For corporations engaged in or dealing with real estate in the Philippines, understanding the tax implications, particularly concerning the sale of “ordinary assets,” is crucial. This article provides a comprehensive overview of the definitions, Value-Added Tax (VAT) rules, and other relevant tax considerations for corporate sellers of such properties, incorporating recent legislative updates like the Real Property Valuation and Assessment Reform Act (RPVARA).
Table of Contents
- Defining Real Property and Key Corporate Roles
- Understanding “Ordinary Assets” for Corporate Real Estate Sales
- Value-Added Tax (VAT) on Corporate Sales of “Ordinary Assets”
- VAT-Exempt Corporate Sales of Real Property
- Reporting Corporate Real Property Sales in the Income Tax Return (ITR) and Other Filings
- The Impact of the Real Property Valuation and Assessment Reform Act (RPVARA)
Defining Real Property and Key Corporate Roles
To properly assess tax obligations, it’s essential to first clarify what constitutes real property and the distinct roles corporations might play in the real estate sector:
- Real Property: As per Revenue Regulations (RR) No. 7-2003, which adopts Article 415 of the Civil Code of the Philippines, real property encompasses land, buildings, roads, and all constructions adhered to the soil. It also includes anything attached to an immovable in a fixed manner, such that it cannot be separated without damaging the materials or deteriorating the object.
- Real Estate Dealer (Corporate Context): Defined by RR No. 7-2023, a corporation acting as a real estate dealer is engaged in the business of buying, selling, or exchanging real properties, holding itself out as a full or part-time dealer in real estate. For such corporations, real properties primarily held for sale are inherently considered “ordinary assets.”
- Real Estate Developer (Corporate Context): Also under RR No. 7-2023, a real estate developer corporation is involved in developing real properties into subdivisions, building houses on subdivided lots, or constructing residential or commercial units, townhouses, and similar projects for its own account, offering them for sale or lease. The properties developed and offered for sale by these corporations are likewise classified as “ordinary assets.”
Understanding “Ordinary Assets” for Corporate Real Estate Sales
When a corporation sells real property, its tax treatment largely hinges on whether the property is classified as an “ordinary asset” or a “capital asset.” This article focuses on “ordinary assets,” which generally trigger VAT unless specifically exempted.
Revenue Memorandum Circular (RMC) No. 99-2023 provides a clear definition of real properties considered “ordinary assets” for tax purposes:
- Inventory Stock: Real property that constitutes the stock in trade of the corporate taxpayer or other real property of a kind that would properly be included in the inventory if on hand at the close of the taxable year.
- Held for Sale in Ordinary Course of Business: Real property held by the corporate taxpayer primarily for sale to customers in the ordinary course of its trade or business.
- Depreciable Business Property: Real property used in the corporation’s trade or business (e.g., buildings and/or improvements) that is of a character subject to the allowance for depreciation under Sec. 34 (F) of the National Internal Revenue Code (NIRC) of 1997, as amended.
- Other Business-Use Property: Any other real properties used in trade or business by the corporate taxpayer.
It’s important to note that for a VAT-registered corporation, even a donation of a real property used in the course of its business, or a property originally intended for business use, is classified as a “deemed sale” of an ordinary asset and is therefore subject to VAT.
Value-Added Tax (VAT) on Corporate Sales of “Ordinary Assets”
Generally, sales of real property classified as “ordinary assets” by a VAT-registered corporation are subject to VAT.
The VAT, equivalent to 12%, is based on the gross sales. Under the Ease of Paying Taxes (EOPT) Act, “gross sales” is defined as the total amount of money or its equivalent value which the purchaser pays or is obligated to pay to the seller in consideration of the sale, barter, or exchange of the goods or properties, excluding the VAT itself. Any excise tax, if applicable, on such goods or properties will form part of the gross sales.
RR No. 99-2023, in conjunction with RR No. 16-2005, specifies that the 12% VAT on the sale of real property shall be based on the gross selling price of the property or the fair market value (FMV), whichever is higher. The FMV is further defined as the higher of the zonal value and the assessed value.
