Property Taxation and EVAT Implications for Leased Properties

Below is a comprehensive discussion of Property Taxation (specifically Real Property Tax under the Local Government Code) and the Expanded Value-Added Tax (EVAT) implications for leased real properties in the Philippines. This article aims to provide an overview of the legal framework, key concepts, and compliance requirements, including references to pertinent laws, regulations, and recent amendments.

I. Overview of Real Property Taxation in the Philippines

1. Governing Law

Real Property Tax (RPT) in the Philippines is primarily governed by Republic Act No. 7160, otherwise known as the Local Government Code of 1991 (“LGC”). The relevant provisions on real property taxation can be found in Title Two, Book II of the LGC.

2. Definition of Real Property

Real property, for taxation purposes, generally includes:

  • Land;
  • Buildings;
  • Machinery;
  • Other improvements affixed or attached to land or buildings.

Under the LGC, local government units (LGUs) have the power to levy an annual ad valorem tax on real property such as land, structures, and improvements.

3. Who is Liable for Real Property Tax?

Real property tax is imposed on the owner or the person with legal interest in the property (e.g., registered owner, usufructuary, or in some cases, the lessee if lease agreements specify that the lessee will shoulder real property taxes). However, by default, liability typically remains with the registered owner.

4. Assessment and Classification

  • Assessment: LGUs perform regular assessments of real property to determine its Fair Market Value (FMV). An Assessor’s Office in each city or municipality is responsible for maintaining a schedule of market values (SMV) that categorizes real properties based on location, usage, and nature.
  • Classification: Real properties are classified (e.g., residential, commercial, industrial, agricultural, etc.). The classification affects the assessment levels and the applicable tax rates.

5. Tax Base and Rates

  1. Assessed Value: The assessed value is derived by applying the assessment level (a percentage prescribed by local ordinances) to the property’s fair market value.
  2. Basic RPT Rate:
    • Provinces: Up to 1% of the assessed value.
    • Cities and municipalities within Metro Manila: Up to 2% of the assessed value.
  3. Special Education Fund (SEF): An additional levy of 1% on the assessed value of real property, the proceeds of which go to the local school board.

(Please note that the specific rates vary by LGU, subject to the maximum rates set by the LGC. LGUs may pass local ordinances that set precise rates within the permissible range.)

6. Payment and Deadlines

  • Annual RPT: Typically due on or before January 31 of each year, although LGUs may provide for quarterly installments.
  • Penalties and Interests: Late payments incur interest at a rate not exceeding 2% per month, for up to a maximum of 36 months (or until fully paid).

7. Exemptions and Special Cases

  • Certain properties used for religious, charitable, or educational purposes may be exempt from real property tax.
  • Government-owned properties (used for public purposes) are exempt.
  • Lease agreements sometimes stipulate which party (lessor or lessee) will bear real property tax obligations. However, from the perspective of the LGU, the ultimate legal liability often remains with the registered owner.

II. EVAT (Expanded Value-Added Tax) on Leased Real Properties

1. Governing Law

Value-Added Tax (VAT) in the Philippines is governed by the National Internal Revenue Code (NIRC), as amended, and the various regulations and revenue issuances of the Bureau of Internal Revenue (BIR). The Expanded Value-Added Tax (EVAT) system was introduced primarily by Republic Act No. 7716 (the Expanded VAT Law) and modified by subsequent laws including the TRAIN Law (RA 10963) and the CREATE Law (RA 11534).

2. Who is Subject to VAT on Rentals?

Under the NIRC, as amended, persons (individuals or juridical entities) who are in the business of leasing or sub-leasing real property in the course of trade or commerce are typically subject to VAT if their annual gross receipts exceed the VAT threshold.

  • The current VAT threshold for leases is PHP 3,000,000 annual gross receipts.
  • If a lessor’s annual gross receipts from rental of real property exceed PHP 3,000,000, the lessor is subject to 12% VAT (unless exempted under special laws or incentives).
  • If the annual gross receipts do not exceed PHP 3,000,000, the lessor is generally considered a Non-VAT taxpayer and may be subject instead to 3% percentage tax (or 1% under certain periods covered by the CREATE Law) on gross receipts.

