Reimbursement of EWT Surcharges from a Philippine Condominium Developer

A doctrinal, contractual, and practical guide

1. Background: Why the issue arises

When a buyer acquires a condominium unit from a developer, the transaction is ordinarily the sale of an “ordinary asset” by a VAT-registered real-estate dealer. Under §57–58 of the National Internal Revenue Code (NIRC) of 1997 and Revenue Regulations (RR) 2-98, as most recently amended by RR 11-2018, the buyer becomes the withholding agent and must:

Withhold 1.5 % of the gross selling price or fair-market value (whichever is higher);
File BIR Form 1606 and pay the tax on or before the 10th day of the month following payment (or on the eFPS schedule); and
Furnish the developer a BIR Form 2307 so the latter can credit the tax against its quarterly income-tax liabilities.

Failure to withhold, under-withholding, or late remittance triggers surcharges, interest, and compromise penalties under §§248–249 NIRC. Because the underlying tax (the 1.5 %) is for the developer’s account yet the duty to collect and remit rests on the buyer, the perennial question is: who ultimately bears the penalties?

2. Statutory allocation of liability

Item	Responsible party	Statutory basis
Underlying EWT (1.5 %)	Seller/developer (as income-tax credit)	§57(B), RR 11-2018
Duty to withhold, file and remit	Buyer (as withholding agent)	§58, RR 2-98
Surcharge (25 % or 50 %), interest (currently 20 % p.a.), compromise penalty	Buyer	§§248–249, 255 NIRC

Key doctrine: Penalties for failure to withhold attach to the withholding agent, not to the income recipient. The BIR may assess the buyer directly and need not chase the developer.

3. Can the buyer shift or recoup the surcharge?

3.1 No automatic right under tax law

Tax statutes impose the surcharge personally on the erring withholding agent. The developer is neither solidarily liable nor entitled to credit the penalties, so tax law itself offers no refund mechanism.

3.2 Contractual indemnity

The buyer may recover only if the sale documents expressly obligate the developer to shoulder “all taxes and any penalties relative thereto” or contain a broad hold-harmless clause. Common templates, however, limit the seller’s liability to the tax proper, leaving penalties to the buyer.

Drafting tip: Insert language such as:

“Seller shall indemnify and hold Buyer harmless from any and all taxes, surcharges, interest, or penalties assessed by the Bureau of Internal Revenue arising out of or in connection with this sale, whether due to acts or omissions of either party.”

3.3 Civil Code remedies in the absence of an express clause

Theory	Requisites	Comments
Breach of contract (Arts. 1159, 1170)	Seller undertook to “pay all taxes” and the surcharge is deemed part of “taxes”	Depends on wording; courts construe “taxes” strictly.
Quasi-delict (Art. 2176)	Seller’s negligence induced buyer’s mistake (e.g., misclassification of property, wrong TIN) that led to penalty	Buyer must show causal connection.
Unjust enrichment (Art. 2142)	Developer benefited (buyer paid surcharge that should in equity burden seller) without just cause	Invoked when no contract covers the situation.
Abuse of rights (Art. 19)	Seller’s refusal to reimburse is in bad faith	Requires proof of malice or intent.

The prescriptive period is generally four (4) years from the date of buyer’s payment if treated as a quasi-contract, or six (6) years if viewed as an oral contract or open account.

4. Typical scenarios and how courts tend to view them

Scenario	Likely outcome
Buyer filed and paid EWT late because of internal oversight.	Surcharge remains buyer’s loss; courts hold the omission entirely within its control.
Buyer under-withheld because developer advised that the unit was a “capital asset” (0 % CWT) but BIR later ruled it an ordinary asset (1.5 %).	Developer may be compelled to reimburse on breach-of-warranty or negligence theory.
Contract says “all taxes due from the Seller shall be for Seller’s account.” Buyer paid EWT on time but incurred interest due to BIR re-computation after appraisal.	Many arbitral awards treat the interest as part of “taxes due from Seller,” hence reimbursable.
No contractual clause. Buyer paid penalties after BIR audit revealed both parties’ mistaken computation.	Recovery hinges on proving unjust enrichment; success depends on equities of the case.

5. Procedural roadmap for buyers seeking reimbursement

Secure proof of payment – official receipt, Form 0613, BIR assessment notice.
Serve a formal demand on the developer specifying legal basis (contract clause or Civil Code article) and enclosing proofs.
Negotiate set-off against remaining installments or retention money.
If negotiation fails:
- Mediation/Arbitration – follow any ADR clause in the contract to sell or deed of absolute sale.
- Civil action – file before the RTC (commercial court if the developer is in receivership). Damages may include surcharge, interest, filing fees, and attorney’s fees.
Preserve records for at least ten (10) years; BIR audits can reopen assessments within this period in fraud cases.

6. Defenses commonly raised by developers

Statutory defense – buyer alone is liable as withholding agent.
Contract construction – the phrase “all taxes” excludes penalties.
Laches/Prescription – buyer slept on its rights.
Contributory negligence – buyer independently decided to under-withhold or pay late.
No unjust enrichment – developer did not profit; surcharge benefited only the government.

Courts weigh these against documentary evidence and the parties’ sophistication.

7. Best-practice clauses for future transactions

Comprehensive tax clause – expressly covers “tax, surcharge, interest, compromise penalty, and any analogous impost.”
Information-accuracy warranty – seller warrants accuracy of TIN, classification, and zonal value.
Indemnity and hold-harmless – includes third-party assessments.
Retention mechanism – buyer may withhold a percentage of price until BIR clears the transaction.
ADR provision – specifies arbitration to avoid public litigation.

8. Takeaways

Statutorily, the surcharge sticks to the buyer, but contract and equity may shift the burden.
Meticulous drafting and timely filing are the cheapest insurance.
Documentation trumps disputation – keep every Form 2307, 1606, and BIR receipt.
When in doubt, over-withhold (you can apply the excess to future payments); under-withholding or delay is costlier.
Prompt legal advice can convert a potential penalty into a recoverable cost.

In sum

Reimbursing EWT surcharges from a condominium developer is not a matter of course—it is a function of statutory duties, contractual language, and the Civil Code’s remedial principles. Buyers who plan ahead, insist on airtight tax clauses, and act swiftly upon receiving a BIR assessment have the best chance of shifting—or altogether avoiding—the sting of penalties.