A reader recently contacted me about concerns related to Value Added Tax (VAT) on land purchases in the Philippines. While I am aware of the VAT exemption thresholds for real property (Train Law: P1.9 million for residential lots and P2.9 million for houses and condos), I did not specify any amounts but promised to write a blog post on the topic.
I. Applicable law: Section 109(P) of the Tax Code
Section 109(P) of the National Internal Revenue Code of 1997 states:
(P) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, residential lot valued at One million pesos (P1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P2,500,000) and below: Provided, That beginning January 1, 2021, the VAT exemption shall only apply to sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business, sale of real property utilized for socialized housing as defined by Republic Act No. 7279, sale of house and lot, and other residential dwellings with the selling price of not more than Two million pesos (P2,000,000): Provided, further, That every three (3) years thereafter, the amount herein stated shall be adjusted to its present value using the Consumer Price Index, as published by the Philippine Statistics Authority( PSA);
II. The VAT Exemption Threshold under the TRAIN Law on Real Estate Sales
The Tax Reform for Acceleration and Inclusion (TRAIN) Law (RA 10963) states that starting January 1, 2021, the VAT exemption threshold for transactions involving residential dwellings was reduced from P2.5 million to P2 million.
When the TRAIN Law was implemented on January 1, 2018, the thresholds were set at P1.5 million for residential lots and P2.5 million for houses and condos. As of January 1, 2021, the VAT-exempt thresholds are:
Residential lot: Not more than P1.5 million
House and lot/condo: Not more than P2 million
For residential lots, the TRAIN Law lowered the VAT exemption from P1,919,500 to P1,500,000. However, this exemption only applied before January 1, 2021. Consequently, sales of residential lots are no longer included in the VAT exemption threshold.
The 12% VAT on "lot only" sales in Cebu from small-time developers will likely impact the sales of such residential lots.
III. Recent Revenue Resolution: BIR RR 8-2021
The Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 8-2021 on June 12, 2021, amending RR 4-2021, which was issued to implement VAT and Percentage Taxes under Republic Act (RA) 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act. One of the key changes in RR 8-2021 is the reversion of the VAT-exempt threshold on the sale of dwellings to P3,199,200, based on the 2010 Consumer Price Index values pursuant to RR 16-2012.
Starting January 1, 2024, the exemption threshold will be adjusted based on the prevailing Consumer Price Index (CPI), not the 2010 CPI.
IV. The 2010 Consumer Price Index as Basis in Determining the VAT Exemption Threshold
According to BIR RR 16-2011, the VAT exemption threshold must be adjusted to its present value using the Consumer Price Index (CPI) published by the Philippine Statistics Authority (PSA, formerly NSO), rounded to the nearest hundred.
Using the formula in BIR RR 16-2011, the VAT exemption threshold was adjusted to P1,919,500 for residential lots and P3,199,200 for houses and other residential dwellings.
VI. President Duterte Vetoed CREATE Bill seeking the raise of VAT Exemption Threshold on Real Estate Sales
President Duterte vetoed certain provisions of the CREATE Bill, including the proposed increase of the VAT exemption threshold for real estate sales from P3.2 million to P4.2 million. The President argued that this increase would benefit individuals who are not the intended recipients of VAT exemptions and could lead to abuse, such as parceling properties to fall within the VAT-exempt threshold.
As a result, the P2 million threshold under the TRAIN Law remains in effect, as implemented by RR 4-2021 in April. According to RR 8-2021, the VAT exemption threshold for house-and-lot and other residential dwellings (e.g., condos) has reverted to P3,199,200, based on the 2010 Consumer Price Index values pursuant to RR 16-2012. This discussion is for educational purposes only. Consult your lawyer for advice on your specific case. For any questions, contact us.
If you’re planning to buy a residential lot, house-and-lot, or condo unit, get in touch with us at 0920 207 6284 or email cebuhousefinder@yahoo.com for free assistance.
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