Who Should Pay Capital Gains Tax?

Who Should Pay Capital Gains Tax? Understanding the Buyer's and Seller's Responsibilities

In real estate transactions, Capital Gains Tax (CGT) is a key component that both buyers and sellers must consider. The Bureau of Internal Revenue (BIR) defines CGT as a tax imposed on the presumed gains realized by the seller from the sale, exchange, or disposition of capital assets. In Palawan, particularly in high-demand areas like San Vicente, CGT can be a source of confusion and potential conflict, especially when it comes to deciding who should bear the responsibility of paying this tax.

Understanding the intricacies of CGT and how it affects property transactions can help both buyers and sellers navigate this aspect smoothly and avoid misunderstandings. In this article, we’ll explore the role of CGT, how it impacts real estate transactions in Palawan, and who typically shoulders the cost.

What is Capital Gains Tax (CGT)?

Capital Gains Tax (CGT) is a tax levied on the presumed profit made by a seller when disposing of real estate property. Interestingly, this tax applies whether the seller actually makes a profit or not—hence, the term “presumed gains.”

In the Philippines, the CGT rate is set at 6% of the selling price or the property's fair market value, whichever is higher. CGT is crucial for transferring ownership and registering the sale with the appropriate government agencies, ensuring the buyer’s rights are safeguarded.

Who Should Pay CGT?

In the context of Capital Gains Tax (CGT), presumed gains refer to the assumption by tax authorities that the seller has made a profit from the sale of a capital asset, such as real estate, regardless of whether an actual profit was realized. This means that the tax is based on the assumption that the seller has gained from the sale, even if the property was sold at a loss or at the same price it was purchased.

For example, if you sell a property in the Philippines, the Bureau of Internal Revenue (BIR) will impose CGT based on the presumed gain from the transaction. The tax is calculated as 6% of either the selling price or the fair market value (determined by the government), whichever is higher, regardless of how much profit the seller made or if there was a loss.

Even if a seller sold their property at the same price they originally bought it for, or for less, they still owe CGT based on the presumed gain. This concept ensures that the government collects tax revenue from all property transactions, regardless of the seller's actual financial outcome.

In theory, the seller is responsible for paying the Capital Gains Tax, as it is the seller who is presumed to benefit from the sale of the property. However, in practice, the responsibility of paying CGT can vary depending on the terms of the sale and the agreement between the buyer and seller. Here are the typical scenarios:

1. When the Buyer Pays CGT

In some cases, the buyer is required to shoulder the CGT. This is especially common when properties are marketed with a price that is "NET of all taxes, fees, and incidental expenses." In this scenario, the asking price does not include CGT or other taxes, meaning the buyer is responsible for paying these additional costs on top of the agreed sale price.

Common scenarios where the buyer pays CGT:

• The property is marketed as "NET" of all taxes, which implies that the buyer is responsible for covering the taxes, including CGT.
• The sales agreement explicitly states that the seller will not cover CGT, leaving the buyer responsible for it.
• In some regions like Palawan, especially in hot real estate markets such as San Vicente, El Nido, and Coron, it is often customary for the buyer to cover these additional costs to expedite the transaction.

2. When the Seller Pays CGT

In more traditional arrangements, the seller is responsible for paying CGT since it is a tax on their presumed gains from the sale. In this case, the seller may have factored the CGT into the selling price, ensuring that the net proceeds from the sale meet their expectations even after paying the required taxes.

Common scenarios where the seller pays CGT:

• The asking price includes an allowance for CGT, meaning the seller has already accounted for the tax when setting the price.
• The sales agreement specifies that the seller will cover all taxes, including CGT, to simplify the transaction for the buyer.
• In some negotiated agreements, the seller takes responsibility for CGT to make the sale more appealing to potential buyers.

In Reality...

In most property transactions, the buyer often ends up bearing the burden of paying the Capital Gains Tax (CGT). This comes down to pricing strategies used by the seller. A seller can offer the property at a "NET" price, which explicitly means they are not covering the CGT, leaving the buyer responsible for paying it. Alternatively, a seller might claim they will pay the CGT, but in reality, they’ve already factored the tax into the selling price.