For VAT purposes, the sale of real property by corporations is classified into two types, which remain unchanged by the EOPT Act:
- Installment Sale: This applies if the initial payment received in the year of sale does not exceed 25% of the gross selling price. In such cases, the corporate seller is required to recognize the output VAT on every installment payment actually and/or constructively received, including any interest and penalties. Correspondingly, the buyer can claim the input tax in the same period as the seller recognized the output tax.
- Deferred-Payment Basis: If the initial payment in the year of sale exceeds 25% of the gross selling price, the sale is considered a cash sale. Consequently, the corporate seller is required to recognize the output tax on the entire selling price in the month of sale, and the input tax accrues to the buyer at the time of sale. Any subsequent payments made by the buyer will no longer be subject to VAT.
Corporate sellers of real properties classified as “ordinary assets” are mandated to issue Sales Invoices. This requirement also extends to VAT-registered corporations primarily engaged in the sale of services but selling real property used in their trade or business, as per the EOPT Act.
VAT-Exempt Corporate Sales of Real Property
It’s important to note that not all sales of real property, even by corporations, are subject to VAT. RR No. 1-2024, which amended RR No. 8-2021, provides for the following VAT-exempt sales, which may apply to corporate transactions under specific conditions:
- Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business. (Note: This is generally applicable to capital assets, but may apply to ordinary assets if they transition out of being held for sale.)
- Sale of real property utilized for socialized housing.
- Sale of house and lot, and other residential dwellings, with a selling price of not more than Three Million Six Hundred Thousand Pesos (P3,600,000.00) effective January 1, 2024.
Reporting Corporate Real Property Sales in the Income Tax Return (ITR) and Other Filings
The reporting of real property sales in the Income Tax Return (ITR) for a corporation depends on its primary business activity:
- If the corporation’s registered business with the BIR is real estate (e.g., real estate dealer or developer), the sales of “ordinary assets” shall form part of its gross sales reported in the ITR, which are then subject to corporate income tax.
- If the corporation is a VAT-registered taxpayer primarily engaged in another business (e.g., manufacturing, services) but sells a real property (classified as an “ordinary asset” because it was used in trade or business), the sale, despite the issuance of a sales invoice, shall not form part of the gross sales from its primary operations. Instead, the gain on such sale of real property shall 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 sales invoice. Any creditable tax withheld by the purchaser shall be claimed as a tax credit.
A copy of BIR Form No. 1606 with proof of payment of the Creditable Withholding Tax (CWT) shall be attached to the ITR where the sales were declared by the corporate seller.
Beyond the corporate ITR, additional tax returns are required to be filed:
- The buyer of the real property shall file BIR Form No. 1606 for the remittance of expanded withholding tax on the purchase of such real property.
- BIR Form No. 2000-OT shall be filed by either the corporate seller or the buyer for the declaration and payment of the documentary stamp tax (DST) due on the sale/transfer of real property.
The Impact of the Real Property Valuation and Assessment Reform Act (RPVARA)
The enactment of Republic Act No. 12001, or the Real Property Valuation and Assessment Reform Act (RPVARA), in June 2024 significantly changes the landscape for valuing real properties, directly impacting the tax base for corporate sales.
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 across the country. The law also mandates the market value as the single valuation base for assessment, eliminating inconsistencies that previously arose from different valuation methods.
A crucial change for corporate sellers is that, with the enactment of the RPVARA, the Bureau of Internal Revenue (BIR) is no longer in the position to determine the zonal value of real properties for internal revenue tax purposes. This responsibility is now transferred to local assessors, who are required to adopt the PVS to ensure uniform valuation of real properties.
In effect, this means:
- The valuation of real properties for tax purposes, including for VAT calculation (where FMV is higher than selling price), is expected to be more uniform and easier to determine as it will be based on the PVS-driven market value.
- Consequently, the computation of taxes like the VAT on gross selling price/FMV, and the Documentary Stamp Tax (DST) on the sale of real property, will now rely on a more consistent and standardized valuation basis.
Additionally, the RPVARA grants a real property tax amnesty for unpaid real property taxes, including penalties, surcharges, and interests. While primarily benefiting property owners, this could indirectly affect corporate sellers or buyers who are looking to settle previous tax arrears on properties. Property owners who want to avail the amnesty may choose either a one-time payment or installment payment of delinquent taxes within two years after the law’s effectivity.