Introduction

In the Philippines, the sale of real property triggers several fiscal obligations, including taxes that ensure the government collects revenue from such transactions. Among these is the transfer tax, a local government-imposed levy that plays a crucial role in the conveyance of property ownership. This tax is distinct from national taxes like the Capital Gains Tax (CGT) and Documentary Stamp Tax (DST), as it falls under the jurisdiction of local government units (LGUs) such as provinces, cities, and municipalities. Understanding who bears the responsibility for paying this tax is essential for buyers, sellers, real estate professionals, and legal practitioners to ensure compliance and avoid disputes.

This article provides a comprehensive examination of the transfer tax in the context of real property sales under Philippine law. It covers the legal framework, liability determination, computation methods, payment procedures, exemptions, common practices, and potential penalties for non-compliance. While the law primarily assigns liability to one party, practical considerations often influence how the burden is shared.

Legal Basis for the Transfer Tax

The transfer tax on real property sales is governed by the Local Government Code of 1991 (Republic Act No. 7160, or RA 7160). Specifically, Section 135 of RA 7160 authorizes provinces, cities, and municipalities to impose a tax on the transfer of real property ownership. This provision states:

"The province may impose a tax on the sale, donation, barter, or on any other mode of transferring ownership or title of real property at the rate of not more than fifty percent (50%) of one percent (1%) of the total consideration involved in the acquisition of the property or of the fair market value in case the monetary consideration involved in the transfer is not substantial, whichever is higher."

For cities within the Metropolitan Manila Area, the rate is capped at seventy-five percent (75%) of one percent (1%) under the same code. This tax is levied on the act of transferring ownership, regardless of whether the transfer is through sale, donation, barter, or inheritance (though inheritance may have separate rules under national laws).

It is important to note that the transfer tax is a local tax, meaning its implementation can vary slightly across LGUs based on their respective ordinances. However, these ordinances must align with the limits set by RA 7160 and cannot exceed the prescribed rates or impose additional burdens contrary to national policy.

In addition to RA 7160, related laws such as the National Internal Revenue Code (NIRC) as amended by the Tax Reform for Acceleration and Inclusion (TRAIN) Law (RA 10963) and the Comprehensive Tax Reform Program influence the overall tax landscape for property transfers, though they primarily address national taxes.

Determination of Liability: Who Pays the Transfer Tax?

Under Philippine law, the primary liability for the transfer tax rests with the seller or transferor. Section 135 of RA 7160 explicitly imposes the tax on the "seller, donor, transferor, executor, or administrator." This means that in a standard sale of real property, the seller is legally obligated to pay the transfer tax.

The rationale behind this assignment of liability is rooted in the principle that the tax is on the privilege of transferring ownership. The seller, as the party relinquishing title, is seen as the one exercising this privilege. This is consistent with other jurisdictions where transfer taxes or stamp duties are often seller-borne.

However, the law does not prohibit parties from agreeing otherwise through contractual stipulations. In practice, it is common for sales agreements (e.g., Deed of Absolute Sale) to include clauses shifting the burden to the buyer. Such agreements are enforceable under the Civil Code of the Philippines (RA 386), particularly Article 1306, which allows parties to stipulate terms not contrary to law, morals, good customs, public order, or public policy. Since shifting the tax payment does not violate any prohibitory law, courts generally uphold these provisions.

For instance, in many real estate transactions, especially in developer-led sales of subdivisions or condominiums, the purchase agreement may specify that the buyer assumes all transfer taxes, fees, and registration costs. This is often done to make the net proceeds more predictable for the seller. Buyers, particularly first-time purchasers, should carefully review these clauses to avoid unexpected financial burdens.

In cases involving estates or inheritances, the executor or administrator is liable, but the tax may ultimately be deducted from the estate's assets before distribution to heirs. For corporate sellers, the tax is a corporate expense, paid from company funds.

Computation of the Transfer Tax

The transfer tax is computed based on the higher of two values: the total consideration (selling price) or the fair market value (FMV) of the property. The FMV is typically determined by the LGU's schedule of market values, which is updated periodically through ordinances, or by the Bureau of Internal Revenue's (BIR) zonal valuations for national tax purposes. LGUs may adopt the BIR zonal values if they lack their own assessments.

