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

IMF retains Philippines growth outlook for 2024, 2025

The International Monetary Fund (IMF) has retained its growth prospects for the Philippines for this year and next amid challenging private consumption expansion in the country.

Based on the World Economic Outlook (WEO) released yesterday, the Washington-based multilateral lender kept its gross domestic product (GDP) assumption for the Philippines at 5.8 percent.

This was the same forecast the IMF gave the Philippines during the 2024 IMF Article IV consultation earlier this month.

While this is an improvement from last year’s 5.5 percent expansion, it falls below the six to seven percent growth assumption set by the Cabinet-level Development Budget Coordination Committee (DBCC).

The IMF said private consumption is going to grow slightly with less momentum. The sector’s growth during the first semester was lower than expected due to more expensive food prices.

Private consumption rose by 4.6 percent in the second quarter, slower than the 5.5 percent growth in the same period last year.

IMF’s growth forecast for the Philippines remains one of the highest in the region, next to Vietnam’s 6.1 percent.

This year, the Philippines is expected to grow faster than Indonesia, Thailand, Malaysia and even China.

Likewise, the IMF retained its 6.1-percent GDP assumption for 2025, also way below the 6.5 to 7.5-percent target of the economic team.

For inflation, the IMF also did not change its inflation forecast for the Philippines, which would ease to 3.3 percent this year and further to three percent in 2025.

The latest data showed that the September inflation eased to an over four-year low of 1.9 percent, even falling below the expectation of the Bangko Sentral ng Pilipinas.

The sharp reduction was primarily due to slower increases in the prices of food and non-alcoholic beverages, as well as transport and housing water, electricity, gas and other fuels.

In its report, the IMF noted that the global battle against inflation has essentially been won, even though price pressures persist in some countries.

However, the IMF also warned that downside risks to inflation are rising, specifically with the escalation in regional conflicts, monetary policy remaining tight for too long, growth slowdown in China and continued protectionist policies of some countries.

World Economic Outlook 2024

.pdf

Download PDF • 9.66MB

Source: Philstar

Disinheritance of Compulsory Heirs in the Philippines: Legal Framework and Grounds

Introduction

The Philippine legal system, rooted in civil law traditions, has specific provisions concerning inheritance and the protection of heirs. One significant aspect of succession law is the concept of compulsory heirs—those who cannot be deprived of their inheritance without just cause. However, the law provides instances when even these heirs may be disinherited under specific circumstances. This article explores the legal framework governing the disinheritance of compulsory heirs in the Philippines, the valid grounds for disinheritance, and the procedural requirements for such disinheritance to be valid.

Compulsory Heirs: A Brief Overview

Under the Civil Code of the Philippines, compulsory heirs are individuals who, by law, are entitled to receive a portion of the deceased's estate, even against the will of the decedent. These heirs include:

1. Legitimate children and descendants.

2. Legitimate parents and ascendants.

3. The surviving spouse.

4. Illegitimate children (who are entitled to a smaller share than legitimate ones).

The portion of the estate reserved for these heirs is called the legitime, and it cannot be freely disposed of by the testator through a will. However, the law permits disinheritance of compulsory heirs, subject to strict requirements.

Legal Basis for Disinheritance

The disinheritance of compulsory heirs in the Philippines is governed by Articles 915 to 922 of the Civil Code. It is important to note that disinheritance must be expressed in a valid will and can only be done for legally prescribed causes. If disinheritance is done outside of these prescribed grounds or if procedural requirements are not followed, the act is void.

Grounds for Disinheritance

Articles 919 to 921 of the Civil Code provide exhaustive grounds for disinheriting each category of compulsory heir. These causes must exist at the time the will is made, and they must be explicitly stated in the will.

1. For Children and Descendants (Art. 919):

- Conviction of a crime involving physical harm or an attempt against the life of the testator, their spouse, or ascendants/descendants.

- Accusation against the testator of a crime punishable by imprisonment of six years or more, if the accusation is found to be false.

- Use of violence or coercion to compel the testator to change their will.

- Refusal to support the testator when legally required.

- Maltreatment or serious insult to the testator.

2. For Parents and Ascendants (Art. 920):

- Abandonment of the children or descendants by their parents.

- Conviction of an offense punishable by a long-term prison sentence.

- Accusation against a child or descendant of a crime punishable by imprisonment of six years or more, knowing the accusation to be false.

- Seduction, corruption, or maltreatment of the testator's child.

- Serious insult by deed or words against the testator.

3. For the Surviving Spouse (Art. 921):

- Adultery or concubinage.

- Conviction of an offense punishable by long-term imprisonment.

- Attempt against the life of the testator, their children, or ascendants.

- Serious insults or maltreatment towards the testator.

Procedural Requirements for Valid Disinheritance

For disinheritance to be legally valid, several procedural requirements must be met:

1. Written in a Will: Disinheritance must be explicitly stated in the testator's last will and testament. A general or vague statement is insufficient.

2. Grounds Must Be Stated: The will must specifically mention the grounds for disinheritance as provided by law. Failing to indicate a legally prescribed cause voids the disinheritance.

3. Grounds Must Be Proven: In cases where the disinherited heir contests the disinheritance, the testator's estate or the other heirs must prove the existence of the ground(s) for disinheritance. If no sufficient proof is provided, the disinheritance may be invalidated by the courts.

4. Subsequent Forgiveness Nullifies Disinheritance: If the testator pardons or reconciles with the disinherited heir after committing the act that justified disinheritance, the disinheritance becomes void. Such forgiveness may be either express or implied by the testator’s actions.

Effects of Disinheritance

When a compulsory heir is validly disinherited, they lose their right to the legitime. However, their descendants (if any) will still inherit in their place. This principle ensures that the disinheritance does not unfairly prejudice future generations.

For example, if a child is disinherited by the parent, the grandchildren can still inherit their parent's share by virtue of representation.

Challenging Disinheritance

Disinheritance can be contested in court, particularly if the disinherited party believes that the grounds cited are false or unjustified. Heirs may also challenge the validity of the will if they believe it was executed under duress, mistake, or undue influence.

If the court finds the disinheritance invalid, the heir will be reinstated to their rightful share of the estate, including the legitime.

Conclusion

Disinheritance of compulsory heirs in the Philippines is a legally complex process. While the law provides certain grounds for disinheriting an heir, these must be strictly followed to ensure the disinheritance is valid. The protection of compulsory heirs is a fundamental aspect of Philippine succession law, ensuring that heirs receive their rightful share of the estate unless a justifiable cause for disinheritance exists. For anyone considering disinheritance, it is essential to consult legal professionals to ensure compliance with the law and to protect the validity of the will.

Source: Ziggurat Real Estate