HE LOST P10.7MN, JUST LIKE THAT

Once upon a time, a buyer was offered a pre-selling office space in the heart of the city.

The buyer only owned residential units, and commercial units were completely new to him. At that time, office spaces seemed like a smart alternative: longer lease terms compared to residential leases, capital and operational expenses involved, and minimized credit risk as long as you rent out to a reputable company.

So, the buyer took the bait and invested Php 100 Mn in an office space. In the documents, he put his personal name as the buyer. Just like that, he lost Php 10.7 Mn of his money.

The end.

Do you understand how the buyer lost P10.7 Mn?

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Value Added Tax (VAT)

VAT is designed to be paid only by the end consumer. Here's how it works: when a business buys raw materials, it pays VAT on those purchases. However, the business can later claim a refund on this VAT, as it is considered a "VAT input."

Example of VAT in Action

Suppose you own a restaurant and purchase P112,000 worth of meat, which includes P12,000 VAT (known as the "VAT Component"). The P12,000 paid to the meat seller can be used as a tax-deductible ("VAT input"). When a customer buys a burger from your restaurant for P448 (P400 for the burger + P48 VAT), you need to pay the P48 VAT to the Bureau of Internal Revenue (BIR) by the 20th of the following month. However, since you have a P12,000 VAT input, you subtract the P48 VAT collected from customers, leaving you with a remaining VAT input of P11,952. In this way, only the end consumer is ultimately taxed, while businesses in the supply chain can refund the VAT they’ve paid.

The Buyer’s VAT Loss

When the developer sold the property, the purchase included a VAT component (P89.3 Mn VAT-ex price + P10.7 Mn VAT Component = P100 Mn). To get a refund on the VAT paid, the buyer needs to be VAT-registered and conducting business. However, by putting the title under his personal name, the buyer essentially identifies himself as the end consumer, making him ineligible for a VAT refund.

Takeaway

This scenario highlights the importance of understanding the tax implications of commercial property transactions. Sellers, including in-house brokers, should be well-versed in what they are selling and the associated tax consequences to avoid costly mistakes like the one described above.

Note: Other commenters on Tuesday's post are correct—this VAT input issue is only the tip of the iceberg. By putting a commercial asset in his name, he just tagged himself as someone who is "engaged in RE business." This means all his properties (even the house he lives in) will be tagged as "used for business" (i.e., VAT-able).