SALE OR LEASE OF REAL PROPERTIES UNDER CERTAIN CONDITIONS

Categories of exempt transactions on real properties

A. Sale of real properties
a. By as person not engaged in the realty business (non dealer)
b. By a person engaged in the realty business which complies with
statutory price ceilings (dealers)
B. Lease of residential dwellings not exceeding P12,800 a unit per month
Sale of Real Properties
Sale by a non dealer (casual sale)
Sale of real properties not primarily held for sale to customers or held for
lease in the ordinary course of business is exempt from business tax.
The reason is that the seller is not engaged in business.
For VAT taxpayers, the sales of properties held for use of the business
(ordinary assets) are subject to VAT even if the sale is not regular.
However, the sale of properties considered as capital assets are exempt
from VAT.
Sale by a realty dealer, developer or lessor
Normally, the sale by a dealer is subject to business tax except sales of
the following residential properties if the real estate dealer complies with
the following price ceilings:
1. Sale of real properties utilized for socialized housing unit:
a. House and lot package P450,000
b. Residential lots only P180,000
2. Sale of real properties utilized for low cost housing wherein the
price ceiling per unit is P750,000
3. Sale of residential lot valued at P1,919,500 and below
4. Sale of residential dwelling valued at P3,199,200 and below
Socialized housing a housing program and project covering houses and lots only
undertaken by the Government or private sector for the underprivileged and
homeless citizens. It shall also refer to projects intended for the underprivileged and
homeless wherein the housing package selling price is within the lower interest rate.
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 registered and licensed by the
Housing and Land Use Regulatory Board wherein the selling price is within the
selling price per unit of P750,000.
Sale of Adjacent Lots
For the purpose of the ceiling, the sale of adjacent residential lots, houses
and lots and other residential dwellings within the 12 month period in favor
of one buyer shall be treated as one. This rule is intended to counter
unwarranted partition of the sale into several deeds to evade the business
tax.

ILLUSTRATION:
A realty developer was supposed to sell 100m2 lot a price of P2,000,000. However,
the lump sum sale of the sale of the lot would make it subject to business tax. The
developer proposed to sell the first 50m2 lot for P1,000,000 then later the other 50m2
for another P1,000,000 so that the sale of the lot would be tax free.
Answer: This tax minimization technique is no longer allowed. The sale of the
adjacent lots to the same buyer shall be aggregated for purpose of threshold. Since
the aggregate selling price of the lots exceeds the price ceiling, both sales are
subject to business tax. The VAT will be recognized on the second sale.
This aggregation rule does not apply to sale of parking lots which may or may not be
included in the sale of condominium units because parking lots is neither a
residential lot, house and lot nor residential dwellings. The sale of parking lot is
vatable.
Lease of residential unit with monthly rental not exceeding P12,800
Residential units refer to apartments and houses and lots used for residential
purposes, and building or parts or units thereof used as dwelling places such as,
dormitories, rooms and bed spaces, except, motels, motel rooms, hotels, and hotel
rooms, lodging houses, inns and pension houses.
The term unit shall mean:
1. An apartment unit in the case of apartment
2. A house in the case of residential houses
3. Per person in the case of dormitories, boarding houses and bed spaces
4. Per room in the case of rooms for rent
The apparent purpose of this exemption is to provide tax incentive for keeping
rentals of housing units low considering that housing is a necessary and natural
human consumption.
ILLUSTRATION:
Cohen Homes is a real property lessor with the following properties and receipts:
P30,000 2 apartment houses at P15,000 rental per unit
P62,500 5 residential houses at P12,500 rental per month
P200,000 1 boarding house with 50 standard rooms capable of accommodating 2
person paying P2,000 per month each
Answer:
The following indicates the taxability of these residential dwellings:
Per unit rental
Annualized rent
Apartment Houses
P15,000
P360,000
Residential Houses
P12,500
P750,000
Boarding Houses
P2,000
P2,400,000
Total Annual Rent
P3,510,000
Cohen is not required to register as VAT taxpayer because its P360,000 vatable
sales is below the VAT threshold. It may pay 3% percentage tax on this receipt. The
tax exempt rentals will not be subject to VAT or percentage tax.

