New Rule: Lease of Residential Units Exempt From VAT & Exempt From The 3% Percentage Tax

Revenue Regulations (RR) No. 13-2018 are Regulations Implementing the Value-Added  Tax Provisions under the Republic Act (RA) No. 10963, or the “Tax Reform for Acceleration and Inclusion (TRAIN),” Further Amending Revenue Regulations (RR) No. 16-2005 (Consolidated Value-Added Tax Regulations of 2005), as Amended.

Taxpayers and other concerns need to know the updates with regards to tax rule in Lease of Residential Units. In these regulations, Lease of Residential Units is considered as VAT Exempt Transactions stated in Sec. 4. 109-1, B (q) as follows:

(q) Lease of residential units with a monthly rental per unit not exceeding Fifteen Thousand Pesos (P15,000.00). 

The foregoing notwithstanding, lease of residential units where the monthly rental per unit exceeds Fifteen Thousand Pesos (P15,000.00), but the aggregate of such rentals of the lessor during the year do not exceed Three Million Pesos (P3,000,000.00) shall likewise be exempt from VAT; however, the same shall be subject to three percent (3%) percentage tax under Section 116 of the Tax Code. 

In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per unit of not exceeding P15,000.00 while others are leased out for more than P15,000.00 per unit, his tax liability will be as follows:

1. The gross receipts from rentals not exceeding P15,000.00 per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts. It is also exempt from the 3% percentage tax. 

2. The gross receipts from rentals exceeding P15,000.00 per month per unit shall be subject to VAT if the aggregate annual gross receipts from said units only exceeds P3,000,000.00. Otherwise, the gross receipts will be subject to the 3% tax imposed under Section 116 of the Tax Code.

In case of mixed transactions, the above-mentioned rule should be observed. 

The term ‘residential units’ shall refer to apartments and houses & lots used for residential purposes, and buildings or parts or units thereof used solely as dwelling places (e.g., dormitories, rooms and bed spaces) except motels, motel rooms, hotels and hotel rooms, lodging houses, inns and pension houses. 

The term ‘unit’ shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent.

Please refer https://www.bir.gov.ph/images/bir_files/internal_communications_1/Full%20Text%20RR%202018/RR%20No.%2013-2018%20Corrected%20Copy.pdf of the full text of RR No. 13-2018 and illustrations.

Lease of Residential Units Exempt From VAT

Under SEC. 4.109-1 VAT-Exempt Transaction (B) Exempt Transactions - (q) Lease of residential units with a monthly rental per unit not exceeding Ten Thousand Pesos (P10,000.00), regardless of the amount of aggregate rentals received by the lessor during the year; Provided, that not later than January 31, 2009 and every three (3) years thereafter, the amount of P10,000.00 shall be adjusted to its present value using the Consumer Price Index, as published by the NSO;

The foregoing notwithstanding, lease of residential units where the monthly rental per unit exceeds Ten Thousand Pesos (P10,000.00) but the aggregate of such rentals of the lessor during the year do not exceed One Million Five hundred Pesos (P1,500,000.00) shall likewise be exempt from from VAT, however, the same shall be subjected to three percent (3%) percentage tax.

In cases where a lessor has several residential units for lease, some are leased out for a monthly rental per unit not exceeding P10,000.00 while others are leased out for more than P10,000.00 per unit, his tax liability will be as follows:

1. The gross receipts from rental not exceeding P10,000.00 per month per unit shall be exempt from VAT regardless of the aggregate annual gross receipts.

2. The gross receipts from rental exceeding P10,000.00 per month per unit shall be subject to VAT if the aggregate annual gross receipts from said units only (not including the gross receipts from unit leased for not more than P10,000.00) exceeds P1,500,000.00. Otherwise, the gross receipts will be subject to the 3% tax imposed under Section 116 of the Tax Code.

The term 'residential units' shall refer to apartments and house & lots used for residential purposes, and building or parts or units thereof used solely as dwelling places (e. g., dormitories, rooms and bed spaces) except hotels, motel rooms, hotels and hotel rooms.

The term 'unit' shall mean an apartment unit in the case of apartments, house in the case of residential houses; per person in the case of dormitories, boarding houses and bed spaces; and per room in case of rooms for rent.

However, the bureau has issued the Revenue Regulations No. 3-2012 of the Effectivity of Threshold Amounts for Sales of Residential Lot, Sales of House and Lot, Lease of Residential Unit and Sales or Lease of Goods or Properties or Performance of Services covered by Section 109 (P), (Q) and (V) of the Tax Code of 1997, as amended.

The threshold amounts has been adjusted as follows:

1. Section 109 (P) - from P1,500,000.00 to P1,919,500.00

2. Section 109 (P) - from P2,500,000.00 to P3,199,200.00

3. Section 109 (Q - Lease of Residential Units) - from P10,000.00 to P12,800.00

4. Section 109 (V) - from P1,500,000.00 to P1,919,500.00

The new threshold amount was made effective for instrument of sale (whether the instrument is nominated as a deed of absolute sale, deed of conditional sale or otherwise) is executed and notarized on or after January 1, 2012.

Value Added Tax (VAT) on Lease of Real Property (Commercial and Residential Units)

In general, all forms of lease of properties held primarily for lease to customers in the ordinary course of trade or business, whether personal or real, shall be subject to 12% Value Added Tax (VAT), except or unless the gross annual receipts of the lessor do not exceed P1,919,500 and is non-vat registered shall be subject to 3% percentage tax under Section 116 of the Tax Code

Gross receipts from lease of commercial units are subject to 12% VAT if the property leased is located in the Philippines regardless of the place where the contract of lease or licensing agreement was executed.

In a lease contract, advance payment by the lessee may be: a loan to the lessor from the lessee, an option money for the property, and a security deposit to insure the faithful performance of certain obligations of the lessee to the lessor are not be subject to VAT. But a security deposit that is applied to rental is subject to VAT at the time of application. A prepaid rental is subject to VAT to the lessor in the month when received, regardless of the accounting method applied by the lessor.

While, the gross receipts from lease of "residential units" are subject to the following rules: If the monthly rental is not more than P12,800 per unit, per month, regardless of the aggregate annual rentals and if the monthly rental is more than P12,800 per unit, per month but the aggregate annual rentals do not exceed P1,919,500 are VAT exempt subject to 3% percentage tax under Section 116 of the Tax Code. However, if the monthly rental exceed P12,800 per unit, per month and the aggregate annual rentals exceed P1,919,500 shall be subject to 12% Value Added Tax (VAT). Provided, every 3 years thereafter, the amount shall be adjusted to its present value using the Consumer Price Index, as published by the NSO; Provided, further, that such adjustment shall be published through revenue regulations to be issued not later than March 31 of each year.

References: Revenue Regulations No. 16-2005 and Revenue Regulations No. 16-2011 which took effect  November 1, 2005 and January 1, 2012, respectively.

Please refer: http://philippinetaxtalk.blogspot.com/2018/06/new-rule-lease-of-residential-units.html of New Rule: Lease of Residential Units Exempt From VAT & Exempt From 3% Percentage Tax.