July 7, 2004

BIR RULING [DA-381-04]

RR 2-98; 7-95; VAT Ruling No. 047-98; 036-98; BIR Ruling No. 076-96 Laya Mananghaya & Co. 22/F Philamlife Tower 8767 Paseo de Roxas Makati City Attention: Atty. Francisco C. Tagao Principal, Tax & Corporate Service and Atty. Ronald L. Carreon Director, Tax & Corporate Service Gentlemen : This refers to your letter dated November 4, 2002 stating that your client, Ayala Land, Inc. (ALI) and its affiliate realty companies (Realty Cos.) enter into sales of real property on installment plan and on deferred-payment, not on the installment plan; and that the taxation of these transactions is as follows: Installments Sales that for income tax purposes, gain on installment sales is reported on installment basis pursuant to Section 176 of Income Tax Regulations No. 2; that the buyers on this installment plan withhold the 5% creditable withholding tax on their installment payments pursuant to Revenue Regulations No. 2-98, as amended, which the Realty Cos. credit against their corporate income tax due; and that the 10% VAT is imposed or collected on each installment payment with the Realty Cos. issuing their VAT registered receipts to their buyers who, on the basis of such VAT-registered receipts, utilize the input tax credit if the buyers are VAT-registered taxpayers. Deferred-Payment Sales Not on Installment Plan
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that the gain on deferred-payment sales are reported on cash basis pursuant to Section 177 of Income Tax Regulations No. 2; that the buyers on deferred-payment sales not on installment plan withhold the 5% creditable withholding tax based on the entire selling price in the year of sale pursuant to Revenue Regulations No. 2-98, as amended, which tax withheld at source is then credited against the corporate income tax due from the Realty Cos.; that the deferred-payment sales of realty are also subjected to the 10% VAT; that the VAT is collected up front on the total selling price because deferred-payment sales of realty not on installment plan are treated as cash sales: that the subsequent deferred payments are no longer subjected to VAT; that the VAT-registered buyers take the benefit of the creditable input VAT on the purchase of realty based on the VAT receipt issued; and that in this type of sale, the Realty Cos. collect from the buyers both the 10% VAT and the 5% CWT based on the total selling price and issue a VAT registered official receipt for the entire selling price. Accounts Receivable that due to the number of installment sales and deferred-payment sales, the Realty Cos. are beginning to accumulate substantial accounts receivable (AR) that are evidenced by postdated checks (PDCs) of the buyers for both sales made on installment basis and deferred payment plan; that they foresee the difficulty of maintaining their own AR as installment sales and sales on deferred payment plan become more numerous and there is a need for liquidity to finance their operations; that in the long run, it will be more cost-efficient for the Realty Cos. to sell their AR on a without recourse basis to a bank or finance company to easily raise funds to finance their immediate needs and concentrate solely on selling realty, which is their core business and expertise; that upon the sale of their AR, the Realty Cos. will endorse and surrender the PDCs to the bank or finance company; and that the bank or finance company will then encash the check and notify the Realty Cos. of such encashment. Tax Administration That ALI and the Realty Cos are using BIR approved SAP accounting system and computer generated receipts for their sales of realty. Based on the foregoing representations, you now request for opinion on the following: SALE OF AR ON INSTALLMENT SALES OF REALTY:
"1. The gain derived from the installment sales of real property arising from the sale or assignment of the AR on a without recourse basis represents taxable income in the year of sale or assignment of such AR and
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should no longer be reported on the installment basis for income tax purposes; "2. The payment to the Realty Cos. from the bank or finance company, in consideration for the sale or assignment on a without recourse basis of the AR are not subject to creditable withholding tax (CWT) because the payments are for the purchase of AR and not for the sale or assignment of realty. Since the sale of the AR is not among the transactions subject to CWT pursuant to Revenue Regulations No. 2-98, as amended, the bank or finance company cannot be constituted as a withholding agent over such payment; "3. The installment buyer of the real property is no longer required to withhold the CWT on the installment payments to the bank or finance company because the Realty Cos. have already reported for tax purposes the entire income/gain from the sale of the real property upon the sale of the AR to the bank or finance company; "4. The sale of AR on installment sales of real property is subject to the 10% VAT since the payment represents a collection of what would have comprised the seller's gross receipts from the sale of the real property".