3. VATable Transactions and Exemptions

  1. Residential Units
    • Leases of residential units with a monthly rental not exceeding PHP 15,000 per unit are VAT-exempt, regardless of the aggregate annual gross receipts.
    • However, once the monthly rental rate exceeds PHP 15,000 per unit and the total annual gross receipts from rentals exceed the PHP 3,000,000 threshold, the lease becomes subject to 12% VAT.
  2. Commercial Properties
    • Leases of commercial spaces (offices, warehouses, retail spaces, etc.) generally fall under VAT if the lessor’s total annual rental income exceeds PHP 3,000,000.
    • If the total annual receipts from leasing commercial space are PHP 3,000,000 or below, the lessor may be subject to the 3% percentage tax (or 1% under the CREATE Law during the temporary period).
  3. Special Cases / Exemptions
    • Leasing to government agencies may follow special rules depending on the arrangement, but generally remains VATable if the threshold is met.
    • VAT-exempt entities (e.g., educational institutions under certain conditions) could be relevant if the property is leased by them; however, the lessor typically must still report the lease as part of its gross receipts for threshold determination.

4. VAT Registration Threshold

  • VAT Registration is mandatory if the annual gross receipts from business activities (including leasing) exceed PHP 3,000,000.
  • Voluntary VAT Registration is allowed below the threshold, but once you opt to become VAT-registered, you must comply with VAT filing and payment rules.

5. Filing and Payment of VAT

  • Monthly and Quarterly Returns: VAT-registered taxpayers file:
    • BIR Form 2550M (Monthly VAT Declaration), and
    • BIR Form 2550Q (Quarterly VAT Return).
      (Note: Under recent regulations, the BIR has moved towards streamlining tax returns, but the principle remains that VAT must be reported monthly and quarterly.)
  • VAT Payable: The lessor pays the net VAT after deducting allowable input VAT (from purchases or expenses related to the leasing business) from the output VAT (the 12% VAT collected on rentals).

6. Percentage Tax in Lieu of VAT

  • If the lessor is non-VAT (i.e., does not exceed the PHP 3,000,000 threshold), the lessor is subject to percentage tax based on gross rental receipts.
  • Historically, the rate of percentage tax was 3%. Under the CREATE Law (RA 11534), from July 1, 2020 until June 30, 2023, the rate was 1%; it reverted back to 3% by 2023-2024 (subject to legislative changes).
  • The lessor must file BIR Form 2551Q (Quarterly Percentage Tax Return) to report and pay this tax.

III. Interaction Between Real Property Tax and EVAT for Leased Properties

  1. Distinct Nature of Taxes
    • Real Property Tax (RPT) is a local government tax on the ownership (or legal interest) of real property, assessed annually based on the property’s classification and assessed value.
    • VAT (or Percentage Tax) is a national tax on the gross receipts derived from leasing real property, governed by the NIRC and BIR regulations.
  2. Party Liable
    • RPT: Legally due from the registered owner (although lease contracts often stipulate whether the lessor or lessee shoulders the cost).
    • VAT: The lessor (or sub-lessor) is liable to register, collect VAT from the lessee, and remit it to the BIR if subject to VAT.
  3. Passing on the Tax
    • Leases typically allow lessors to pass on the VAT to lessees (i.e., the rent plus 12% VAT).
    • Real property tax is sometimes negotiated in the lease agreement. However, any arrangement does not change the LGU’s legal perspective that the property owner is primarily responsible for paying RPT.
  4. Compliance Burdens
    • Lessors of real property must ensure they separately track obligations and due dates for RPT (paid to the LGU) and VAT or percentage tax (paid to the BIR).
    • Failure to pay RPT on time can lead to penalties, interest, or even tax delinquency sales of the property by the LGU.
    • Non-compliance with VAT or percentage tax requirements can lead to BIR assessments, surcharges, and penalties.

