Can You Pay Capital Gains Tax With Only a Tax Declaration and No Title in the Philippines?

Introduction

In the Philippine tax system, Capital Gains Tax (CGT) is a crucial obligation imposed on the sale, exchange, or other disposition of capital assets, particularly real property classified as capital assets. Under Section 24(D) of the National Internal Revenue Code (NIRC) of 1997, as amended, CGT is levied at a rate of 6% based on the gross selling price or the current fair market value of the property, whichever is higher. This tax applies to individuals, estates, trusts, and corporations, with certain exemptions for principal residences under specific conditions.

A common scenario in real estate transactions involves properties that lack a formal Certificate of Title (such as an Original Certificate of Title or Transfer Certificate of Title) but are supported by a Tax Declaration issued by the local assessor's office. The Tax Declaration serves as a record for property taxation purposes, indicating the assessed value, classification, and ownership claim for real property tax (RPT) assessment. It is not, however, a conclusive proof of ownership like a Torrens title, which is indefeasible under the Property Registration Decree (Presidential Decree No. 1529).

The central question is whether CGT can be paid—and the transaction cleared for registration—with only a Tax Declaration and no formal title. This issue arises frequently in rural areas, ancestral lands, or properties under ongoing titling processes, where sales occur based on deeds of sale and tax declarations. This article explores the legal framework, requirements, procedures, potential challenges, and practical implications in the Philippine context.

Legal Basis for CGT on Untitled Properties

The NIRC does not explicitly require a formal title for CGT to be applicable or payable. Instead, the tax is triggered by the transfer of ownership or rights over the property, regardless of whether it is titled. Revenue Regulations (RR) No. 7-2003, which governs the imposition of CGT on real property, recognizes that real properties may be untitled. It allows for the use of alternative documents to establish the property's value and the transaction's validity.

Key legal provisions include:

Section 27(D)(5) of the NIRC: For corporations, CGT on real property sales is similarly imposed, emphasizing the gain realized from the disposition.
Bureau of Internal Revenue (BIR) Rulings and Memoranda: Various BIR issuances, such as Revenue Memorandum Order (RMO) No. 15-2003, outline procedures for processing CGT on untitled properties. The BIR accepts Tax Declarations as a basis for determining the fair market value, often cross-referenced with zonal valuations under Department of Finance (DOF) orders.
Civil Code Provisions: Under Articles 1458 and 1498 of the Civil Code, a sale is perfected upon agreement on the object and price, and ownership transfers upon delivery, even without a title. Thus, a valid sale can occur for untitled properties, making CGT due.
Local Government Code (Republic Act No. 7160): Section 209 mandates that transfers of real property require payment of taxes, including CGT, before the Register of Deeds (RD) or assessor can annotate or transfer the Tax Declaration.

In essence, the absence of a title does not exempt the transaction from CGT; it merely shifts the evidentiary burden to other documents like the Tax Declaration.

Requirements for Paying CGT Without a Title

To pay CGT with only a Tax Declaration, the following requirements must generally be met:

Proof of Transaction: A notarized Deed of Absolute Sale (DAS) or equivalent instrument (e.g., Deed of Assignment or Exchange) detailing the parties, property description, selling price, and terms.
Tax Declaration: The current Tax Declaration in the seller's name, showing the property's assessed value, area, boundaries, and classification (e.g., residential, agricultural). This serves as the primary document for valuation in lieu of a title.
Proof of Ownership or Possessory Rights: Additional supporting documents may include:
- Affidavits of ownership or adverse claim.
- Barangay certification confirming possession.
- Receipts of real property tax payments for at least the last five years.
- If applicable, a Certificate of No Improvement or other assessor-issued documents.
Valuation Documents:
- BIR Zonal Valuation for the area, which determines the fair market value.
- If the selling price is lower than the zonal value, CGT is computed on the higher amount.
- Sworn Declaration of the property's true value by the seller.
Other BIR Forms and Payments:
- BIR Form 1706 (CGT Return).
- Documentary Stamp Tax (DST) under Section 196 of the NIRC, at 1.5% of the consideration or fair market value.
- Creditable Withholding Tax (CWT) if the buyer is engaged in trade or business.
Exemptions and Relief: If the property is the seller's principal residence, a Certificate Authorizing Registration (CAR) may be issued without CGT payment upon compliance with RR No. 13-1999, requiring reinvestment in a new residence within 18 months. However, this still necessitates submission of the Tax Declaration.