SALE OF AR ON DEFERRED-PAYMENT SALES, NOT ON INSTALLMENT PLAN:

"1. The proceeds pertaining to the sale of AR on deferred-payment sales will no longer form part of the taxable income of the realty Cos. since the original sales of realty are treated as cash sales that are already reported as taxable at the time of sale of the realty; "2. The payment for the purchase of AR on deferred-payment sales of real property is not subject to the 5% CWT because it represents only a collection of previously taxed income. Moreover, the payments are for the purchase of AR and not for the sale of realty. Since the sale of the AR is not among the transactions subject to CWT pursuant to Revenue Regulations No. 2-98, as amended, the bank or finance company cannot be constituted as a withholding agent over such payment; "3. The buyer of the real property on deferred-payment plan is no longer required to withhold the 5% CWT on the deferred payments to the bank or finance company because the Realty Cos. have already reported the entire taxable income on the deferred-payment sale at the time the sale of realty was entered into; "4. The sale of AR on deferred-payment is not subject to the 10% VAT because the VAT on the entire selling price of the real property has already been reported as subject to VAT at the time of sale of the realty, it
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being considered a cash sale."

VAT INVOICING ISSUES:

"1. The Realty Cos. are allowed to issue their own VAT-registered official receipts covering the payments of their installment plan buyers to the bank or finance company without being further subjected to VAT but just to enable the VAT registered buyers to claim the input VAT; "2. The Realty Cos. will use the same system generated ORs, that bear the notations as proposed and using a segregated series of numbers within the BIR approved series that will be utilized only for the purpose of issuing the VAT and Non-VAT ORs needed for the proposed transactions; however, with respect to the VAT ORs, these will be used only for the purpose of allowing the VAT registered buyers on installment basis to avail of the input tax on their purchase of realty; "3. The special VAT receipts must contain the notation as proposed in the request: NOTE: Issued as evidence of installment payments made in connection with installment sales receivables that have been transferred to the bank/finance company. Issued solely for the benefit of the VAT-registered buyer for purposes of claiming its input tax and does not in anyway constitute additional receipts or income of the issuer for either VAT and/or income tax purposes. "4. The installment-plan buyers can claim input taxes on their subsequent installment payments to the bank or finance company on the basis of and as evidenced by the VAT-registered official receipts that ALI and its affiliate realty entities will issue; "5. The subsequent payments to the bank or finance company will not generate input taxes for the VAT-registered buyer on deferred-payment plan because the full input VAT benefit has been made upon the issuance of the VAT registered receipts covering the initial payment as this is treated as a cash sale for VAT purposes; "6. The Realty Cos. should generate separate non-VAT receipts BIR approved accounting system using a series of numbers that should be segregated from the existing series of BIR approved numbers; these will be used only for the purpose of allowing the buyers on deferred payment plan to evidence the subsequent payments made; "7. The Realty Cos. are allowed to issue their own non-VAT official receipts covering the payments of their deferred payment plan
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buyers to the bank or finance company; and "8. The non-VAT receipts must contain the notation as proposed in the request: NOTE: Issued as evidence of subsequent payments made in connection with sales on deferred payment plan receivables that have been transferred to the bank/finance company. Issued solely for the benefit of the buyer for purposes of evidencing payments made and does not in anyway constitute additional receipts or income of the issuer for either VAT and/or income tax purposes".

