‘ax Research Journal Study on the Exemption from Capital Gains Tax of Gains Derived from the Sale, Exchange or Other Disposition of Principal Residence’ 1. INTRODUCTION A principal residence is considered to be the fruit of one’s hard work and efforts. The er of a prineipal home or property normally spends a considerable amount of money and time just to be able to build the home that he or she desires either for himself or herself or for his or her family. Filipinos have a very sentimental nature when it comes to their homes as this is the place where they build their hopes and dreams and plan for their future. In fact, one can build a home and live there for a significant number of years or even untit old age or death, Hence, unless circumstances call for it, home owners will not easily dispose of or let go of a place they call their “home”, It is therefore commendable that in 1998, the government through Section 24 (D) of the National Intemal Reventie Code (NIRC) of 1997 looked beyond the revenue aspect of the sale of one’s principal residence when it exempted from the six percent (6%) capital gains tax (CGT) the gains derived by individuals from the sale of their principal residence on the condition that the proceeds shall be used to purchase or construct another prineipal residence within eighteen (18) calendar months from the date of sale o- disposition of the principal residence. However, this exemption can only be availed of once every ten (10) years This study is the Re-Entry Action Plan (REAP) under the Philippine-Austealia Human Resource slopment Facility (PAHRDF) of Ms, Roselyn C. Domo as a PAHRDF. erin Training (LTT) Awardee ‘who finished Masters of Public Policy Specializing in Policy: Analysis at The Australian National University on January to December 2008 [Sia on tie Erwin rom Copal Cas Ta i(NHRC Tax Reseach rural Volume 31 I. OBJECTIVES ‘The objective of this study is to analyze the above provision of the NIRC. ‘The study seeks to determine the extent of availment of this provision by concerned property owners as vwell as the amount of revenue foregone by the government since its implementation. The study also discusses the problems encountered in the implementation of this provision and recommends measures to address them. ‘The study also examines the proposal under the Land ‘Administration and Management Project (LAMP) to base the exemption on the area of the disposed of residence. In relation to this, the study considers the merits and demerits of the proposal and looks into the possibility of amending the prevailing provision of the NIRC JI. BACKGROUND ON THE TAX TREATMENT OF THE SALE, EXCHANGE OR DISPOSITION OF PRINCIPAL RESIDENCE Prior to the NIRC, the sale, exchange or disposition of principal residence had no special tax consideration, that is, the gains derived from such transaction were subject to the CGT. With the enactment of Republic Act (RA) No. 8424 on December 11, 1997, a relief was provided to individual taxpayers whose intention is merely to sell their principal residence and use the proceeds derived therefrom to acquire or construct a new residence Such sale is not subject anymore to the 6% CGT [Sec. 24(D)(2), NIRC]. Revenue Regulations (RR) No. 13-99°, as amended by RR No. 14-2000" are the regulations implementing the aforesaid provision of the NIRC. IV. AVAILMENT OF THE CGT EXEMPTION ON THE SALE, EXCHANGE OR DISPOSITION OF PRINCIPAL RESIDENCE 1. In order to avail of the CGT exemption on the sale, exchange or disposition of principal residence by a natural person, the following conditions must be met by the individual making such disposition: The LAMP is a long-term commitment of the Government of the Philippines (GOP) to increase land tenure security and improve the efficiency and effectiveness of the land tiling and administration system, The overall goal ofthe LAMP is to reduce poverty and enhance economic growth by improving land tenure security and fostering the development of efficient land markets in rural and urban areas through the development of an tifcient system ef land titling and administration based on clea, transparent, coherent and consistent policies fand laws and supported by-an appropriate institutional structure. At present, the NTRC is part of the Component 4 (Property Valuation and Taxation) of the Program, (Source:) > Exemption of Certain Individuals from the Capital Gains Tax on the Sale, Exchange or Disposition of a Principal Residence under Certain Conditions. July 26, 1999. + Amencing Sections 2(2), 3 and 6 of Revenue Regulations No, 13-99 vis-i-vis Sale, Exchange or Disposition, by a Natural Person of his Principal Residence. November 20, 2000, E Say on he Erompon rom Copal Gas Ta]NIRC Tax Research Journal Volume XXI1.1 a. Escrow® Agreement a1 Section 2 of RR No. 14-2000, which amended Section 3 of RR No. 13-99, provides that the 6% CGT otherwise due on the presumed capital gains derived from the sale, exchange or disposition of principal residence must be deposited in cash or manager's check in an interest-bearing account with an Authorized Agent Bank (AB) under an escrow agreement between and among the seller/transferor/taxpayer, concemed Revenue District Officer, and the AB. ‘The amount deposited, including its interest yield, shall only be released to such Seller/Transferor upon certification by the said RD Officer that the proceeds of sale or disposition. thereof have, in fact, been utilized in the acquisition or construction of the Sellet/Transferor’s new principal residence within eighteen (18) calendar months from date of the said sale or disposition’, 4.2 The escrow agreement is designed to ensure the payment of CGT in case of non-utilization or underutilization of the proceeds of the sale. b. Capital Gains Tax Return bl A seller-individual is not required to pay the CGT, but he/she is, however, required to file, in duplicate, his/her CGT Return (BIR Form No. 1706) covering the sale or disposition of his/her principal residence with the concerned Revenue District Office (RDO) within thirty (30) days from the date of its sale or disposition. Together with the CGT return, the seller-individual is also required to submit the following: i. Proof of payment of Documentary Stamp Tax (DST) on the deed of sale or conveyance of the “principal residence”; fi, Swom statement from the Barangay _Chairman/Building Administrator (should the principal residence be a condominium unit) that the taxpayer's principal residence is located within the jurisdiction of the Barangay/Condominium Building and that the same has been the taxpayer’s residence immediately prior to the date of its sale or disposition; iii. Duplicate original copy of the Deed of Conveyance of the taxpayer's principal residence; * Escrow, as provided under RR 14-2000, generally means a scroll, writing or deed, delivered by the ‘grantor, promisor or obligor into the hands of a third person, to be held by the latter until the happening of @ ‘contingency or performance of a condition, and then by him delivered to the grantee, promisee or obligee. (See Annexes A to C for a copy of the forms on Escrow Agreement, Release from Escrow Agreement and Forfeiture ofthe Bank Deposit in Escrow) © ‘The date of sale or disposition of a property refers to the date of notarization of the document evidencing she transfer of said property [Study on the Exemption from Capital Gains Tax 3(TRC Tax Research Journal vi. Volume XXIL1 Certified photocopy of the Transfer Certificate of Title (TCT) or Condominium Certificate of Title (CCT) covering the principal residence sold or disposed; Certified photocopy of the latest Tax Declaration covering the said principal residence (land and improvement); and Building Permit or Occupaney Permit issued by the concemed city or municipality showing the amount of the construction cost thereof (if the building or improvement