In the Philippine real estate market, a perfected contract of sale is not always the end of the story. For various reasons—ranging from a failure to pay the purchase price to the discovery of hidden defects or mutual agreement—parties may decide to cancel a Deed of Sale.
However, once a Deed of Sale is signed and notarized, it enters the sphere of the Bureau of Internal Revenue (BIR). Undoing such a transaction requires more than just tearing up the paper; it involves navigating specific tax implications and administrative procedures to avoid double taxation or penalties.
1. Distinguishing the Nature of the Cancellation
The tax treatment depends heavily on when and why the cancellation occurs. The BIR generally looks at whether the sale was "consummated" or if the rescission happened before the transfer of ownership was fully recognized for tax purposes.
- Mutual Rescission: Both parties agree to return to their original state (status quo ante).
- Rescissory Conditions: The contract is cancelled because a specific condition (like full payment) was not met.
- Judicial Annulment: A court declares the Deed of Sale void due to fraud, lack of consent, or other legal grounds.
2. Capital Gains Tax (CGT) and Creditable Withholding Tax (CWT)
Under the National Internal Revenue Code (NIRC), CGT (6% of the gross selling price or fair market value, whichever is higher) is due within 30 days of notarization.
- If taxes are not yet paid: The parties must formally notify the BIR of the cancellation through a Deed of Rescission. This prevents the BIR from assessing deficiency taxes and penalties on a sale that never truly "happened."
- If taxes are already paid: Once the 6% CGT is paid, the BIR generally treats the transaction as finished. Recovering this tax via a Tax Refund or Tax Credit Certificate (TCC) is notoriously difficult. The taxpayer must prove that the sale was void from the beginning (void ab initio) or that the rescission happened before the "constructive delivery" of the property.
3. Documentary Stamp Tax (DST) Implications
DST is an excise tax on the privilege of entering into a transaction.
- The "One-Way" Rule: The BIR often takes the position that DST is due upon the execution of the instrument. Even if the sale is cancelled later, the DST paid on the original Deed of Sale is usually non-refundable, as the "privilege" of executing the document was already exercised.
- New DST: A formal Deed of Rescission is itself a notarized document and may be subject to its own nominal DST.
4. The "Second Sale" Trap
A major risk in cancelling a Deed of Sale is the BIR viewing the cancellation as a second transfer.
If the title has already been transferred to the buyer’s name, and the parties want to revert it to the seller, the BIR may treat the "Rescission" as a re-sale. This means:
- The first sale is taxed (CGT + DST).
- The "return" to the seller is taxed again as a new sale (another 6% CGT + 1.5% DST).
To avoid this, parties must ensure the Deed of Rescission is executed before the Registry of Deeds issues a new Transfer Certificate of Title (TCT).
5. Essential Procedures for BIR Compliance
To properly process a cancellation, the following steps are typically required:
- Execution of the Deed of Rescission: A notarized document stating the specific reasons for the cancellation and the agreement to return any monies paid.
- Affidavit of Non-Consummation: In many jurisdictions, the BIR requires an affidavit stating that the sale did not result in the actual transfer of possession or ownership.
- Application for Tax Abatement or Cancellation: If a tax return was filed but not paid, the taxpayer must apply to have the "open case" closed in the BIR’s system to avoid accumulating surcharges.
- Presentation of Original Documents: The BIR will usually require the original "Blue Copy" of the acknowledged tax return and the original Deed of Sale to be marked "CANCELLED."
6. Value Added Tax (VAT) Considerations
For properties sold by real estate developers (ordinary assets), the cancellation involves a Credit Memo.
- The seller must reverse the Output VAT declared on the initial sale.
- The buyer (if a business) must reverse the Input VAT claimed.
- Documentation must be meticulous to survive a BIR audit, specifically ensuring the cancellation is reflected in the Summary List of Sales/Purchases (SLS/SLP).
Summary Table: Tax Impact
| Tax Type | Status if Cancelled Early | Status if Title Already Transferred |
|---|---|---|
| Capital Gains Tax | May be avoided/cancelled | Likely forfeited; "Re-sale" tax applied |
| Doc Stamp Tax | Generally non-refundable | New DST due for the return transfer |
| Transfer Tax | Refundable from LGU (varies) | Non-refundable; New tax due |
| VAT | Reversible via Credit Memo | Complex reversal or treated as new sale |
Conclusion
Navigating a cancelled sale requires immediate action. The window between notarization and the 30-day tax deadline is critical. Once taxes are paid and the title is processed, "undoing" the transaction becomes a costly exercise in double taxation. Legal counsel should always ensure that a Deed of Rescission is filed with the relevant Revenue District Office (RDO) at the earliest possible moment.