Taxation for Real Estate Transactions, Deal or No Deal? Part 2

Real Property Tax (RPT)

Under the Local Government Code of 1991, the tax imposed to properties in the provinces, cities and within Metro Manila cities and municipalities vested by the national government to create their own revenues.

Types of properties that are taxable

The tax applies to all forms of property such as land, building, improvements and machinery. Exemption is given to real properties owned by government, charitable institution, churches, cooperatives and those that are used in the supply of water and electric power, and equipment for environmental protection.

Base Tax or Assessment level.

1

To compute for the tax, determine first the market value of the land and building as assessed by the local Assesor.

Machinery

2

Tax on Farm Lands

3

A city or municipality in Metro Manila may impose 2% while cities and municipalities outside Metro Manila may levy the tax at the rate not exceeding 1%.

Special Education Fund(SEF) Tax is 1% of Assessed Value on all Property Classifications.

Tax Collections – first of January of every year and can be paid in four installments before the office of local treasurer on or before the end of each quarter, 2% surcharge per month but not to exceed 36 months.

The Real property tax is the most important tax revenue source of local government.

References: CES Academy and Manila Board C.R.E.S for Broker Manual

If I may share, Atty. Vic C. Mamalateo, on his ‘SEMINAR ON REAL PROPERTY TRANSACTIONS’ he discussed the Nature of Assets which are:

1.     ORDINARY ASSET (Taxed under global system)

•     Inventory if on hand at end of taxable year (mfr or dealer)

•     Stock-in-trade primarily held for sale or for lease in the course of trade or business (real estate dealer, developer, or lessor)

•         Asset used in trade or business, subject to depreciation

•         Real property used in trade or business

•         Gross income times 25% = Income tax

2.     CAPITAL ASSET (Taxed under schedular or global tax system)

  • All other assets, whether or not used in trade or business, other than the above-stated ordinary assets (Sec. 39, NIRC).
  • 6% capital gains tax on GSP or FMV, whichever is higher, if property is located in the Philippines

In the case of Real Estate transactions, there are 2 major areas these are:

1.      Individual, if it’s in the name of a person or either resident or alien, Capital gains Tax is 6 %.

2.      Corporation, if domestic corporation, (Taxed on worldwide income)Capital asset,6% capital gains tax on GSP or FMV, whichever is higher, if property is located in the Philippines.

Rule: Ordinary asset, regardless of location: Net income times 30% = Income tax less EWT, if applicable = Balance.

In Foreign Corporation, (taxed on income from sources within the Philippines)

Rule: If resident, Net income from the Phil x 30% = Income tax. If Non-resident: Gross income from the Phil x 30% = Income tax; FWT is required to be withheld by a Phil buyer.

Capital assets are generally properties that are not used in trade or business of the taxpayer. On the other hand, ordinary assets are properties used in doing trading or business or primarily held for sale by the taxpayer.

The sale of capital assets (land and/ or building) is subject to capital gains tax which is six percent based on the gross selling price or fair market value at the time of sale, whichever is higher. On the contrary, sale of ordinary assets is subject to the creditable withholding tax at a rate ranging from 1.5 percent- 6 percent and consequently to ordinary income tax, corresponding DST and likewise to the 12 percent VAT.

Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines, including pacto de retro sales and other forms of conditional sale.

However, it was been a practice in order to save taxes, single asset corporations, unfortunately, the BIR who rather tax the transaction or sale of corporate taxes instead of shares of stock. Thus, making the real estate transaction very difficult because of the tax burden.

Because of these real estate transactions involving single asset corporations, do not materialize, because of the tax burden. 

The tax burdens has reach a point that I feel is confiscatory in nature and unjust. Therefore, buyers and sellers justify “undervaluation”. It is a common practice among sellers and buyers to use zonal value, which is not reflective of the true market price.

In general, exception to the practice of “undervaluation” are public listed corporations because they require transparency, accountability and corporate governance.

Despite the higher than expected revenues from the so-called “sin” products, the Bureau of Internal Revenue (BIR) is not amenable to any upward adjustment in the government’s excise tax collection goal for this year.

“My policy has always been, you gave a goal, I would not argue about it but do not change it,” was the immediate reaction of BIR Commissioner Kim Jacinto-Henares on any proposal that would raise the P104.8 billion revenue collection target on sin taxes this year, which is higher by 22 percent compared with the P85.85 billion target for last year, 2013.

