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Impact of TRAIN 2 in the Real Estate Industry this 2019

The tax reform package on land and property valuation will simplify the taxation process and appraise properties on a regular basis and on an internationally accepted standard.


The series of tax reform packages being rolled out by the Department of Finance under the administration of President Rodrigo Duterte has been generating quite a buzz from a wide spectrum of stakeholders affected by it—from the typical wage earners who survive from paycheck to paycheck to corporate behemoths and multinational companies who bemoan the loss of tax incentives that were previously granted to them.

While the first tax reform package that went into effect beginning on January 1, 2018, included some provisions on the real estate industry and how the property sector would be affected by it, a broader and more detailed provision on property valuation and taxes would be rolled out under the third package. The first tax reform package, known as the Tax Reform for Acceleration and Inclusion or TRAIN, zeroed in on personal income tax and consumption tax. The second package, which goes by the acronym TRABAHO or Tax Reform for Attracting Better and Higher Quality Opportunities, is focused on the corporate income tax and fiscal incentives.  The Department of Finance has already submitted tax reform packages 3 and 4 to Congress for review.


International standards on property valuation


According to Finance Secretary Carlos G. Dominguez III, the main goals of the tax reform package on land and property valuation is to simplify the taxation process, follow international standards by making sure that the appraisal of properties is done on a regular basis and on an internationally accepted way, and lower the rate of transaction taxes on real estate properties. In other words, according to the finance chief, it’s supposed to be revenue neutral. Some of the offsetting measures under the tax reform package on property valuation will include the rationalization of the valuation of properties by making it closer to market prices. This means the valuation of real estate properties would be increased as it moves closer to market prices.


Socialized and low-cost housing expected to address mass housing backlog


Because of the country’s mass housing backlog, the main beneficiaries of the administration’s tax reform package would be property seekers availing of socialized and low-cost housing packages. Consequently, property developers and related companies in the industry who plan to venture into socialized and low-cost housing development are expected to benefit from this since it should make selling low-cost housing projects easier and more convenient to property seekers.

The tax provisions on socialized and low-cost housing transactions have already been included under the TRAIN law—the first tax reform package. Under the TRAIN law, socialized housing transactions worth 450,000 and below, as well as low-cost housing worth 3 million and below, are exempt from being levied a value-added tax. During the previous administration, only low-cost housing units worth 1.9 million and below were exempted from being levied a value-added tax.

A study conducted by international property consultants Pronove Tai on the impact of the TRAIN law on socialized and low-cost housing noted that families who would avail of such housing packages could expect savings of as much as 360,000 due to the VAT exemption.


Decongesting Metro Manila


“Outside the National Capital Region, the sale of residential dwellings worth 2 million and below will also be exempted from the 12 percent value-added tax. This provision supports the move to decongest Metro Manila,” according to the Pronove Tai report.

Given the estimated 5.7 million units of mass housing backlog in the Philippines, this provision under the TRAIN law would help the government of President Duterte address a major national problem like this by encouraging property development firms to venture into socialized and low-cost housing and provide this segment of property seekers with affordable and decent housing.

Under the TRAIN law, the following socialized housing segments are exempted from being imposed a value-added tax:

Sale of real properties not primarily held for sale to customers or for lease in the ordinary course of trade or business.Sale of real property utilized for socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws.Residential lot valued at 1.5 million and below.House and lot and other residential dwellings valued at 2.5 million and below, provided that beginning January 1, 2021, the VAT exemption shall only apply to the sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business.Sale of house and lot and other residential dwellings with a selling price of not more than 2 million, provided, that every three years thereafter, the amount shall be adjusted to its present value using the Consumer Price Index as published by the Philippine Statistics Authority.


Tax relief on monthly rentals for a young workforce


Another group of beneficiaries under the TRAIN law would be those who are paying a monthly rent or lease of 15,000 and below for apartments or houses. According to the Philippine Statistics Authority, as much as 47 percent of the country’s labor force is comprised of young professionals aged 21-35. These young members of the workforce, noted the Pronove Tai report, are likely to rent condominiums or apartments near their workplaces. As such, they would benefit the most in the VAT exemption for the lease of residential units being raised from 12,800 to 15,000 as well as the removal of VAT on association dues for condominiums.

This should be music to the ears of real estate developers whose project portfolio include developing residential condominiums whose main demographic target belong to this segment—young urban professionals who prefer to reside in places that are near their workplace and are easily accessible to reach whether by taking public transportation, walking, or biking.

The growing problem of urban congestion, particularly in several cities in Metro Manila, have seen the rise across the archipelago of mixed-use development projects were commercial, business, and residential buildings are clustered together in a particular location. Although some of the residential units in these mixed-use hubs do not qualify for VAT exemptions when it comes to monthly rentals, especially those that are located in the more affluent part of the city, some developers might want to consider zeroing in on those young urban professionals that make up a majority of the workforce who are looking for residential abodes that offer accessibility, comfort, and convenience on their daily work commute.

It’s not surprising then that an array of township projects and mixed-use communities are expected to arise over the next few years not just in Metro Manila and other cosmopolitan urban hubs such as Cebu and Davao but in other key provincial cities as well such as Iloilo and Clark. Policy-makers and urban planners see these as a pivotal solution in addressing the growing problem of urban congestion.


Encouraging growth in real estate sector


“TRAIN simplified the tax policy by removing the 2 to 15 percent tax table as previously used. Twenty years is a long time. The tax code was definitely in need of a simplification to encourage compliance and increase generation. We remain hopeful that implementation will be done smoothly and efficiently,” Pronove Tai noted in its report, adding that some of the provisions on land and property under the first tax reform package would encourage growth across the real estate sector.

Since corporate and commercial property taxes were not included in the first tax reform package, many are hoping that several amendments on the provisions on this segment of the real estate industry would be incorporated in the third tax reform package and would come out as a win-win situation for property developers, tenants, and the government.

(source: business mirror)

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