BUSINESS & REAL ESTATE TAXES

(Updated under TRAIN & CREATE Law)

by:

ATTY. ROLANDO B. PAGTOLON-AN, REB, REA, REC

GENERAL PRINCIPLES OF TAXATION All transactions have tax.

If you die you pay estate tax

TAXATION, definition
- Taxation is the power by which the sovereign, through its law making
body, raises revenue to defray the necessary expenses of the
government. It is merely a way of apportioning the costs of government
among those who in some measure are privileged to enjoy its benefits
and must bear its burdens.

TAXES
- Are the enforced proportional contributions from persons and property
Purpose levied by the law-making body of the state by virtue of its sovereignty
for the support of the government and for public needs.
Governing Code/ Basis
National Internal Revenue Code (NIRC)
- is the Tax Code of 1997 of the Philippines CREATE LAW RA 11534

board
exam - Republic Act No. 8424 The Corporate Recovery and Tax Incentives for
Enterprises (CREATE) law aims to make the Philippines
more competitive in ASEAN by lowering the corporate
income taxes to 25% and 20% for small, medium and micro
enterprises.
January 2018.
Tax Reform for Acceleration and Inclusion Act (TRAIN Law)
- Republic Act No. 10963
*** During pandemic

The TRAIN Act is aimed to generate revenue to achieve the 2022

and 2040 vision of the Duterte administration, namely, to eradicate
Nature of Taxation extreme poverty, to create inclusive institutions that will offer equal
opportunities to all, and to achieve higher income country status.
How a Bill becomes
a law :
1. HOR has 3 hearings 1) It is an inherent attribute of sovereignty because the moment the State
need a quorum to brain
storm
2.Senate pass 3 readings
exists, the power to tax automatically exists; and Branches of Government
(LEJ)
3. the bill is sent to the
President. If the President 2) It is legislative in character. Legislative - Make law, Congress and Senate
approves of the
legislation, it is signed Executive - President and cabinet, DOJ
and becomes law
Characteristics of Taxation Acronym : Judiciary - Supreme Court and Sandigan Bayan
CUPS

1) Comprehensive- -it covers persons, businesses, activities,

professions, rights and privileges;
2) Unlimited- -the power to impose taxes is one so unlimited in force
and in so searching in extent that the courts scarcely
venture to declare that it is subject to any restriction
whatever, except such as rest in the discretion of the
authority which exercises it; limited by discretion
3) Plenary -it is complete; and
4) Supreme -although referred to as the strongest of all the powers
of the government, it cannot be interpreted to mean
that it is superior to other inherent powers of the
government.

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ATTY. ROLANDO B. PAGTOLON-AN, REB, REA, REC
iACADEMY School of Business
 What are the three (3) inherent powers of the government?
Power of Expropriation

PET
Power of Taxation Police Power Power of Eminent
Domain
The power of the The power of the The power of the
government to government to regulate government to take
raise revenue to to promote public private property for
defray its welfare. public purpose with
necessary payment of just
expenses. compensation.

Principles of Sound Tax System FAT

In evolving a sound tax system, the following principles have been

suggested in order to make it sound, but not necessarily to make the law valid:

1) Fiscal Adequacy - sources of government revenue must be

sufficient to meet government expenditures and
other public needs;
2) Administrative Feasibility - tax laws must be capable of being
effectively enforced with the least inconvenience
to the taxpayer; and
3) Theoretical Justice - a sound tax system must be based on the
taxpayer’s ability to pay.

Theory and Basis of Taxation LNB

1) Lifeblood Theory - without revenue raised from the taxation, the

government will not survive;
Pork Barrel is unconstitutional as it
cannot be audited 2) Necessity Theory - the existence of the government is a necessity;
Confidential Fund that it cannot continue without a means to pay its
expenses and therefore, it has a right to compel
all citizens and property within its limits to
contribute; and
3) Benefits-Protection Theory - the state demands and receive taxes from
Board Exam
the subjects of taxation within its jurisdiction so that
Symbiotic Relationship Theory -
Mutual benefit they be secured in the enjoyment of the benefits
of organized society.

