Who Should Pay Capital Gains Tax and DST in a Philippine Real Estate Sale: Buyer or Seller?

Introduction

In the Philippine real estate market, the sale of property involves various taxes and fees that must be settled to ensure a valid and legally compliant transaction. Among the most significant are the Capital Gains Tax (CGT) and the Documentary Stamp Tax (DST). These taxes are imposed by the national government through the Bureau of Internal Revenue (BIR) and are critical components of the transfer process. Understanding who bears the responsibility for paying these taxes—whether the buyer or the seller—is essential for both parties to avoid disputes, penalties, and delays in title transfer.

This article provides a comprehensive overview of CGT and DST in the context of Philippine real estate sales. It covers the legal basis, computation methods, liability allocation, exemptions, procedural requirements, and practical considerations. The discussion is grounded in the provisions of the National Internal Revenue Code (NIRC) of 1997, as amended by subsequent laws such as the Tax Reform for Acceleration and Inclusion (TRAIN) Law (Republic Act No. 10963) and other relevant BIR issuances.

Legal Framework for Taxes in Real Estate Transactions

The taxation of real estate sales in the Philippines is primarily governed by the NIRC, specifically Sections 24(D), 27(D), and 196 for CGT and DST. These provisions classify real property as a capital asset unless it is held as ordinary asset (e.g., inventory in a real estate business). For most individual sellers, real estate is treated as a capital asset, triggering CGT upon sale.

The BIR administers these taxes, and failure to pay them can result in the transaction being deemed invalid for registration purposes with the Registry of Deeds. Additionally, the Local Government Code (Republic Act No. 7160) imposes local transfer taxes, but this article focuses solely on national taxes: CGT and DST.

Capital Gains Tax (CGT): Overview and Computation

What is CGT?

CGT is a tax on the gain or profit derived from the sale, exchange, or other disposition of real property classified as a capital asset. It is not a tax on the property itself but on the presumed or actual gain from the transaction. Under Philippine law, CGT applies to sales of land, buildings, and other real properties located in the Philippines, regardless of the seller's nationality or residence, as long as the property is within Philippine territory.

Rate and Basis of Computation

The CGT rate is a flat 6% applied to the higher of:

The gross selling price (GSP) as stated in the Deed of Absolute Sale (DOAS); or
The current fair market value (FMV), which is the higher of the zonal value set by the BIR or the assessed value determined by the local assessor's office.

For example, if a property is sold for PHP 5,000,000 but the zonal value is PHP 6,000,000, CGT would be 6% of PHP 6,000,000, amounting to PHP 360,000.

If the sale involves installment payments, CGT is computed on the entire selling price or FMV at the time of sale, not prorated over installments, unless the initial payments do not exceed 25% of the selling price, in which case it may qualify for installment reporting under certain conditions.

Who Pays CGT: Buyer or Seller?

Legally, the seller is liable for paying the CGT. This is because CGT is imposed on the income or gain realized by the seller from the disposition of the capital asset. The NIRC explicitly places the tax burden on the seller, who is considered the taxpayer deriving the benefit from the sale.

However, in practice:

Parties may negotiate and agree in the contract of sale (e.g., via a clause in the DOAS) that the buyer will shoulder the CGT. Such agreements are common, especially in buyer's markets or when the seller wants to maximize net proceeds.
Even if the buyer agrees to pay, the legal liability remains with the seller. The BIR can still pursue the seller for non-payment, penalties, and interest if the tax is not settled.
The buyer cannot register the transfer of title without proof of CGT payment, as the BIR issues a Certificate Authorizing Registration (CAR) only after CGT is paid.

Exemptions and Special Rules for CGT

Certain transactions are exempt from CGT, which can influence who effectively bears the cost:

Principal Residence Exemption: If the seller uses the proceeds to purchase or construct a new principal residence within 18 months, the sale may be exempt, provided the seller notifies the BIR and complies with escrow requirements (Revenue Regulations No. 13-99).
Corporate Sellers: For domestic corporations, CGT applies similarly, but if the property is an ordinary asset (e.g., for real estate developers), it is subject to regular income tax (up to 25% under CREATE Law, Republic Act No. 11534) instead of CGT.
Exchange of Properties: Tax-free exchanges under Section 40(C)(2) of the NIRC (e.g., in mergers or for shares of stock) may defer CGT.
Foreclosure Sales: In judicial or extrajudicial foreclosures, the mortgagor (seller) pays CGT on any gain, but special rules apply for deficiency judgments.
Non-Resident Sellers: Non-resident aliens or foreign corporations pay CGT, but withholding tax mechanisms apply, often handled by the buyer as withholding agent.

Penalties for non-payment include a 25% surcharge, 12% interest per annum, and compromise penalties, all borne ultimately by the seller unless otherwise agreed.

Documentary Stamp Tax (DST): Overview and Computation

What is DST?

