January 15, 1996

REVENUE MEMORANDUM CIRCULAR NO. 3-96

SUBJECT : Clarification of Issues Affecting the Sale, Exchange, Transfer or Lease of Real Properties, under Republic Act No. 7716, Otherwise Known as the "Expanded VAT Law." All Internal Revenue Officers and Others Concerned.

TO

Q-1. What real estate transactions are subject to VAT starting January 1,1996? A-1 Real estate transactions which are subject to VAT starting January 1, 1996 include the following: a. Sale, barter or exchange of real property held primarily for sale to customers or for lease, in the ordinary course of trade or business, when the gross annual and/or receipts exceed P500,000.00; Lease of real property in the ordinary course of trade or business, whether for commercial or residential use, when the gross annual receipts exceed P500,00.00 and provided that, in the case of residential use, the monthly rental exceeds P3,950.00/unit (as adjusted under Republic Act No. 7644, otherwise known as the Rent Control Law); Security deposits in lease contracts, when the same is applied to rental (at the time of the application); Advance payment received in the month/quarter by the lessor, when the same is in fact a pre-paid rental, regardless of the accounting method used; Real property dividends distributed by real estate dealers/lessors to its stockholders and declared out of the retained earnings. The VAT should be computed based on the fair market value or zonal value thereof, whichever is higher, at the time of distribution.
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b.

c. d.

e.

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Q-2 A-2

What real estate transaction are exempt from VAT? Real estate transaction which are not subject to VAT include the following: a. b. Sale of real property not primarily held for sale to customers or held for lease in the ordinary course of trade of business; Sale of real property utilized for socialized housing under RA 7279, except when sold by a real estate dealer to a person other than the intended or qualified beneficiaries; Sale of real property utilized for low-cost housing under BP 220 or PD 957, except when sold by a real estate dealer to a person other than the intended or qualified beneficiaries; Transfer of real property to a trustee if the property is to be held merely in trust for the trustor; Transfer of real property to a corporation in exchange for its shares of stock under Section 34 (c) (2) and (6) (c) of the Tax Code; Advance payment by the lessee in a lease contract, when the same is actually a loan to the lessor from the lessee; Security deposits for lease arrangements to insure the faithful performance of certain obligations of the lessee to the lessor; Lease of residential units, boarding houses, dormitories, rooms and bed spaces offered for rent by their owners at a monthly rental not exceeding P3,950.00/unit as adjusted under Republic Act No. 7644, (Rent Control Law); The term "unit" shall mean an apartment unit in the case of apartments; house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in the case of rooms for rent. i. Sale or lease of real property primarily held for sale to customers or for lease in the ordinary course of trade or business when the gross annual sales and/or receipts do not exceed P500,000.00.
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c.

d. e. f. g. h.

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Q-3 A-3

What residential units are referred to in A-2 (h)? The term "residential units" shall refer to apartments, houses and/or lands on which another's dwelling is located, used for residential purposes and shall include not only buildings, parts or units thereof, used solely as dwelling places [except motels, hotels, apartelles, pension houses, lodging houses and resorts] or also used for home industries, retail stores or other business purposes, if the tenant thereof and his family actually live therein and use them principally for dwelling purposes; What is the business tax liability of a real estate dealer/lessor whose gross sales/receipts do not exceed P500,000.00 during any 12-month period? They shall be liable as Non-VAT taxpayers subject to 3% percentage tax imposed under Sec. 112 of the Tax Code. However, they have the option to register as VAT taxpayers, in which case, they are liable to the 10% VAT with the benefit of input tax credits. What is the business tax liability of individuals whose gross sales receipts do not exceed P100,000.00 during any 12-month period? Individuals whose gross receipts do not exceed P100,000.00 during any 12-month period shall be exempt from the VAT and 3% percentage tax imposed under Sec. 112, since they are considered principally for subsistence or livelihood and not in the course of trade or business. Who are the persons liable to VAT? The following persons engaged in real estate business are liable to VAT: a. Any person, whether natural or juridical, engaged in the sale, barter, or exchange of real properties in the ordinary course of trade or business; Real estate lessors and sub-lessors; Non-resident lessors of real property located in the Philippines through their resident lessees; Non-stock, non-profit organizations engaged in the sale, barter, exchange or lease of real property, irrespective of the disposition of
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Q-4 A-4

