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Rationale - Under existing issuances, sellers of real properties are required to file their capital gains tax returns within 30 days from date of sale/exchange at the Office of the Revenue District Officer where the property is located.  This procedure is followed for all types of taxpayers, corporation or otherwise, whether taxable or exempt from the capital gains (final) tax.  However, the gain from sale or exchange of real property by persons exempt from the capital gains (final) tax must be declared for income tax purposes in the seller's regular income tax returns required to be filed after the end of the taxable year (for individual taxpayers) or after the end of the quarter for corporate taxpayers).

It has been observed lately that many sellers of real properties, who are exempt from the capital gains tax, do not include in their income tax returns the gain from their sales of real properties.  This non-reporting of gain has been made possible because of the defect in the system - the Certificates Authorizing Registration (CAR) are generally secured from the Revenue District Officer where the property is situated and the regular income tax returns are required to be filed in the place of residence or principal place of business of the taxpayer.  Because of this, the Bureau of Internal Revenue is experiencing some difficulties in monitoring and matching these transactions during audit.

In order to prevent further leakage of revenues from these transactions, Revenue Regulations No. 12-89 dated December 21, 1989, subjecting sales of real property other than capital assets to the creditable withholding tax was issued.  The rates prescribed in Revenue Regulations (RR) No. 12-89 were, however, deemed high by the various associations engaged in real estate industry, considering that the basis of the withholding tax is the gross selling price.  The real estate industry officials expressed their fear that the industry might eventually collapse as a result of the spiralling costs of construction materials, labor, and interest rates, which is exacerbated by the imposition of the high withholding tax rates. It is also feared that there might be numerous claims for tax credits filed in the future; hence, RR No. 1-90 dated January 16, 1990 (see p._was issued to amend RR No. 12-89.

This Circular seeks to clarify and amplify some pertinent provisions of the aforesaid regulations.

1.       Coverage. All sales, exchanges, or transfers of real properties (whether classified as ordinary or capital asset) by corporations, consummated on or after January 1, 1990, are subject to the creditable withholding tax.  However, in the case of individuals, estates, trusts, trust funds or pension funds, only sales, exchanges or transfers of real properties classified as ordinary assets, consummated on or after January 1, 1990, are subject to the creditable withholding tax.  Sales by individuals of real properties classified as capital assets remain subject to the 5% capital gains (final) tax.

As provided for in RMC 80-89, the date of notarization appearing on the Deed of Sale shall be considered prima facie the date of consummation of the contract of sale. In the case of sales evidenced by public instruments notarized on or before November 30, 1989, the same shall be deemed consummated on the date the Deed of Sale/Transfer is filed with or submitted to the proper revenue office, except in exceptional circumstances where the taxpayer can prove by documentary evidence other than the Deed of Sale/Transfer that the public instrument was truly executed and notarized on the date shown therein.

Illustrations. (a) If the Deed of Sale notarized on November 10, 1989 was presented to the proper revenue official within 30 days from date of sale, such transaction is not subject to the withholding tax provision of RR No. 12-89.

(b)          If such Deed of Sale was submitted to the proper revenue officer after 30 days from date of sale but before January 1, 1990; i.e., anytime between December 10 to December 31, 1989 in the example, the same is still not subject to the creditable withholding tax but subject to the penalties for late filing of the capital gains tax return and late payment of the tax.

(c)          The above transaction becomes subject to the creditable withholding tax if presented only on or after January 1, 1990.

(d)          If a Deed of Sale notarized on December 10, 1989 was presented to the BIR not later than January 9, 1990, such transaction is not subject to the creditable withholding tax. However, if the sales document was submitted to the BIR only on January 15, 1990, the sale is already subject to the creditable withholding tax because more than 30 days have elapsed from the date of sale.

The reason for the cut-off date is to prevent ante-dating of public instruments transferring real properties. However, the Revenue District Officer may issue the CAR without the payment of the creditable withholding taxes where the taxpayer can clearly prove that there was not antedating and the late submission of the Deed of Sale was due to a reasonable and justifiable cause, such as when due to a fire in the Quezon City Hall the title to the property was destroyed and had to be judicially reconstituted, or the Contract To Sell shows the last installment to have been paid on or before November, 1989, or the new Deed of Sale amends only some minor details in the old Deed of Sale notarized in 1989 like adding the Tax Account Numbers of the contracting parties. In such case, the revenue enforcement officer should state in his written report the relevant circumstances and attach to his report the other documents submitted by the taxpayer.

When the seller of real property is an entity exempt from income tax (e.g., GSIS, SSS, qualified pension plan), no withholding of tax is required to be made thereon. In such a case, the seller must execute an affidavit establishing its exemption from income tax and submit the same together with the relevant law, decree or executive order.  However, if the seller is an exempt entity under Article 26 of the Tax Code, the gain from sale of real property is still subject to income tax and consequently to the withholding tax, because the last paragraph of said section provides that "notwithstanding the provisions in the preceding paragraphs, the income of whatever kind and character of the foregoing organizations from any of their properties, real or personal, x.x.x, regardless of the disposition made of such income, shall be subject to tax imposed under this Code."

2.       When tax deducted and withheld creditable. In the case of a corporation, all sales or exchanges of real property, whether classified as ordinary or capital asset, shall be subject to the expanded withholding tax. The amount of withholding tax paid during the quarter to the BIR evidenced by Confirmation/Official Receipts (CR/ROR) and covered by BIR Form Nos. 1743W and 1743-B, is creditable against its income tax liability for the quarter in which payments or remittance of taxes were made.

