How VAT affects real property sales

Businessworld (January 13, 2013) - THE PHILIPPINE economy continues to show many positive signs with noticeable indicators such as stable growth, increased remittances from overseas Filipino workers (OFWs), and a thriving outsourcing sector. As a result, there is also a strong parallel expectation that the country’s real estate industry will continue to flourish.

Investing in real estate, however, requires a significant amount of money, making it imperative for prospective buyers and real estate agents or sellers to be familiar with matters such as taxation of real estate transactions.

Revenue Regulations (RR) No. 16-05, as amended by RR Nos. 04-07, 3-2012 and, very recently, by 13-2012 prescribe the value-added tax (VAT) rules on real estate sales.

The sale of a residential lot with gross selling price (GSP) exceeding P1,919,500 (previously P1.5 million), and the sale of a residential house and lot or other residential dwelling with GSP exceeding P3,199,200 (previously P2.5 million), are subject to 12% VAT. These new threshold amounts apply to instruments of sale which are executed and notarized on or after Jan. 1, 2012. Here are some important definitions to know. GSP means the consideration or selling price stated in the sales document, or fair market value (FMV), whichever is higher. FMV is the FMV or zonal value as determined by the BIR, or the FMV in the real property tax (RPT) declaration, whichever is higher. If there is no zonal value, GSP refers to the FMV in the latest RPT declaration, or the consideration, whichever is higher. If the VAT is not stated separately in the document of sale, the selling price or consideration stated therein shall be deemed to be inclusive of VAT. Meanwhile, the FMV is deemed exclusive of VAT.

VAT-taxable sales of real property the consideration for which is paid by the buyer in full at the time of sale (i.e., cash sales) will be subject to VAT at the time of sale.

On the other hand, VAT-taxable sales of real property the consideration for which is paid by the buyer on installment (i.e., deferred payment) are classified for tax purposes into either (i) sales of property on the installment plan, or (ii) deferred-payment sales not on the installment plan. The determination as to whether the sale will be treated as a sale on the installment plan or a deferred payment sale not on the installment plan depends on the percentage of initial payments received in the year of sale over the GSP.

The term “initial payments” means all payments which the seller receives in the year of sale, either in cash or in property other than the evidence of indebtedness of the buyer. If the initial payments in the year of sale do not exceed 25% of the GSP, the transaction will be considered as a sale on the installment plan in which case the VAT is recognized based on collection. On the other hand, if the initial payments in the year of sale exceed 25% of the GSP, the transaction will be considered as a deferred payment sale not on the installment plan, in which case the VAT will be recognized outright in full at the time of sale as though the sale was a cash sale.

For installment sales, the seller should issue VAT official receipts (ORs) for the collections. The VAT should be declared on every installment. To illustrate, if the consideration is P5 million (excluding VAT) and the FMV is P6 million, the total VAT is P720,000 (12% of P6 million) where the VAT base is the FMV of P6 million. If the total amount collected (including interest and penalties for late payment) during the taxable year is P1 million (excluding VAT), the VAT on said collection shall be P144,000 (P720,000 multiplied by P1 million divided by P5 million). The remaining VAT of P576,000 (P720,000 less P144,000) shall be recognized upon collection of the remaining installments.

On the other hand, if the FMV is P4.5 million, the VAT base shall be the consideration of P5 million. Thus, the total VAT is P600,000 (12% of P5 million) where the VAT to be declared for the taxable year is P20,000 (P600,000 multiplied by P1 million divided by P5 million).

For deferred payment sale, the seller should issue a VAT invoice for the entire GSP. Using the illustration above, this would be the total VAT of P720,000 (12% of the FMV of P6 million). The VAT should be declared in the month of sale. Meanwhile, the seller shall issue non-VAT ORs for the subsequent collections since these are no longer subject to VAT. For both types of sales, the seller is required to separately indicate the amount of VAT on the face of the VAT invoice/OR. Moreover, these should be supported by a public instrument (e.g., deed of absolute sale, deed of conditional sale, contract/agreement to sell, etc.).

RR No. 13-2012 (effective Nov. 1, 2012), the most recent amendatory regulations, explicitly provides that the sale, transfer or disposal of two or more adjacent residential lots and/or dwellings by the same seller to the same buyer “within a 12-month period” although covered by separate titles and/or tax declarations, shall be considered as one residential area for VAT purposes.

The 12-month period was not mentioned in the old RR for purposes of determining whether the sale of two or more adjacent lots to the same buyer shall be considered as a sale of one residential area. This meant, in effect, that the sale of adjacent lots should be made on the same date (even if covered by different titles) so that the sale shall be considered as one residential area for VAT purposes.

However, under the new rules the sale, for example, of two adjacent lots with a value of P1 million each within a 12-month period shall be subject to 12% VAT since the aggregate selling price of P2 million will already exceed the VAT threshold of P1,919,500 for residential lots.

Moreover, RR 13-2012 provides that the sale of parking lots in a condominium is subject to VAT, regardless of amount, since it is not considered as a residential lot, house and lot or a residential dwelling. While investing in Philippine real estate may be considered financially rewarding due to the country’s positive economic performance, it is particularly important to know the VAT rules applicable to real estate sales, including its recent amendments. The knowledge can help investors reduce their tax obligations and avoid any risk of penalties.

Maricris U. See is a Senior Tax Director of SGV & Co.

This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.