PITFALLS OF NET PRICING

Saying "all taxes shall be paid by the buyer" in the Deed of Absolute Sale (DOAS) can have significant implications. How will the Bureau of Internal Revenue (BIR) view such a statement?

Background:

Some sellers prefer "net pricing" when determining the selling price for real estate. They might do this to avoid unexpected costs, such as the sale being subject to VAT, and believe that net pricing is a smarter move.

However, since capital gains tax (CGT) is–by default–paid by the seller, the BIR interprets net pricing in the DOAS as an attempt to reduce the taxable amount.

As a result, the BIR will recompute the gross price to include the capital gains tax. For example, sellers might think the correct computation for CGT is:

Net selling price: P10,000,000

CGT: P10,000,000 x 6% = P600,000

In reality, the BIR's computation would be:

Net selling price: P10,000,000

Gross selling price: P10,000,000 / (100% - 6%) = P10,000,000 / 94% = P10,638,298

CGT: P10,638,298 x 6% = P638,298

Conclusion:

Buyers should always demand to write the gross price in the Deed of Absolute Sale to avoid complications and ensure the accurate computation of taxes.