Double Taxation
- taxing the same subject or object twice by the same taxing power within
the same taxable period for the same purpose.

- 2 Kinds:

Illegal a) Direct Duplicate Taxation – the objectionable kind of double taxation

since it violates the equal protection clause of the Constitution:

i. The same property or subject matter is taxed twice

ii. Both taxes are levied for the same purpose; and
iii. Imposed by the same taxing authority
* within the same jurisdiction
* during the same taxing period
If any one of the requisite are not present it
becomes invalid
* covering the same kind of
character of tax
(Villanueva vs. City of Iloilo).
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ATTY. ROLANDO B. PAGTOLON-AN, REB, REA, REC
iACADEMY School of Business
Ex. If LGU taxes you twice
 Legal
b) Indirect Duplicate - the permissible kind of double taxation. This
arises in the absence of one or more of the above
mentioned elements of direct double taxation.

Scenario:
Abida Land, Inc. is a real estate corporation engaged in the leasing of its
own apartments. It is regularly paying its annual real property taxes. Due to
License fee = police power
the great demand of real estate in the area, the City of Magallanes
Real Property tax = tax
power enacted an ordinance in 2018 which requires that all businesses engaged
NOT double taxation in the leasing of real property shall pay an annual fee of Php20,000.00.
Abida Land, Inc. questioned the said ordinance since they are already
paying annually the real property tax. Do you think there is double taxation
(direct duplicate taxation)?

No. The impositions are of different nature and character. The fixed annual
fee is in the nature of a license fee imposed through the exercise of police
power, while the real property tax is imposed through the exercise of taxing
powers of the city as sanctioned under the Local Government Code.

Forms of Escape from Taxation

1) Shifting of Tax Burden; Ex. Mega World did not pay taxes last
year.
2) Tax Avoidance; and But in any stage you can sue and firm
can pay late since goal of the

3) Tax Evasion.
government is just to collect.
unconstitutional

Shifting of Tax Burden Tax Avoidance Tax Evasion

- it is the transfer of - also called tax - it is an illegal means
the burden of tax minimization of escaping taxation.
by the original It connotes fraud
What are indirect taxes - shifted
payer of the one on - it is the exploitation by through the use of
from seller to buyer whom the tax was the taxpayer of legally pretenses and
1. VAT
2. Excise tax
assessed or permissible alternative forbidden devices to
3. Percentage Tax
4. Documentary stamp tax
imposed to another tax rates or methods of lessen or defeat taxes.
VEPD
or someone else. assessing taxable
property or income, in 2 Kinds:

- this only applies to order to avoid or 1. Pretenses - In order to lessen

2. Defeat Tax - not pay tax at all no
indirect taxes (VAT,, reduce tax liability. declareation of sources income

excise tax, other

percentage tax,
documentary The use of strategies and is legal

stamp tax)

Real Estate Dealer - Buy property and

Example: Example: Example:
resells it to public
I am a real estate I am a real estate I sold my
dealer, I buy lots of dealer, I buy lots of condominium unit for
condominium units condominium units. In Php5,000,000.00. In
and then sell it later order to avoid the order to pay lesser tax
on. When I buy a payment of huge taxes for the transfer of the
condominium unit, it if I register my real property to the buyer,
has VAT. I pay for the estate dealer business I declared in the
said unit including the as a corporation, I contract to be
VAT. Later, I sold the register the same as a submitted to the BIR
said unit to other proprietorship instead that the Total Contract
persons, the said VAT which pays lesser taxes. Price is only
will be shifted or Php2,000,000.00. This is
passed on to the Ex. 32 % of income tax if you many declared sources
of income . There is a BIR ruling you can pay only 8% undervaluing.
buyer. but you must avail .

Ex. Extra Judicial Settlement of the State when you

get inheritance. Where you pay estate tax, twice for
documentary stamp and capital gain tax

Then you make absolute sale if you want to sell said

property. 3|P a ge
ATTY. ROLANDO B. PAGTOLON-AN, REB, REA, REC
Better to make an EJS with deed with sale which is
iACADEMY School of Business
one document. Where you pay estate tax, twice for
documentary stamp and capital gain tax BUT you only
pay ONE transfer tax .