Q-5 A-5

Q-6 A-6

b. c. d.
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its net income and whether or not the sale/lease is exclusively to its members, as long as the transaction is undertaken in the regular conduct or pursuit of a commercial or an economic activity; and e. Government, its agencies and instrumentalities, including government-owned or controlled corporations engaged in the sale, barter, exchange or lease of real properties in the ordinary course of trade or business. Provided, however, that the gross sales/receipts from the sale, barter, exchange and/or lease of real property of the aforementioned taxpayers in the course of its/his trade or business during any 12-month period exceed P500,000.00. Q-7 A-7 Who is considered a real estate dealer? A real estate dealer is any person engaged in the business of buying, developing, selling, or exchanging real property as principal and holding himself out as a full-time or part-time dealer in real estate. Who is considered a real estate lessor? A real estate lessor includes any person engaged in the business of leasing or sub-leasing of real property. When is a real estate dealer considered to be engaged in low cost housing project? A real estate dealer is considered to be engaged in low-cost housing project when such project is registered and licensed by HLURB/HUDCC as low-cost housing pursuant to BP 220 or PD 957, or any other similar law. Low-cost housing refers to housing projects intended for homeless low-income family beneficiaries, undertaken by the Government or private developers, which may either be a subdivision or a condominium, wherein the unit selling price is not more than P375,000.00 or as may be determined from time to time by HLURB/HUDCC;

Q-8 A-8 Q-9 A-9

Q-10 When is a real dealer considered to be engaged in socialized housing? A-10 A real estate dealer is considered to be engaged in socialized housing when such project is registered and licensed by HLURB/HUDCC as socialized
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housing pursuant to RA 7279, otherwise known as the "Urban Development and Housing Act of 1992." Socialized housing refers to housing programs and projects covering houses and lots or homelots only undertaken by the Government or the private sector for the underprivileged and homeless citizens which shall include sites and services development, long-term financing, liberalized terms on interest payments, and such other projects intended for the underprivileged and homeless wherein the housing package selling price is not more than P150,000.00 or within the lowest interest rates under the Unified Home Lending Program (UHLP) or any equivalent housing program of the Government, the private sector or non-government organizations; Q-11 For purposes of determining exemption from VAT, what documents are required to be submitted by real estate dealer engaged in low-cost socialized housing projects? A-11 Within 30 days from approval of each project, real estate dealers engaged in low-cost/socialized housing are required to submit a duly authenticated copy of the certificate of license to sell issued by HLURB/HUDCC specifying the project name, location and number units to be sold, to the Revenue District Office where its principal place of business is located. Q-12 Are commissions of real estate agent/broker subject to VAT? A-12 Yes, commissions of real estate agent/broker are subject to VAT if the gross receipts exceed P500,000.00 during any 12-month period. Q-13 Can real estate dealers withhold the VAT from the commissions paid to real estate brokers? A-13 No, real estate dealers are not allowed to withhold VAT; however, government entities can withhold VAT on its payment for goods and services. Q-14 Are all sales of real property prior to January 1, 1996 subject to VAT? A-14 No. only sales of real property held primarily for sale to customers or for lease by real estate dealers or lessors on installment plan shall be subject to VAT with respect to the installment payments made on or after January 1, 1996. Sale of real properties on deferred payment basis in 1995 and prior years are not subject to VAT.

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Q-15 What do we mean by sale of real property on installment plan? A-15 Sale of real property on the installment plan means sale of real property the initial payments of which in the year of sale do not exceed 25% of Gross Selling Price. Q-16 What do we mean by sale of real property on the deferred payment basis? A-16 Sale of real property on a deferred payment basis means sale of real property, the initial payments of which in the year of sale exceed 25% of the gross selling price. Q-17 What does initial payment mean? A-17 Initial payment 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 purchases) during the calendar 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 calendar year of sale, the aggregate of which determines the limit set by law. Q-18 How do we compute the percentage of initial payment? A-18 There are two ways of determining the percentage of the initial payment over the contract price 1. Add the downpayment and he scheduled principal amortization during the year of sale and divide the sum by the total contract price, or Add the downpayment and the scheduled amortizations (principal plus interest) during the year of sale and divide the sum by the aggregate of the downpayment and the total amortization for the entire contract, including interest. If either test results to more than 25% then it is a sale on the deferred payment plan, otherwise, it is a sale on the installment plan.

