Introduction

In the Philippines, the sale of real property is subject to various taxes, with capital gains tax (CGT) being one of the primary fiscal obligations imposed on such transactions. CGT is a tax on the profit or gain realized from the sale, exchange, or other disposition of real property classified as a capital asset. This tax is governed primarily by the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent laws such as Republic Act No. 10963 (TRAIN Law) and Republic Act No. 11534 (CREATE Act). When the buyer in such a transaction is a Local Government Unit (LGU)—such as a city, municipality, or province—the question of who bears the responsibility for paying CGT often arises, particularly in contexts involving voluntary sales, negotiated purchases, or eminent domain proceedings.

This article explores the intricacies of CGT liability in sales of property to LGUs, drawing from Philippine tax laws, revenue regulations, and relevant jurisprudence. It covers the general rules on CGT, the specific application to transactions with LGUs, exemptions and exceptions, procedural requirements, and practical considerations for property owners and government entities.

Overview of Capital Gains Tax on Real Property Sales

Under Section 24(D) of the NIRC, as amended, CGT is imposed at a flat rate of 6% on the gross selling price or the current fair market value (FMV) of the property, whichever is higher, for sales of real property located in the Philippines that are considered capital assets. Capital assets include land, buildings, and other real properties not used in trade or business (i.e., not ordinary assets like inventory).

The tax is computed on the presumed gain, meaning it is applied regardless of whether an actual gain was realized, unless the transaction qualifies for an exemption. Key elements include:

Tax Base: The higher of the actual selling price or the zonal value (as determined by the Bureau of Internal Revenue, BIR) or the assessed value (as per the local assessor's office).
Liability: The seller or transferor is primarily liable for the CGT, as it is a tax on the income or gain derived by the seller.
Payment Timeline: CGT must be paid within 30 days from the date of notarization of the deed of sale or transfer document.

This framework applies to most real property transactions, but nuances emerge when the buyer is a government entity, including LGUs.

CGT Liability in Sales to Local Government Units

When real property is sold to an LGU, the general rule remains that the seller is responsible for paying the CGT. LGUs, as political subdivisions of the national government, are treated similarly to other government entities under tax laws. The NIRC does not provide a blanket exemption from CGT for sales to LGUs, whether the sale is voluntary, negotiated, or compelled through eminent domain (expropriation).

Voluntary or Negotiated Sales

In cases where a property owner voluntarily sells land or buildings to an LGU—for instance, for public infrastructure projects like roads, schools, or markets—the transaction is treated as a standard sale of a capital asset. The seller must compute and pay the 6% CGT based on the agreed selling price or FMV, whichever is higher.

Withholding Requirements: If the LGU qualifies as a withholding agent (which it typically does as a government entity), it may be required to withhold the CGT at source under Revenue Regulations (RR) No. 2-98, as amended. However, for CGT on real property, the withholding is not mandatory in the same way as for income taxes; instead, the seller files and pays the tax directly via BIR Form 1706. In practice, LGUs often assist in the process by ensuring tax compliance before releasing full payment.
Documentary Requirements: The deed of absolute sale must be presented to the BIR for CGT payment and issuance of a Certificate Authorizing Registration (CAR), which is necessary for the transfer of title at the Registry of Deeds.

Sales Under Eminent Domain or Expropriation

Expropriation occurs when an LGU exercises its power of eminent domain to acquire private property for public use, upon payment of just compensation (as per Section 9, Article III of the 1987 Philippine Constitution). In such scenarios:

CGT Applicability: The Supreme Court has ruled in cases like National Power Corporation v. Court of Appeals (G.R. No. 113103, June 30, 2008) that just compensation in expropriation is considered income subject to taxation, including CGT if the property is a capital asset. Thus, the property owner (seller) remains liable for CGT on the gain from the expropriation amount.
Computation in Expropriation: The tax base is the just compensation amount (determined by the court or through negotiation) or the FMV, whichever is higher. If the just compensation is below FMV, the tax is still on the higher FMV to prevent undervaluation.
Payment Mechanics: The LGU pays the just compensation, but the owner must settle CGT before the full transfer. In some instances, the court may order the deduction of taxes from the compensation amount, but the liability stays with the owner. BIR rulings, such as Revenue Memorandum Circular (RMC) No. 5-2014, clarify that CGT applies to expropriated properties unless exempted.

