pinoytaxation.com » Value-added tax

Buy & sell of real properties, how taxed?

pinoytaxation — Fri, 14 Aug 2009 03:46:47 +0000

Realty business had not been new in the country. Realty business nowadays are even becoming more aggressive and sophisticated with the advent of technological advancements on design and marketing their products. Apart from that, let us try to see the industry applicable taxes.

Tax implication of real property disposition basically depends on its classification for tax purposes: ordinary asset or capital asset. Ordinary assets simply refers to those used in business, while capital assets refer to those not used in trade or business. As an example, a land used as a factory site, or warehouse site or office site is an ordinary asset, while, a land bought for anticipation of future increment of value and for which, the same is booked as an investment is a capital asset. Circumstances of the owner, e.g. engagement in trade or business, and actual usage of the real property are important factor for such classification. An owner may not be a businessman but the property may have been rented out making it an ordinary asset. On the other hand, an owner maybe a businessman but the property disposed is not used in trade or business, like its residence, and so it will be classified as a capital asset.

An ordinary asset is subject to the following rules upon its bona fide transfer for a consideration:

* 12% value-added tax (VAT)
* 1.5% documentary stamp tax (DST)
* 1.5 to 6% creditable withholding tax (CWT), depending on the gross selling price to be withheld by a buyer if the seller is engaged in trade or business
* 6% creditable withholding tax if the seller is not engaged in trade or business
* Local transfer tax with the LGU, and registration fees with the Registry of Deeds of approximately 1%
* 30% donor’s tax as an indirect gift if the valuable consideration is less than the fair market value of the property

A capital asses on the other side is subject to the following:

* 1.5% documentary stamp tax (DST)
* 6% capital gains tax (CGT) based on the gross selling price or fair market value of the property, whichever is higher
* Local transfer tax with the LGU, and registration fees with the Registry of Deeds of approximately 1%

Main difference of the two lies on the VAT and income tax. No VAT on capital asset as the seller is not in furtherance of a trade or business and VAT is a business tax. 30% income tax on ordinary asset is based on net income after deducting the cost and necessary expenses of the sale, while 6% on capital asset is based on the gross selling price or fair market value of the property, whichever is higher, without any deduction, normally. Accordingly, to determine for tax savings, the author suggest that a proper study be made as there could be some tax minimization schemes that may help legally reduce tax dues.

In either case of the above classifications, a Certificate Authorizing Registration (CAR) that will authorize the Registry of Deed to transfer the title in the name of the new owner is necessary. It is issued upon finding of the BIR-one time transactions (ONETT) that the correct taxes had been paid . Should there be deficiency taxes, then the BIR shall first assess the corresponding tax and require payment of the same prior to the issuance of the CAR. Upon approval of the CAR, and along with the other requirements of the registry of Deeds, the new title in the name of the buyer shall be issued.

VAT 0% and VAT-exempt, what’s the difference?

pinoytaxation — Sun, 09 Aug 2009 05:41:21 +0000

As to taxability in VAT, it may be said to be VATable or non-VATable. If VATable, it maybe subject to 12% regular rate or 0% under certain conditions. On the other hand, if non-VATable, it maybe VAT-exempt covering those which are not subject to VAT but subject to other percentage tax (OPT) of 3%, or those which are neither subject to VAT nor to OPT. In the above items, the law provides which are VATable and at what rate, those which are non-VATable but subject to OPT, and those which are non-VATable and not subject to OPT. The general rule is VATable, and the exception is non-VATable, which must be expressly or impliedly covered by a law or regulation. Seems so confusing, right?

In the meantime let us differentiate the features of zero-rated and VAT exempt to simply understand their nature.

Zero-rated are subject to VAT at the rate of 0%, while VAT exempt are not subject to VAT as it enjoys immunity from VAT imposed by law or a treaty;
Input VAT is allowed to be credited in zero-rated against the output taxes to compute the VAT due at the end of the month or quarter, while in VAT exempt input VAT is treated as an expense or part of cost of the property or goods purchased;
At the option of the VAT-registered taxpayer, input taxes from zero-rating is eligible for tax refund or tax credit within two (2) years from the time sales are made, while in VAT exempt, no tax refund or tax credit is allowed

From the above distinctions, the material factor is on the application of VAT and the use of input taxes. Examples of zero-rated sale is exportation of goods, sales from the customs territory to economic zone registered entity, foreign currency denominated sales, and the likes. On the other hand, a typical example of VAT exempt sale is a sale in between two economic zones enjoying special privileges, and those enumerated in Section 109 of the Tax Code, as amended.

Please note that VAT exemption in Section 109 covers both VAT and OPT because the exemption covers the transaction itself, as defined in the Tax Code or in relation to the special laws. Section 109 is an attempt to consolidate VAT exemptions, but is not all inclusive and the Congress may from time to time legislate new VAT exemptions. However, exception is made with due respect to subsections 109(E) on percentage taxes imposed on other provisions of the tax Code, as amended, and 109(V) on VATable entities failing to come-up with the PhP1.5M gross sales or receipts that is nevertheless subjected to 3% OPT instead of the 12% VAT.