In reply thereto, please be informed that the following opinion will be based on the provisions of the Tax Code of 1997 and existing regulations and tax issuances applicable to the taxation of Sale of AR on installment sales and/or deferred payment of realty and its incident thereto. Sale of AR on installment sales (1) The transfer or assignment of the AR on installment sales to a bank or finance company will effectively result in the collection of the balance on the installment price of realty sold. For income tax purposes, the portion of the consideration paid for the AR on installment sales will be reported as income during the year the AR was sold and should no longer be reported on the installment basis for income tax purposes. Thus, in the case of Bibiano Baas, Jr. v. Court of Tax Appeals, et al., G.R. No. 102967 dated February 10, 2000 involving the sale of realty, the Supreme Court ruled:
EIASDT

"Where an installment obligation is discounted at a bank or finance company, a taxable disposition results, even if the seller guarantees its payment, continues to collect on the installment obligation, or handles repossession of merchandise in case of default. This rule prevails in the United States. Since our income tax laws are of American origin, interpretations by American Courts on our parallel tax laws have persuasive effect on the interpretation of these laws. In applying the aforesaid interpretation by analogy in the case at bar a taxable disposition result when the discounting of the promissory note is done by the seller himself. Clearly, the indebtedness of the buyer is discharged, while the seller acquires money for the settlement of his receivables. Logically, then, the income should be reported at the time of the actual gain. When the petitioner had the promissory note covering the succeeding initial payments of the land issued by Ayala, discounted by Ayala itself, on the same day of the sale, he lost entitlement to report the sale as a sale on installment since, a taxable disposition resulted and petitioner was required by law to report in his
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returns the income derived from the discounting.

(2) Considering that the sale of the AR is not one of those transactions subject to creditable withholding tax mentioned in Revenue Regulations No. 2-98, as amended, the payments made to the Realty Cos. by the bank or finance company, in consideration for the sale or assignment on a "without recourse" basis of the AR are not subject to the creditable withholding tax prescribed in the said regulations. Consequently, the bank or finance company cannot be constituted as a withholding agent over such payment. (3) The creditable withholding tax is imposed only to ensure advance partial remittance of income tax payments due from the income recipient. Since the Realty Cos. will be reporting for tax purposes the entire gain on the sale of its realty on installment sales upon the sale of the AR to the bank or finance company the Realty Cos. are no longer required to withhold the creditable withholding tax because they are no longer taxable on the installment payments that the buyers will remit under the original payment schedule to the bank or finance company to whom the AR will be sold or assigned. Accordingly, the objective of the creditable withholding tax under Revenue Regulations No. 2-98, as amended, no longer exists when the AR are sold because the Realty Cos. have reported the income from the sale of the real property upon receipt of the proceeds of the sale of the AR. (4) The sale of the AR on installment sales on a without recourse basis to a bank or finance company is subject to the 10% value-added tax, because the proceeds from the sale of the receivables are deemed as collections of what would have comprised the Realty Cos.' gross receipts. Thus, in BIR VAT Ruling No. 047-98 dated December 2, 1998, this Office had already occasioned to rule that
"xxx xxx xxx

"By selling or discounting the receivables, your client in effect has collected the receivables which comprise its gross receipts. In other words, the Company is deemed to have received payment for the service fees payable by its subscribers and users upon the receipt of the proceeds from the sale of the receivables. Accordingly, your client is liable to pay 10% VAT on its gross receipts as above defined."

