BIR Ruling [UN-145-94]

May 3, 1994 BIR RULING [UN-145-94] Ms. Rosalinda G. Antiporda 11 Mt. Semeru Street, Filinvest I Capitol District, Quezon City M a d a m : This refers to your letter dated June 15, 1993 stating that in a sale of a parcel of land with improvements thereon, to an individual by a corporation engaged in real estate business, the selling price is P212,780; 20% or P42,556.00 as downpayment, and the balance payable in 10 years from 1986-1995; that the Deed of Absolute Sale, executed to effect the said sale transaction was notarized on December 31, 1985; that it was established by documentary evidences other than the Deed of Sale, that the documentary evidences other than the Deed of Sale, that the public instrument was truly executed and notarized on the date shown therein; that the same documentary evidences also showed that the vendee took immediate absolute possession of the property after the consummation of the sale on December 31, 1985, notwithstanding that full payment was made not until 1992; and that presentation of the Deed of Absolute Sale to the Revenue District Officer was made only on June 14, 1993, and cited as reasonable and justifiable cause for late submission was the fire that gutted Quezon City Hall and with it the records of the Register of Deeds which is housed in the building. Based on the foregoing representation, you now request a ruling on the following queries: 1. Should the installments paid beginning 1990 (January) on said sale transaction be subjected to creditable withholding tax when the transaction itself is not covered by Revenue Memorandum No. 7-90, considering that the sale was consummated before January 1, 1990, the cut-off date in determining whether realties sold, exchanged otherwise disposed of shall be subject to the creditable withholding tax imposed under Revenue Regulations No. 1-90. aisadc 2. Is the above represented sale transaction, classified as a conditional sale or installment sales even when the conveyance is by way of Absolute Deed of Sale and even when the vendee has taken possession of the realty sold upon consummation of the Deed of Absolute Sale? 3. Is the governing rule regarding the date of consummation of the contract of sale, disregarded when it comes to transfers with installments payments made beginning January 1, 1990? 4. The confusion lies in the section on withholding tax base which provides that "In case of installment sales, only such amounts paid beginning in 1990 shall be subject to the withholding tax". Does the abovecited provision cover only transfers of real properties consummated on or after January 1, 1990 or all transfers regardless of date of consummation of the deed of sale? 5. Is the abovecited provision on installment sales superior to the governing rule on cut-off date of real estate transactions that may be subjected to creditable withholding tax? 6. Does the installment term of real estate transaction overturn of disregard the rule about the date when the sales, exchanges or transfers of real properties are consummated? 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, in case of installment sales, only such amounts paid beginning in January 1, 1990 shall be subject to the creditable expanded withholding tax. This is in consonance with the rule that regulations shall apply prospectively. Thus, past installment payments made before 1990 on the sale adverted to in your letter should not be subject to the expanded withholding tax provision because the requirements were imposed only in January, 1990. 2. Section 42(b) of the Tax Code, as amended, provides viz: "Section 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 doe 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 evidences 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 during the year of sale. The sale is on the installment plan if the initial payments in the year of sale do not exceed twenty-five (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 payments 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 CTA 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 did not exceed 25% of the selling price of the realty sold, the said transaction is therefore, an installment sale, notwithstanding the fact that the conveyance is by way of a Deed of Absolute Sale and even if the Vendee has taken possession of the realty sold upon the consummation of the Deed of Absolute Sale. 3. Considering that the sale in the instant case is an installment sale, the rule that should govern the same should be that pertaining to installment sales in Revenue Memorandum Circular No. 7-90 and not that pertaining to the rule regarding consummation of contract of sale. 4. The provision in Revenue Memorandum Circular No. 7-90 that "In case of installment sales, only such amounts paid beginning in 1990 shall be subject to the withholding tax", refers to all sale transactions of realty on the installment basis regardless of the date of consummation of the sales document. 5. The aforequoted provision on installment sales provides the guideline to be followed in cases were the sale transaction is an installment sale. On the other hand, the rule on the cut-off date on realty transaction provides a clarification as to the effective date of sale of which realty is subject to the creditable withholding tax imposed under Revenue Regulations No. 1-90. Thus, both clarificatory guidelines on the provisions of Revenue Regulations No. 12-89 as amended by Revenue Regulations No. 1-90 could be said to compliment each other, considering that in the case of installment sale of realty, only income payments received by the seller beginning January 1, 1990, the effective date of Revenue Regulations No. 1-90, shall be subject to the creditable expanded withholding tax. 6. If the sale of realty falls within the criteria set forth under Section 42(b) of the Tax Code, as amended, the same shall be classified as an installment sale, that is, the initial payments, during the year of sale, as explained previously, does not exceed 25% of the selling price of the realty sold. Thus, installment term of real estate transaction does not per se determine whether such transaction could properly be classified as an installment sale of realty so as to render payments beginning January 1, 1990 made pursuant thereto subject to the creditable withholding tax imposed under Revenue Regulations No. 1-90 implementing Section 50(b) of the Tax Code, as amended, disregarding as a result of the rule on the prospective applications of Revenue Regulations. (BIR Ruling Nos. 205-91; 304-70) cdtech Very truly yours, ALICIA P. CLEMENO Acting Assistant Commissioner (Legal Service)