What is Value Added Tax?

pinoytaxation — Fri, 07 Aug 2009 14:59:54 +0000

“Any person who, in the course of trade or business, sells, barters, exchanges, leases goods or properties, renders services, and any person who imports goods shall be subject to value-added tax (VAT)…”(Section 105 of the Tax Code, as amended.) The rate is 12% of the gross selling price or gross receipts.

VAT is a business tax imposed upon sales of those who are engaged in the regular conduct of trade or business in the Philippines – either as a seller of goods or rendering services. With the expanded VAT law, more establishments and entities are now subject to VAT. Those who are not engaged in trade or business are not liable thereto even if they made sales of articles or rendered services that should have been subject to VAT if regularly undertaken, as they are not engaged in trade or business. Examples of these are casual sales of say, a real property, or personal assets of persons not engaged in trade or business.

Generally, to be subject to VAT, the entity must be VAT-registered and the gross sales or gross receipts must exceed PhP1.5M (except radio and television franchising which must exceed PhP10M) during a 12-month period. Non-VAT registered with gross sales or gross receipts not exceeding P1.5M (or PhP10M in radio/television franchising) shall be subject to other percentage tax (OPT) of 3%. However, upon reaching such amount it is required to register as VAT and shall be liable to VAT.

It is likewise a consumption tax. Thus, goods which are destined to be consumed in the Philippines are subject to VAT. Non-resident foreign persons rendering services in the Philippines are likewise subject to VAT, unless otherwise exempted by law or treaty. Likewise, importers, whether for business or for personal use, are subject to tax, unless otherwise exempted by law or treaty. This is because they are destined to be consumed in the Philippines. By implication, the final consumer or end-user shoulders the VAT that aggregates along the distribution chain and every consumer is paying this. By this, no one may safely say that he or she is not paying tax at all.

Value-added tax (VAT) is an indirect tax which means that the buyers are the one’s actually burdened by the tax while the seller establishment is the one obligated to remit the corresponding tax. For buyer, the VAT imposed on his purchases is called “input VAT”. For the seller, the VAT on its sales of goods or services is called “output VAT”. If you buy a VATable good, the price you will pay includes the VAT and you will notice the same on the invoice or receipt as it is required to be shown separately.

At the end of the month or quarter, VATable entities are required to filed monthly BIR Form No. 2550M for the first two months of every calendar quarter, and quarterly BIR Form 2550Q VAT returns. In this returns, output VAT less input VAT equals VAT payable to the BIR.

VAT zero-rated and VAT-exempt, what makes the difference?

“Taxes affect lives, care for taxes and save lives”

Tax on renting aparment, condo, and other residential dwellings

pinoytaxation — Fri, 07 Aug 2009 01:14:05 +0000

This post covers tax implications of renting residential dwellings such as an apartment, condominium unit, and a house and lot in both sides-the lessor or owner and the lessee or tenant. Tax implication would depend on the monthly rental of such units. For every lease contract, a documentary stamp tax (DST) at the rate of P3.00 for the first P2,000 and P1.oo for every succeeding P2,000.00 or fractional part thereof payable by either the lessor (the owner or original lessor, if sublease) or the lessee (the one paying the rental for the use and possession of the property).

Monthly rentals exceeding P10,000.00 is subject to value-added tax (VAT) of 12% if the lessor is a VAT-registered. It may be absorbed by the lessor or he/she may pass it on to the lessee based on their agreement. If the lessor is a non-VAT registered, the applicable tax type is other percentage tax (OPT) at 3% and is payable by the lessor only. Lessor shall be liable to VAT even if non-VAT registered if gross receipts from rentals exceeding P10,000.00 will be more than P1,500,000 during a 12 -month period. On the other hand, monthly rentals not exceeding P10,000 is exempted from VAT irregardless of whether or not the lessor’s gross receipts from rentals not exceeding P10,000 exceeds P1,500,000 during a 12-month period.

Likewise, lessor is subject to income tax of 30%, if corporation (limited liability company in other countries), or 5-32%, if individual. As a rule, if the lessee is engaged in trade or business, or in the exercise of its profession where the rental is deducted for its income tax computation, then its periodic lease payments are subject to withholding tax of 5% of gross periodic payment. Said withholding tax is required to be remitted to the BIR through BIR Form No. 1601-E not later than the 10th day of the month following the payment of such rental. Lessee will then issue BIR Form 2307 or Certificate of Creditable Withholding Tax (CWT) to the lessor not later than 30 days from such payment. Upon filing quarterly or annual ITR of the lessor, said withholding tax shall be deducted against its income tax due for the period and the certificates will be attached to the ITR upon filing.

Real estate lessor is subject to income tax only those rentals that is either collected or earned during the taxable period. Rental deposits are not taxable as they are not income until applied as rental at the end of the lease term based on agreement. Advance rental is subject to income tax. On the part of the lessee, adjustments to escalation clauses required by the accounting standards are not yet deductible for income tax purposes. They serve as temporary difference in the ITR.

Failure to withhold on the part of the lessee that is engage in trade or business, or engage in the practice of profession shall mean non-deductibility of such rental payments. If deducted without the requisite withholding, the same will still be disallowed and an assessment equivalent to the amount required to be withhold plus surcharge of 25%, interest of 20% and compromise penalties ranging from P200 to P25,000 depending on the basic amount.

If the lessee is not engaged in trade or business, or is not in the exercise of a profession, no such withholding is required on its periodic payments.