Koko’s primary source of income is his employment with the government. He earns extra from the land he inherited from his parents, and which land he has been leasing to a private, non-stock, non-profit school since 2005.
Last January, the school offered to buy the land from Koko for an amount equivalent to its zonal value plus 15% of such zonal value. Koko agreed but required the school to pay, in addition to the purchase price, the 12% VAT. The school refused Koko’s proposal to pass on the VAT contending that it was an entity exempt from such tax. Moreover, it said that Koko was not regularly engaged in the real estate business and, therefore, was not subject to VAT. Consequently, Koko should not charge any VAT to the school.
(a) Is the contention of the school correct? (2.5%)
(b) Will your answer be the same if Koko signed up as a VAT-registered person only in 2017? (2.5%)
Suggested answer only. Not an official answer and not legal advice.
**Answer:** (a) No, the school's contention is **incorrect**. (b) Yes, the answer changes if Koko is **VAT-registered**. **Legal Basis:** VAT is an **indirect tax** shifted to the buyer as part of the purchase price, so a
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Quick check
Why can an exempt educational institution NOT refuse to pay passed-on Value-Added Tax charged by a seller?
As an indirect tax, Value-Added Tax is shifted to the buyer, meaning a buyer cannot invoke personal tax exemptions against passed-on tax.
Under Section 106(A)(1)(a) of the Tax Code, when is a sale of real property by an individual subject to Value-Added Tax?
Real property sales are subject to Value-Added Tax if made by a VAT-registered person or one engaged in the real estate business.
What is the tax consequence if a non-VAT-registered individual who leases inherited land makes an isolated sale of that land?
An isolated sale of leased land by an unregistered individual not regularly in the real estate business is exempt from Value-Added Tax.
How does voluntary registration as a VAT-registered person under Section 236(H) affect the sale of leased real property?
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Who is the taxpayer legally liable to pay the output Value-Added Tax to the Bureau of Internal Revenue?
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Learn more about these topics
1. Indirect Tax Nature
Under Section 105 of the National Internal Revenue Code, Value-Added Tax is an indirect tax that can be shifted or passed on by the seller to the buyer as part of the purchase price. A tax exemption enjoyed by a buyer, such as an exempt educational institution, applies only to direct taxes for which the buyer is directly liable. Consequently, a buyer cannot invoke its personal tax exemption to avoid paying passed-on Value-Added Tax incorporated into the purchase price by a VAT-registered seller.
2. Real Property VAT
Under Section 106(A)(1)(a) of the Tax Code, Value-Added Tax applies to sales of real property held primarily for sale to customers or held for lease in the ordinary course of trade or business. An isolated sale of real property by an individual who is not regularly engaged in the real estate business is generally treated as a capital transaction exempt from Value-Added Tax. However, if the seller is registered as a VAT taxpayer, the sale of leased property held for business becomes subject to Value-Added Tax.
3. Voluntary VAT Registration
Under Section 236(H) of the Tax Code, any person who is not required to register for Value-Added Tax may elect to register as a VAT-registered person. Once an individual voluntarily registers under the Value-Added Tax system, all taxable sales of goods, properties, or services made in the course of trade or business, including the sale of real property held for lease, become subject to twelve percent output Value-Added Tax regardless of whether the transaction is regular or isolated.