thereon has been constructed on or after the year 1990). Post-Reporting Requirements c.l The proceeds of the sale of the principal residence must be utilized in acquiring or constructing a new principal residence within eighteen (18) calendar months from the date of its sale, exchange or disposition. ¢.2. In order to show proof that positive action was undertaken to utilize the proceeds for the acquisition or construction of an individual’s principal residence within the 18-month reglementary period, the seller-individual shall submit to the Revenue District Office (RDO) concerned, within thirty (30) days from the lapse of the said period, the following documents: i, iti iv. ‘Swom statement that the total proceeds from the sale or disposition of the old principal residence have been actually utilized in the acquisition or construction of his/her new principal residence or, if the construction of the new principal residence is still in progress, a sworn statement that such amount shall be fully utilized to procure the necessary materials and pay for the cost of labor and other expenses for the construction thereof; Certified statement from the architect or engineer, or both, showing the cost of materials and labor for the construction of his/her new principal residence; Certified copy of the Building Permit issued by the Office of the Building Official of the City or Municipality where his new principal residence shall be constructed, as well as photocopies of documents (e.g., building specification plan, construction plans, or construction cost estimates) submitted with his/her application for the said Building Permit on which computation of the amount of the building license fee has been based; In case the new principal residence is acquired by purchase, a duplicate original copy of the Deed of Absolute Sale covering the purchase of the new principal residence. Shady on the Exenpiion from Capital Gains Tx)¢.3. It is only upon showing of the aforementioned documents that the proceeds of sale, exchange or disposition of the old principal residence have already been fully utilized in the acquisition or construction of the new principal residence that the Revenue District Officer shall, within fifteen (15) days from date of submission by the Seller/Transferor of the foregoing documents, release the Escrow on the aforesaid bank deposit in favor of the Sellet/Tranferor. 2. The regulations also provide that the historical cost or adjusted cost basis of the old principal residence sold, exchanged or disposed shall be carried over to the cost basis of the new principal residence. 3. If, however, the seller/transferor fail to submit documentary evidence within thirty (30) days after the lapse of the 18-month period, showing that he/she has utilized the proceeds of sale, exchange or disposition of his/her old principal residence to acquire or construct his/her new principal residence, it shall be presumed that he/she did not utilize the proceeds of sale for the construction or acquisition of his/her new principal residence, in which case, he/she shall be treated deficient in the payment of his/her CGT from the sale or disposition of his/her principal residence, and shall be assessed accordingly for deficiency CGT, inclusive of the 20% interest per annum, pursuant to the provisions of Sec. 228 of the NIRC, as implemented by RR 12-99, in relation to Sec. 249 of the said Code. 4, On the other hand, in the instance of partial utilization of the proceeds of sale, exchange or disposition of principal residence, the individual will be liable for deficiency CGT, inclusive of 20% interest per annum to the extent of the unutilized amount, computed from the 31% day after the date of sale or disposition of the old principal residence, Such amount will be taken from the escrowed tax money in the custody of the depository bank. If the amount in the bank is not sufficient to cover the entire amount assessed, the seller/transferor shall remain liable for the remaining balance of the assessment. The excess money in the escrow, on the other hand, shall be returned by the bank to the seller/transferor upon written authorization from the Commissioner or his duly authorized representative. 5. Lastly, the regulations provide that the tax exemption privilege may only be availed of once every ten (10) years. Y. CONCEPT OF PRINCIPAL RESIDENCE 1. A principal residence is defined as the primary location that a person inhabits whether it is a house, apartment, trailer or boat for as long as it is where one lives most of the ‘Study on the Exemption from Capital Gains Tax 3NERC Tax Reseach Journal - Yotine 007] time.” In the United States, for purposes of the Internal Revenue Service (IRS), a principal residence includes: a conventional single-family structure, house trailer, mobile home, houseboat, condominium, cooperative apartment, duplex or row house. It may even include a boat or recrectional vehicle if it contains facilities for cooking, sleeping and sanitation.” 2. Section 2@) of RR 13-99, as amended, defines a “principal residence” as referring to the dwelling house, ineluding the land on which itis situated, where the husband and wife or an unmarried individual, whether or not qualified as head of family, and members of his/her family reside. Actual occupancy of the principal residence shall not be considered interrupted or abandoned by reason of the individual’s temporary absence therefrom due to travel or studies or work abroad or such other similar circumstances. The principal residence must be characterized by permanency in that it must be the dwelling house in which, whenever absent, the said individual intends to return. 3. The regulations also provide that in instances where ownership of the land and the dwelling house thereon belongs to different persons (¢.g., where the land is leased to the dwelling house owner), only the dwelling house shall be treated as principal residence of the dwelling house owner. Thus, if the said land and the dwelling house thereon be jointly sold or disposed by the said owners, only the sale or disposition of the dwelling house shall be entitled to the benefit of exemption from the CGT. However, where both the owner of the land and owner of the dwelling house actually reside in the said dwelling house, both the land and dwelling house shall be treated as their principal residence (e.g., owner of the land i the parent, while owner of the house is his/her child, or vice versa) 4, In the instance, however, where the land and the dwelling house thereon be owned by several co-owners, ¢.g., inherited by two or more heirs through hereditary succession, and where the said property is actually used as principal residence by one ot more of the said co-owners, including the members of his/her family, the property shall be treated as the principal residence of the eo-owner/s actually occupying and using the same as his/her principal residence but to the extent of his/her proportiotiate share in the value of the principal residence. Conversely, the CGT exemption benefit shall not apply in respect of the other co-owners who do not actually use and occupy the same as their principal residence. VI. RATIONALE FOR TAXING CAPITAL GAINS 1. Capital gains are gains realized from the disposal of eapital assets or investments by a taxpayer over a certain period. It is said that the rationale behind the imposition of htipi//www. investopedia.com/terms/p/principalresidence.asp>, viewed on May 18, 2009. * source: , viewed on March 15,2010, ” Sour z Sia on the Ezempln frm Capa Gas Ta]NRC Tax Research Journal Volume XI CGT is that realized gains are equivalent to income because the taxpayer may use such gains in the same way as income.” 