2.

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Q-19 What is the basis of the VAT on taxable sales of real property? A-19 For cash basis/deferred payment plan The computation of the VAT by persons/entities engaged in the sale of real property in the course of trade or business shall be based on the gross selling price which is either selling price stated in the sales document or the zonal values of the real properties sold, whichever is higher. In the absence of zonal values the gross selling price shall refer to the market value as shown in the latest tax declaration or the consideration, whichever is higher. Q-20 How is the zonal valuation rule applied in the case of sale of real property on installment plan basis? A-20 For sale of real property on installment plan, the computation of the VAT shall be based on the actual consideration received, including interests and other charges. However, upon full payment, if the zonal/market value is higher than the total receipts/collections, the additional VAT shall be paid accordingly. Q-21 What is the tax base of VAT on lease of real properties? A-21 The computation of the VAT by lessor of real properties shall be based on their gross receipts from the lease of real properties. Gross receipts, as defined under Revenue Regulations No. 7-95, 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 in advance payments actually or constructively received during the taxable quarter for the services performed or to be performed for another person excluding VAT. Q-22 If the contract of lease was notarized outside the Philippines, is the lease subject to VAT? A-22 Gross receipts from lease of real property covered by the VAT law are subject to VAT regardless of the place where the contract of lease was executed, if the property on lease is located in the Philippines. Q-23 If the lessor has real property for lease located in different places, should the lessor register each property separately?

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A-23 There shall only be one registration and, consequently, he shall pay an annual registration fee of P1,000.00 in the RDO where the main or head office is located. However, if he maintains an office within the premises of the leased properties, said office shall be considered as branch which shall also be registered and for which the applicable registration fee shall be paid. Q-24 Is the rental of residential houses or offices of embassies or diplomatic agents subject to the VAT, or percentage tax, as the case may be? A-24 Yes, the exemption of diplomatic agents/embassies is limited only to direct taxes. Since the VAT and percentage taxes are indirect taxes, the lessors of diplomatic agents and embassies are liable thereto. However, if the sending state allows Philippine diplomatic agents/embassies exemption from indirect taxes on transactions in that state, their diplomatic agents/embassies shall enjoy exemption from indirect taxes in the Philippines, pursuant to the international rule on reciprocity. Q-25 How are real property transaction documented for VAT purposes? A-25 Taxable sales of real property on cash basis and on the deferred payment plan shall, in addition to the document of sale, be covered by a VAT invoice for the entire selling price and Non-VAT official receipts for the initial and succeeding payments. Taxable sales of real property on the installment plan shall, in addition to the document of the sale, be covered by a VAT receipt for every installment payment. Taxable lease or real property shall be covered by a VAT receipt. Exempt sale of real property be real estate dealers shall, in addition to the document of sale, be covered by non-VAT receipts upon collection of the payments. Exempt lease of real property by real estate lessors shall be covered by a non-VAT receipt. Q-26 What is the consequence if a VAT-exempt person issues a VAT invoice or receipt? A-26 Any person whose sale or lease of real property is VAT-exempt, but issues a VAT invoice or receipt shall, in addition to his liability to other applicable
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percentage tax, if any, be liable to VAT without the benefit of input tax credit, and such tax shall not also be recognized as input tax credit to the purchaser/lessee. Q-27 Can unused invoices or receipts printed prior to January 1, 1996, of persons becoming liable to VAT for the first time, be used on or after January 1, 1996? A-27 Yes, unused invoices or receipts printed prior to January 1, 1996 can still be used provided that an inventory indicating the number of booklets and the corresponding serial numbers as of December 31, 1995 shall be submitted to the RDO where the main office is located on or before January 31, 1996 and the phrase "VAT registered as of (date of registration) is stamped on all copies thereof. Said unused invoices or receipts shall be allowed for use in transactions subject to VAT up to June 30, 1996. Q-28 Are real estate dealers entitled to the 8% presumptive input tax? A-28 Yes, real estate dealers shall be entitled to the 8% presumptive input tax. Q-29 What is the basis of the 8% presumptive input tax of the real estate dealer? A-29 The presumptive input tax credit of 8% of the real estate dealers shall be based on the book value of the improvements, such as buildings, roads, drainage systems, water drainage system perimeter posts, landscaping and other similar structures constructed on or after January 1, 1988 (the effectivity of E.O. 273), in addition to its inventory of supplies and materials for use in the business. Q-30 Are real lessors entitled to the 8% presumptive input tax? A-30 Yes, real estate lessors are entitled to the 8% presumptive input tax only with respect to their inventory of supplies and materials. Q-31 What are documents required to be filed by sellers or lessors of real property subject to VAT on or before January 31, 1996? A-31 Seller or lessor of real properties are required to submit the following documents not later than January 31, 1996 to the Revenue District Office where their principal place of business is located. A) For Presumptive input tax purposes;

