BIR Ruling No. OT-028-2024: Clarification on the Basis for the Computation of the Creditable Withholding Tax and Documentary Stamp Tax on its Transaction involving the Sale of Real Property on Installment

On 29 May 2024, the Bureau of Internal Revenue (“BIR”) issued Ruling No. OT-028-2024, confirming its opinion on an inquiry from Fine Properties, Inc. (“FPI”), on the basis for the computation of the Creditable Withholding Tax (“CWT”) and Documentary Stamp Tax (“DST”) on its transaction involving the sale of real property on installment. The BIR emphasized that the basis should be determined on the gross selling price or fair market value of the property at the time of the execution of the Contract to Sell, whichever is higher, pursuant to the guidelines set under Revenue Regulations (“RR”) No. 17-2003.

FPI’s transaction took place in 2021, where FPI and Prime Asset Ventures, Inc. (“PAVI”) entered a Contract of Lease over a 123,000 sq.m. portion of a lot in Orion, Bataan (“Subject Portion”). Three years later, the parties rescinded the contract and entered into an Agreement to Purchase and Sale (“Subject Agreement”) for the sale of the Subject Portion classified as an agricultural lot with a gross area of 151,458 sq.m. (“Subject Property”). 

Under the terms of their agreement, PAVI was to purchase the Subject Portion for PHP49,200,000.00 in installments, subject to a down payment of PHP7,200,000.00 and other conditions, payable as follows:

1. PHP3,000,000.00 — on 24 June 2021, simultaneous with the execution of the Subject Agreement issued on the same date.
2. PHP4,200,000.00 — on or before 31 August 2021, provided FPI has transferred to PAVI the Subject Portion’s physical and vacant possession.

The prevailing zonal value of the subject portion was PHP25.00 per sq.m. at the time of the agreement. Additionally, PAVI’s authorized representative filed for reclassification of the Subject Property from agricultural to industrial use before the Sangguniang Bayan of Orion, Bataan, and was eventually granted.

Furthermore, FPI requested a ruling to confirm that the Subject Agreement is a sale of real property on installment. The computation of the CWT and DST should be based on the highest value among the zonal value and the market value per tax declaration at the time of the agreement, in accordance with Section 3(J) of RR No. 17-2003, to wit:

“Tax shall be deducted and withheld by the buyer from every installment which tax shall be based on the ratio of actual collection of the consideration against the agreed consideration appearing in the Contract to Sell applied to the gross selling price or fair market value of the property at the time of the execution of the Contract to Sell, whichever is higher.”

On the other hand, payment of the DST shall accrue upon the execution of the Deed of Sale, and the basis for such imposition is similar to that of the basis of CWT payment, which is the gross selling price or fair market value of the property, whichever is higher, at the time of the execution of the Contract to Sell.

Section 3 (J) of RR No. 17-2003 likewise mandates the contract to sell to be attached with the deed of absolute sale executed upon completion of the payments and the duly notarized original duplicate copy of both documents must be presented to the Revenue District Office having jurisdiction of the place where the property is located for validation of the correctness of the issuance of an electronic Certificate Authorizing Registration. The BIR clarified that the computation of the CWT takes effect only after the deed of absolute sale is notarized, which is necessary to bind third parties. The legal consequences of the conveyance retroact to the time of the perfection of the contract of sale.