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Advance VAT on real properties

Advance VAT on real properties

by Kristine S. Casa-Siervo

In another effort to increase its revenue collections, the Bureau of Internal Revenue (BIR) has turned it sights and zeroed in on the real estate business. BIR has come up with a draft revenue regulation requiring taxpayers engaged in the real estate business or those which are habitually engaged in the sale or lease of real properties, to advance the payment of value-added tax (VAT) at the rate of 3% based on gross selling price (GSP) as indicated in the contract between the parties or the fair market value (FMV), whichever is higher.

According to the draft regulation, taxpayers registered with the Housing and Land Use Regulatory Board (HLURB), as well as with the Housing and Urban Development Coordinating Council (HUDCC), are automatically deemed to be engaged in the real estate business.

However, even without such registration,  a taxpayer is also considered to be engaged in the real estate business if he has entered into at least six  taxable real estate transactions in the preceding year, regardless of the amount involved.  This is also known as the six transaction rule.

The proposed advance VAT will be due as follows:
1.  On cash/deferred payment sale  -  3% of GSP or FMV due on the 10th of the month following the month when the transaction occurred.

2.  On installment sale - 3% on installment receivable due for collection in the current year, payable on the 10th of January of every year.

3.  On installment sale, in the initial year of installment - 3% on installment payments expected during the year, payable on the 10th of the month when the initial installment is due.

Two valid legal points have been raised questioning this imposition of an advance VAT.

One, there is no legal basis for the imposition considering that under the VAT law, the VAT is mandated to be paid on a monthly and quarterly basis. Section 245 and 244 of the Tax Code on which this proposed regulation is anchored give authority to the Secretary of Finance through the recommendation of the Commissioner of Internal Revenue, among others, to promulgate rules and regulations on the manner by which taxes are to be paid and collected in general. However, since there is already a specific provision in the same Tax Code on when and how VAT is to be paid, such should take precedence over a general mandate. Second, there was no factual, economic or logical basis presented on how the 3% rate was determined in computing for the advance VAT.

With the manner of imposing the advance VAT, serious concerns on tax compliance on the part of the affected taxpayers and the basic cost and benefit analysis on the part of the Bureau should be considered before pushing for this collection strategy.

On the tax compliance issue, this certainly will put additional burden and cost to covered taxpayers because this entails an addition to the already voluminous support documents (e.g BIR tax returns and payment   forms, sales documents, official receipts)   required before a Tax Clearance Certificate (TCL)/ Certificate Authorizing Registration (CAR) can be issued.
This is no doubt a cause of irritant among the taxpayers and the Bureau and more seriously, a potential source of corruption in the level of those processing the TCL and CAR.  Furthermore, this might pose a cash flow problem on the part of the sellers since the advanced VAT has to be paid even before payments on the sale transaction are received.

The Bureau, on the other hand, should carefully consider whether the projected benefit is justified by the increase in administration cost.  Additional man-hours will be used by Bureau personnel in processing the TCL and CAR considering the immense documents to be reviewed.

More importantly, the Bureau should analyze this collection strategy by determining how much increase in revenue collection it can generate when such advance payment covers transactions whose VAT payments are eventually due and demandable within the current year.  Since the advance payments may be immediately used as credit against the taxpayer’s VAT liability, it is likely that the advance VAT will not result to incremental VAT revenues during the year.

Furthermore, under the cash basis sale on real properties, the total VAT is already collected upfront on the full contract or sales price.

It must be emphasized that tax administration is not all tax collection. This should be balanced by taking into consideration the compliance cost incurred by the taxpayer in paying their taxes as well as the administration cost incurred by the Bureau in enforcing its rules. Equally important is the proper observance of existing provisions of the Tax Code and the Constitution.

(The author is a senior tax manager at Punongbayan & Araullo, member of Grant Thornton International.  For comments and inquiries, please email the author or call 886-5511.)