The BIR Revenue District Office (RDO) with jurisdiction over the property evaluates these documents. If satisfied, it issues the CAR, which is essential for transferring the Tax Declaration to the buyer at the assessor's office.

Procedure for Payment and Clearance

The step-by-step process for paying CGT on untitled properties is as follows:

Prepare Documents: Gather the DAS, Tax Declaration, and supporting proofs.
File CGT Return: Submit BIR Form 1706 to the RDO within 30 days from the notarization of the DAS. Compute CGT as 6% of the higher of the gross selling price or fair market value.
Pay Taxes: Pay CGT and DST at an Authorized Agent Bank (AAB) or via electronic means under the Electronic Filing and Payment System (eFPS) for large taxpayers.
Request CAR: Submit all documents to the BIR for CAR issuance. The BIR may conduct an ocular inspection or require additional affidavits to verify the property's status.
Transfer Tax Declaration: With the CAR, proceed to the provincial, city, or municipal assessor's office to pay the transfer tax (typically 0.5-0.75% under local ordinances) and update the Tax Declaration in the buyer's name.
Register with RD (If Applicable): If the property is later titled, the CAR facilitates annotation on the future title.

Delays may occur if the BIR questions the property's classification (e.g., if it's ordinary asset subject to income tax instead of CGT) or if there are disputes over boundaries.

Challenges and Limitations

While possible, paying CGT with only a Tax Declaration presents several challenges:

Evidentiary Weaknesses: Tax Declarations are rebuttable and do not confer indefeasible ownership. Buyers risk future claims from third parties, potentially leading to litigation under the Civil Code or Land Registration laws.
BIR Scrutiny: The BIR may deny CAR issuance if it suspects undervaluation or fraud, requiring appraisals or audits. Under RR No. 18-2012, discrepancies can lead to deficiency assessments.
Local Variations: Practices differ across RDOs and assessors' offices. In some areas, additional requirements like DENR certifications for agricultural lands apply.
Tax Implications for Buyers: Without a title, buyers cannot immediately secure loans or fully protect their interests, though the Tax Declaration allows RPT payment and possession.
Case Law Insights: Judicial decisions, such as in Heirs of Spouses Dela Cruz v. Heirs of Papa (G.R. No. 210319, 2017), emphasize that Tax Declarations, combined with actual possession, can support ownership claims for tax purposes. However, in Republic v. CA (G.R. No. 108998, 1994), the Supreme Court noted that untitled properties under public domain cannot be alienated without proper classification.
Reforms and Updates: Recent amendments under the Tax Reform for Acceleration and Inclusion (TRAIN) Law (RA No. 10963) and CREATE Act (RA No. 11534) have not altered the core treatment of untitled properties but emphasize accurate valuation to prevent tax evasion.

Conclusion

In the Philippines, it is indeed possible to pay Capital Gains Tax using only a Tax Declaration and no formal title, as the tax obligation arises from the transfer itself rather than the property's registration status. This accommodates the reality of numerous untitled properties in the country, facilitating transactions while ensuring revenue collection. However, parties must meticulously prepare documentation to satisfy BIR requirements and mitigate risks. Sellers and buyers are advised to consult with tax professionals or lawyers to navigate potential complexities, ensuring compliance and protecting their interests in what can be a nuanced process. Ultimately, while a Tax Declaration suffices for CGT payment, pursuing formal titling through judicial or administrative means remains ideal for long-term security.