Accounting and Tax Guide for Sales of Memorial Lots in the Philippines

I. Introduction

In the Philippines, the sale of memorial lots—parcels of land designated for burial purposes within memorial parks or cemeteries—represents a unique intersection of real estate transactions, perpetual care obligations, and specialized regulatory oversight. These sales are governed by a combination of civil law principles, tax statutes, and accounting standards tailored to the Philippine context. Memorial lots are classified as real property under the Civil Code of the Philippines (Republic Act No. 386), and their development and sale are regulated by entities such as the Housing and Land Use Regulatory Board (HLURB), now part of the Department of Human Settlements and Urban Development (DHSUD), and local government units.

This guide provides a comprehensive overview of the accounting and tax considerations for such sales, drawing from relevant provisions of the National Internal Revenue Code (NIRC) as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963), the CREATE Act (Republic Act No. 11534), Philippine Financial Reporting Standards (PFRS), and other pertinent regulations. It addresses key aspects including revenue recognition, cost allocation, value-added tax (VAT), income taxation, documentary stamp tax (DST), and compliance requirements. Understanding these elements is essential for developers, sellers, and buyers to ensure legal adherence and financial accuracy.

II. Legal Framework Governing Memorial Lot Sales

A. Classification and Regulation

Memorial lots are treated as immovable property under Article 415 of the Civil Code. Sales must comply with Presidential Decree No. 957 (Subdivision and Condominium Buyers' Protection Decree), which mandates registration with the DHSUD and the issuance of a License to Sell (LTS). Developers are required to establish a Perpetual Care Fund (PCF) under Republic Act No. 1309 (Memorial Parks and Cemeteries Act), equivalent to at least 10% of gross sales proceeds, to maintain the memorial park in perpetuity.

Contracts for sale are typically installment-based, with titles transferred only upon full payment. This affects both accounting and tax treatments, as partial payments may trigger revenue recognition thresholds.

B. Key Regulatory Bodies

Department of Human Settlements and Urban Development (DHSUD): Oversees development standards, LTS issuance, and consumer protection.
Bureau of Internal Revenue (BIR): Administers tax compliance, including VAT and income tax assessments.
Local Government Units (LGUs): Impose real property taxes (RPT) and business permits.
Securities and Exchange Commission (SEC): Relevant for corporate developers, ensuring financial reporting transparency.

Non-compliance can result in penalties under the NIRC, including fines up to PHP 200,000 and imprisonment, or revocation of LTS by DHSUD.

III. Accounting Treatment for Sales of Memorial Lots

Accounting for memorial lot sales follows PFRS, particularly PFRS 15 (Revenue from Contracts with Customers), which emphasizes performance obligations, and Philippine Accounting Standards (PAS) for specific treatments.

A. Revenue Recognition

Under PFRS 15, revenue from memorial lot sales is recognized when control of the asset transfers to the buyer. For outright sales, this occurs at the point of title transfer. For installment sales, common in the industry, revenue is recognized over time if the seller has an enforceable right to payment for performance completed to date, or at a point in time upon full payment and title transfer.

Installment Method: If the contract allows repossession upon default, revenue is recognized using the installment sales method under PAS 18 (legacy standard, still applicable in some cases pre-PFRS 15). Gross profit is deferred and recognized proportionately as collections are made.
Threshold for Recognition: BIR Revenue Regulations (RR) No. 16-2005 requires recognition when collections reach 25% of the selling price in the year of sale for installment sales of real property.
Perpetual Care Fund Allocation: 10% of sales proceeds must be set aside as a liability for the PCF, recognized as a non-current liability. Income from the fund's investments is accounted for separately under PFRS 9 (Financial Instruments).

B. Cost Allocation and Inventory

Memorial lots are inventoried as real estate held for sale under PAS 2 (Inventories), valued at the lower of cost or net realizable value. Costs include land acquisition, development (e.g., landscaping, roads), and indirect costs allocated based on relative sales value or area.

Direct Costs: Land purchase, excavation, and monument installation.
Indirect Costs: Administrative overheads, prorated across lots.
Impairment: Assessed annually; if net realizable value falls below cost due to market conditions, impairment losses are recognized in profit or loss.

C. Financial Statement Presentation

Balance Sheet: Unsold lots as current assets (if expected sale within 12 months) or non-current. Receivables from installment sales as trade receivables, with allowances for doubtful accounts under PFRS 9.
Income Statement: Revenue net of VAT, less cost of sales. PCF contributions as expenses.
Cash Flow Statement: Sales proceeds as operating inflows; PCF deposits as investing activities if placed in trust funds.
Notes to Financial Statements: Disclose revenue recognition policies, PCF details, and contingent liabilities (e.g., buyer defaults).

