BIR Ruling [UN-287-95]

August 2, 1995 BIR RULING [UN-287-95] Sycip Gorres Velayo & Co. 6760 Ayala Avenue Makati City Attention: Atty . Cirilo P . Noel Tax Division Gentlemen : This refers to your letter dated May 30, 1995 stating that your client, Carmelray Development Corporation (Carmelray) is a domestic corporation with offices at the 7th Floor, Rufino Plaza, 6784 Ayala Avenue, Makati City; that it was registered with the Board of Investments on November 27, 1990, on a preferred non-pioneer status, as a new developer of industrial estate; that it sells or leases out the industrial lots in the industrial estate; that pursuant to said registration, Carmelray was entitled to an income tax holiday incentive "for a period of four (4) years from the start of commercial operation in April 1991 or from the actual start of selling/leasing of the lots whichever comes first, but in no case earlier than the date of registration of the project"; that the four-year period was reckoned from April 1, 1991, the start of commercial operation; that Carmelray's income tax holiday expired last March 31, 1995; that the sale of industrial lots is embodied in a "Deed of Conditional Sale" wherein the purchase price is payable in installments after the payment of the initial downpayment; that it is further provided that title to the industrial lot passes to the vendee (buyer) upon the execution of the Deed of Absolute Sale and upon the full payment of the purchase price; that on various dates from 1993 to March 31, 1995, Carmelray sold industrial lots to the following buyers: BUYER DATE OF EXECUTION OF DEED OF CONDITIONAL SALE Canley Traders Corporation 03-31-95 Airden Phils. Inc. 03-31-95 Diamante Property Holdings, Inc. 03-31-95 Fujitsu Development Corp. of the Phils. 12-21-94 Hi Kian Yu (in trust for FHE Properties, Inc.) 03-31-94 Integrated Device Technology Realty Holdings, Inc. 03-31-95 Tara Asset and Holdings Corporation 10-18-94 Network Properties and Development Corp. 03-31-95 Enrico M. Ingles (Sekisui) 03-31-95 Jose Ben R Laraya (in trust for 01-27-95 Outdoor Technologies [Phils.], Inc. Nichei Pilipinas, Inc. 03-31-95 AMTRACO Realty Development Corp. 10-22-93 that the buyers listed above made initial down payments of 25% or more of the industrial lots stipulated price in the year when the respective Deeds of Conditional Sale were made and executed; that for purposes of its returnable income for the years 1993, 1994 and the first quarter of 1995, the gross profits derived by Carmelray have already been reported by it in full; that for income tax reporting purposes, the sale of industrial lots in the years abovementioned was treated as cash sale under the Deeds of Conditional Sale; and that of the aforementioned buyers, majority had fully paid the total purchase price of the lot and executed, respectively, the Deed of Absolute Sale with the seller, Carmelray. In connection therewith, you are requesting confirmation of your opinion that the initial downpayments received by Carmelray in 1993, 1994 and the first quarter of 1995 and installment payments in subsequent years on the sales of industrial lots covered by the above-described Deeds of Conditional Sale executed in said years, respectively, are not subject to the expanded withholding tax since said sales were already reported as cash sales and the income therefrom has already been reported for income tax purposes in said years, during which period Carmelray still enjoys its income tax holiday, hence, it is exempt from income tax. In reply thereto, 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 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. 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 a 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 aforementioned listed buyers have made initial downpayments of 25% or more of the stipulated price of the industrial lots in the year the respective Deeds of Conditional Sale were made and executed, 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 industrial lots, 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 and further amended by Revenue Regulations No. 12-94 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, as amended by Revenue Regulations No. 12-94 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 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, your opinion to the effect that the initial downpayments received by Carmelray in 1993, 1994 and the first quarter of 1995 and installment payments in subsequent years on the sales of industrial lots covered by the abovementioned Deeds of Conditional Sale executed in said years are not subject to the creditable withholding tax since said sales were already reported as cash sales and the income therefrom has already been reported for income tax purposes in said years; and since Carmelray still enjoys an income tax holiday up to March 31, 1995, Carmelray is exempt from the payment of the creditable withholding tax on the aforementioned sales, even though it has not yet received the monthly amortizations due for the subsequent years, is hereby confirmed. (BIR Ruling Nos. 205-91; 034-70; 061-94; UN-028-94 dated January 28, 1994). This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. Very truly yours, ALICIA P. CLEMENO Assistant Commissioner (Legal Service)