Introduction

In the Philippine real estate landscape, the transfer of property titles is a critical process governed by both civil and tax laws. Capital Gains Tax (CGT) plays a pivotal role in property transactions, ensuring that gains from the sale of real property are properly taxed. However, complications arise when previous buyers in a chain of transactions fail to transfer the title to their names, often due to unregistered deeds of sale. This scenario raises the question: who bears the responsibility for paying the CGT on those prior transfers?

This article explores the legal framework surrounding CGT in such cases, including the obligations of parties involved, the implications of unregistered transfers, procedural requirements for title transfer, potential liabilities, and practical resolutions. It draws from the National Internal Revenue Code (NIRC), Civil Code provisions, and established Bureau of Internal Revenue (BIR) practices to provide a comprehensive analysis.

Understanding Capital Gains Tax in the Philippines

Capital Gains Tax is a final tax imposed on the presumed gain from the sale, exchange, or other disposition of real property classified as a capital asset located in the Philippines. Under Section 24(D) of the NIRC, as amended by Republic Act No. 10963 (TRAIN Law), the CGT rate is 6% based on the gross selling price, the fair market value (FMV) as determined by the BIR, or the zonal value as per the Department of Finance, whichever is highest.

The tax applies to individuals, estates, trusts, and corporations (with some exemptions for corporations under Section 27(D)(5)). Key points include:

Taxable Event: The tax is triggered upon the execution of a deed of sale or similar instrument, regardless of whether the title is immediately transferred.
Exemptions: Sales of principal residences may qualify for exemption if proceeds are used to acquire a new residence within 18 months, subject to BIR approval. Socialized housing and certain government-mandated sales are also exempt.
Payment Deadline: CGT must be paid within 30 days from the date of notarization of the deed of sale, as per Revenue Regulations (RR) No. 7-2003.
Documentary Requirements: Filing involves BIR Form No. 1706 (CGT Return), supported by the deed of sale, tax declarations, and proof of payment.

Importantly, CGT is the liability of the seller, not the buyer, unless otherwise agreed upon in the contract.

The Issue of Unregistered Transfers and Title Non-Transfer

Under Article 1495 of the Civil Code, a sale of immovable property is perfected upon meeting of minds on the object and price. However, for the transfer to bind third parties, the deed must be registered with the Register of Deeds (RD) pursuant to Presidential Decree No. 1529 (Property Registration Decree).

When previous buyers fail to transfer the title:

Unregistered Deeds: The sale remains valid between the immediate parties but does not affect innocent third persons. The title certificate (e.g., Transfer Certificate of Title or TCT) stays in the name of the registered owner.
Chain of Transfers: A common scenario involves multiple successive sales (e.g., Owner A sells to B, B to C, C to D) where only the final buyer (D) seeks title transfer. Intermediate deeds are often absolute sales executed via notarial instruments but not registered, perhaps to avoid taxes or fees.

This creates a "broken chain" in the title history, complicating tax compliance. The RD will not annotate the new transfer without clearing prior obligations, including unpaid taxes.

Legal Basis for CGT Liability in Unregistered Chains

The NIRC does not explicitly address multiple unregistered transfers, but BIR interpretations and jurisprudence provide guidance:

Separate Taxable Events: Each sale in the chain constitutes a distinct taxable event. Per RR No. 5-2009, CGT accrues upon each execution of a deed, irrespective of registration. Thus, Seller A owes CGT on the sale to B, B to C, and so on.
Seller's Primary Liability: Section 24(D) places the burden on the seller to file and pay CGT. Failure to do so incurs penalties under Section 248 (civil) and 249 (criminal) of the NIRC, including 25% surcharge, 12% interest per annum, and potential fines or imprisonment.
Buyer's Role: While not primarily liable, the buyer may withhold the tax if acting as a withholding agent (e.g., in corporate transactions). In practice, contracts often stipulate that the buyer advances CGT, with reimbursement from the seller.
BIR's Enforcement Mechanism: To obtain a Certificate Authorizing Registration (CAR) from the BIR—required by the RD for title transfer—all CGT for the entire chain must be settled. The BIR examines the chain through submitted deeds and may require separate CGT returns for each link.