The formula is straightforward:

Transfer Tax = Rate × (Higher of Selling Price or FMV)

Rates vary by LGU type:

Provinces: Up to 0.5% (50% of 1%).
Cities outside Metro Manila: Up to 0.5%.
Cities in Metro Manila: Up to 0.75% (75% of 1%).

For example, in a sale of a property in Quezon City (Metro Manila) with a selling price of PHP 5,000,000 and an FMV of PHP 6,000,000, the tax would be 0.75% of PHP 6,000,000, equaling PHP 45,000.

If the transaction involves no monetary consideration (e.g., donation), the tax is based solely on the FMV. Partial considerations are treated similarly, using the higher value.

Payment Process and Requirements

Payment of the transfer tax is a prerequisite for the registration of the transfer with the Registry of Deeds (RD), as mandated by the Property Registration Decree (Presidential Decree No. 1529). The process typically involves:

Execution of the Deed: The parties execute a Deed of Absolute Sale or similar instrument, notarized by a notary public.
Payment of National Taxes: Before local taxes, the seller must settle CGT (6% on the higher of selling price, FMV, or zonal value) and DST (1.5% on the same base) with the BIR, obtaining a Certificate Authorizing Registration (CAR).
Local Assessment: Present the CAR, deed, and other documents (e.g., tax declarations, clearances) to the local treasurer's office for assessment of the transfer tax.
Payment: Pay the assessed amount, often in cash or via bank draft, and obtain an official receipt.
Registration: Submit the paid receipt and documents to the RD for title transfer.

The buyer usually handles the logistics of payment and registration to secure the new title promptly, even if the seller is liable. Delays in payment can result in surcharges and interest, typically 2% per month under local ordinances.

Exemptions and Special Cases

Certain transactions are exempt from transfer tax under RA 7160 and related laws:

Government Transfers: Sales to or by the national government, its agencies, or LGUs are exempt.
Socialized Housing: Transfers under the Urban Development and Housing Act (RA 7279) for low-cost housing may be exempt or subject to reduced rates.
Foreclosures: Judicial or extrajudicial foreclosures may defer the tax until redemption or further sale.
Mergers and Consolidations: Corporate reorganizations under Section 40 of the NIRC may qualify for exemptions if no gain is realized.

Special cases include:

Installment Sales: Tax is due upon execution of the deed, based on the full value, not installments.
Condominium Units: Treated similarly to land, but with considerations for common areas.
Agricultural Land: Subject to additional rules under the Comprehensive Agrarian Reform Law (RA 6657), where transfers may require Department of Agrarian Reform clearance, and taxes could be adjusted.
VAT-Exempt Sales: If the sale is VAT-exempt (e.g., residential lots below PHP 1.5 million), it still incurs transfer tax.

Common Practices and Disputes

In real estate practice, the "who pays" question often leads to negotiations. Sellers may insist on net pricing, where buyers absorb all taxes, while buyers seek concessions. Real estate brokers and lawyers play key roles in advising on these matters.

Disputes arise when agreements are ambiguous. Courts, guided by the Civil Code, interpret contracts based on parties' intentions (Article 1370). If silent on taxes, the default legal liability (seller) applies. The Supreme Court has ruled in cases like Commissioner of Internal Revenue v. Court of Appeals (G.R. No. 124043, 1998) that tax liabilities are personal unless contractually shifted.

Consequences of Non-Payment

Failure to pay the transfer tax can result in:

Non-Registration: The RD will not issue a new title, leaving the buyer without legal ownership.
Penalties: Surcharges (up to 25% of the tax), interest (2% per month), and potential liens on the property.
Criminal Liability: Willful evasion may lead to fines or imprisonment under the Local Government Code and Anti-Graft laws.
Civil Actions: Parties may sue for breach of contract if one fails to pay as agreed.

Conclusion

The transfer tax in real property sales under Philippine law is fundamentally the seller's responsibility, as established by RA 7160. However, contractual flexibility allows parties to allocate this burden differently, reflecting the practical realities of transactions. Comprehensive knowledge of this tax ensures smooth conveyances, compliance with local ordinances, and avoidance of legal pitfalls. Stakeholders are advised to consult updated LGU ordinances and seek professional legal advice for specific cases, as rates and procedures may evolve with fiscal policies. By addressing this tax proactively, buyers and sellers can facilitate efficient property transfers while contributing to local development through revenue generation.