IV. Practical Considerations and Common Issues

  1. Lease Contracts

    • Common practice is for lessors to structure the lease contract so that any VAT (if applicable) is added on top of the agreed rental rate.
    • Clause regarding RPT: Some contracts require the lessee to reimburse or share in the payment of real property tax, especially for long-term commercial leases. This is not universal and depends on negotiations.

  2. Threshold Monitoring

    • Lessors near the PHP 3,000,000 threshold must carefully monitor their gross receipts across all properties to avoid unintentional non-registration or late registration for VAT, which can result in penalties.

  3. Input VAT Deductions

    • For a VAT-registered lessor, expenses associated with the leased property (e.g., repairs, utilities, association dues if re-billed, etc.) may generate input VAT that can be credited against output VAT—provided the expenses are properly documented with valid BIR VAT invoices/official receipts.

  4. Different LGU Policies

    • While the basic framework for real property tax is the same nationwide, different cities and municipalities might have unique RPT assessment levels, deadlines, and surcharges. Always check local ordinances to ensure accurate calculation and timely payment.

  5. Enforcement & Penalties

    • Real Property Tax: Unpaid RPT can lead to tax delinquency notices, and properties with unpaid taxes may be subject to a public auction after due process.
    • VAT: Non-filing or underpayment can lead to BIR audit, deficiency assessments, surcharges (25% or 50% depending on the infraction), and interest (12% per annum on deficiency taxes), plus possible criminal sanctions for willful violations.

V. Recent Developments and Updates

  1. TRAIN Law (RA 10963)

    • Increased the VAT threshold for small businesses to PHP 3,000,000 (from the previous PHP 1,919,500).
    • The law sought to simplify VAT compliance and expand the base by removing certain exemptions. However, the PHP 15,000 monthly rental ceiling for VAT-exempt residential units was retained.

  2. CREATE Law (RA 11534)

    • Temporarily reduced the percentage tax rate from 3% to 1% for certain periods (July 1, 2020 to June 30, 2023) to help businesses during the pandemic.
    • After the specified period, the rate reverted to 3%, unless further extended by new legislation.

  3. Digital Filing and Payments

    • The BIR has been moving towards more online and electronic systems for filing and payment (eFPS, eBIRForms) to streamline compliance.
    • Some LGUs have begun online portals for RPT payment, but these vary widely in availability.

VI. Conclusion

Property Taxation (RPT) and EVAT implications for leased properties in the Philippines involve two separate spheres of taxation—local real property tax and national value-added tax or percentage tax. Key takeaways include:

  1. Real Property Tax:

    • Imposed by LGUs on the ownership of land, buildings, and improvements.
    • Rates vary depending on location (province vs. city) and property classification (residential vs. commercial).
    • Non-payment leads to interest, penalties, and potential auction of the property.

  2. EVAT:

    • Imposed on business transactions, including the lease of real property.
    • Subject to 12% VAT if annual rental income exceeds PHP 3,000,000, or if monthly rental per unit for residential spaces exceeds PHP 15,000 and crosses the annual threshold.
    • Otherwise, the 3% (or 1% under certain periods) percentage tax applies for non-VAT lessors.

  3. Compliance and Documentation:

    • Lessor must maintain proper books, issue official receipts, and accurately compute and remit taxes due.
    • Clear stipulations in the lease contract regarding who shoulders RPT, as well as how VAT is passed on, helps avoid future disputes or misunderstandings.

For anyone involved in leasing real estate—whether as a property owner, landlord, investor, or tenant—it is critical to understand and stay current with these regulations. Given ongoing legislative changes and local government policies, consulting with a tax lawyer, accountant, or relevant local government assessors is advisable to ensure full compliance and optimal tax planning.

Disclaimer: This content is not legal advice and may involve AI assistance. Information may be inaccurate.

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