DOF: Property rentals below P10,000 to remain VAT-free

Low-income renters and small property owners will be shielded from the impact of the Duterte administration's tax reform program as real property rentals at P10,000 or below will remain value-added tax (VAT) exempted, according to the Department of Finance (DOF).

“The lease today, if it is below P10,000, is VAT free, then above P10,000, that is VATable. Halimbawa po nag-lease po tayo ng condo unit or town house for P10,000, so every year P120,000. Ayon naman po sa ating proposal kapag ‘yung nag papaupa ay may gross sales below P3 million, kasi ‘yan po ‘yung VAT threshold, that is exempt,” Finance Undersecretary Karl Kendrick Chua said in a statement.

“Sa isang nagpapaupa na let’s say has 25 units at P10,000 per month, pasok po ito sa VAT threshold so that is still exempt. Siyempre kung ikaw talaga ay nagnenegosyo na maraming unit isang daan, dalawang daan na unit sa isang condominium siyempre dapat magbayad po ng VAT kasi para patas," Chua added.

The old VAT threshold of P1.9 million based on gross sales will be raised to P3 million under House Bill 5636, the substitute Comprehensive Tax Reform (CTRP) bill also known as the Tax Reform for Inclusion and Acceleration Act, currently undergoing plenary deliberations in the House of Representatives. 

Chua noted that “the price increase will only be slight and will remain affordable for buyers because even if the 12 percent VAT is applied on low-cost and socialized real estate developments, the tax increase will actually be only around four percent because VAT inputs can be credited instead of the usual practice of padding the final price to offset the cost of input VAT.”

“Assuming a 50-percent markup for low-cost housing developers, the price increase for a P1 million house will be only P37,000, which is just 3.7 percent of P1 million,” he said.

He said removing the VAT-exempt privilege of housing developers will stop their practice of raising the final selling price of socialized or low-cost housing units in order for them to indirectly pass on VAT inputs they had paid for the construction of the units to house buyers.

“Now if we remove their VAT exempt privilege, then they can already credit all their VAT inputs and they will no longer need to pass on their added costs in the final price of the housing unit. That’s why our estimate is that the increase in the final price is only 4 percent and not 12 percent because the input VAT can now be credited, and the less the markup of developers, the lower the additional increase” Chua said.

Chua said the abuse of the VAT-free privilege by property developers results in large tax leakages that could have otherwise been used to help the poor buy low-cost housing units by means of targeted subsidies.

“The transfer pricing scheme employed by some property developers to avoid paying VAT, such as moving the input VAT from exempt to VATable sales lead to massive leakages, which is currently the subject of BIR audits,” Chua said.

Many developers also abuse the VAT threshold by selling condo and land parcels below the VAT threshold to avoid the tax and combining the properties later on, he added.

In lieu of tax exemptions that only rich property developers get to enjoy, Chua said a better strategy is to transfer this benefit directly to poor and low-income house buyers by way of targeted subsidies.

The substitute bill or HB 5636, which contains moderate modifications to Package One of the CTRP, removes the VAT exemptions specified in special laws, except for raw food, health and education and those granted to seniors and persons with disabilities.

HB 5636 consolidated the mother bill HB 4774, authored by Rep. Dakila Carlo Cua, chairman of the House of Representatives Ways and Means panel, with 54 other similar tax reform measures. —ALG, GMA News