According to Philstar’s write-up last December 20, 2013, Finance Secretary Cesar Purisima said Philippines is in a strong position to withstand any turbulence that may arise from the US Fed’s decision to scale back its bond buying program, citing the  country’s improved fiscal policy, robust macroeconomic fundamentals and strong liquidity.

“Philippines’ much improved macroeconomic fundamentals and better managed fiscal situation will allow the country to go through tapering from a proactive position,” Purisima said.

Purisima stated, “the country is well papered for the tapering of the US Fed’s record stimulus given its good governance program”.

Businessmirror wrote last December 19, 2013 that Finance Secretary Cesar Purisima said the fiscal policies of the Aquino administration strengthened the macroeconomic fundamentals of the economy, which will allow the country to go through the effects of tapering.

“President Aquino has always been mindful that the Fed will eventually scale back its bond purchases and consequently has imposed strict fiscal discipline and fast-tracked governance reforms that allowed us to deploy our resources strategically resulting in increased infra and people investments,” Purisima said in a statement.

Dep. Of Finance Ceasar Purisima sharing a light moment regarding real estate valuation with Appraiser Ramon CF Cuervo III, Professional Regulation Commission Real Estate Service.

Dep. Of Finance Ceasar Purisima sharing a light moment regarding real estate valuation with Appraiser Ramon CF Cuervo III, Professional Regulation Commission Real Estate Service.

During my privilage conversation with Secretary Ceasar Purisima after his speech at APRECE Conference last November 12, 2013, he replied to my inquiry regarding the proposed Single Valuation Act, he agreed with me that there is a need to reform the “Zonal Valuation” and “Assessed Value” that are more often than not, arbitrary and not reflective of true Market Value. The main issue here will be the pending house bill no.84, but there is a need to lower the tax rate, to avoid “undervaluation” or “using zonal value” as a basis for paying capital gain tax.

For more details regarding the pending bill, you can visit the link below:

http://www.congress.gov.ph/download/basic_16/HB00084.pdf

This leads me to a very important pending bill in the congress and senate called “single valuation act”, sponsored by Congressman Mel Sennen Sarmiento and advocacy is LAMP Project, the objective of this is to come up with one value, because the practice today is that there are more than several types of “valuation” that causing confusion as to what is true value or market value. Eventually, we ought to have an agency that would regulate, monitor, appraisal and valuations and do away with arbitrary valuation that of zonal or assessed value. However, when value are increased to its real market level, the suggestion is to lower the tax rate so that the taxpayer are not burden unjustly. Those who do the judgement, should only be duly licensed professional.

Real estate appraiser is a duly registered and licensed natural person who, for a professional fee, compensation or other valuable consideration, performs or renders, or offers to perform services in estimating and arriving at an opinion of or acts as an expert on real estate values, such services of which shall be finally rendered by the preparation of the report in acceptable written form.

While real estate assessor, a duly registered and licensed natural person who works in a local government unit and performs appraisal and assessment of real properties, including plants, equipment, and machinery, essentially for taxation purposes.

Taxation for real estate transactions will be a “deal or no deal?”. Very high taxation on real estate transactions will have a negative effect on the real estate market. Sellers will be hesitant to sell, unless it be tax efficient, buyers on the other hand must be careful since they may have to share the burden on the capital gain stocks and the Value Added Tax (VAT).

In some cases, even real estate brokers are used by unethical sellers or buyers to justify in passing part of the tax burden to the real estate brokers commission forcing the broker to take a “deep haircut” what was rightfully due then. I urged to real estate brokers and warn them about having an authority to sell of a property on a “net basis” or “net to owner price”. With that kind of authority to sell, the broker may end up with nothing, especially once the buyer and seller meets, there is that danger that the real estate broker will be cut-off from the transaction.

To end, our real estate market for 2014 will depend on fiscal policies, new BIR rulings, increase in real estate taxes and other burdens that “make or break” a real estate transaction.

Source:

http://www.philstar.com/business/2013/12/20/1270041/bsp-ready-fine-tune-policy-after-fed-taper

http://www.mb.com.ph/bir-rejects-raising-excise-tax-collection-target/

http://business.inquirer.net/132061/inability-to-tax-the-rich-blamed-for-income-gap

http://www.philstar.com/headlines/2013/10/03/1241015/abad-should-resign-out-delicadeza-miriam

http://www.economywatch.com/economic-statistics/Philippines/Income_Tax_Rate/

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This entry was posted in Appraisal, Brokerage, Consultancy, Real Estate, Sales, Taxation. Bookmark the permalink.

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