2, Different countries have considerable variation in the tax treatment of capital gains. Some countries only levy CGT on the disposal of certain assets, ¢.g., real property, ships, securities and works of art. There ate assets, however, that are exempt from the CGT regime such as the sale of principal residence. Under certain circumstances the CGT may also only be deferred until similar assets are purchased to replace the asset disposed of. This deferral is described as a “rollover”. (While the rollover relief is not an exemption per se, the deferral ray be such as to amount to an exemption). The essential feature of this scheme is that a gain which would otherwise have arisen on the occurrence of a taxable event for CGT purposes is deferred, or rolled over, until there is a subsequent disposal of the asset concerned. The deferred gain is added to the gain arising on the subsequent disposal." 3. Most countries impose a tax on capital gains for fiscal equity. Capital gains constitute an acctetion of economic or spending power, conferring on the recipient an increased taxable capacity which should be taken into account if the burden of taxation is to be equitably spread. ‘The purpose of spreading the tax burden more equitably is to widen the tax base.'’ It has been said that “taxing rather than exempting capital gains counters incentives to characterize or convert taxable ordinary income (i.e., wages and salaries) and investment income (e.g., interest, dividends, rents) into tax-exempt capital gains.”” Taking ‘Australia as an example, prior to its introduction of its CGT legislation, opportunities for tax planning to convert income receipts or characterize them as capital gains occurred frequently. Another important policy concer in Australia which was addressed with the introduction of a comprehensive CGT in 1985 was the distinction between income and capital for tax purposes. 4. Another reason for the imposition of the CGT is to combat avoidance of inheritance and gift duties. Information on capital gains helps to build up @ picture of the ‘ownership and values of assets to assist the fiscal authorities to tighten the administration of other capital taxes. Aside from addressing equity concerns, the imposition of the CGT is also seen as a means to raise tax revenue ° Source: , viewed on April 17, 2009. '© International Bureau of Fiscal Documentation, International Tax Glossary, Second Edition Completely Revised. (IBFD Publications BV, 1992). "Organisation for Economic Cooperation and Development (OECD), The Taxation of Net Wealth, Capital Transfers and Capital Gains of Individuals, Paris: 1979, p. 95 [National Tax Research Center, Review of the Capital Gains Tax on the Sale, Exchange or Other Disposition of Real Properties, September-October 2005, Vol. XVILS]. "2 Organisation for Economic Cooperation and Development (OECD), Taxation of Capital Gains of Individuals: Policy Considerations and Approaches, Pats: 2006, p.9, ‘Study om the Exempiion from Capital Gains Tax 7]NTRC Tax Reseach Joural Volone xxi | 5. Contributions to horizontal and vertical equity’? are also main factors in the adoption of a CGT on individuals, In Ireland, the introduction of the CGT system in 1974 was made in order to strengthen tax equity between those who are earning primarily ordinary (wage) income and those making capital gains. The same is true in the case of the United Kingdom where the major policy objective for its CGT in 1965 was to improve faimess in the tax system by ensuring that individuals making capital gains paid tax on them. In Australia, the non-inelusion of capital gains from its income tax base prior to 1985 did not only violate the principle of horizontal equity but also reduced the effective progression of the personal income tax system and conflicted with the principle of vertical equity. This is for the reason that those with capital income usually have greater ability to pay taxes and generally, higher income eames are those who are able to convert or receive income as capital. VI. RATIONALE FOR THE EXEMPTION OF GAINS DERIVED FROM THE SALE OF PRINCIPAL RESIDENCE 1. The preferential tax treatment accorded to certain forms of capital gains is said to be justified mainly on the grounds that “[fJaimess demands that capital gains which have accumulated over a number of years should not be taxed at the regular progressive income tax rates in the year of sale [and that] [p]referential rates encourage saving and investment ~ particularly high-risk investment — and thereby stimulate the growth of the economy”. = 2. It is said that the practical reason for relieving gains derived from the sale, exchange or disposition of principal residence from the CGT is because the sale is made not for purposes of business or profit but only for a change of residence. The relief is intended to enable an individual to replace his/her existing home with another home of similar or higher value by ensuring that the earnings of the sale of the old home are not diminished by a charge such as the imposition of the CGT, Generally speaking, the owner-occupier will want to use the full sale proceeds to pay for the new house where he/she is moving to. If house prices have increased since he/she bought his/her old house, so that he/she makes a gain on the sale, an equivalent new house is likely to cost the same sum as the old one. If he/she had to pay tax on the gain, he/she might have to be content with buying an inferior house (although the existence of a general capital gains liability on private houses may have a depressive effect on house, prices in general; rather than tha, he/she might opt not to sell the olé house anymore." Horizontal and vertical equity are both principles concerning ways to keep taxation “fair” Horizontal equity implies that those with similar abilities or incomes should pay the same amount of taxes. ‘Vertical equity, on the other hand, means that those with a greater ability o pay should in fact pay more taxes than those with a limited ability to pay. (The Intemational Development Research Centre, Science for Humanity, , viewed on April 5, 2010.) Davie Martin, “Capital Gains Taxation: Issues in Perspective", Highlights of Alternative Approaches to Capital Gains Taxation, (Washington, D.C.; The Brookings Institution, 1968) p. 2. '§ OECD, epeit, p.113, t Shady on the Exemption From Capital Gains TexNRC Tax Research Journal Volume xxi] VIII. PROPOSAL UNDER THE LAMP'* 1, In 2006/2007, the country’s national and local land-related taxes and fees were reviewed under the Land Administration and Management Project (LAMP). These taxes and fees are as follows: a. National land-related taxes: i. CGT; ii, Documentary Stamp Tax (DST); iii, Estate Tax; iv. Donor’s Tax; and v. Value-Added Tax. b, Local land-related taxes: i. Real Property Tax (RPT); ii. Special Education Fund (SEF); iii, Tax on the Transfer of Property Ownership; iv. Special levy; and v. Idle land tax. c. Fees imposed by national government agencies on land transactions and land registration, principally by the Department of Environment and Natural Resources (DENR) and the Land Registration Authority (LRA)/Register of Deeds (ROD). 2, The LAMP’s review report did not only provide the historical background and recent performance of the said taxes and fees but it likewise provided for a comprehensive evaluation framework for the review of the same based on the generally accepted tax principles of efficiency, equity, administrative simplicity, transparency, revenue adequacy and stability. This review used as inputs the findings from the Naga City Tax Compliance Study (which determined the present distribution of property taxes across and within taxpayer categories and the corresponding levels of compliance) and the Survey of Public Perception of National and Local Land-Related Taxes and Fees. In December 2007, a preliminary report on a set of reform options for the aforementioned taxes taking into consideration the government's revenue requirement and present fiscal position was formulated. 