TRANSPORT OF PASSENGERS BY INTERNATIONAL CARRIERS

The receipt from the transport of passengers by international carriers originating
from the Philippines going abroad is exempt from business tax.
International Carriers air carriers or shipping carriers owned by residential foreign
corporations doing business in the Philippines.
1. Receipts from outgoing flights (foreign consumption, service rendered
within) 0% VAT
2. Receipts from incoming flights (foreign consumption, service rendered
abroad) Exempt
3. Receipts from domestic flights (domestic consumption) 12% VAT
SALE OF COOPERATIVES
With the exception of electric cooperatives, cooperatives of any kinds are exempt
from business tax if they transact business only with members. Cooperatives
which transacts business with non members are subject to business tax on their
sales with non members are subject to business tax on their sales with non
members if their accumulated reserves exceeds P10,000,000.
However, regardless of the type of cooperatives, their transactions from unrelated
activities are subject to business taxes just like other entities not considered as
business.
Taxability of cooperatives to VAT on Importation
Cooperatives are generally subject to VAT on importation with the exception of those
exempt of those exempt importations.
EXPORT SALES OF NON VAT TAXPAYERS
The export sale of non VAT taxpayers is exempt from percentage tax. Under the
law, however, the export sale of VAT taxpayers is taxable to the value added tax but
at 0% rate.
TRANSACTIONS EXEMPT UNDER INTERNATIONAL AGREEMENTS OR
SPECIAL LAWS
Sales to exempt parties are exempt from VAT. Likewise, they are also exempt from
the scope of the 3% percentage tax.
Exempt parties entities that are granted VAT exemption under special law or
international agreements to which the Philippines is a signatory.
Examples:
1. PEZA registered enterprises
2. Asia Development Bank
3. Philippine National Red Cross
4. Embassies of foreign government
5. The Philippine Amusement and Gaming Corporations
INVOICING REQUIREMENTS FOR EXEMPT SALES

With respect to VAT taxpayers, exempt sales must be specifically designated as

such by indicating or pre printing the caption EXEMPT on the invoice or receipt.
The failure to comply with this requirement shall make the sale subject to business
tax.
OPTIONAL VAT TREATMENT
Any person who is VAT registered but enters into transactions which are exempt
from VAT (mixed transactions) may opt that the VAT apply to his transactions which
would have been exempt. Such option must be made within 10 days before the
beginning of the taxable quarter.
Once the election is made, it shall be irrevocable for a period of 3 years counted
from the quarter when the election is made.
The Pre dominance test
This option is allowed if the main or principal business of the taxpayer falls within
the VAT system. The main or principal business of the taxpayer is said to be within
the VAT system if 50% of its gross sales and or receipts comes from its business
subject to VAT.
NOTE ON SALES TO SENIOR CITIZENS AND PERSONS WITH DISABILITY
The sale to senior citizens is exempt from VAT but sale to PWDs, net of discount, is
subject to VAT. The sale to senior citizens and PWDs are subject to other business
taxes such as percentage tax and excise tax.
If the senior citizens and PWDs own businesses, they are subject to business taxes
on their sales or receipts similar to other regular business taxpayers.
ILLUSTRATION:
A business establishment made the following sales during a month:
Sales to Senior Citizen
Sales to PWDs
Sales to regular customers
Total sales
Answer:
If the business establishment is a VAT taxpayer, the vatable sales shall be:
Sales to Senior Citizen (VAT Exempt)
Sales to PWDs (20K x 80%)
Sales to regular customers
Total sales
If the business establishment is a non VAT taxpayer, the sales subject to
percentage tax shall be the total P200,000. Senior citizens and PWDs are not
exempt to the percentage tax and excise tax.