5% for province and 5.75% in city for Transfer tax

 BUSINESS TAXES
Shifting the Burden

I. VALUE ADDED TAX (VAT)

- is a tax on consumption levied on the sale, barter, exchange or lease of
goods or properties and services in the Philippines and on importation
of goods into the Philippines.

Characteristics:
1. It is an indirect tax;
Types of Tax
2 It is a tax on value added of a taxpayer;
Capital Gains Tax is a tax imposed on
the gains presumed to have been
realized by the seller from the sale, 3. It is a transparent form of sales tax, since the law requires that the amount
Offsetting VAT:
of the tax be shown as a separate item in the VAT Invoice or receipt; thatThe
exchange, or other disposition of
capital assets located in the principle behind VAT is
Philippines, including pacto de retro it is a tax on the value added
sales and other forms of conditional by a business. To compute the VAT
sale. The difference between the liability, a business subtracts the input
purchase price and the selling price.
4. It is collected through the tax credit method VAT (what it has paid) from the output VAT
(what it has collected). If the output VAT is
Documentary Stamp Tax is a tax on greater than the input VAT, the business
documents, instruments, loan owes the difference to the tax
agreements and papers evidencing authorities. Conversely, if the
the acceptance, assignment, sale or
transfer of an obligation, rights, or Tax Credit Method- also known as invoice method input VAT exceeds the
output VAT, the

- it refers to the manner by which the input tax shifted

property incident thereto.

Donor's Tax is a tax on a donation or

gift, and is imposed on the gratuitous
transfer of property between two or
by the seller to the buyer is credited against the
more persons who are living at the
time of the transfer. buyer’s output taxes when he in turn sells the taxable
Estate Tax is a tax on the right of the
deceased person to transmit his/her
goods, properties or services
estate to his/her lawful heirs and
beneficiaries at the time of death and
on certain transfers which are made
by law as equivalent to testamentary Output Tax- refers to the Vat due or paid on the
disposition.

Income Tax is a tax on all yearly

taxable sale, barter or exchange of goods, properties
profits arising from property,
profession, trades or offices or as a
Input VAT (or more generally “input tax”) is
the amount of Value Added Tax (VAT) that
or services by a seller or transferor
tax on a person’s income, a business pays on the goods and services
emoluments, profits and the like. it purchases for its business operations. It

Input Tax- refers to the VAT due from or paid by A VAT-

is called "input" VAT because it is the VAT
Percentage Tax is a business tax paid on the inputs or purchases used by
imposed on persons or entities who the business to produce goods or provide
sell or lease goods, properties or
services in the course of trade or
services.
registered person on importation of taxable goods, or
business whose gross annual sales or
receipts do not exceed P550,000 and
are not VAT-registered.
The amount of input VAT paid can usually
be used to offset VAT liabilities on sales on local purchase of taxable goods, properties or
(output VAT). In other words, even though a
Value-Added Tax is a business tax
business paid VAT to their suppliers, this
tax paid can typically be recovered from the
services, including lease or use of properties, in the
course of his trade or business;
imposed and collected from the seller government and is therefore not a net cost
in the course of trade or business on to the business.
every sale of properties (real or
personal) lease of goods or properties
(real or personal) or vendors of
services. It is an indirect tax, thus, it
can be passed on to the buyer. 5. It adopts the “tax inclusive method”. Unless otherwise stated, any price
Withholding Tax on Compensation is
the tax withheld from individuals
charged by a VAT-registered person shall be deemed to include the VAT
receiving purely compensation
income. charged
Expanded Withholding Tax is a kind of
withholding tax which is prescribed
only for certain payors and is
creditable against the income tax due
How to compute? Export has Vat but it is
of the payee for the taxable quarter
year. Total Amount ÷ 1.12 x 12%= VAT just 0%

Final Withholding Tax is a kind of

withholding tax which is prescribed
only for certain payors and is not
creditable against the income tax due 6. It follows the destination principle
of the payee for the taxable year.
Income Tax withheld constitutes the
full and final payment of the Income
Tax due from the payee on the said
income.
Destination Principle in r/t VAT
Withholding Tax on Government - also known as cross-border doctrine
Money Payments is the withholding
tax withheld by government offices
and instrumentalities, including
- it means that destination of the goods determines
government-owned or -controlled
corporations and local government
taxation or exemption from tax.
units, before making any payments to
private individuals, corporations, - example: Export sales of goods are subject to zero
partnerships and/or associations.

