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TRJ 2010 Vol XXII No 1: Study on the Exemption from Capital Gains Tax of Gains Derived from the Sale, Exchange or Other Disposition of Principal Residence, January - February 2010

The study analyzes the above provision of the NIRC. It seeks to determine the extent of availment of this provision by concerned property owners as well as the amount of revenue foregone by the government since its implementation. The study also discusses the problems encountered in the implementation of this provision and recommends measures to address them. The study also examines the proposal under the Land Administration and Management Project (LAMP) to base the exemption on the area of the disposed principal residence. In relation to this, the study considers the merits and demerits of the proposal and looks into the possibility of amending the prevailing provision of the NIRC. One of the foremost problems with the CGT exemption provision of the NIRC is that not all taxpayers are aware or knowledgeable about the availment procedures. This is manifested in the data on the number of transactions involving principal residences that were exempted from the CGT, interview with the BIR official and results of the NTRC’s 2007 tax perceptions survey. Another factor that might have discouraged individuals from availing of the CGT exemption is the submission of various documentary requirements. While these requirements are made to ensure that only those who are really qualified are entitled to the exemption, they pose as a disincentive to taxpayers due to the inconvenience imposed on them. Another condition that may pose a problem is the full utilization of the sale proceeds to avail of the exemption. It should be noted that the amount of CGT due on the sale or transfer transaction is deposited in the escrow account opened in the Authorized Agent Bank (AAB) to ensure its payment in case the taxpayer fails to satisfy the utilization condition. The condition also works against the optional utilization of sale proceeds in the manner deemed more beneficial by the taxpayer. The CGT exemption of the gains derived from the sale, exchange or disposition of principal residence does not appear to be appreciated by concerned property owners. This is so as only a handful of taxpayers has taken advantage of it. While this phenomenon may be due to the rarity of transactions in principal residences, it could also be that not many taxpayers are well-informed about the exemption or if they are informed, they just forego the privilege as they are not willing to comply with the numerous conditions and documentary requirements prescribed for the exemption. There is merit in the proposal under the LAMP to automatically exempt owners of common/small principal residences for the reason that it will not only ease the administration and monitoring concerns of the BIR but also lessen the cost of compliance of taxpayers as they need not go through the tedious process of securing supporting documents, opening of escrow account, payment of taxes and other fees and submitting post documentary requirements. However, basing the CGT exemption of gains derived from the sale of principal residence on the land area of the principal residence may violate the principle of equity as those who will likely benefit from this are urban residential property owners whose areas of principal residence may be small but the market values of which are very high. Vertical equity dictates that individuals with more ability to pay taxes should pay more than those with limited capacity to pay. This option may put rural residential property owners at a disadvantageous position because their principal residence may have bigger land areas and thus still need to qualify for the CGT exemption even if the values of their principal residences are lower than those in urban areas. It is therefore recommended to make the CGT exemption value-based rather than area-based. Due, however, to the various factors to be considered in this option, a separate paper may have to be done on this aspect. Attached to the proposed automatic exemption is the removal of conditions, the most significant of which, is the reinvestment of the proceeds of the sale on another principal residence. This will give taxpayers the liberty to dispose in any manner they wish the proceeds of the sale of their principal residence to boost the property or capital market, among others. Maintaining the conditions, on the other hand, for certain property owners is necessary in order to preclude instances of leakages/abuses. The practices in other countries as noted in this study are also worth considering if the subject provision of the NIRC is to be amended. Factors such as period of residency, distinction between principal residences that are also used for business purposes and those solely for residential purposes and the rollover relief or deferral of the CGT which allows some degree of financial ease to the concerned property owners may be worth considering.

National Tax Research Center
Authors Keywords
National Tax Research Center; tax exemption; taxation; Philippines; economic models; industry; capital gains; capital gain tax;
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Published in 2010 and available in the NTRC library or Downloaded 195 times since November 25, 2011
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