2.4 CGT Concerns a, In the case of the CGT, the study observed that it is a poor tax in the context of the tax principles earlier mentioned... This is so as the CGT contributes to the relatively high costs incurred by taxpayers when undertaking property ‘© LAMP Phase 2, Executive Summary, Valuation and Land Taxation Report - August 2008, ‘Study on the Exemption from Capital Gains Tax a)TRC Tax Rese Touma vane oT] transactions and complying with their tax obligations. The CGT together with the DST is likewise said to have an overall negative impact on property market transactions since these taxes alter behaviour by: i. Discouraging some buyers from registering their transfer of ownership; ji, Reducing sales values as a result of sellers passing on all or part of the costs of these taxes to property buyers as a reaction to the overall high compliance costs; iii, Forcing prospective purchasers of new lots and houses to postpone purchases; and iv. Discouraging owners of existing land lots and houses from selling their properties and reinvesting in other properties. b. In order to address the aforesaid problems with the CGT, two broad options for reform are considered. Part of the first option relates to the exemption of the sale of principal residence. Because property owners find difficulty in availing of the principal residence exemption because of the numerous compliance requirements!”, the study proposed that the present exemption for principal residences bbe made more generous by exempting all sales of principal residences and abolishing all conditions provided that the subject lot area is not more than 200 square meters. ‘Availment of the exemption is likewise proposed not to be limited to once every ten years for properties with Jot area of less than 200 square meters but for every instance of disposition. On the other hand, in the case of properties where the lot area is more than 200 square meters, the existing conditions under the NIRC and its revenue regulations shall remain in force. ‘The rationale for a more generous tax treatment of principal residences where the area involved is not more than 200 square meters is that the property size is anyway small and to hasten the investment of proceeds derived from the disposition of such property into new properties, in the process promoting more property transactions and greater value-added for the property market. 2.2 Other Findings" a. The study also observed that the present exemption from the CGT for principal residences is not particularly generous for the reason that although owners of principal residences enjoy an exemption, funds that are not reinvested in another " NTRC PowerPoint Presentation, Recommendations Concerning National and Local Land-Related ‘Taxes and Fees, November 25, 2008. Review of National and Local Land-Related Taxes and Fees, LAMP Phase 2, Valuation and Land ‘Taxation Report. August 28, 2008. Prepared by Land Equity International Pty Ltd. 10 ‘Study on the Exemption from Capital Gains Tax)(INTRC Tax Research Journal Volume XXI.1 principal residence are still levied the CGT. It is likewise noted that the availment of the CGT exemption is limited to once every ten (10) years which effectively reduces the ability of taxpayers to change principal residences whenever they want to or where an opportunity to do so, with some benefits to them, is available. Moreover, the CGT exemption of principal residences does not distinguish between high and low valued principal residences. Thus, a P 1 million principal residence will be treated in the same way as a P 500,000 principal residence. Additionally, there is also an issue when proceeds from the sale of a principal residence are only partly reinvested in another principal residence. For example, a P 100,000 excess from the proceeds from the sale of a P] million principal residence that is not reinvested in the new principal residence attracts the same CGT as the excess of P100,000 from the sale of a P500,000 principal residence. ‘The review also compared the present level of exemption for principal residences in the Philippines as against developed countries and noted that the incentive provided in the country is relatively low by international standards, It cited that twenty (20) out of the thirty (30) countries surveyed by the OECD in 2004 gave more generous treatment in respect of principal residences and about ten (10) countries provide total exemption without any conditions. It is also stressed that capital gains are usually taxed on a net gain basis, unlike the gross basis used in the Philippines.” The report recommended therefore that the present exemption of principal residences be reviewed and made more comparable with international practices. 3. Along this line, the report indicated the factors necessary to be considered in revising the present exemption of principal residences as follows: (a) setting of a maximum area to ensure that very large and valuable properties are not exempted; (b) prescribing a required period of ownership to qualify for the exemption; and (c) introdueing a permitted level for the realization of development potential when small blocks of land adjacent to a prineipal residence are sold. IX, TAX TREATMENT OF SALE OF PRINCIPAL RESIDENCE IN OTHER COUNTRIES 1. In 2006, the Organisation for Economic Cooperation and Development (OECD) released the findings of a 2004 project involving thirty (30) countries regarding the taxation of capital gains of individuals. ‘The questionnaire given to the subject countries included a question on the tax treatment of gains on principal residence in their respective countries. The findings of the project on the said portion of the questionnaire are as follows: '? ‘The Philippines also used to tax capital gains on a net basis in the past. However, because of many instances of leakages/abuses, the government decided to tax capital gains on a gross basis ® OBCD, Taxation of Capital Gains of Individuals: Polley Considerations and Approaches, pp. 33- 41. “Sid on the Brompton fom Capital Gata Taz =r]TRC Tax Research Journal Volume XCXIL.1 In Australia, principal residences are generally exempt from the CGT. However, partial tax liability occurs when the taxpayer uses the residence for business or other income-producing purposes. In the case of Austria, principal residences are also exempt from CGT provided the taxpayer has resided therein for at least two (2) years prior to the sale or the taxpayer is the one who has erected the building. In Belgium such transaction is also exempt from CGT but if gains are deemed speculative, the same is separately taxed at a flat rate of 16.5%. |. Canada also exempts gains from principal residence from the CGT; however, no ‘more than one principal residence may be recognized per family at any one time, The Czech Republic like Austria requires that the taxpayer must have resided in the principal residence for at least two (2) years prior to the sale for purposes of CGT exemption and that no exemption shall be accorded if the residence is used for business purposes. In Denmark, the exemption applies only if the principal residence is occupied by the owner and the total ground area of the property is less than 1,400 square meters. Otherwise, the gains will be taxed as capital income. Finland also requires that the taxpayer must have owned and permanently ‘occupied the principal residence for more than or equal to two (2) years prior to the sale to qualify for CGT exemption. If not, the transaction will be separately taxed at a 29% flat rate of national income tax. In the case of France, Greece, Italy, Luxembourg and Switzerland, gains from principal residences are exempt without any conditions. Germany also requires occupancy by the owner for a minimum period of time to attract a CGT exemption and denies exemption for residences used for business purposes. In Hungary, gains from principal residence may only be exempt from tax if proceeds are reinvested in new residence within five (5) years after the sale, otherwise the gains are taxed separately at a 20% flat rate. If the new residence, however, is sold within five (5) years, the exempt amount becomes taxable. . In Teeland, a principal residence that is owned for more than or equal to two (2) years is exempt from tax while those that are owned for less than two (2) years fare entitled to a rollover relief if the proceeds are reinvested in a new residence within two (2) years, Residences that are used for business purposes are not entitled to exemption. 