Excise Tax is a tax on the production,

percent (0%) rate, while imports of goods are subject to
sale or consumption of a commodity
in a country. It applies to goods the 12% VAT (exports are zero-rated because the
consumption of such goods will be made outside the
manufactured or produced in the
Philippines for domestic sale or
consumption or for any other
Philippines; on the other hand, imports of goods are
subject to the regular VAT rate because they are for
consumption within the Philippines).

4|P a ge
ATTY. ROLANDO B. PAGTOLON-AN, REB, REA, REC
iACADEMY School of Business
 What are the elements of a VATable transaction?
In the Philippines, the sale of land is
generally subject to Value Added Tax (VAT)
- For VAT to be charged (other than on imports), the following conditions
if certain conditions are met. Here are some
key points to consider:
must be satisfied:
VAT Threshold: The sale of land by VAT- 1) There must be a sale, barter, exchange or lease (SBEL) in the
registered persons or entities is subject to
VAT if the gross annual sales or receipts
exceed the threshold set by the Bureau of
Philippines;
Internal Revenue (BIR). As of the latest
updates, this threshold is PHP 3,000,000. 2) The sale, barter, exchange or lease must be of taxable goods,
Type of Land: Commercial land and
residential lots are typically subject to VAT if
properties, or services; and
the seller is VAT-registered and the sale
exceeds the VAT threshold. However,
3) The sale must be made by a taxable person in the course of his
certain types of land sales, such as those
involving agricultural land, may be exempt. trade or business or furtherance of his/its profession.
Seller's Status: If the seller is not VAT-
registered or if the sale does not exceed the
VAT THRESHOLD:
VAT threshold, the transaction might be
exempt from VAT. However, it could still be The sale or lease of goods or properties or the performance of LOOK FOR UPDATED

services is with an annual gross sales and/or receipts of more than

subject to percentage taxes. VAT THRESHOLD

Real Estate Dealers: Real estate dealers,

developers, lessors, and parties who
regularly engage in the sale of real estate
Php3,000,000.00.

Who are persons liable?

- Any person who, in the course of his trade or business, sells, barters,
exchange, leases goods or properties, renders services and any person
who imports goods shall be subject to VAT.

What is meant by the phrase “in the course of his trade or business” (Rule of
Regularity)?
- It means the regular conduct or pursuit of a commercial or an economic
activity, including transactions incidental thereto, by any person
regardless of whether or not the person engaged therein is a non-stock,
non-private organization (irrespective of the disposition of its net income
and whether or not it sells exclusively to members or their guests), or
government entity.
- The term incidental means something necessary, appertaining to or
depending upon another, which is termed the principal, something
incident to the main purpose (Magsaysay Lines Inc., et.al. vs. CIR)

Note: Even if the real property is not primarily held for sale to customers
or held for lease in the ordinary course of trade or business but the same
is used in the trade or business of the seller, the sale thereof shall be
subject to VAT being a transaction incidental to the taxpayer’s main
business.

Example:
Mr. Sepe is the owner of a shop selling computers in Makati City. His
business is VAT- registered. Recently, he sold his building where the
computer shop is situated, do you think the said sale is subject to VAT?

Yes. Since the property sold is the property used in his computer
business.
- This rule does not apply to the following transactions, which means that
they shall be subject to VAT although not made in the course of trade
Ex. Kpop Star performance
or business:
is subject to VAT
Forgein doctor who
1) Services rendered in the Philippines by non-resident foreign
performs surgery
persons; and
2) Importation of goods.

