In the Philippine business landscape, it is common to encounter land that is "untitled"—meaning it is not yet registered under the Torrens System (no Original Certificate of Title or Transfer Certificate of Title). However, for accounting and tax purposes, businesses often need to recognize these holdings as Fixed Assets (Property, Plant, and Equipment).
While a title is the best evidence of ownership, Philippine law and tax regulations provide pathways to recognize and record "unregistered" land based on possession and various secondary documents.
1. The Legal Basis: Ownership vs. Registration
In the Philippines, there is a distinction between ownership and the certificate of title.
- Ownership is a substantive right created by law (e.g., through sale, succession, or prescription).
- Title is merely the evidence of that ownership.
Under the Civil Code of the Philippines, ownership is transferred through "delivery" (traditio). When a buyer takes possession of untitled land via a public instrument (Deed of Sale), they acquire a real right over the property that can be recognized in financial books.
2. Required Documentation for Recognition
To declare untitled property as a fixed asset, the "Paper Trail" must be airtight to satisfy both auditors and the Bureau of Internal Revenue (BIR).
- Deed of Absolute Sale (DOAS): This must be notarized to qualify as a public document. It serves as the primary evidence of the transaction and the "delivery" of the property.
- Tax Declaration (TD): In the absence of a title, the Tax Declaration is the most significant evidence of a claim of ownership. It must be in the name of the entity declaring the asset.
- Chain of Possession: A history of previous Tax Declarations and Deeds of Sale tracing the property back to the original occupant or a "disposable and alienable" grant from the State.
- Survey Plan: A blueprint approved by the Department of Environment and Natural Resources (DENR) or the Land Management Bureau (LMB) to define the exact metes and bounds of the asset.
3. Tax Considerations and Compliance
Recognition as a fixed asset triggers several tax obligations and benefits:
A. Real Property Tax (RPT)
Under the Local Government Code, the "beneficial user" or owner is liable for RPT. Even without a title, the entity must pay annual "Amilyar" to the City or Municipal Treasurer based on the Tax Declaration. Failure to pay can lead to the property being auctioned by the LGU.
B. Capital Gains Tax (CGT) vs. Creditable Withholding Tax (CWT)
- If the seller is an individual (not engaged in real estate): 6% CGT is paid based on the gross selling price or zonal value, whichever is higher.
- If the asset is used in business: The transfer may be subject to CWT and VAT.
C. Depreciation
Important Note: Land itself is not depreciable under Philippine Accounting Standards (PAS 16) and BIR rules, regardless of whether it is titled or untitled. However, any improvements (buildings, fences, warehouses) built on that untitled land are depreciable assets.
4. Risks and Mitigation (The "Caveat")
Declaring an untitled property as a fixed asset carries inherent risks that must be disclosed in financial footnotes:
| Risk Factor | Description | Mitigation |
|---|---|---|
| Overlapping Claims | Someone else may hold a "hidden" title or a prior Tax Declaration. | Conduct a "Due Diligence" search with the Register of Deeds and the Assessor’s Office. |
| Reversion | The State may claim the land is "Forest Land" or "Inalienable." | Secure a Certification of Alienable and Disposable (A&D) Land from the DENR. |
| Administrative Costs | Converting the Tax Declaration into a Title (via Judicial or Administrative Titling) is costly. | Set up a "Reserve for Titling" or recognize the cost of titling as a capitalized expense. |
5. Accounting Treatment (PAS 16)
To record the asset, the entity must demonstrate that it is probable that future economic benefits will flow to the entity and the cost can be measured reliably.
Journal Entry Example:
Debit: Property & Equipment - Land (at Purchase Price + Taxes) Credit: Cash / Accounts Payable
Even without a TCT number, the asset is recorded. The accountant should use the Tax Declaration Number as the primary identifier in the Fixed Asset Registry.
Summary Checklist for Businesses
- Verify the land is Alienable and Disposable (DENR).
- Execute and notarize a Deed of Absolute Sale.
- Transfer the Tax Declaration to the company name at the Assessor’s Office.
- Pay the Transfer Taxes and Documentary Stamp Tax (DST) at the BIR.
- Record the asset in the General Ledger based on the total cost of acquisition.
Would you like me to draft a sample "Notes to Financial Statements" disclosure regarding the risks associated with holding untitled real property?