BIR Ruling [UN-028-94]

January 28, 1994 BIR RULING [UN-028-94] Sycip, Gorres Velayo & Co. 6760 Ayala Avenue Makati, Metro Manila Attention: Atty . C . P . Noel Gentlemen : This refers to your letters dated November 11, 1992 and July 9, 1993 requesting in behalf of your clients, Cityland Development Corporation (Cityland), City and Land Developers and Cityland, Inc., a ruling confirming your opinion stated as follows: "(1) The installments payments received by Cityland in 1990 and subsequent years on a sale of a condominium unit covered by the above-described Contract to Sell executed in 1989 are not subject to the expanded withholding tax (EWT) since said sale has already been reported as cash sale, and the income therefrom has already been reported for income tax purposes, in 1989; "(2) For sales qualifying as installment sales for income tax reporting purposes (where the sum of the downpayment and installments received in the year of sales does not exceed 25% of the contract price) the tax base for the EWT on installment payments received beginning 1990 should be the zonal value at the time of the execution of the Contract to Sell, not the zonal value when the Deed of Absolute Sale is executed; and "(3) In the same manner, the basis for computing the documentary stamp tax (DST) liability for the above-described transaction is the zonal value at the time of the execution of the "Contract to Sell". Correlative thereto, you mentioned in your letter dated July 9, 1993 addressed to Revenue District Office No . 32 (Makati-West) that inasmuch as City and Land Developers Inc . (CLDI) and Cityland Inc . (CI) adopt the same accounting practice of recognizing in the year of sale all income on cash sales and on sales where the total initial payments received in the year of sale exceed twenty-five percent (25%) of the selling price, you further requested that your letter dated November 11, 1992 requesting for confirmation of your above opinion on behalf of Cityland Development Corporation, be deemed also to include CLDI and CI . It is represented that Cityland is a domestic corporation engaged in, among others, the business of developing and selling condominium buildings; that each of its sale of a condominium unit is documented by a "Contract to Sell"; that under the "Contract to Sell", the purchase price is payable in installments after the payment of the initial downpayment; that it is also stipulated in the said contract that title to the unit sold passes to the buyer and the corresponding Deed of Absolute Sale will be executed only after full payment of the purchase price; that in 1989, Cityland sold condominium units evidenced by the said Contract to Sell up to a certain period, e.g., 3 years thus, if a Contract to Sell was executed in May, 1989 and has an installment period of 3 years the Deed of Sale would be executed after payment of the last installment in May 1992; that for a condominium unit sold in 1989, the sum of the monthly amortizations and downpayment received by Cityland in that year amount to more than twenty-five percent (25%) of the unit's stipulated price; that for purposes of settling its income tax liability in 1989, the gross profits derived by Cityland from the said installment sale have already been reported by it in full; that investigation conducted on the accounting computerized records of your client to prove the correctness and consistency of the accounting system adopted by your said client covering the installment sales of its condominium units, particularly the sales made prior to 1990 and the appropriate method of determining its income realized from the initial payments made by the buyers during the first installment year showed that when the initial payments received from each buyer during the first year exceeded twenty-five (25%) percent of the stipulated price, the cash sale method of reporting its gross income is applied; and that, if the said initial payments did not exceed twenty-five (25%) percent of the stipulated price, the applicable installment method is thus followed. In his Memorandum-Report dated July 29, 1993, Revenue Officer Antonio A. Aluguin of RDO No. 32A, West Makati, Metro Manila stated that: "As a result thereof, it was properly verified that when the initial payments received from each buyer during the first year exceeded twenty-five percent (25%) of the stipulated price, the cash sale method of reporting its gross income is applied, while, if the said initial payments did not exceed twenty-five (25%), the applicable installment method is then followed. Further investigation disclosed that the same accounting method was adopted and the same computerized records were maintained by its affiliated companies, namely, City and Land Developers Inc., and Cityland Inc." In reply, please be informed that Section 42(b) of the Tax Code, as amended, provides, viz: "SEC. 42. Installment basis (a) xxx xxx xxx "(b) Sales of realty and casual sales of personalty. In the case of (1) a casual sale or other casual disposition of personal property (other than property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year), for a price exceeding one thousand pesos, or (2) of a sale or other disposition of real property, if in either case the initial payments do not exceed twenty-five percent of the selling price, the income may under regulations prescribed by the Secretary of Finance, be returned on the basis and in the same manner above prescribed in this Section. As used in this Section the