DST is an excise tax imposed on documents, instruments, and papers evidencing certain transactions, including the sale or transfer of real property. In real estate sales, it applies to the DOAS or any instrument conveying title. It serves as a revenue measure to tax the privilege of executing such documents.

Rate and Basis of Computation

The DST rate for real property sales is 1.5% (or PHP 15 per PHP 1,000) based on the higher of:

The consideration or GSP as per the DOAS; or
The FMV (zonal or assessed value).

For instance, on a PHP 10,000,000 sale with a higher zonal value of PHP 12,000,000, DST would be 1.5% of PHP 12,000,000, equaling PHP 180,000.

DST must be paid within five days after the close of the month in which the taxable document was executed, but in practice, it is settled before obtaining the CAR.

Who Pays DST: Buyer or Seller?

The NIRC does not explicitly assign liability for DST to either party; it is imposed on the document itself. However, by convention and legal interpretation:

The seller is typically responsible for paying DST, as it is associated with the transfer of ownership initiated by the seller.
BIR Revenue Regulations (e.g., RR No. 26-2002) imply that the person making, signing, or issuing the document (often the seller) is liable.
In practice, similar to CGT, parties frequently negotiate for the buyer to pay DST, especially since the buyer handles registration. Clauses in the sales agreement can shift the burden.
If unpaid, the BIR can hold either party accountable, but the seller remains primarily liable. The buyer cannot proceed with title transfer without DST payment evidence.

Exemptions and Special Rules for DST

Government Transactions: Sales involving government entities may be exempt.
Certain Corporate Reorganizations: Similar to CGT, tax-free under Section 40 of the NIRC.
Installment Sales: DST is based on the full consideration, not installments.
Leases with Option to Buy: DST applies only upon exercise of the option.
Donations: Subject to donor's tax instead, but if disguised as a sale, DST may apply.

Non-payment incurs similar penalties as CGT: surcharges, interest, and potential invalidation of the document.

Procedural Aspects: Payment and Compliance

Steps in Paying CGT and DST

Execute the DOAS: Notarized document stating the terms, including tax allocation if agreed.
Secure Tax Clearances: Seller obtains real property tax clearance from the local treasurer and, if applicable, certificate of no improvement or other local requirements.
File with BIR: Submit BIR Form 1706 (for CGT) and pay via authorized agent banks or eFPS. For DST, affix stamps or use BIR Form 2000.
Obtain CAR: Issued by BIR after verifying payments, essential for Registry of Deeds registration.
Pay Local Transfer Tax: 0.5% to 0.75% of GSP or FMV, usually paid by buyer, but separate from CGT/DST.
Register the Deed: Buyer submits to Registry of Deeds, paying registration fees (often borne by buyer).

Withholding Tax Considerations

If the seller is engaged in real estate as a business (habitual seller), the buyer must withhold 5% creditable withholding tax (CWT) on the GSP, remitted using BIR Form 1606. This is in lieu of CGT for ordinary assets. For non-habitual sellers, no withholding is required for CGT, but DST remains separate.

Role of Notaries and Brokers

Notaries public must report notarized deeds to the BIR within five days, ensuring tax compliance. Real estate brokers (licensed under Republic Act No. 9646) often advise on tax allocation but cannot alter legal liabilities.

Practical Considerations and Common Issues

Negotiation and Contractual Agreements

While the seller is legally liable, market dynamics often lead to "net of tax" sales where the buyer absorbs all taxes to make the deal attractive. Such stipulations must be clear in the contract to avoid disputes. However, the BIR disregards private agreements for enforcement purposes.

Impact on Foreign Sellers and Buyers

Foreign sellers must appoint a local attorney-in-fact for BIR filings. Non-resident buyers face no direct CGT/DST liability but must ensure compliance for title transfer.

Tax Avoidance vs. Evasion

Structuring sales to minimize taxes (e.g., via donations or corporate vehicles) is legal if compliant, but misdeclaring values constitutes evasion, punishable under the NIRC with fines up to PHP 100,000 and imprisonment.

Recent Developments and Reforms

Under the TRAIN Law, the CGT rate remained 6%, but FMV bases were updated. The CREATE Law reduced corporate rates but did not alter CGT for individuals. BIR issuances like Revenue Memorandum Circular No. 27-2021 clarify online transactions, potentially applying to digital real estate sales.

Consequences of Non-Compliance

Unpaid taxes lead to liens on the property, preventing future sales. The BIR can assess deficiencies via audits, with a three-year prescription period (extendable to 10 years for fraud).

Conclusion

In Philippine real estate sales, the seller is primarily responsible for both CGT and DST, reflecting the principle that taxes on gains and transfers burden the party realizing the benefit. However, contractual flexibility allows shifting costs to the buyer, a common practice to facilitate deals. Parties should consult tax professionals or lawyers to navigate exemptions, computations, and procedures accurately. Proper compliance not only avoids penalties but also ensures smooth property title transfer, safeguarding investments in the dynamic Philippine real estate sector.