P3 Mn VAT Threshold

A property classified as an ordinary asset (used for business) is being sold. The owner asserts that the sale should not be subjected to VAT because:

He is NOT VAT-registered, and

The rent collected (P100,000/month) is less than Php3 million annually.

Is he correct?

The key determinant is the "VAT Threshold," a value set by the BIR to ascertain whether a taxpayer should be registered as a "VAT" entity (i.e., someone required to pay VAT).

If a taxpayer's sales (revenue) for a calendar year are expected to exceed Php3 million, then the taxpayer must be VAT-registered. Once VAT-registered, all sales, regardless of amount, are subjected to VAT.

So, considering the scenario, should someone collecting P100,000/month in rent (totaling P1.2 million/year) be VAT-registered?

Initially, NO, because the rent collected is well below the Php3 million threshold.

HOWEVER,

When the commercial asset being rented out is sold, that sale will be recorded as revenue. It is reasonable to assume that a property renting for P100,000/month is valued more than Php3 million. Therefore, the sale of the asset will cause the seller's revenue to exceed the VAT threshold, automatically converting the seller into a VAT-registered entity.

In summary, it is typically the sale of the asset by a non-VAT registered seller that pushes them to become a VAT-registered entity (if they aren't already).