LGUs do not assume the tax liability; they merely act as the acquiring party. However, in negotiated settlements to avoid lengthy court proceedings, LGUs may agree to shoulder related costs like transfer taxes, but CGT remains the seller's burden unless explicitly negotiated otherwise (though such agreements must comply with tax laws).

Exemptions and Exceptions Relevant to LGU Transactions

While the seller generally pays CGT, certain exemptions under the NIRC may apply, potentially relieving the seller of the tax in LGU sales:

Principal Residence Exemption (Section 24(D)(2), NIRC): If the property sold is the seller's principal residence and the proceeds are used to acquire or construct a new principal residence within 18 months, the CGT may be exempted. This requires BIR approval via a Certificate of Exemption. This can apply to sales to LGUs if the conditions are met.
Sales to Government for Specific Purposes: There is no automatic exemption for sales to LGUs, but under Section 32(B)(7)(e) of the NIRC, gains from sales to the government in connection with low-cost housing or socialized housing projects may qualify for exemptions under special laws like Republic Act No. 7279 (Urban Development and Housing Act). For instance, if the LGU acquires land for resettlement, the seller might claim exemption if certified by the Housing and Urban Development Coordinating Council (HUDCC) or its successor agencies.
Non-Resident Sellers: If the seller is a non-resident alien or foreign corporation, different rates or rules apply (e.g., 6% CGT still, but with potential treaty benefits), but liability remains with the seller.
No Exemption for Public Use Alone: Mere sale to an LGU for public use does not exempt CGT; exemptions must be explicitly provided by law. For example, donations to LGUs are exempt from CGT under Section 34(K) of the NIRC, but sales are not donations.

In jurisprudence, the Supreme Court in Commissioner of Internal Revenue v. Fort Bonifacio Development Corporation (G.R. No. 175707, September 29, 2010) emphasized that tax exemptions must be strictly construed against the taxpayer.

Other Taxes and Costs in LGU Property Acquisitions

Beyond CGT, sales to LGUs involve additional fiscal considerations, which indirectly affect the net proceeds to the seller:

Documentary Stamp Tax (DST): At 1.5% of the selling price or FMV, paid by the seller but often shared or shouldered by the LGU in negotiations.
Local Transfer Tax: Imposed by the LGU at up to 0.75% (for cities) or 0.5% (for municipalities) under the Local Government Code (Republic Act No. 7160), typically paid by the seller but collectible by the LGU.
Creditable Withholding Tax (CWT): If the property is an ordinary asset (e.g., held by a developer), a 1.5% to 6% CWT applies, withheld by the LGU as buyer.
Value-Added Tax (VAT): Not applicable to capital assets but may apply if the seller is VAT-registered and the property is ordinary.

In expropriation, the LGU may also pay for relocation costs or improvements, but these do not offset CGT liability.

Procedural Steps and Compliance

To ensure proper handling of CGT in sales to LGUs:

Valuation: Obtain BIR zonal value and local assessed value.
Computation: Seller calculates CGT.
Filing: Submit BIR Form 1706 with supporting documents (deed of sale, tax declarations).
Payment and CAR Issuance: Pay CGT; BIR issues CAR for title transfer.
LGU Role: LGUs must ensure tax clearance before final payment or title transfer, as per Department of Finance guidelines.

Non-payment can lead to penalties (25% surcharge, 12% interest per annum) and holds on title registration.

Practical Considerations and Challenges

Property owners selling to LGUs often face delays due to bureaucratic processes, valuation disputes, or funding issues. In expropriation, owners may contest just compensation in court, which can affect tax computations. Tax planning is advisable—consulting a tax lawyer or CPA can help explore exemptions or deferrals.

LGUs, constrained by budgets, may negotiate terms where they advance tax payments, but this does not shift legal liability. Recent trends under the Duterte and Marcos administrations emphasize infrastructure, increasing LGU acquisitions and highlighting CGT issues.

Conclusion

In summary, when property is sold to a Local Government Unit in the Philippines, the capital gains tax is unequivocally the responsibility of the seller, whether the transaction is voluntary or through expropriation. While exemptions exist under specific conditions, they are not automatic and require strict compliance. Understanding these rules ensures smooth transactions and avoids fiscal pitfalls, aligning with the government's goal of equitable taxation for public benefit. Property owners should prioritize professional advice to navigate this complex area of Philippine tax law.