Computing Zonal Values from Tax Declarations for Capital Gains Tax in the Philippines

Introduction

In the Philippine tax system, capital gains tax (CGT) serves as a crucial mechanism for taxing profits derived from the disposition of capital assets, particularly real property. Under the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent laws such as Republic Act No. 10963 (TRAIN Law), CGT is imposed on the sale, exchange, or other disposition of real property classified as capital assets. The tax rate is a flat 6% based on the gross selling price or the fair market value (FMV) of the property, whichever is higher. Determining the FMV is pivotal in this computation, and it relies heavily on two key valuation tools: zonal values established by the Bureau of Internal Revenue (BIR) and assessed values reflected in tax declarations issued by local government units (LGUs).

This article provides a comprehensive examination of how zonal values and tax declarations interplay in computing the CGT base. It covers the legal framework, valuation methodologies, procedural requirements, exemptions, and practical considerations, drawing from relevant provisions of the Tax Code, revenue regulations, and administrative issuances. Understanding this process is essential for taxpayers, real estate practitioners, and legal professionals to ensure compliance and avoid penalties.

Legal Framework Governing Capital Gains Tax on Real Property

The imposition of CGT on real property is governed by Section 24(D) of the NIRC, which stipulates that gains from the sale or disposition of lands and/or buildings not actively used in business are subject to a final tax of 6%. This provision was modified by the TRAIN Law effective January 1, 2018, which unified the rate and base for CGT, eliminating previous distinctions based on property location or value.

Key revenue regulations elaborate on these rules:

• Revenue Regulations (RR) No. 7-2003, as amended, outlines the guidelines for determining FMV for CGT purposes.
• RR No. 2-2018 implements TRAIN Law provisions on CGT.
• Department Orders (DOs) from the Department of Finance (DOF) and BIR issuances periodically update zonal valuation schedules.

The FMV for CGT is defined as the higher of:

• The zonal value as determined by the BIR Commissioner.
• The assessed value as per the latest tax declaration issued by the provincial, city, or municipal assessor.

This dual valuation approach ensures that the tax base reflects a conservative estimate of the property's worth, preventing undervaluation in sales transactions.

Understanding Zonal Values

Zonal values represent the BIR's appraised value of real properties located in specific zones or areas across the Philippines. These values are established through a collaborative process involving the BIR, DOF, and local assessors, based on market data, sales trends, and economic indicators.

Determination and Publication of Zonal Values

• Process: Under Section 6(E) of the NIRC, the BIR Commissioner is authorized to divide the country into zones and determine FMVs therein. This is done via Department Orders, such as DO No. 001-2023 (the latest comprehensive update as of early 2023, with subsequent amendments for specific regions).
• Factors Considered: Zonal values account for location (e.g., proximity to commercial centers, infrastructure), land use (residential, commercial, agricultural), and recent comparable sales. They are reviewed and revised every three years or as needed to reflect market changes.
• Accessing Zonal Values: Taxpayers can obtain zonal values from the BIR's website (bir.gov.ph), Revenue District Offices (RDOs), or through the eZonal Value portal. For instance, Metro Manila zones are detailed by barangay, street, and classification.

Zonal values are not computed from tax declarations per se; rather, they are independently set by the BIR. However, in practice, local assessors' market value schedules (under the Local Government Code of 1991, Republic Act No. 7160) often influence or align with zonal updates, creating a symbiotic relationship.

Role of Tax Declarations in Valuation

Tax declarations are official documents issued by LGU assessors under Section 212 of the Local Government Code. They declare the ownership, description, and assessed value of real property for real property tax (RPT) purposes.

Components of a Tax Declaration

• Assessed Value: This is computed as a percentage (assessment level) of the fair market value as per the LGU's Schedule of Fair Market Values (SMV). Assessment levels vary: 20% for residential land, up to 50% for commercial.
• Market Value in SMV: LGUs establish SMVs through ordinances, approved by the Sangguniang Panlalawigan/Panlungsod, and reviewed by the DOF.
• Relevance to CGT: The assessed value in the tax declaration serves as an alternative FMV benchmark. If the zonal value is unavailable or lower, the assessed value prevails.

Tax declarations must be updated upon property transfer (via a new declaration under the buyer's name), and discrepancies between declarations and actual property conditions can lead to reassessments.