2 “Siu onthe Exemption from Copital Gans Tax)[NTRC Tax Research Joumal Volume XXIL1 L In the case of Ireland, land with area of up to one (1) acre is exempt from tax. If the same is sold, however, with development potential, a proportion of the gain is taxed at a 20% flat rate . In Japan, the first ¥60 million gains derived from the sale of principal residence held for more than ten (10) years are taxed at a flat rate of 10% and the excess at a 15% flat tax rate. For a principal residence that is owned for more than five (5) but less than ten (10) years, a separate flat rate tax of 20% is imposed on gains from the sale amounting to less than ¥40 million while that in excess of ¥40 million is taxed at a 25% flat rate In Korea, exemption is also granted to principal residence that is owned by a taxpayer for more than or equal to three (3) years. An extra condition of occupancy by the taxpayer for more than or equal to two (2) years is required if the residence is situated in the metropolitan area. Mexico also grants exemption from tax of gains derived from the sale of principal residence provided the same has been occupied by the owner. In the case of Netherlands and New Zealand, gains from the sale of principal residence are not subject to tax provided the same is not used for business purposes, In Norway, exemption is also granted on gains from principal residence provided the seller owned the same for more than or equal to one (1) year; used it as a principal residence for at least one of two previous years; and it was not used for business purposes. In Poland, the principal residence should be held for more than five (5) years or that the proceeds be used within two (2) years to acquire another residence, to be entitled to tax exemption. Otherwise, the net sale proceeds (sale price less costs of sale) will be taxed at a 10% flat rate. In Portugal, gains from the sale of principal residence may be rolled over if the same is used within two (2) years to purchase, refurbish or enlarge another permanent residence or a land that is purchased is used to build a permanent residence. Singapore, on the other hand, does not have a CGT regime hence, gains arising from the sale of a principal home or residence do not give rise to any CGT.! In the Slovak Republic, the primary residence is required to be owned/used by the owner for more than or equal to two (2) years before it shall be exempt from tax. Primary residences, on the other hand, that are used for business purposes or are rented out, are taxed at a 19% flat rate, + As per reply received from Mr. James Clemenee, Singapore-Partner, Pricewaterhouse Coopers on the Online Worldwide Tax Summaries Enquiry. ‘Study on the Exemption from Capital Gains Tax 3(NERC Tax Research Journal Volume XX] v. In the case of Spain and Sweden, a rollover relief is provided in respect of taxpayer's principal residence. If the proceeds of the sale are used to purchase a new primary house, recognition of a capital gain on the sale is deferred. In Spain, under certain restrictions, partial relief is also granted even if only a part of the proceeds are reinvested. In addition, an owner who is 65 years of age or older is automatically exempt from tax on gains derived from the sale of a principal residence. w, In Turkey, gains on sale of principal residences are also exempt from tax if the same is used by the taxpayer as primary residence for more than or equal to four (4) years prior to sale. x. In the United Kingdom, gains are also exempt subject, however, to certain conditions. y. Inthe United States, individuals can exclude from taxation an amount equivalent to $250,000 ($500,000 for married couples who file a joint return) representing gains from the sale of principal residence. This is on the condition, however, that the owner must have owned and used the property as his/her principal residence for at least two (2) years (this period does not have to be continuous or consecutive) during the five year period ending on the date of the sale or exchange. This exclusion may also be availed of by taxpayers not more than once every two years.” U.S. rules also do not limit reinvestment of proceeds to another principal residence. The taxpayer may choose to use the proceeds to purchase a new principal residence, a second home, investment property or in any other manner as the owner chooses. 2. From the aforementioned, it may be observed that various countries have similarities and differences in the way they treat gains derived from the sale of principal residence. Based on the welter of information, itis noted that there are countries that provide exemption without the need to satisfy any conditions as in the case of France, Greece, Italy, Luxembourg end Switzerland. The absence of conditions is presumably based on the need to facilitate the grant of CGT exemption thereby encouraging more transactions involving principal residences, There are, however, countries that require a certain period of occupancy and residency by the owner in the principal residence before gains from the sale will be exempt from tax. Countries that require this condition include Austria, Czech Republic, Dermark, Finland, Germany, Iceland, Korea, Mexico, Norway, Slovak Republic, Turkey and the United States. ‘The requirement is intended to establish the proof of principal residence, There are also countries which do not grant a CGT exemption if the principal residence is used for business purposes. These countries include Australia, Czech Republic, Germany, Iceland, Netherlands, New Zealand, and Norway. ‘The non-recognition of a CGT exemption in such instance is justified as the property is not really a place of residence but a Source: , viewed on April 17, 2009. Source: hitps/www realtor org/fedistrk.nsile2c6e] 7e27e921 1985257218005ed953/aafI9920 eee .eea8625714b0067042b7OpenDocument>, viewed on April 17, 2009, M4 ‘Study on the Exemption from Capital Gains Tax)([NTRC Tax Researoh Journal —Wotane tT place of business. There are also countries which require that the proceeds of the sale be reinvested in another principal residence as a condition for exemption, such as that in Hungery and Poland. This model is similar to the Philippines which imposes a similar requirement, even if the reinvestment option is limited. Sweden, Spain and Iccland provide for a rollover relief, wherein recognition of capital gain on the sale is deferred, if the proceeds of the sale are used to purchase a new primary house within a certain period, While this is a tax deferral and not an exemption, the scheme allows some degree of financial ease to the concemed property owners. Spain also grants automatic exemption from tax of gains derived by taxpayers aged 65 years and older from the sale of their principal residence. This is probably based on the recognition that said individuals have no more opportunities to earn income on their own. There are also countries that have size or area considerations in the grant of tax exemption such as Denmark and Ireland. The size or area consideration ensures that differences in property levels or values are considered. Then, there is also Japan which does not provide for tax exemption of gains derived from the sale of principal residence and instead subjects the same fo tax at various rates, depending on the number of years when the principal residence was held by the taxpayer and the amount of gains. ‘This is perhaps due to the fact that the tax rates applicable are set at levels lower than the regular income tax rates. X. COMMENTS AND OBSERVATIONS A. General 1. As earlier mentioned, the exemption from CGT of gains derived from the sale, exchange or disposition of principal residence was introduced more than thirteen (13) years ago by virtue of RA No. 8424 which took effect on January 1, 1998. Prior to this, no special treatment was accorded to this type of transaction, that is, gains derived from the sale of a principal residence was taxable. 