EFFECTS OF VALUE ADDED TAX TO CONDOMINIUM OWNERS AND BUYERS

With the issuance of Revenue Memorandum Circular (RMC) No. 65-2012 by the Bureau of Internal Revenue last year, condominium corporations are now subject to income tax and value added tax (VAT).

Housing and condominium construction are still in a boom this year. Instead of slapping VAT to houseowners, government should help the people afford a house. (Photo source: www.memberfiles.freewebs.com / www.www.handsetformwork.com.ph)

Housing and condominium construction are still in a boom this year. Instead of slapping VAT to houseowners, government should help the people afford a house.
(Photo source: http://www.memberfiles.freewebs.com / http://www.www.handsetformwork.com.ph)

This means, condominium tenants and owners will pay additional charges in their association dues, membership fees, and other assessment and charges collected from them.

According to the BIR, these charges comprises the income payments for beneficial services condominium corporation provides to its members and tenants, which should be subject to VAT and income tax, including the applicable withholding tax under Revenue Regulations (RR) 2-1998, as amended.

Condominium residents argued that the collections are exclusively for maintenance and operations of the condominium. They also said that previous BIR rulings were correct in exempting the dues from taxation because condominium corporations that operate and supervise these buildings do not earn profits or gains from such undertakings.

In  the previous rulings, it was stated that a condominium corporation does not sell, barter, exchange, nor lease any goods or property and neither does it render service for a fee but merely implements the administration of the required services to collect the association dues from the unit owners pursuant to its corporate purposes as “trustee” for the fund.
But, BIR Commissioner, Kim Henares, rejected the appeal of condominium residents to withdraw the order. She insisted that the old rulings have no legal basis.

In her Revenue Memorandum Circular No. 65-2012, she stated “that association dues and membership fees are income payments and form part of the gross earnings of the condominium corporations, hence subject to both income and business taxes, including VAT.”

In an interview, Realtor, Ramon C.F. Cuervo III, expressed dismay over the BIR ruling and added it has negative effects to the housing program of the government.

“This VAT adds to the burden middle income earners. What’s more, it affects the housing program of the government, especially the social housing projects,” Mr. Cuervo said. “How can a buyer a buy an affordable house when the cost is too high because of this VAT. This will discourage the people to own a decent home.”

Another VAT was slapped on sales of nearby residential properties and parking lots.

The practice of real estate property sellers who documents the sale to one buyer of neighboring residential lots and other residential properties as a sale of separate units in order to avoid payment of VAT by keeping them below the VAT threshold amount, even such amounts are actually being combined and utilized as one residential unit, has made BIR issued Revenue Regulations (RR ) No. 13-2012.

The RR No. 13-2012 states that “the sale, transfer or disposal within 12-month period of two or more adjacent residential lots, house and lots or other residential dwellings to one buyer, whether from the same or from different sellers shall be considered as one single transaction. Hence, the sale of the adjacent lots shall be subject to VAT if the aggregate value exceeds the exemption threshold of P1,919,500 for residential lots and P3,199,200 for residential house and lots or residential dwellings, notwithstanding that the value of individual properties do not exceed the VAT exemption thresholds.
In relation to the sale of condominium units, the sale/purchase of parking lots is not considered a sale of residential unit and therefore not covered by the rules on VAT exemption thresholds.”

Bayan Muna Representatives, Teddy Casino and Neri Colmenares. (Photo source: www.newsinfo.inquirer.net)

Bayan Muna Representatives, Neri Colmenares and Teddy Casino.
(Photo source: http://www.newsinfo.inquirer.net)

Bayan Muna Representatives, Teddy Casino and Neri Colmenares, jointly filed a measure in the Congress to remove the VAT on association and membership fees.

The move has expressed full support by condominium owners.

According to the lawmakers, the imposition of VAT goes against the government’s program solving the serious housing shortage.

We will share below an informative article of Maricris U. See, a Senior Tax Director of SGV & Co., about tax on real property sales:

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.

Bureau of Internal Revenue Commissioner, Kim Henares.(Photo source: ofwnow.com)

Bureau of Internal Revenue Commissioner, Kim Henares.
(Photo source: ofwnow.com)

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.

With sources from different newspaper issues.

 

 

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