Net Proceeds Calculation

Here's another tricky scenario...

After a lengthy discussion with the seller about why it will be subjected to VAT, he asks how much he would receive as net proceeds.

Will you...

Option 1: Send him the computation for net proceeds after deducting CWT and VAT.

Option 2: Send him the computation for net proceeds after deducting CWT and VAT, and include a note that the net proceeds are still subject to approximately 30% income tax.

Option 3: Advise him to simply advertise a "net pricing."

Take note: Choosing option 2 will likely result in the seller not pursuing the sale.

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The poll results are in! Will you inform the seller that they still have to pay income tax after paying VAT and CWT?

Out of the 7 people who participated, six said they would inform the seller about their liability for income tax.

The low participation rate highlights how tricky this situation is.

Option 1 is a safe choice because, as brokers, our involvement in the seller’s taxation is limited to the sale. We don't know what expenses the seller might declare to minimize taxable income (e.g., acquisition cost of the property). This is a technical area that requires an accountant's expertise.

It's also possible that the seller never finds out about the pending income tax bill. Unless the BIR sends them a letter (which is rare), the only way they would find out is if they request an "open case report" from the BIR.

[I'm not sure if the BIR tends to pursue the seller's estate for unpaid taxes. Does anyone have insight on this?]

Option 2 is the choice a cautious person would make (like myself). We want to avoid any issues with sellers later accusing us of providing incorrect calculations. The downside of this option is that sellers might be deterred from completing the sale upon learning they will be subject to income tax.

As for Option 3, I'm glad no one chose it. This is the worst option because if the seller later discovers they owe income tax, they might try to pass the burden onto the unwary buyer.