2. An earlier NTRC study” revealed that the exemption of the sale or disposition of principal residence by individual taxpayers is one of the reasons for the decline in CGT collection beginning 1998. The table below shows the number of availment of the CGT exemption and the amount of revenue foregone since its implementation. ‘NTRC Tax Research Journal, “Review of the Capital Gains Tax on the Sale, Exchange or Other Disposition of Real Properties”. Vol. XVILS, September-October 2005, p. 12. ‘Study on tha Exemption from Capital Gains Tax 15[INTRCTax Research Journal Volume XXIL1 | Table 1. NUMBER OF CGT EXEMPTION AVAILMENT AND AMOUNT OF CGT WAIVED ON GAINS DERIVED FROM THE SALE, EXCHANGE OR DISPOSITION OF PRINCIPAL RESIDENCE 1998 TO 2008 No, of Rulings Amount of CGT Waived/ Year Issued by the BIR/ Foregone Revenues | Beneficiaries* (in million B) | 1998 7 BP 0.40 1999 54 8.35 2000 45 13.28 2001 3 093 7002 3 1.00 2003 - No Available Data ~| 2004 ‘No Availment 2005 6 235 2006 28 17.65 2007 “22 9.32 | 2008** 9 0.81 | TOTAL | 17 B 54.29 | Source” Various BIR Rulings Assessment Service, BIR + Figures for 1998 to 2002 are based on various rulings issued by the BIR while those from 2005 to 2008 are based on the Table on Revenues Waived fom Existing Fiscal Incentives Laws prepared by the Assessment Service division ofthe BIR, ++ Figure for this year isnot yet final. 3. The table shows that for the period 1998 to 2008, a total of 177 CGT exemption availment on the sale, exchange or disposition of principal residence was recorded, This totalled to 54.29 million in foregone revenues on the part of the government, Excluding the years where there are no available data (2003) and no availment (2004), the average number of availment and foregone revenues per year are 19 and B 6.03 million, respectively. 4, Based on the information, it is revealed that after more than thirteen years, only 177 individuals (or 177 transactions in principal residences) availed of the CGT exemption. The reasons for this low tumout may be due to a number of factors. For one, should be mentioned that an owner of a al residence has some clements of 16 ‘Shudy on the Exemption from Capital Gains Tax]NIRC Tax Research Journal Volume XXI1 attachment to his or her home, hence, the disposition of the same may only be resorted to in case of extreme financial difficulty. The conditions for exemption may also be an explanation for the low availment incidence, Thus, transactions involving principal residences are rare occurrences. 5. Another probable reason, as confirmed by a BIR official, is that not many individuals are knowledgeable about the said exemption. Accordingly, despite the question in the CGT retum form asking whether the property being sold is a principal residence and the follow-up question of whether there is an intention to construct or acquire a new principal residence in the next 18 months (Items 17 and 18 of BIR Form No. 1706), there are still those who miss to answer these questions. In fact, there was even a case when a taxpayer filed for a refund of the CGT which she has paid for the gains she derived from the sale of her principal residence and which gains were used to acquite a new principal residence. This was so as she only learned about the CGT exemption after the tax had already been paid. This situation occurred simply because the taxpayer was unaware of the CGT provision in the NIRC. In this connection, it is worth mentioning that the perceptions survey conducted by the NTRC in 2007 revealed that in the case of the CGT, more than 40% of the respondents did not know how the CGT is computed or who are legally liable to pay it. The same number of respondents also believed that more information on the CGT should be disseminated to the public.”* In the case of the CGT exemption on the sale of principal residence, it was pointed out that if the public will be made more aware of this provision as well as the rules and requirements for its availment, there will be more individuals or taxpayers who can enjoy this privilege 6. If compared to the total CGT collections on the sale or transfer of real properties, it may be observed that the foregone revenues from the exemption of gains from the sale of principal residence are only very minimal. The ratio of foregone CGT revenue to total CGT collection actually ranges only from .009% to 0.38%. 7. Based on available data, Table 3 shows the Revenue District Offices (RDOs) where the CGT exemption of gains derived from the sale, exchange or disposition of principal residence was availed of. It is interesting to note that the 65 beneficiaries of the exemption from 2005 to 2008 belong to only three (3) RDOs, namely, Caloocan City, Las Pinas-Muntinlupa Cities and Hoilo City. This is not to say that it is only in these RDOs that individuals are properly informed or aware of the CGT exemption. It is also possible that there are individuals in other RDOs who applied for CGT exemption but were not accorded the same for failure to comply with its requirements. % Land Equity International Pry Ltd, Review of National and Local Land-Related Taxes and Fees, Final Report, Report D28, August 28, 2008, p. 21 ‘Study on the Exemption from Capital Gains Taz ~ - aTWIRC Tax Reseach foural Volume XX] Table 2. RATIO OF FOREGONE REVENUES FROM THE CGT EXEMPTION OF GAINS DERIVED FROM THE SALE OF PRINCIPAL RESIDENCE TO TOTAL CGT COLLECTION Amount of Foregone Revenues Ratio of Foregone Year CCE from Sale of Principal | Revenues from Collections Residence Sale of Prin. Res. (in million P) to Total CGT Coll. | 1998 4415 B 040 0.009% [_ 1998 3,697 8.35 0.22% [2000 3,499 13.28 0.38% [- 2001 3,180 0.93 0.03% 2002 4,155 10 0.02% 2002 4,103 ‘No Available Data a 2006 | 4,220 0.0 0.00% 2005 4,580 255 [ 0.06% 2006 4,805 17.65 037% 2007 3,946 9.32 0.24% 2008" 6,569 O81 001% —| [roraL | P47,169 B 54.29 0.12% ‘Source: Various BIR Annual Reports (CGT Collections) Table 3. REVENUE DISTRICT OFFICES WHERE THE CGT EXEMPTION OF GAINS FROM SALE OF PRINCIPAL RESIDENCE WAS AVAILED OF: 2005 TO 2008 : s ‘Amount of year | RevenueDistist | | N0-of | roregone Revenues fice Beneficiaries an (in million P) 2005 27 — Caloocan City 6 ~ B 255 2005 | 27— Caloocan City 2 0.15 353 — Las Pinas-Muntinlupa "26 i750 ~‘| 2007 53 - Las Pinas-Muntinlupa 22 9.32 2008 ‘53 — Las Pinas-Muntinlupa 7 0.67 74 — Tloilo City 2 013 TOTAL 6 P30.32 ‘Source; Audit Information, Tax Exemption and incentives Division, BIR National Office 8 ‘Study on the Exemption from Capital Gains Tax][NTRCTax Research Journal Volume XXIL1 B. On the LAMP Proposal B.1. The Alternative Reform Option 1. The alternative reform option considered under the LAMP is to make the sale of principal residence with land area of not more than 200 square meters automatically exempted from the CGT, without any conditions required. In the case of principal residences with bigger land area, the present conditions under the law and the implementing regulations will still apply. If this option is to be pursued, justification or basis for setting the automatic exemption based on the area of 200 square meters must be further explored. 