Introduction

In the Philippine real estate market, the practice of underdeclaring the sale price of property—wherein the parties to a transaction report a lower value than the actual consideration paid—remains a persistent issue despite its illegality. This underdeclaration is often motivated by the desire to minimize tax liabilities, such as capital gains tax and documentary stamp tax. However, such actions carry significant legal risks, including civil, administrative, and criminal consequences. This article comprehensively examines the legal framework governing property sales, the specific implications of underdeclaration, potential penalties, detection mechanisms, and related jurisprudence in the Philippine context. It underscores the importance of compliance with tax laws to avoid severe repercussions.

Legal Framework for Property Transactions

Property sales in the Philippines are governed by a combination of civil, tax, and local government laws. The Civil Code of the Philippines (Republic Act No. 386) defines a contract of sale as one where the seller transfers ownership of a thing to the buyer for a price certain in money or its equivalent (Article 1458). For real property, the transaction must be evidenced by a public instrument, typically a Deed of Absolute Sale, which is notarized and registered with the Registry of Deeds.

Tax obligations arise under the National Internal Revenue Code (NIRC) of 1997, as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963) and subsequent reforms like the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act (Republic Act No. 11534). Key taxes include:

Capital Gains Tax (CGT): Imposed at 6% on the gross selling price, fair market value (as determined by the Bureau of Internal Revenue's zonal valuation), or the assessed value by the local assessor, whichever is highest (Section 24(D) of the NIRC).
Documentary Stamp Tax (DST): Levied at 1.5% on the same basis as CGT (Section 196 of the NIRC).
Creditable Withholding Tax (CWT): Applicable if the seller is engaged in the real estate business, at rates ranging from 1.5% to 5% depending on the classification.
Local Transfer Tax: Under the Local Government Code (Republic Act No. 7160), provinces and cities impose a tax of up to 0.75% on the total consideration or fair market value, whichever is higher.
Value-Added Tax (VAT): If the seller is habitually engaged in real estate, VAT at 12% may apply on sales exceeding certain thresholds.

The declared sale price in the Deed of Sale serves as the basis for computing these taxes. Underdeclaration distorts this base, leading to underpayment.

The Practice of Underdeclaration and Its Forms

Underdeclaration typically involves stating a fictitious lower price in the official Deed of Sale while the actual higher consideration is paid separately, often through undocumented means like cash or side agreements. Common variants include:

Double Contracts: One public deed with the underdeclared price for tax and registration purposes, and a private contract reflecting the true price.
Partial Declaration: Declaring only a portion of the payment as the sale price, with the excess disguised as a "donation" or "improvements."
Zonal Value Manipulation: Relying on outdated or incorrect zonal values to justify a lower declaration, even when the actual price is higher.

While this practice may seem commonplace in informal real estate dealings, it constitutes fraud against the government and violates the principle of full disclosure in contracts.

Tax Implications and Administrative Penalties

Underdeclaration primarily results in tax evasion or deficiency assessments by the Bureau of Internal Revenue (BIR). Under Section 248 of the NIRC, civil penalties for underpayment include:

Surcharge: 25% of the tax due if due to negligence, or 50% if willful neglect or fraud is established.
Interest: 12% per annum (reduced from 20% post-TRAIN) on the unpaid amount from the due date until full payment.
Compromise Penalties: Additional fines based on BIR regulations, which can range from PHP 1,000 to PHP 50,000 or more, depending on the violation.

If the underdeclaration leads to a substantial underpayment (e.g., 30% or more of the correct tax), it may be classified as fraudulent under Section 254 of the NIRC, triggering higher penalties. The BIR can issue a Formal Letter of Demand and Assessment Notice (FLDAN), requiring payment within 30 days, failing which collection actions like garnishment or levy may ensue.

Local government units (LGUs) may also impose penalties for underpayment of transfer taxes, including surcharges up to 25% and interest at 2% per month, capped at 72 months (Section 168 of the Local Government Code).

In cases where the excess amount is treated as a donation to evade taxes, donor's tax at 6% (Section 99 of the NIRC) may still apply, potentially leading to double taxation if not properly declared.

