Taxes on the sale of property

Knowing the proper taxes and tax compliance requirements on transactions surrounding real property have become a key business consideration for real estate companies.

In this article, let us tackle the tax rules applicable to sale of real property classified as “ordinary assets.”

DEFINITIONS

Real property under Revenue Regulations (RR) No. 7-2003 follows the definition laid down in Article 415 of the Civil Code of the Philippines which enumerates 10 items of real property, including land, buildings, roads and construction of all kinds adhered to the soil, and everything attached to an immovable object in a fixed manner, in such a way that it cannot be separated therefrom without breaking the materials or causing the deterioration of the object.

On the other hand, a real estate dealer is defined by RR No. 7-2023 as any person engaged in the business of buying and selling or exchanging real property and holding himself out as a full or part-time dealer in real estate. A real estate developer is any person engaged in the business of developing real property into subdivisions, or building houses on subdivided lots, or constructing residential or commercial units, townhouses and the like for his own account and offering them for sale or lease.

VAT-EXEMPT SALE OF REAL PROPERTY

Not all sale of real property is subject to value-added tax (VAT). In RR No. 1-2024, which amended RR No. 8-2021, it provides that the sale of real property not primarily held for sale to customers or held for lease in the ordinary course of trade or business; real property utilized for socialized housing; and house and lot, and other residential dwellings, with a selling price of not more than P3.6 million effective Jan. 1, 2024, is VAT-exempt.

SALE OF REAL PROPERTY SUBJECT TO VAT, TAXABLE BASE AND INVOICING REQUIREMENTS

Revenue Memorandum Circular (RMC) No. 99-2023 provides that generally, sales of real property classified as “ordinary assets” are subject to VAT (except for the transactions mentioned in the preceding part of this article).

Real property considered ordinary assets include the following: (a) Stock in trade of a taxpayer or other real 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; or (b) Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or (c) Real property used in trade or business (i.e., buildings and/or improvements) of a character which is subject to the allowance for depreciation provided under Sec. 34 (F) of the National Internal Revenue Code (NIRC) of 1997, as amended; or (d) Real property used in trade or business by the taxpayer.

Further, donation by a VAT-registered person of a real property used in the course of business of the donor-taxpayer and donation by a VAT-registered person of a real property originally intended for use in business are deemed sales of real property classified as ordinary assets and hence shall also be subject to VAT.

VAT, which is equivalent to 12%, shall be based on the gross sales. The definition of gross sales under the Ease of Paying Taxes (EoPT) Act means the total amount of money or its equivalent value in money which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter or exchange of the goods or property, excluding VAT. The excise tax, if any, on such goods or property forms part of the gross sales.

RR No. 99-2023, in relation to RR No. 16-2005, provides that the 12% VAT on the sale of real property be based on the gross selling price of the property, which is the consideration stated in the sale document or the fair market value (FMV), whichever is higher. The FMV is the higher of the zonal value and assessed value.

For VAT purposes, the sale of real property is classified into installment sale or deferred sale, which was left unchanged by the EoPT Act. It is considered a sale on installment plan if the initial payment in the year of sale does not exceed 25% of the gross selling price; otherwise, it is considered as having been executed on a deferred-payment basis.

In installment sale, the seller is required to recognize the output VAT on every installment payment, actually and/or constructively received, including interest and penalties. Correspondingly, the buyer can claim the input tax in the same period that the seller recognized the output tax.

In deferred-payment transactions, the sale is considered a cash sale; hence, the seller is required to recognize the output tax on the entire selling price in the month of sale, with the input tax accruing to the buyer at the time of sale. As such, any subsequent payment will no longer be subject to VAT.

The seller of real property classified as “ordinary assets” are required to issue a Sales Invoice. The same applies to a VAT-registered taxpayer engaged solely in the sale of services but sells a real property used in trade or business pursuant to the EoPT Act.

REPORTING OF SALE IN THE INCOME TAX RETURN

RMC No. 99-2023 states that if the seller’s registered business with the BIR is real estate, the sale forms part of its gross sales reported in the Income Tax Return (ITR). Otherwise, the sale, despite the issuance of a sales invoice, does not form part of gross sales, but the gain on such sale of real property must be declared as other taxable income in the ITR. The gain is computed by deducting the book value of the real property from the selling price indicated in the SI. Any creditable tax withheld by the purchase may be claimed as a tax credit.

The copy of BIR Form No. 1606 with proof of payment of the Creditable Withholding Tax must be attached to the ITR where the sales were declared by the seller.

OTHER TAX RETURNS TO BE FILED

The buyer of the real property must file BIR Form No. 1606 for the remittance of expanded withholding tax on the purchase of such real property, and BIR Form No. 2000-OT must be filed by either of the parties for the declaration and payment of the documentary stamp tax (DST) due on sale/transfer of real property.

RPVARA (REPUBLIC ACT NO. 12001)

In June, Republic Act No. 12001 or the Real Property Valuation and Assessment Reform Act (RPVARA) was signed into law. As a summary, this Act prioritizes the adoption and implementation of the Philippine Valuation Standard (PVS). The PVS aims to ensure uniformity in valuing real properties for taxation and other purposes. The law also establishes market value as the single valuation base for assessment, eliminating inconsistencies arising from different valuation methods.

With RPVARA, the BIR is no longer in the position of determining the zonal value of real property for internal revenue tax purposes. This function is now transferred to local assessors, who are required to adopt the PVS to ensure uniform valuation of real property. It is thus expected that the valuation of real property will now be uniform and easier, as this will be determined via the PVS. Hence, the computation of Capital Gains Tax and DST on sale of real property now has a uniform basis.