VAT on sale of properties Developer, Dealers,

Apartment Owner, Business

The properties subject to VAT:

Entities engaged to sell

1. Real properties held primarily for sale to customers or held for lease in the
ordinary course of trade or business.

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ATTY. ROLANDO B. PAGTOLON-AN, REB, REA, REC
iACADEMY School of Business
Levy, Assessment, and Collection:
VAT is levied, assessed, and
collected on every sale, barter, or
exchange of goods or properties.

Tax Rate: The rate of the VAT is

twelve percent (12%).

Base of Tax: The tax is based on

the gross selling price or the gross
value in money of the goods or
properties that are sold, bartered, "Section 31. Section 106 of the NIRC, as amended, is hereby further amended
or exchanged.
to read as follows:
Responsibility for Payment: The
VAT is to be paid by the seller or
transferor of the goods or
properties.
Sec. 106. Value-added Tax on Sale of Goods or Properties -
Explanation:
12% VAT Rate: This is a standard
rate applied to the sale of goods
and properties in the Philippines. "(A) Rate and Base of Tax - There shall be levied, assessed and collected on every
Gross Selling Price: This refers to
the total amount at which the
sale, barter or exchange of goods or properties, a value-added tax equivalent to
goods or properties are sold,
without any deductions.
twelve percent (12%) of the gross selling price or gross value in money of the
Seller's Responsibility: The seller goods or properties sold, bartered or exchanged, such tax to be paid by the seller
or transferor is responsible for
paying the VAT, meaning that they or transferor.”
must include this tax in the selling Capital Asset is different from Ordinary
price and remit it to the Bureau of Asset
Internal Revenue (BIR).
- If less than 5 sales, then its capital asset
not subject VAT.

What is the tax base of VAT on sale of properties? - If individual is not VAT registered

The tax base of VAT in sale of properties is 12% based on:

- Selling Price (Gross) in the sales contract

Scenario:
Adabson Realty Inc. is a real estate dealer corporation. It sells mansion
houses located in Alabang, Muntinlupa. One of its latest transaction is
Board Exam
questions
the sale of a mansion with a selling price of Php13,000,000.00. The value If lot has house
- Tax deck for fair market
of the said property if based on the Zonal Value is Php 10,000,000.00. of Zonal Value

Applying the Assessor’s valuation, said property is valued at Php - Selling price can see of
on deed of absolute sale
10,500,000.00. Compute for the VAT (inclusive of the price/value) of the
said transaction.

Computation:

Php13,000,000.00 ÷ 1.12 x 12%= Php 1,392,857.14

Assuming that the selling price is still exclusive of VAT, how to compute
for the same?
Vat only computation

LOOK FOR UPDATED Php13,000,000.00 x 12%= Php1,560,000.00

THRESHOLD ON NEW NOTES

Situs (place of taxation) of VAT? Not where property is located

WHERE business is located
- Place where the principal office of the business is located

What are the requisites for the taxability (VAT) of real properties? Settlement
??? Parang a is a. The seller executes a deed of sale, including dacion en pago, barter or
exchange, assignment, transfer or conveyance or merely contract to sell
wrong - Not deed of sale
- one essential element for
tax to be imposed is a
sale; a separation of
gains
involving real property;
b. The real property is located within the Philippines;
c. The seller or transferor is engaged in the real estate business either as a
real estate dealer, developer or lessor;
d. The real property is held primarily for sale or for lease in the ordinary
course of his trade or business; and
e. The sale is not exempt from VAT under any law.

Note: Absence of any of the above requisites exempts the transaction from
VAT. However, percentage taxes may apply.

Transactions deemed sale

- When there is no actual sale. However, the law deems that there is a
sale subject to VAT.
- Examples that are related to real estate:

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ATTY. ROLANDO B. PAGTOLON-AN, REB, REA, REC
iACADEMY School of Business
 a. Transfer, use or consumption not in the course of business of goods
or properties originally intended for sale or for use in the course of
business; and
b. Retirement from or cessation of business with respect to inventories
Closing business due to “lugi” at a lower
price but still subject to VAT

on hand.
- the output tax shall be based on the market value of the properties
deemed sold as of the time of the occurrence of the transaction.