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1)

Inventory of goods, supplies & materials not for sale but purchased for use in business on hand as of December 31, 1995. Inventory of goods or properties and improvements as of December 31, 1995; (for real estate dealer only)

2) B) C)

Inventory of unused invoices as of December 31, 1995, and Schedule of receivable for contracts on a deferred payment basis as Dec. 31, 1995. Failure to submit this schedule shall subject receivables to VAT.

Q-32 How does the threshold provision of P500,000.00 apply to real estate lessor to determine whether they are liable to VAT? A-32 For purposes of determining compliance with the threshold of P500,000.00, even gross receipts from lease of residential units covered by the Rent Control Law shall be included. If the aggregate of the gross receipts exceeds P500,000.00, then the real estate lessor shall register as a VAT person. However, for purposes of determining the VAT payable, VAT shall be computed only on the gross receipts from lease of real properties/residential units not covered by the Rent Control Law. To illustrate: For the month of January, 1996, ABC Realty Inc. is the lessor of a 15-door apartment with the following monthly rental charges: 10 units are being leased out for P3,950 per unit; while 5 units are being leased out for P5,000 per unit. Is ABC Realty Inc. subject to VAT? If so, how much is the VAT available? I. Determine first whether the gross receipts of ABC Realty Inc. for the taxable year (TY) 1996 from the lease of the 15-door apartment exceeds the threshold of P500,000.00. A. Determine the gross receipts for TY 1995 from rentals covered by the rent Control Law:
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10 x P3,950 = P39,500/month x 12 months P474,000

B.

Determine the gross receipts for TY 1995 from rentals not covered by the Rent Control Law:
5 x P5,000 = x 12 months P300.00 P25,000/month

C.

Add (A) and (B) to determine whether ABC's gross receipts from the aforesaid lease during the 12-month period exceeds the P500,000.00 threshold.
P474,000 (A) + 300,000 (B) P774,000 Excepted Gross Receipts for TY 1996

Therefore, ABC Realty Inc. is subject to VAT because it expects to earn gross rentals exceeding the P500,000 threshold for TY 1996. II. The VAT payable of ABC Realty Inc. for the month of January, 1996 shall be computed as follows: Assume that ABC Realty Inc. incurred P20,000 worth of VAT-invoiced building materials for the repair and maintenance of the apartment units for the month of January, 1995.
1/11 of P25,000 P2,272.73 (Output Tax) Less: 1/11 of P20,000 x 300 774 704.72 (Input Tax) VAT payable for the month of Jan.; 1995 P1,568.01

N.B. the VAT payable is computed on the portion of the gross receipts from rentals corresponding to the five (5) apartment units
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being leased out at a monthly rental of P5,000.00 per unit only. Q-33 What is the manner of payment of VAT on real property transactions? A-33 As a rule, the VAT due on real property transactions shall be paid upon filing of the VAT return/declaration. However, in the case of lease of real properties owned by non-resident lessors, the VAT due shall be withheld and remitted by the lessee through the filing of a VAT return/declaration for and in behalf of the non-resident owner. All revenue officials and employees are hereby enjoined to give this Circular the widest publicity possible.

LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue

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