The law also grants a real property tax amnesty for unpaid real property taxes, including penalties, surcharges and interest. Property owners who want to avail of the amnesty may choose either a one-time payment or installment payment of delinquent taxes within two years after the law’s effectivity.

TAKEAWAYS

The sale of real property is considered to have special tax compliance rules. Hence, with the changes introduced by EoPT and RPVARA, we may expect new regulations to be issued by the BIR to ease the processing of related taxes for real properties and assist the real estate industry with its steady growth.

Source: Business World

BIR guidelines on digital business registration

Amid a thriving digital economy in the country, the Bureau of Internal Revenue (BIR) has introduced a new regulatory measure that covers all persons engaged in business using digital platforms.

Revenue Regulations 15-2024, released on Aug. 15, 2024, stipulates that persons engaged in business, including brick-and-mortar stores and online businesses — whether selling goods, offering services, operating digital platforms, digital content creators or working as freelancers — are now mandated to register with the BIR. Failure to do so may result in administrative penalties and criminal liabilities.

The guidelines on the required place of registration of different forms of business operations are as follows:

a. Brick-and-mortar stores — in the case of its head office, at the BIR district office that has jurisdiction over the place of business address. In the case of a branch and/or facility, at the BIR district office that has jurisdiction over the place of business address or location of the branch and/or facility.

b. A person operating, maintaining or setting up an online presence or an online store for its brick-and-mortar store — shall register its store name with the BIR as an additional "business name" attached to the head office or branch managing or operating the said online store or business and shall not be registered as a branch.

c. Online businesses — for individuals, at the BIR district office that has jurisdiction over the place of residence. For juridical entities, at the BIR district office that has jurisdiction over the principal place of business registered with the Securities and Exchange Commission (SEC).

Penalties range from P1,000 for late registration to P50,000 for businesses subject to excise tax that fail to register. In more serious cases, criminal charges may be filed against those who deliberately avoid registration.

Moreover, lessors, sub-lessors of commercial establishments/buildings/space, and operators of digital platforms are responsible for ensuring their tenants and online sellers are properly registered with the BIR. Lessors and digital platforms may incur fines of P20,000 per branch or establishment for allowing unregistered sellers to operate.

Once registered, the BIR also requires businesses to display their Certificate of Registration (COR) or Electronic Certificate of Registration (eCOR) at their physical location and each branch, where it can be easily seen by the public. For businesses operating online through websites, social media or digital platforms, the eCOR must be visibly posted on their website, webpage, account, page, platform or application. The regulation emphasizes that the proof of registration should always be easily accessible to customers. Failure to display the COR or eCOR will result in a penalty of P1,000 for each violation per business or store name.

The BIR's move to require mandatory registration of online businesses is part of a broader effort to bring the rapidly growing online economy under formal regulatory oversight. The government aims to level the playing field among online and traditional businesses, all of which must adhere to the same tax obligations. By requiring businesses to display their proof of registration, the BIR wants to foster greater trust among consumers in the online marketplace.

Are you engaged in business of any kind or form? By registering with the BIR and adhering to these new rules, you not only avoid penalties but also contribute to a more transparent and trustworthy business environment. In the realm of business regulations, compliance is the best defense against costly consequences.

Source: Manila Times

Imposition of 1% withholding tax on online sellers takes effect

The Bureau of Internal Revenue (BIR) has formally imposed the one percent withholding tax on online platform providers as the government moves to level the playing field among businesses.

In his latest revenue memorandum circular, BIR Commissioner Romeo Lumagui Jr. said all electronic marketplace operators were ordered to impose the withholding tax to sellers and merchants last July 15.

The imposition of withholding tax was supposed to begin in mid-April, but the BIR extended the transitory period for 90 days to give online merchants time to comply with the other related policies or requirements of other government agencies.

“We have already extended this by 90 days. No further extensions will be given,” Lumagui said.

A withholding tax is a kind of tax on the salary earned by a certain employee. Based on the current framework, employers are required to deduct a certain percentage of their employee’s salary, which in turn will be remitted to the BIR.

“This is not a new tax, it is merely a system of taxation where taxes are collected at source, which will be credited against the total income tax liability of the sellers and merchants,” Lumagui said.

“We aim to level the playing field between brick-and-mortar stores, which are regularly complying with their tax obligations, and online marketplaces. Whether their business is operated online or through physical stores, sellers and merchants have to pay their taxes,” he said.

Further, the circular only extended the transitory period for digital financial services providers.

The BIR will impose a withholding tax of one percent on one-half of the gross remittances of the online platform providers to the sellers of the goods and services.

The withholding tax imposed, however, will not apply if the annual total gross remittances to an online merchant for the past taxable year has not exceeded P500,000.

Also excluded are online sellers with cumulative gross remittances to an online merchant in a taxable year that have not yet exceeded P500,000, as well as those cooperatives duly registered with the BIR with a valid certificate of tax exemption.

Gross remittance is the total amount received by an e-marketplace operator or digital financial services provider from a buyer.

According to the BIR, e-marketplace refers to a digital platform whose business is to connect online consumers with online merchants, facilitate and conclude the sales, process the payment of the products, goods or services through the platform.

It also facilitates the shipment of goods or provides logistics services and post-purchase support within such platforms and otherwise retains oversight over the consummation of the transaction.

This includes the marketplace for online shopping, food delivery platforms, platforms for booking of resort, hotel, motel, inn, house, condominium unit, bed space, room for rent and other similar lodging accommodations and other service or product marketplaces.

Data showed that there are roughly two million entities involved in online selling as of last year.

Source: Philstar