therefrom and pay income taxes thereon over the years (i.e., installment reporting of income from installment sale transaction) or to report his entire income therefrom in the year of sale (i.e., deferred payment sale not on installment plan, which is treated as a cash sale transaction). In BIR RULING No. 078-94, it was ruled that in the case of deferred payment sale of real property not on installment plan, the income derived 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. 019-96, which ruled that the basis of the CWT shall be on the amount of the "Selling Price" rather than based on the "initial or down payment", modified this ruling. BIR RULING No. 019-96 has been circularized in REVENUE MEMORANDUM CIRCULAR No. 30-96. The latest revenue issuance in respect of sale of real property payable on a periodic amortization over the years is embraced by Sec. 2.57.2 (J) of REVENUE REGULATIONS No. 2-98, as follows: "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 a 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." Since the deferred payment sales of real property at issue were made during the year 1995, or during the effectivity of BIR RULING No. 078-94, your Buyers of condominium units were duty bound to deduct and withhold from you the CWT computed based only on their respective "initial or down payment" in the year of sale, i.e., in the year 1995. BIR RULING No. 019-96, which was circularized under RMC No. 30-96, requiring that the CWT be computed based on the entire selling price, is not applicable because to apply the same in this case will amount to its retroactive application which Section 246 of the Code proscribes or censures, as follows: "SEC. 246. Non-Retroactivity of Rulings . Any revocation, modification or reversal of any of the rules and regulations promulgated in accordance with the preceding Sections or any of the rulings or circulars promulgated by the Commissioner shall not be given retroactive application if the revocation, modification or reversal will be prejudicial to the taxpayers . . . ." It is also represented that while the said condominium units Buyers deducted and withheld CWT on their initial payments in the year of sale (i.e., in the year 1990), and remitted the same to the BIR, they still further deducted and withheld CWT on their payments to you of their amortization in the years following the year of sale, and remitted the same to the BIR. Please be informed that the same constituted an erroneous and excessive withholding of CWT. Since CWT is income tax, it may only be withheld provided there is income payment to the Seller/Payee. In the case of a deferred payment sale of real property, the Seller's income from the sale had already been wholly taxed in the year of sale. He, therefore, derives no income from amortization paid by installment Buyers after the year of sale. To him, such receipt of amortization no longer constitutes "income" but a "mere return of capital" (supra). However, since the said erroneously withheld and remitted CWTs have been fully credited against your income taxes in the years following the year sale, the said error had been offset by your subsequent use thereof as a credit against your annual income taxes. LexLib In view of the foregoing considerations, this Office hereby rules that: 1. Since the foregoing deferred payment sales were made during the year 1995, the basis of the CWT was on the "initial or down payment," pursuant to BIR RULING NO 078-94. Accordingly, the said Buyers /Withholding Tax Agents have withheld and remitted the correct amounts of CWTs due thereon. 2. If the Buyer is an individual who is not engaged in trade or business, he shall not withhold any CWT on his down payment and amortization made during the year of sale, since he is only required to withhold the tax based on his last installment payment . (RMC NO. 7-90) Therefore, such individual is only a withholding tax agent vis-a-vis a sale of real property, the income from which may be reported by the Seller on installment basis because the Buyer's initial payments in the year of sale did not exceed 25% of the selling price. The term "initial payments" means "at least one other payment in addition to the initial payment." In case the real property sold is under mortgage and the Buyer, under the contract, shall assume payment of the unpaid mortgage, the excess of the unpaid mortgage over the Seller's cost basis for the property (if any) shall form part of the "initial payments." (See Sec. 175, Revenue Regulations No. 2) Conversely, the said individual was not constituted as a withholding agent vis-a-vis deferred payment sale transactions since his payment of the last installment did not constitute an income payment but, on the contrary, a mere return of capital of the Seller (supra). 3. Your 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 during the year 1995. Hence, your request for non-imposition of any penalty is in order. 4. This will serve as the basis of our concerned Revenue District Office to cause the issuance of the corresponding Certificate Authorizing Registration (CAR) of the condominium units in the name of their respective Buyers. In this regard, the list of CCT Numbers of the units said to be involved in the transaction is indicated in the annex hereto attached. llcd This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, the facts are different, then this ruling shall be considered null and void. Very truly yours, (SGD.) BEETHOVEN L. RUALO Commissioner of Internal Revenue