Computing the Fair Market Value for CGT

The core of CGT computation involves selecting the appropriate FMV from zonal values and tax declarations. The process is as follows:

Step-by-Step Computation

1. Identify the Property's Classification and Location: Determine if the property is residential, commercial, industrial, or agricultural, and pinpoint its zone (e.g., via barangay and street).
2. Obtain Zonal Value:
   • Consult the latest DO for the area.
   • Multiply the zonal value per square meter by the property's area (e.g., for a 500 sqm lot in a zone valued at PHP 50,000/sqm, zonal value = PHP 25,000,000).
   • For improvements (buildings), use the zonal construction cost or replacement cost if specified.
3. Retrieve Assessed Value from Tax Declaration:
   • The tax declaration lists the assessed value directly.
   • To derive the implied market value, divide the assessed value by the assessment level (e.g., assessed value of PHP 5,000,000 at 20% level implies market value of PHP 25,000,000).
4. Determine the FMV: Take the higher of the zonal value or the market value implied from the tax declaration.
5. Compare with Gross Selling Price (GSP): The CGT base is the higher of GSP or FMV.
6. Apply the Tax Rate: CGT = 6% × Tax Base.
7. Deduct Allowable Costs: If applicable, subtract selling expenses (e.g., broker's commission, documentary stamp tax) from the base, though pure CGT computations often exclude these unless qualified.

Example Illustrations

• Scenario 1: Residential Lot Sale

  • Property: 300 sqm lot in Quezon City.
  • Zonal Value: PHP 40,000/sqm → Total = PHP 12,000,000.
  • Tax Declaration: Assessed Value = PHP 2,000,000 (at 20% level) → Implied FMV = PHP 10,000,000.
  • GSP: PHP 11,000,000.
  • FMV: Higher of PHP 12M (zonal) and PHP 10M (declaration) = PHP 12M.
  • Tax Base: Higher of PHP 11M and PHP 12M = PHP 12M.
  • CGT: 6% × PHP 12M = PHP 720,000.

• Scenario 2: Commercial Building Sale

  • Property: Building on 1,000 sqm land in Makati.
  • Zonal Value (Land): PHP 200,000/sqm → PHP 200M; Building: PHP 50M (per zonal cost).
  • Tax Declaration: Assessed Value (Total) = PHP 60M (at 50% level) → Implied FMV = PHP 120M.
  • GSP: PHP 180M.
  • FMV: Higher of PHP 250M (zonal total) and PHP 120M = PHP 250M.
  • Tax Base: PHP 250M.
  • CGT: PHP 15M.

In cases where zonal values are not established (e.g., remote areas), the tax declaration's value defaults as FMV.

Exemptions and Special Rules

Certain transactions are exempt from CGT:

• Sales to the government or LGUs (Section 24(D)(2), NIRC).
• Principal residence sales, if proceeds are used to acquire a new residence within 18 months (RR No. 13-99).
• Properties classified as ordinary assets (e.g., held for sale in business) are subject to income tax instead.
• Foreclosures and inheritance are not considered sales for CGT.

For agricultural lands, if certified as such by the Department of Agrarian Reform, CGT may be deferred under certain conditions.

Procedural Requirements and Compliance

• Filing and Payment: CGT must be paid within 30 days from notarization of the deed of sale via BIR Form 1706, filed at the RDO where the property is located.
• Documentation: Submit tax declaration, zonal value certification, deed of sale, and proof of payment.
• Withholding: The buyer withholds the CGT as a creditable withholding tax.
• Penalties: Late payment incurs 25% surcharge, 12% interest per annum, and compromise penalties. Underdeclaration of FMV can lead to deficiency assessments and fraud penalties (50% surcharge).

Audits may involve BIR verification of valuations, and disputes can be appealed to the Court of Tax Appeals.

Challenges and Practical Considerations

• Discrepancies Between Valuations: Zonal values often exceed LGU assessments due to BIR's conservative approach, leading to higher taxes.
• Updates and Revisions: Taxpayers must use the zonal value effective at the time of sale, not acquisition.
• Multiple Properties: For subdivided lots, prorate values accordingly.
• Installment Sales: CGT is computed on the full base but paid proportionally (RR No. 17-2003).
• Inflation and Market Fluctuations: While values are periodically updated, rapid market changes can create inequities.

Taxpayers are advised to consult BIR RDOs or accredited appraisers for complex cases. In joint ventures or corporate transactions, additional rules under RR No. 6-2008 apply.

Conclusion

Computing the FMV using zonal values and tax declarations is integral to ensuring accurate CGT liability in the Philippines. This mechanism balances revenue generation with fair valuation, rooted in a framework that promotes transparency and compliance. By adhering to these guidelines, stakeholders can navigate the complexities of real property transactions while minimizing risks of non-compliance. Ongoing reforms, such as digitalization of BIR services, promise to streamline this process further.