Jurisprudence reinforces this:

In Commissioner of Internal Revenue v. Spouses Santos (G.R. No. 196123, 2013), the Supreme Court emphasized that CGT is due upon sale perfection, not registration, underscoring that non-transfer does not extinguish tax liability.
Cases like BIR v. Heirs of Dela Rama highlight that unregistered sales do not evade taxation; the BIR can assess deficiencies based on available documents.

Consequences of Non-Payment by Previous Buyers

If previous buyers/sellers neglected CGT:

Accumulated Liabilities: Unpaid CGT accrues interest and surcharges, potentially ballooning the amount. The BIR may issue deficiency assessments via Letter of Authority audits.
Blockage in Title Transfer: The final buyer cannot register the title without a CAR, leaving them with only equitable ownership (possessory rights but no legal title).
Third-Party Risks: Unregistered titles expose the property to claims from creditors of prior registered owners or double sales under Article 1544 of the Civil Code.
Criminal Implications: Willful non-payment may lead to tax evasion charges under Section 255 of the NIRC, with penalties up to PHP 100,000 and imprisonment.
Prescription: CGT assessments prescribe after three years from the due date (or 10 years if fraudulent), per Section 203 and 222 of the NIRC. However, unregistered chains often reset the clock upon discovery.

Who Ultimately Pays the CGT?

While each seller is legally liable for their segment's CGT:

Practical Reality: Previous sellers may be uncooperative, deceased, or untraceable. In such cases, the final buyer often shoulders the entire CGT to expedite title transfer, treating it as part of the purchase cost.
Computation in Chains: The BIR computes CGT for each transfer based on:
- Gain = Selling Price - Acquisition Cost (adjusted for improvements and holding costs).
- If acquisition costs are undocumented, the BIR uses presumptive values.
- For the chain, total tax is the sum of each segment's 6% on the higher of selling price/FMV.
Substituted Payment: In some instances, the BIR allows the final transferee to pay under a "substituted basis," where the original owner's cost basis is used for the final sale's CGT computation, avoiding multiple taxations. This is not standard but may be granted via ruling requests.
Contractual Agreements: Deeds often include clauses allocating tax payments. Under Article 1458 of the Civil Code, parties can agree on who pays, but this does not bind the BIR.
Buyer's Recourse: If the final buyer pays prior CGT, they can seek indemnity from intermediate sellers via civil action for reimbursement, grounded in unjust enrichment (Article 22, Civil Code).

Procedural Steps to Resolve and Transfer Title

To address unpaid CGT in unregistered chains:

Gather Documents: Collect all deeds of sale, tax declarations, and proofs of payment from the chain.
File CGT Returns: Each seller (or their representatives) must file separate BIR Form 1706 for their sale, paying the tax plus penalties if late.
Request BIR Ruling: If complexities arise (e.g., missing sellers), apply for a confirmatory ruling under RR No. 18-2012 to clarify liabilities.
Secure CAR: Submit to the Revenue District Office (RDO) with payments; the BIR issues CAR upon verification.
Pay Other Fees: Include Documentary Stamp Tax (1.5% under Section 196, NIRC), transfer taxes (up to 0.75% local), and RD fees.
Register with RD: Present CAR and deeds for annotation and issuance of new TCT.
Alternative: Judicial Action: If disputes persist, file a petition for quieting of title or specific performance in court, which may order tax payments.

For estates (if sellers are deceased), involve the executor under RR No. 12-2018 for estate tax clearance first.

Preventive Measures and Best Practices

To avoid such issues:

Immediate Registration: Buyers should insist on title transfer within the sale contract, with escrow for taxes.
Due Diligence: Conduct title searches via RD and verify tax payments before purchase.
Tax Clauses: Include hold-harmless provisions in deeds.
Professional Assistance: Engage lawyers, accountants, or real estate brokers familiar with BIR procedures.
Amnesty Programs: Watch for tax amnesties (e.g., under RA 11213) that waive penalties for voluntary payments.

Conclusion

In the Philippines, CGT liability in cases of non-transferred titles remains with each seller in the chain, but enforcement often falls on the final buyer seeking registration. This underscores the importance of compliance at every transaction stage to prevent escalating costs and legal hurdles. Parties should prioritize proper documentation and timely payments to safeguard property rights and minimize tax exposures. Consulting with tax experts is advisable for case-specific guidance, as BIR interpretations may evolve.