VAT registered?

Usually, in determining whether a sale would be subjected to VAT, brokers ask sellers whether they're "VAT registered." Is this correct?

Background: Time and again, I've encountered brokers conducting due diligence head to the BIR to check whether the seller's Tax Identification Number (TIN) is "VAT" or "non-VAT" Registered. If the examiner says "non-VAT", brokers rejoice and think they're in the clear (the sale wouldn't be subjected to VAT). Is this correct?

No.

See, a person's TIN is classified in two ways:

a. the tax type that person is subjected to (VAT or non-VAT)

b. the business he's in

Asking whether a person is "VAT registered" merely identifies the taxes he must pay. The more relevant question would be whether "he's engaged in RE business." A person can be VAT registered but have a profession unrelated to RE (e.g., a sole proprietor).

For example, if a VAT registered DOCTOR sold a property, it wouldn't be subjected to VAT (assuming he didn't rent it out).

Conversely, a person can be non-VAT registered but engaged in RE business. An example of this is a LESSOR whose annual income doesn't exceed Php3 Mn.

But Juan his annual rental income doesn't exceed Php3 Mn, so why would the sale be subjected to VAT?

As someone engaged in RE business, that lessor would have to book the sale of the property as revenue. If the revenue booked (selling price) exceeds Php3 Mn, the sale will automatically convert the seller to VAT-registered. Considering current RE prices, the property will likely be sold for more than the VAT threshold.

Conclusion: Don't ask the BIR whether a person is VAT registered. Also, ask what his PSIC/Line of business is. If it states "68110" or a person engaged in RE business, the sale of RE assets will be subjected to VAT. Better yet, get a copy of that person's BIR Certificate of Registration (BIR Form 2303) if he's an entrepreneur.

In your SPA authorizing you to conduct due diligence, indicate the following powers (the BIR's super strict):

+ Check whether the Tax Identification Number (TIN) is registered as VAT-registered or Non-VAT registered;

+ Check whether the TIN is registered under the Bureau of Internal Revenue’s system as someone who is engaged in “Real estate buying, selling, renting, leasing, and operating of self-owned/leased apartment buildings, non-residential and dwellings”