Since President Rodrigo Duterte vetoed certain provisions of the Corporate Recovery and Tax Incentives for Enterprises (Create) or Republic Act (RA) No. 11534, including the proposed increase of the value-added tax (VAT) exemption threshold on sale of real property under Section 109(P) of the National Internal Revenue Code, as amended (Tax Code), there seems to be a question as to what is the current VAT-exempt threshold for the sale of real properties in the ordinary course of trade or business.
The President’s veto made ineffective the amendments introduced by the Create Act to increase the VAT-exempt thresholds under Section 109(P) of the Tax Code. Thus, the old provision, as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (RA 10963) remains.
Section 109 of the Tax Code, as amended by the TRAIN Law, provides that the VAT exemption shall apply to sales of house and lot, and other residential dwellings with a selling price of not more than P2 million. This exemption is in addition to the VAT exemption on sale of real properties not held for lease or sale in the ordinary course of trade or business (capital assets, in other words) and the sale of real property utilized for socialized housing under RA 7279, which exemptions continue to be effective. Section 109(P) of the Tax Code (as amended by the TRAIN Law) now reads:
SEC. 109. Exempt Transactions –
(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 P1 million and below, house and lot, and other residential dwellings valued at P2.5 million 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 P2 million: Provided, further, That every three 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)
After the passage of the Create Act, the Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) 4-2021, which added a clause in the VAT exemption provision and clarified that the amount of P2 million shall be adjusted using the 2010 Consumer Price Index, to wit:
Provided, That beginning Jan. 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 (RA) No. 7279, as amended; and, sale of house and lot, and other residential dwellings with selling price of not more than P2 million, as adjusted in 2011 using the 2010 Consumer Price Index values: Provided, further, That every three years thereafter, the amounts stated herein shall be adjusted to its present value using the Consumer Price Index as published by the Philippine Statistics Authority (PSA).
The question then is why was the 2010 index used as reference?
It should be recalled that, even prior to the passage of the TRAIN Law, the BIR adjusted the VAT exemption threshold based on the formula set out in RR 16-2011. Consistent with the provisions of the Tax Code, such regulation provides that the amount of the VAT-exempt threshold shall be adjusted to their present values using the Consumer Price Index as published by the National Statistics Office (NSO) (now referred to as the Philippine Statistics Authority or PSA), and shall be rounded off to the nearest hundred.
Section 1 of RR 16-2011 provides the following formula/information:
Value (Current Year) = CPI (Current year)
Value Base Year CPI (Base Year)
Value 2010 = CPI 2010
Value 2005 CPI 2005
Where:
CPI = Consumer Price Index
CPI 2010 = 166.1
CPI 2005 = 129.8
Pursuant to the above formula, the BIR adjusted the VAT exemption threshold then for sale of residential lot valued at P1,919,500 and below, or house and lot and other residential dwellings valued at P3,199,200. These amounts, however, were not carried over or reflected in the amendments introduced by the TRAIN Law. Thus, the thresholds reverted to P1.5 million and P2.5 million, respectively for these types of sales, effective on January 1, 2018, when the TRAIN Law took effect.
The amendments introduced by the TRAIN Law made it clear that, beginning Jan. 1, 2021, the sale of residential a lot alone is no longer VAT exempt, but the VAT exemption on the sale of house and lot and other residential dwellings continues but at the lower threshold of P2 million.
However, in several webinars conducted on the Create Act and its implementing regulations, BIR officials mentioned that the VAT-exempt threshold under Section 109(P) beginning Jan. 1, 2021 is adjusted to the amount of P2,559,300 What then is the basis for this increase from the P2 million threshold mentioned in the Tax Code, as amended by the TRAIN Law?
It became apparent that the BIR adjusted the amount of P2 million using the 2010 CPI based on the formula set out in RR 16-2011. The computation is as follows:
CPI 2010 = 166.1
CPI 2005 = 129.8
166.1 (CPI 2010)/ 129.8 (CPI 2005) = 1.27966102
1.27966102 X Php2,000,000.00 = 2,559,322.03
Rounded off to the nearest hundred= P2,559,300
It appears then that this amount was intended as a compromise to help the real estate industry. A close reading of Section 109(P) shows that it does not allow the adjustment of the amount of P2 million based on any index. It is only three years after 2021 wherein an adjustment based on the CPI is allowed. However, since the BIR previously issued RR 16-2011, and such regulation has not been repealed, it applied the formula set out therein to arrive at the amount of P2,559,300. The adjustment is explained in the clause added by RR 4-2021 which states that the VAT exemption on sale of house and lot, and other residential dwellings with selling price of not more than P2 million shall be “adjusted in 2011 using the 2010 Consumer Price Index values.”
The next adjustment based on the then prevailing CPI is expected to apply starting on Jan. 1, 2024.
Euney Marie J. Mata-Perez is a CPA-lawyer and the Managing Partner of Mata-Perez, Tamayo & Francisco (MTF Counsel). She is a corporate, merger and acquisition, and tax lawyer and is the president of the Asia-Oceana Tax Consultants’ Association.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. If you have any question or comment regarding this article, you may email the author at [email protected] or visit MTF website at www.mtfcounsel.com.
Article and Photo originally posted by Manila Times last May 13, 2021 and written by Euney Marie Mata-Perez.
About Post Author
More Stories
Banks’ total assets up at P26.2 trillion end-June
Lamudi sees heightened developer confidence with rise in ad spending
Phase 1 of PHINMA’s Bacolod township to finish by next year