VAT on sale of service and use or lease of properties

Section 33. Section 108 of the NIRC, as amended, is hereby further

amended to read as follows:

"Sec. 108. Value-added Tax on Sale of Services and Use or Lease of

Properties.—

"(A) Rate and Base of Tax. - There shall be levied, assessed and
Board
collected, a value-added tax equivalent to twelve percent (12%) of gross
Exam
receipts derived from the sale or exchange of services, including the use
or lease of properties. Doctor, lawyer,
architect, etc.

1. Sale or exchange of services

- it means the performance of all kinds of services in the Philippines
for a fee, remuneration or consideration, whether in kind or in cash

"Sec. 108. (A) xxx

The phrase ‘sale or exchange of services’ means the performance of all
kinds of services in the Philippines for others for a fee, remuneration or
consideration, including those performed or rendered by, real estate
brokers; lessors of property, whether personal or real”

- So, examples: services of real estate brokers, appraisers, consultants,

doctors, etc.
This rule means that if you
lease a property located in
the Philippines, the lease
transaction is subject to 2. Lease of properties
- it shall be subject to VAT irrespective of the place where the
Value-Added Tax (VAT)
regardless of where the lease
contract was signed. The
critical factor is the location of
the property being leased. If
contract of lease was executed, if the property leased or used is in
the property is in the
Philippines, the lease is the Philippines.
subject to VAT.

Is the deposit subject to VAT? Are advance payments made by the lessee
for lease of properties subject to VAT?
Non-taxable Advance Payments: Loans,
option money, and security deposits are- not It depends.
If the advance payment is actually a loan to the lessor, or an option
subject to VAT until applied as rental.

Taxable at Application: Security deposits Not yet applied as

used as rent are subject to VAT at the time
of application.
money for the property, or a security deposit for the faithful rent not VATable

Taxable Prepaid Rentals: Prepaid rentals performance of certain obligations of the lessee, such advance
are subject to VAT upon receipt by the
lessor. payment is not subject to VAT.
Security deposit that is applied to rental shall be subject to VAT at the
time of its application.
On the other hand, if the advance payment constitutes a prepaid rental,
then such payment is taxable to the lessor in the month when received,
irrespective of the accounting method employed by the lessor (R.R. No.
16-05, Sec. 4. 108-3).

Note: Residential unit excludes lodging houses, inns and pension houses

7|P a ge
ATTY. ROLANDO B. PAGTOLON-AN, REB, REA, REC
iACADEMY School of Business
What is the tax base of the VAT on sale of service and use or lease of
properties?
- The 12% is based on the gross receipts derived from the sale or
exchange of services, including the use or lease of properties.

"The term ‘gross receipts’ means the total amount of money or its
equivalent representing the contract price, compensation, service fee,
rental or royalty, including the amount charged for materials supplied with
the services and deposits and advanced payments actually or
constructively received during the taxable quarter for the services
performed or to be performed for another person, excluding value-
added tax.

The time of payment will depend on whether a sale is an Installment Sale or a

Deferred Payment Sale. A sale is on installment if the initial payments in the year
of sale do not exceed 25% of the gross selling price. A sale is considered as cash
or deferred payment if the initial payments in the year of sale exceed 25% of the
gross selling price. [7]

Initial payments means payment or payments which the seller receives before or
upon execution of the instrument of sale and payments which he expects or is
scheduled to receive in cash or property (other than evidence of indebtedness of
the purchaser) during the taxable year when the sale or disposition of the real
property was made. It covers any downpayment made and includes all payments
actually or constructively received during the year of sale, the aggregate of which
determines the limit set by the law.

In other words, add the downpayment plus all amortization payments (principal
portion only) during the year and compute if the total exceeds 25% of the gross
selling price.

A. Deferred payment/Cash basis

• The transaction shall be treated as a cash sale which makes the entire
selling price subject to VAT in the month of sale.

B. Installment basis

• Each installment payment actually and/or constructively received by

the seller is subject to VAT.

Computation for Installment Basis:

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ATTY. ROLANDO B. PAGTOLON-AN, REB, REA, REC
iACADEMY School of Business