Criminal Liabilities

Beyond administrative penalties, underdeclaration can lead to criminal prosecution. Key provisions include:

Tax Evasion: Under Section 254 of the NIRC, attempting to evade or defeat any tax through fraudulent means is punishable by a fine of PHP 30,000 to PHP 100,000 and imprisonment of 2 to 4 years. If the evasion exceeds PHP 1 million, penalties escalate significantly.
Falsification of Documents: If the Deed of Sale contains false statements, parties may be liable under Article 172 of the Revised Penal Code (RPC) for falsification by private individuals, punishable by prision correccional (6 months to 6 years) and fines.
Perjury: Notarizing a deed with a known false declaration violates the Notarial Law (Republic Act No. 10173) and may constitute perjury under Article 183 of the RPC, with penalties of arresto mayor (1 to 6 months) to prision correccional.
Estafa: If one party relies on the underdeclared price to defraud the other (e.g., in resale scenarios), estafa under Article 315 of the RPC may apply, with penalties based on the amount involved.

Professionals involved, such as lawyers, notaries, or real estate brokers, face additional sanctions. Notaries may have their commissions revoked by the Supreme Court, while brokers risk license suspension under the Real Estate Service Act (Republic Act No. 9646).

In extreme cases, if underdeclaration is linked to larger schemes like money laundering, the Anti-Money Laundering Act (Republic Act No. 9160, as amended) may apply, with penalties up to 14 years imprisonment and fines up to PHP 3 million.

Civil and Contractual Implications

From a civil perspective, an underdeclared Deed of Sale remains valid between the parties as long as there is consent, object, and cause (Article 1318, Civil Code). However, the true consideration can be proven by parol evidence if disputes arise (Article 1356). Courts may reform the contract to reflect the actual price in cases of mutual mistake or fraud.

Buyers risk issues with title insurance or financing, as banks often require appraisals based on declared values. Sellers may face claims for breach if the underdeclaration leads to tax liens on the property, which can be enforced against subsequent owners.

In inheritance or partition scenarios, underdeclaration can complicate estate settlements, potentially leading to claims of simulation of contracts (Article 1345, Civil Code), rendering the sale void.

Detection and Enforcement Mechanisms

The BIR detects underdeclaration through various means:

Audits and Investigations: Random or targeted audits under the BIR's Run After Tax Evaders (RATE) program, often triggered by discrepancies between declared values and market data.
Third-Party Information: Reports from banks, registries, or whistleblowers via the BIR's eComplaint system.
Data Matching: Cross-referencing with Land Registration Authority (LRA) records, LGU assessments, or PhilGEPS (for government-related sales).
Appraisals: Mandatory BIR certification of zonal values, which must be higher than the declared price if applicable.

LGUs may conduct their own verifications during title transfers. The Department of Justice (DOJ) prosecutes criminal cases upon BIR referral.

Jurisprudential Insights

Philippine courts have consistently upheld strict compliance with tax declarations. In Commissioner of Internal Revenue v. Estate of Benigno Toda, Jr. (G.R. No. 147188, 2004), the Supreme Court ruled that simulated sales to evade CGT constitute tax evasion, emphasizing that tax avoidance schemes must not cross into evasion. Similarly, in People v. Sandiganbayan (G.R. No. 144595, 2003), underdeclaration in government transactions was deemed falsification.

Cases like BIR v. Court of Tax Appeals highlight that substantial understatements (e.g., declaring 10% of actual price) presume fraud, shifting the burden to the taxpayer to prove otherwise.

Remedies and Compliance Strategies

Taxpayers discovering underdeclaration can avail of the BIR's Voluntary Assessment and Payment Program (VAPP) or compromise settlements under Section 204 of the NIRC, which may reduce penalties by up to 40%. However, this does not apply to cases already under criminal prosecution.

To avoid implications, parties should:

Declare the actual selling price or the zonal value, whichever is higher.
Retain documentation of payments (e.g., bank transfers) to substantiate declarations.
Consult tax professionals for proper computation.
Use electronic filing systems like eBIRForms for transparency.

Conclusion

Underdeclaring the sale price of property in the Philippines is a high-risk practice that undermines public revenue and exposes parties to multifaceted legal consequences. From tax deficiencies and administrative fines to criminal imprisonment and professional disbarment, the implications are far-reaching. As the government intensifies enforcement through digitalization and inter-agency cooperation, compliance is not merely advisable but essential. Stakeholders in real estate transactions must prioritize transparency to safeguard their interests and contribute to national development.