For example, if a property is listed at ₱10,000 per square meter on a "NET of taxes" basis, the buyer must cover the CGT. However, the seller could also list the property at ₱11,000 per square meter, claiming they will pay the CGT. But in this case, the CGT on ₱10,000 per square meter is only ₱600 per square meter (6% of the selling price), meaning the seller is pocketing an additional ₱400 per square meter as extra profit.

For buyers, this highlights an important tip: if you’re offered a "NET" price, it’s often more transparent and potentially cheaper to pay the taxes yourself. By understanding this pricing strategy, buyers can avoid hidden markups and might save money by opting for properties sold at a "NET" price instead of those where taxes are included.

CGT in Palawan: Understanding Local Practices

In Palawan, particularly in areas like San Vicente, where real estate demand is growing due to its potential for tourism and development, properties are often marketed "NET" of taxes. This means that the advertised price excludes taxes and fees, which are left for the buyer to handle. While this is common practice, it can sometimes lead to misunderstandings or disputes, especially if buyers are unaware of these additional costs.

For instance, buyers unfamiliar with the local market may feel that they are being taken advantage of when they learn that they must cover the CGT, on top of other taxes and fees. However, it’s important to recognize that paying these taxes is crucial for the buyer to complete the transaction and transfer ownership of the property legally. Without paying the CGT, the title cannot be transferred, and the buyer will not have full ownership rights.

Why Understanding CGT is Essential for Buyers

For buyers, CGT is not just another expense—it is a critical part of the property transaction process. Failing to pay CGT will prevent the transfer of ownership from being legally recognized, leaving the buyer without full control over the property. In Palawan’s competitive real estate market, buyers who are aware of this responsibility are better positioned to negotiate and complete their transactions without delays.

Reasons why buyers should understand CGT:

• Ownership Transfer: CGT must be paid to facilitate the proper transfer of ownership. Without this payment, the title cannot be registered under the buyer’s name.
• Clear Expectations: Understanding who should pay CGT helps avoid misunderstandings between buyers and sellers, ensuring that both parties are on the same page from the start of the negotiation.
• Legal Compliance: Failure to pay CGT can result in legal issues, including delays in title transfer and penalties from the Bureau of Internal Revenue (BIR).

Tips for Buyers and Sellers Regarding CGT

1. Negotiate Terms Early: Make sure that the responsibility for paying CGT is clearly discussed and agreed upon before finalizing the sale. This prevents any disputes later in the transaction process.

2. Understand Local Practices: In areas like San Vicente, Palawan, where the practice is often for the buyer to pay CGT, it’s important to factor this into your budget. Consider working with a real estate professional who is familiar with local customs to ensure a smooth transaction.

3. Seek Legal Advice: Both buyers and sellers should consult with a real estate lawyer to ensure that all tax-related responsibilities are clearly outlined in the contract. This will help prevent any confusion or legal disputes over who should pay CGT and other related taxes.

4. Use a Clear Sales Agreement: The Contract to Sell and/or the Deed of Sale should clearly indicate whether the selling price is "NET" of taxes or if it includes allowances for taxes such as CGT. Ensure that both parties agree to the terms and that everything is properly documented and notarized.

Who Ultimately Benefits?

While the seller may be the one presumed to benefit from the sale of the property and therefore responsible for paying CGT, it’s important to recognize that the ultimate benefactor of paying CGT is the buyer. This is because, without paying the CGT, the buyer cannot transfer the ownership of the property into their name. Ensuring that all taxes are paid and the proper legal processes are followed protects the buyer’s rights and secures their investment.

In Palawan’s growing real estate market, understanding CGT and clarifying who is responsible for paying it is crucial for a smooth and transparent transaction. By being informed and prepared, both buyers and sellers can avoid disputes and ensure that the transaction proceeds without unnecessary delays.