Such being the case, the sale of the AR by the Realty Cos. to a bank or finance company shall be subject to the 10% VAT considering that the proceeds of the sale being deemed equivalent to a collection of what would have comprised the Realty Cos.' gross receipts. Sale of AR on Deferred-Payment Sales, not on installment Plan
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(1) The proceeds of the sale pertaining to the AR on deferred-payment sales should no longer form part of the income that should be reported for tax purposes because the same are being treated as cash sales under Section 177 of Regulations No. 2, otherwise known as the Income 'Tax Regulations. Accordingly, the entire selling price would have been reported and subjected to income tax in the year of sale, regardless of the fact that there are subsequent or deferred payments to make the purchase price whole. (2) Inasmuch as the deferred-payment sales are treated as cash sales for tax purposes, the entire gain would have been reported, and consequently, the entire creditable withholding tax would have been paid, in the year of the sale. Such being the case, there should no longer be any creditable withholding tax due on the subsequent deferred payments. Moreover, the sale of AR on deferred-payment sales will not result in any taxable income for the Realty Cos. because the amounts received represent only an advance collection of previously taxed income. (BIR Ruling No. 076-96 dated July 11, 1996) (3) The buyers of the real property on deferred-payment plan are no longer required to withhold the 5% creditable withholding tax with respect to their subsequent payments to the bank or finance company because these are being paid not to the seller of the real property but only to the assignee or buyer of the AR. Besides, the Realty Cos. have already reported the entire taxable income on the deferred-payment sale at the time of the sale of realty. (4) Section 4.100-1 of Revenue Regulations No. 7-95, as amended, provides that in the case of sale of real properties on the deferred payment basis not on the installment plan, the subsequent payments of the balance of the gross selling price shall no longer be subject to VAT considering that the transaction is treated as cash. In applying the above principle in the case at bar, it is logical that the sale of AR on deferred payment to the bank or finance company should no longer be subject to VAT, since the total selling price of the real property has been subjected to VAT at the time of the sale. (BIR VAT Ruling No. 036-98) VAT Invoicing Issues (1) The Realty Cos. are allowed to issue their own VAT-registered official receipts in favor of the installment buyer upon receipt of the report from the bank or finance company confirming the installment payments due, thereby giving the buyer on installment plan, who is VAT-registered, the opportunity to claim against its output VAT the input VAT paid on installments falling due after the sale of the AR to the bank or finance company. (2) & (3)
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In order to enable VAT-registered buyers to avail of the input

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tax on their purchases of real property on installment, the Realty Cos. are allowed to use the same system generated ORs, that bear the notations as proposed and using a segregated series of numbers within the BIR approved series which will be utilized only for the purpose of issuing the VAT and Non-VAT ORs needed for the proposed transactions. With respect to the VAT ORs, the Realty Cos. are allowed to print and register with the BIR a separate set of VAT-registered official receipts, which are distinct from the VAT-registered official receipts ordinarily issued by the Realty Cos. in the sale of realty. These are only for the purpose of accommodating VAT-registered buyers to benefit from the input tax creditable on the purchase of the real property with the proposed notation as follows:
"Issued as evidence of installment payments made in connection with installment sales receivables that have been transferred to the bank/finance company. Issued solely for the benefit of the VAT-registered buyer for purposes of claiming its input tax and does not in anyway constitute additional receipts or income of the issuer for either VAT and/or income tax purposes."

(4) The issuance of the VAT-registered official receipt to the installment buyer who is VAT-registered will enable it to claim against its output VAT the input VAT on installments falling due after the AR was sold. There would be no double availment of input VAT on the part of the VAT-registered buyer nor a double declaration of output VAT on the part of the Realty Cos. arising from the issuance of the VAT-registered official receipts inasmuch as the Realty Cos. have already paid in advance the VAT on the remaining installment payments upon the sale of the AR to the bank or finance company. (5) Considering that the deferred-payment sales are treated as cash sales for VAT purposes, the full input VAT benefit has been availed of upon the issuance of the VAT registered receipts covering the initial payment made. Thus, the subsequent payments to the bank or finance company will not generate input taxes for the VAT-registered buyer. (6) The Realty Cos. will print and issue non-VAT receipts which they can generate from their existing accounting system and using the number series segregated from the BIR approved series of numbers; and these will be issued only for the purpose of allowing the buyers on deferred payment plan to evidence the subsequent payments made by the buyer to the bank or finance company when the latter submits a report to the Realty Cos. of the clearing of the post dated checks issued by the buyers on deferred payment plan, and not for the purpose of claiming double availment of input tax credit on the part of the VAT-registered buyer. (7) & (8)
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The printing and issuance of special non-VAT receipts by the

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Realty Cos. will merely serve as evidence of payments on deferred payment plan receivables that have been transferred to the bank or finance company and in no way will form part of the gross receipts of the Realty Cos., subject to the condition that a notation should be indicated on the receipts as follows:
"Issued as evidence of subsequent payments made in connection with sales on deferred payment plan receivables that have been transferred to the bank/finance company. Issued solely for the benefit of the buyer for purposes of evidencing such payments and does not in anyway constitute additional receipts or income of the issuer for either VAT and/or income tax purposes.

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,

(SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group

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