On the other hand, the sale or exchange of real property by an individual, estate, or trust becomes subject to the withholding tax only if the property is classified as an ordinary asset.  The corresponding withholding taxes deducted and withheld, which are paid or remitted to the BIR (CR/ROR and BIR Form Nos. 1743W and 1743-B), may be credited against his income tax liability for the taxable year.

No withholding of tax is required where the real property sold by an individual is a capital asset subject to the 5% capital gains (final) tax.

3.       Rates of withholding taxes. The rates of withholding tax prescribed in RR 12-89 have been reduced from 10%, in the case of corporations, and 15%, in the case of individuals, estates and trusts to a uniform rate of:

0% — where the vendor is registered with and certified to as engaged in low-cost housing projects by the Housing and Urban Development Coordinating Council (HUDCC)/Housing and Land Use Regulatory Board (HLURB) and the consideration for the sale of the lot or house and lot per transaction does not exceed P500 ,000. The transaction, however, is still subject to the regular income tax and should be reported in the taxpayer's income tax return.

2.5% — where the vendor is habitually engaged in real estate business, certified as member by the Chamber of Real Estate and Builders Association, Inc. (CREBA), and is registered with HUDCC/HLURB; and

5% — where the vendor is not habitually engaged in real estate business;

under RR 1-90 and the same rates apply to corporations and individuals on their sales of real property beginning February 1, 1990.  Where any of the conditions for the application of 0% or 2.5% is not met, the sale is subject to the 5% creditable withholding tax.

For purposes of this Circular, a vendor shall be considered "habitually engaged in real estate business" if he has consummated during the preceding year at least six taxable real estate transactions, regardless of amount.  A vendor who has previously been accredited by CREBA and registered with HUDCC/HLURB may still be considered habitually engaged in real estate business even if the number of sales made during the year falls below six.  The duty of determining whether or not the vendor is habitually engaged in real estate business rests upon the BIR.  The role of CREBA is to certify that the vendor is an accredited member of one of its affiliated associations and it may assist the BIR in determining whether or not a person is habitually engaged in real estate business.

In order to simplify tax administration, the reduced rates in RR 1-90 may be withheld and paid by the withholding agent on real estate transactions consummated before February 1, 1990, if the sales document is presented to the BIR on or after February 1, 1990. In other words, beginning February 1, 1990, the test to be used for purposes of determining whether the transaction is subject to the old or new withholding tax rates is the date of receipt or presentation of the Deed of Sale to the BIR.

Since the BIR does not want to refund taxes already paid by taxpayers on prior transactions at the higher rates, and in order to be fair to those who have paid at the old rates, the "date of presentation" test shall also be applied to applications for the issuance of CAR filed with the BIR in January, 1990.  Thus, if the Deed of Sale notarized, for example, on January 5, 1990 is presented to the BIR on January 15, 1990, the rate of withholding tax prescribed in RR 12-89 shall still be applied thereto, even though the amount of tax is paid in February, 1990.

4.       Application of other provisions in RR 6-85 real estate transactions. Considering that sales or exchanges of real properties covered, by the aforementioned regulations are merely added as one of the income payments subject to the expanded withholding tax provisions in Revenue Regulations No. 6-85, all other provisions of said regulations shall also apply to sales of real properties.  For example, the obligation of the payor to deduct and withhold arises at the time the consideration is paid or payable.  The required withholding tax return shall be filed and the tax shall be remitted within ten (10) days after the end of each month.

5.       Withholding tax base. The regulations provide that the basis of the withholding tax shall be 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 these 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 exchange, the fair market value of the property shall be used.

In case of installment sales, only such amounts paid beginning in 1990 shall be subject to the withholding tax.  This is in consonance with the rule that regulations shall apply prospectively.  Thus, past installment payments made before 1990 should not be subject to the expanded withholding tax provision because the requirement was imposed only in January, 1990.

6.       Individuals as withholding agents and installment sales. 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 beginning January, 1990 to the seller.  On the other hand, the applicable rate of withholding tax 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.

If the withholding taxes on the installment payments have been withheld and remitted to the BIR on the dates prescribed in RR 6-85, no further withholding tax shall be imposed when the final Deed of Sale is executed by the contracting parties.  The duty to prove that such withholding of taxes on installments subject to the provisions of RR 12-89 and 1-90 have been made and paid to the BIR rests upon the buyer-withholding agent.

7.       When to issue certificate. No Certificate Authorizing Registration (CAR) shall be issued by the appropriate internal revenue official, unless the Confirmation Receipt or official receipt evidencing payment of the creditable withholding tax on the particular transaction is presented to him.  For this purpose, it is required that the necessary information regarding such payment of withholding tax should be typed and reflected on the face of the certificate to be issued by the internal revenue officer concerned.

8.       Reporting requirement. In order to effectively implement the provisions of the regulations, all officials authorized to issue the certificates are instructed to add a new column "Expanded Withholding Tax Paid" in the monthly report of transactions not subjected to the capital gains (final) tax being submitted to the Chief, Assessment Performance Control Division, BIR National Office Building, Diliman, Quezon City.

9.       Effective date. This Circular, which modifies Revenue Memorandum Circular No. 80-89, shall take effect on February 1, 1990.

All internal revenue officials and others concerned are hereby enjoined to give this Revenue Memorandum Circular the widest publicity possible.

Adopted: 16 Jan. 1990

(Sgd.) JOSE U. ONG
Commissioner of Internal Revenue