Audits must comply with Philippine Standards on Auditing (PSA), with emphasis on related-party transactions if the developer is part of a conglomerate.

IV. Tax Implications

Taxation of memorial lot sales involves multiple layers, ensuring contributions to national and local revenues while providing incentives for compliant developers.

A. Value-Added Tax (VAT)

Under Section 109 of the NIRC, sales of real property, including memorial lots, are subject to 12% VAT if the seller is VAT-registered and the transaction exceeds PHP 3,199,200 (threshold as adjusted by RR No. 21-2021).

Exemptions: Sales below the threshold or to government entities may be exempt. However, memorial lots are not considered residential lots (exempt up to PHP 1,919,500), so full VAT applies unless qualified.
Input VAT: Creditable against output VAT, including VAT on construction materials and services.
Installment Sales: VAT is due on each installment, computed on the principal amount excluding interest (if separately stated).
Zero-Rated Sales: Exports or sales to ecozones are zero-rated, but rare for memorial lots.

Non-filing of VAT returns incurs penalties of 25% surcharge plus interest under Section 248 of the NIRC.

B. Income Tax

Corporate Income Tax (CIT): For corporations, 20% under CREATE Act (reduced from 30%), applied to taxable income from sales. Taxable income = Gross income - Allowable deductions (e.g., cost of sales, PCF contributions as deductible expenses per RR No. 13-98).
Individual Sellers: Progressive rates from 0% to 35% on net income.
Capital Gains Tax (CGT): 6% on the higher of gross selling price or fair market value for sales classified as capital assets. However, if the seller is habitually engaged in real estate (e.g., developers), it's ordinary income subject to CIT, not CGT (per RR No. 7-2003).
Installment Basis: Taxable in the year collections exceed 25% of selling price, with subsequent years taxed on proportional gross profit.
Minimum Corporate Income Tax (MCIT): 1% of gross income if no regular CIT is due, applicable after four years of operation.

C. Documentary Stamp Tax (DST)

Under Section 196 of the NIRC, DST at PHP 15 per PHP 1,000 (or 1.5%) on the deed of sale or contract price. For installment sales, DST is due on the full contract price upfront.

D. Other Taxes and Fees

Real Property Tax (RPT): Assessed by LGUs at 1-2% of assessed value under the Local Government Code (Republic Act No. 7160). Unsold lots are taxable to the developer.
Business Tax: Local business tax on gross receipts, varying by LGU (e.g., 0.5-3%).
Withholding Tax: 5% creditable withholding tax on payments to contractors for development services; 1-15% on interest if financed.
Donor's Tax: If lots are donated (e.g., for public cemeteries), 6% on value exceeding PHP 250,000.

Tax incentives under the CREATE Act may apply for registered enterprises in priority activities, potentially reducing CIT to 5% GIT or exemptions.

V. Compliance and Reporting Requirements

A. Registration and Filing

BIR Registration: Sellers must register as real estate dealers, file quarterly VAT returns (BIR Form 2550Q), annual income tax returns (BIR Form 1702), and withhold taxes.
DHSUD Compliance: Annual reports on PCF status; fund must be trusteed with a bank or institution approved by the Bangko Sentral ng Pilipinas (BSP).
Audited Financial Statements: Required for corporations with gross sales over PHP 3 million, submitted to SEC and BIR.

B. Record-Keeping

Maintain books of accounts for at least five years, including sales contracts, payment receipts, and PCF ledgers, per Section 235 of the NIRC.

C. Penalties for Non-Compliance

Tax Evasion: Criminal penalties under Section 254, up to PHP 10 million fine and 10 years imprisonment.
Administrative Fines: 25-50% surcharges for late filing; interest at 12% per annum.
Regulatory Sanctions: DHSUD may suspend sales or impose fines up to PHP 100,000 per violation.

VI. Practical Considerations and Examples

A. Example: Installment Sale

A developer sells a memorial lot for PHP 500,000 on installment (20% down, balance over 5 years). Cost: PHP 300,000. PCF: PHP 50,000.

Accounting: Recognize revenue proportionally; defer gross profit (PHP 200,000) until collections.
Tax: VAT on each installment; income tax when collections hit 25% (PHP 125,000), taxing 40% gross profit ratio.

B. Risk Management

Developers should conduct tax due diligence, use escrow for PCF, and consult CPAs for PFRS compliance. Economic factors like inflation affect valuations under PAS 36 (Impairment of Assets).

VII. Conclusion

The sale of memorial lots in the Philippines demands meticulous attention to accounting standards and tax obligations to safeguard financial integrity and regulatory compliance. By adhering to PFRS for accurate reporting and NIRC provisions for tax efficiency, stakeholders can navigate this niche market effectively. Continuous updates to laws, such as potential amendments post-CREATE, underscore the need for ongoing professional advice.