term "initial payments" means the payments received in cash or property other than evidence of indebtedness of the purchaser during the taxable period in which the sale or other disposition is made." Generally, income from the sale of real property may be reported either on the installment basis or on the deferred payment basis not on the installment plan. The basic distinction between a sale of real property on the installment plan and a sale on a deferred-payment basis, not on the installment plan, lies on the amount of "initial payments" received by the seller. The sale is on the installment plan if the initial payments in the year of sale do not exceed twenty-five percent (25%) of the selling price. If the initial payments in the year of sale exceed twenty-five percent (25%) of the selling price, then the sale is on deferred-payment basis, not on the installment plan. (Sec. 175, Revenue Regulations No. 2) The term "initial payments" is defined to mean payments received in cash or property other than evidences of indebtedness of the purchaser during the taxable year in which the sale or other disposition is made. This term must not be equated with what is commonly called "downpayment" because its meaning is much broader than that. While it covers any downpayment made, it goes further and includes all payments actually or constructively received during the year of sale. (Gertrude H. Sweet, 8 BTA 404; Cortland Specialty Co. 22 BTA 808) and the aggregate of all such payments determines whether or not the limit which the law has set has been exceeded. (See BIR Ruling No. 70-034 dated June 29, 1970) Such being the case, and since as represented, the aggregate initial payments in the year of sale is in this case, in excess of 25% of the selling price of the condominium units, the gross profits/gains realized from the said sale should be reported on a deferred payment method, not on the installment plan. In other words, the taxable gain or income returnable during the year of sale is the difference between the selling or contract price and the cost of the condominium units, determined in accordance with Section 34(a) and (b) of the Tax Code, as amended, even though the entire purchase price has not been actually received in the year of sale since in a sale on a deferred payment basis, not on the installment plan, "the obligations of the purchaser received by the vendor are to be considered as the equivalent of cash". (Sec. 177 Revenue Regulations No. 2). On the other hand, 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, 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 Revenue Regulations No. 1-90 based on the gross selling price or the total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of the real property. For the purposes of said regulations, the term "gross selling price" means the consideration stated in the sales document or the fair market value/zonal value, whichever is higher. In view thereof, and there having been a factual verification that for purposes of settling their income tax liabilities, the gross profits from the installment sales have already been reported in full, and that, further, the accounting computerized records of your clients showed that when the initial payments received from each buyer during the first year exceeded twenty-five (25%) percent of the stipulated price, the cash sale method of reporting its gross income is applied , your opinion to the effect that 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 said sale has already been reported as a cash sale, or the income therefrom has already been reported in full for income tax purposes in 1989 and the corresponding tax thereon has been paid even though it has not yet received the monthly amortizations due for the succeeding years, is hereby confirmed. Moreover, where the consideration or part thereof is reported and payable on installment basis, 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 case, beginning January, 1990 the withholding of tax shall be made on the last installment(s) paid to the seller. On the other hand, the applicable rate of withholding tax shall be deducted and withheld by the buyer of real property, whether in corporate form or otherwise, who is constituted as a withholding agent, if he is engaged in any trade or business, based on the gross selling price (consideration stated in the sales document) or the fair market value/zonal value whichever is higher, which obligation of the payor to deduct and withhold arises at the time the consideration is paid or payable. Thus, your opinion to the effect that for sales qualifying as installment sales for income tax reporting purposes (where the sum of the downpayment and installments received in the year of sale does not exceed 25% of the contract price) the tax base for the expanded withholding tax (EWT) on installment payments received beginning 1990 should be the zonal value at the time of the execution of the Contract to Sell, not the zonal value when the Deed of Absolute Sale is executed; and that the basis for computing the documentary stamp tax liability for the above-described transaction is also the zonal value at the time of the execution of the Contract to Sell, is likewise, hereby confirmed (See BIR Ruling Nos. 205-91; 034-70) cdi Finally, it is understood that this ruling shall apply to Cityland Development Corporation, City & Land Developers, Inc. and Cityland Incorporated. Very truly yours, JAIME M. MAZA Assistant Commissioner (Legal Service)