2. In this regard, it should be mentioned that there are no available information on the average size or land area of residential properties in the country. In order to get a picture of what the regular or average size of principal residences in ‘the country is, an interview with a BIR official and a look into a few number of Certificate Authorizing Registration (CAR) containing, among others, details on the area of residential properties, was undertaken. This activity revealed that in Manila, areas of residential properties normally range from 30 square meters to less than 200 square meters. In the National Capital Region, itis also observed that there is already a growing number of condominium units being constructed and most of these have a floor area of less than 60 square meters. It should also be noted that residential properties in the metropolitan area nowadays are maximized vertically given the very limited available space. Residences either have three (3) or more floors containing different sections of the house if only to maximize the use of the available space. 3. In the provinces, however, based on the CARs examined, areas of residential properties range from 300 to more than a thousand square meters. 4. To further give basis for the proposed 200 square meters, it is worth mentioning that under the newly signed law, Republic Act No. 10023 (An Act Authorizing the Issuance of Free Patents to Residential Lands, approved last March 9, 2010), the Free Patent Title given to occupants of land in highly urbanized cities is limited only to residential lands less than 200 square meters.”® Considering that the CGT exemption applies only to residential property, the limit provided under the free patent title of less than 200 square meters (the proposal uses the phrase not more than 200 square meters) in highly urbanized cities might as well be used for purposes of the CGT exemption. 5. As to the consequences of this option, it should be mentioned that the proposal is more generous than the present exemption provision as principal In other cities, less than 500 sq.m. 1" and 2™ class municipalities, less than 750 sq.m.; all other ‘municipalities, less than 1,000 sq.m. Study on the Exemption from Capital Gains Tax 9NTRC Tax Research Journal Volume XXL (ae residences with area of not more than 200 square meters will be automatically exempt from the tax when presently, such residences may only be exempt if they meet the prescribed conditions and requirements, This option has a higher chance of acceptability to taxpayers because of the relaxation of the rules on smaller land arca and maintenance of status quo on bigger land area. 5.1 If pursued, Section 24(D)(2) needs to be amended as follows: (2) Exception ~ The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of their principal residence by natural persons WITH LAND AREA OF NOT MORE THAN TWO HUNDRED (200) SQUARE METERS, shall be exempt from the capital gains tax imposed under this Subsection. THE SAID EXEMPTION MAY ALSO BE AVAILED OF IN EVERY INSTANCE OF DISPOSITION BY NATURAL PERSONS OF THEIR PRINCIPAL RESIDENCE. IN THE CASE, HOWEVER, OF PRINCIPAL RESIDENCES WITH LAND AREA OF MORE THAN TWO HUNDRED (200) SQUARE METERS, CAPITAL GAINS PRESUMED TO HAVE BEEN REALIZED BY NATURAL PERSONS FROM THE SALE OR DISPOSITION OF THEIR PRINCIPAL RESIDENCE MAY BE EXEMPT FROM CAPITAL GAINS TAX PROVIDED THE PROCEEDS OF THE SALE ARE FULLY UTILIZED IN ACQUIRING OR CONSTRUCTING A NEW PRINCIPAL RESIDENCE WITHIN EIGHTEEN (18) CALENDAR MONTHS FROM THE DATE OF SALE OR DISPOSITION: PROVIDED, THAT THE HISTORICAL COST OR ADJUSTED BASIS OF THE REAL PROPERTY SOLD OR DISPOSED SHALL BE CARRIED OVER TO THE NEW PRINCIPAL RESIDENCE BUILT OR ACQUIRED: PROVIDED, FURTHER, THAT THE COMMISSIONER SHALL HAVE BEEN DULY NOTIFIED BY THE TAXPAYER WITHIN THIRTY (30) DAYS FROM THE DATE OF SALE OR DISPOSITION THROUGH A PRESCRIBED RETURN OF HIS/HER INTENTION TO AVAIL OF THE TAX EXEMPTION HEREIN MENTIONED: PROVIDED, STILL FURTHER, THAT THE SAID TAX EXEMPTION CAN ONLY BE AVAILED OF ONCE EVERY TEN (10) YEARS: PROVIDED, FINALLY, THAT IF THERE IS NO FULL UTILIZATION OF THE PROCEEDS OF SALE OR DISPOSITION, THE UNUTILIZED PORTION OF THE GAIN PRESUMED TO HAVE BEEN REALIZED FROM THE SALE OR DISPOSITION SHALL BE SUBJECT TO CAPITAL GAINS TAX. FOR THIS PURPOSE, THE GROSS SELLING PRICE OR FAIR MARKET VALUE AT THE TIME OF SALE, WHICHEVER IS higher, SHALL BE MULTIPLIED BY A FRACTION WHICH THE UNUTILIZED AMOUNT BEARS TO THE GROSS SELLING PRICE IN ORDER TO DETERMINE THE TAXABLE PORTION AND THE TAX PRESCRIBED UNDER PARAGRAPH (1) OF THIS SUBSECTION SHALL BE IMPOSED THEREON. ‘Study on the Exemption from Capital Gains Tax}[RRC Ter Reseach Touma Value RR ] 6. On the other hand, this option will also automatically take away from the government prospective CGT revenues. In addition, questions pertaining to vertical equity may also arise out of this option because of the probability that a principal residence with smaller land area, especially in urban settings, might have higher market value than those with bigger land area in rural places. To cite an example, the value of a 150 square meter principal residence in Makati City may be equivalent to or higher than the value of a 1,000 square meters land in the Bicol region. While the ‘owner of the 150 square meter principal residence in Makati enjoys CGT exemption on the gains derived ftom the sale of his/her principal residence without any need to comply with any requirements, the owner of a principal residence with 1,000 square meters lot in the Bicol region has to go through the process of securing supporting documents, opening an escrow account with an AB and then later on submitting post documentary requirements in order to avail of the CGT exemption on the sale of his/her principal residence. Hence, those who will likely benefit from the option are property owners especially in the urban areas with land area of 200 square meters and below but with higher market values. The quality of house/residential building that is erected in the lot is also a major factor in the valuation of the principal residence. 7. It may therefore be worth considering to base the CGT exemption instead on the value of the principal residence. This way, regardless of the location, rural or urban, there is equity in the tax treatment of the principal residence, The factor that needs to be considered for this option, however, is whether the value to be used is the fair market value as determined by the BIR (zonal value) or the fair market value as shown in the schedule of values of the Provincial and City Assessors. The problem with using these values is that they may not be up-to-date and may not reflect the true market value of real properties. There may also be a need to exempt owners of principal residences that are considered as socialized housing units. This will therefore require inquiry with either the Housing and Land Use Regulatory Board (BLURB) or Pag-IBIG for the actual costs of such housing units and the appropriate value of principal residences that will be made exempt from CGT. Given the many factors involved, the determination of the advantages and disadvantages and the estimation of the revenue impact of this recommendation, a separate paper may be necessary to discuss the details of this option, B.2_ On Maintaining the Conditions for CGT Exemption 1. The proposal under the LAMP maintains the conditions only for principal residences with area of more than 200 square meters. In this regard, it should be mentioned that the existence of these conditions protects the government from any ‘opportunities for leakages or abuses as only those who have complied therewith are entitled to the exemption. If the conditions will be removed specially in the case of principal residences with big areas, the government will also be deprived of CGT revenues from principal residences with very high market values. (Sia on th Exemption from Capital Gana Tax Fl[TRC Tax Research Fours —Wotame 357] 2. On the part of the taxpayers, however, they are not given the flexibility to maximize the proceeds of the sale of their principal residence. As they are required to construct a new principal residence from the proceeds of the sale of their old residence to get the exemption, itis either they will construct a new residence or they will produce fake receipts or documents to prove that they have constructed a new principal residence to avail of the CGT exemption. They may also resort to fake documentation in case they are not able to fully utilize the proceeds from the sale of their principal residence as they are not likely to be comfortable paying the CGT on the unvtilized proceeds. 3. As is always the case, monitoring of taxpayer's compliance with the exemption conditions will continue to pose varied and daunting administrative challenges to the BIR. Needless to say, without an effective monitoring system, the exemption will only be an opportunity for leakages/abuses. B.3_ On Removing the Conditions for CGT Exemption 1. As mentioned earlier, the proposed reform option under the LAMP will remove the conditions for CGT exemption for principal residences with an area of not ‘more than 200 square meters. ‘The removal of conditions will relieve the BIR of the administrative hassles of monitoring compliance with such conditions. However, this may cteate opportunities for leakages/abuses. On the part of taxpayers, the option swill not only reduce their cost of tax compliance but will also give them the freedom to decide on where to put and how to use the proceeds in an optional manner. If pursued, the conditions under Section 24(D)(2) of the Tax Code must be deleted and the said Subsection, as amended, should read as follows: (2) Exception, — The provisions of paragraph (1) of this Subsection to the contrary notwithstanding, capital gains presumed to have been realized from the sale or disposition of a principal residence with land area of not more than two hundred (200) square meters, by natural persons shall be exempt from the capital gains tax imposed under this Subsection. B4 Revenue Impact of the Reform Option Even with the small number of individuals availing of the CGT exemption and even if the revenues waived are only a small fraction when compared to total CGT collections on the sale or transfer of real property, its impact on government revenues cannot be taken for granted, considering government's tight financial condition. To illustrate an example, as earlier mentioned, there was an average of 19 availments per year of the CGT exemption on the sale of principal residence. ‘The computed average foregone revenue in a year, on the other hand, amounted to B 6.03 2B ‘Study on the Exemption from Capital Gains Tax][NTRCTax Research Journal Volume XXII million. On the rough assumption that there is no variation in the gross selling price or fair market value of the principal residence disposed of therefore totalling to the same amount of CGT due, the foregone revenue per availment will equate 10 B 317,000. If because of the generosity of the option, the number of availments increases by 30% or about 25 per year, the average foregone revenue per year will increase to B 7.9 million. If availment increases by 50% or 38 per year, the foregone CGT revenue in a year will total to more than P 12 million, XI PROBLEMS AND RECOMMENDATIONS 1. One of the foremost problems with the CGT exemption provision of the NIRC is that not all taxpayers are aware or knowledgeable about the availment procedures. This is manifested in the data on the number of transactions involving principal residences that were exempted from the CGT, the interview with the BIR official and the results of the NTRC.s 2007 tax perceptions survey. 2. Another factor that might have discouraged individuals from availing of the CGT exemption is the submission of various documentary requirements. While these requirements are made to ensure that only those who are really qualified are entitled to the exemption, they pose as a disincentive to taxpayers due to the inconvenience imposed by them. 3. Another condition that may pose a problem is the full utilization of the sale proceeds to avail of the exemption. It should be noted that the amount of CGT due on the sale or transfer transaction is deposited in the escrow account opened in the AB to ensure its payment in case the taxpayer fails to satisfy the utilization condition. ‘The condition also ‘works against the optional utilization of sale proceeds in the manner deemed more beneficial by the taxpayer. XII. CONCLUSION AND RECOMMENDATIONS 1. The CGT exemption of the gains derived from the sale, exchange or disposition of principal residence does not appear to be appreciated by concerned property owners. ‘This is so as only a handful of taxpayers has taken advantage of it. While this phenomenon may be due to the rarity of transactions in principal residences, it could also be that not many taxpayers are well-informed about the exemption or if they are informed, they just forego the privilege as they are not willing to comply with the numerous conditions and documentary requirements prescribed for the exemption. ‘Study on the Exemption from Capital Gains Tax[NiRC Tax Research foul Volume XXi11 ] 2. There is merit in the proposal under the LAMP to automatically exempt owners of common/small principal residences for the reason that it will not only ease the administration and monitoring concems of the BIR but also lessen the cost of compliance of taxpayers as they need not go through the tedious process of securing supporting documents, opening of escrow account, payment of taxes and other fees and submitting post documentary requirements. However, basing the CGT exemption of gains derived from the sale of principal residence on the land area of the principal residence may violate the principle of equity as those who will likely benefit from this are urban residential property ‘owners whose areas of principal residence may be small but the market values of which are very high. Vertical equity dictates that individuals with more ability to pay taxes should pay more than those with limited capacity to pay. This option may put rural residential property owners at a disadvantageous position because their principal residence may have bigger land areas and thus still need to qualify for the CGT exemption even if the values of their principal residences are lower than those in urban areas. It is therefore recommended to make the CGT exemption value-based rather than area-based. Due, however, to the various factors to be considered in this option, a separate paper may have to be done on this aspect. 3. Attached to the proposed automatic exemption is the removal of conditions, the most significant of which, is the reinvestment of the proceeds of the sale on another principal residence. This will give taxpayers the liberty to dispose in any manner they wish the proceeds of the sale of their principal residence to boost the property or capital market, among others. Maintaining the conditions, on the other hand, for certain property owners is necessary in order preclude instances of leakages/abuses. 4. The practices in other countries as earlier mentioned are also worth considering if the subject provision of the NIRC is to be amended. Factors such as period of residency, distinction between principal residences that are also used for business purposes and those solely for residential purposes and the rollover relief or deferral of the CGT which allows some degree of financial ease to the concemed property owners may be worth considering. a “Shad othe Brempilon rom Caphal Gah Fal