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Thursday, October 6, 2022

Personal Income Tax Law reveals impractical provisions on real estate transfer

Updated: 09:13’ - 27/06/2013

Tran Si Vy[1] and Julianne TriphonTriphon[2]
Leadco Legal Counsel

The personal income tax (PIT) is a type of tax that people involved in a purchase of real estate must pay to the State once that real estate is transferred. The 2007 Law on PIT[3] and its guiding documents are regarded as effective tools regulating the incomes of taxpayers involved in these transactions, but there is evidence of certain shortcomings.  Since its enactment, practical application has exposed detrimental loopholes in some provisions that affect this law’s integrity. Such provisions cause these taxpayers financial loss, or allow them to take unfair advantage of the system. The existence of such loopholes makes these provisions unfeasible.

Example 1: Exemption from PIT for transfer of sole real estate

One example proving the unfeasibility of the current Law on PIT is the provisions regarding the exemption from PIT for the transfer of unique real estate. More specifically, Section 2, Article 4 of the 2007 Law on PIT states that “income exempted from the PIT is that generated from transfer of residential housing [and/or] rights to use residential land and the assets attached to the land by an individual who owns only one residential house [or] residential land lot.” Essentially, if an individual has only one residential piece of real estate, that individual is exempted from PIT on the transfer of that real estate.

Section 2.5, Item III, Part A of Circular No. 84/2008/TT-BTC dated September 30, 2008, of the Ministry of Finance, guiding the implementation of a number of articles of the Law on PIT and guiding the implementation of Government Decree No. 100/2008/ND-CP dated September 08, 2008, detailing a number of articles of the Law on PIT, has provided detailed guidance regarding the objects to be exempted from PIT and the conditions for which a person is exempted from PIT within the scope of Section 2, Article 4 of the Law on PIT. Specifically, it states that “bases for determination of tax-exempt income from transfer of the sole residential house or residential land lot shall be declared by the transferor himself/herself who shall take responsibility for the truthfulness of his/her declaration. If the declaration is detected untruthful, PIT shall be retrospectively collected and a fine for the tax fraud shall be imposed under the Law on Tax Administration.”

Aligning with the provisions of the law and the guidance as specified in the Circular of the Ministry of Finance, those who seek tax exemption on transfer of their real estate simply need to declare that they have only one residential house or piece of residential land. Neither the Law nor the Circular clarifies which authority or organization has the responsibility to verify if the taxpayer’s[4] declaration is legitimate and whether he or she is entitled to tax exemption. In theory, the State, specifically the tax authority, has this obligation since the taxpayer has already committed to having only one residence or only one piece of residential land.

The Law requires that tax exemption be granted upon verification that a taxpayer has one single residence or one single piece of residential land. Unfortunately, in practice, tax exemption is made on a case-by-case basis at the discretion of the tax authorities. The tax authority’s refusal to grant this declaration is common for the main reason that the authority is “unable to verify if the taxpayer has only one house or piece of residential land to qualify for tax exemption.” This invariably leads to a situation where the taxpayer is disadvantaged and required to pay a large tax that should not have applied. As real estate transactions normally create high value, the taxable income resulting from those transactions is no small amount. The damage for the taxpayer, if refused the tax exemption, could be severe.

In certain cases where the house or the land to be sold is that the seller is living in, there is a higher probability of the tax authority granting a tax exemption. The taxpayer in this case simply needs to make a declaration committing to own only one piece of real estate and assume liability for this declaration. That is enough for tax exemption and the authority may accept it without question for verification.

However, such a declaration where the seller has a resident address different from the address of the real estate being transferred may not be accepted by the tax authority for tax exemption. In such a case, certain tax authorities require the transferor to provide a document certifying that he or she has only one piece of real estate in order to get tax exemption, even though the law does not necessitate that. In this situation, the tax authority shifts the burden of proving the possession of only one piece of real estate to the transferor, even though this has already been committed to in his or her declaration, with assumption of all liabilities based on this declaration.

Given the second scenario above, in order to prove ownership of only one piece of real estate, the taxpayer would have to appeal to three authorities: The People’s Committee of the commune where he or she regularly resides, the Division of Urban Management, or the Department of Natural Resources and Environment to request confirmation. However, all these authorities will refuse. The People’s Committee at the commune level where the transferor regularly resides only manages resident issues and the issuance of marriage certificates. They will refuse to provide certification to determine if a person has only one house or residential land parcel. The Division of Urban Management will also refuse the confirmation because this Division only manages the issuance of construction permits; thus, it does not have a function in verifying a person’s ownership of a house or land. Finally, the Department of Natural Resources and Environment manages real estate in one location (ex. one province or city); it cannot certify if the transferor has only one piece of real estate because it is not capable of knowing if he or she has real estate in another province or city. As a result, many people eventually pay a tax from which they should have been exempted.

Example 2: Exemption from tax on transfer of real estate among people having blood relations

In another example, the provisions on tax exemption arising from the transfer of real estate among blood relatives have proven themselves unreasonable in practice.

Section 1, Article 4 of the Law on PIT provides that “income from real estate transfers as between husband and wife; as between parents and children, including adoptive parents and adopted children; as between parents-in-law and children-in-law; as between grandparents and grandchildren; and as between siblings is exempted from PIT.” In this provision, the unfeasibility stems from the tax authority’s inability to stop a transferor’s use of a “straw man or woman” to avoid the tax.  The “straw man or woman” has no interest in the property; he or she is simply used for a middle ground transaction between the seller of the property and the true buyer.

For example, a woman that wants to transfer her real estate to her sister-in-law must pay PIT to the state because they are not blood relatives. To evade the tax, the woman will use her father-in-law as a straw man. The woman transfers the real estate to her father-in-law; the father-in-law will then transfer the real estate to the sister-in-law. This additional transaction exempts everyone from the tax because both transfers were made to blood relatives. In using their father-in-law as a straw man, the sisters-in-law easily avoided the tax. Tax authorities have doubt about the legitimacy of such transactions, but find it extremely difficult to prove fraud on the part of the people seeking tax exemption.

Example 3: Decrease of transfer price

This is a typical example of why the legal requirements for which taxable incomes are calculated are unfeasible. Currently, the law provides that the taxable income is the actual price of the transferred real estate as recorded in the transfer contract, but the transfer price must not be lower than the benchmark price of the same real estate provided by the provincial People’s Committee[5].

In reality, the transfer price of the real estate traded in the market is normally higher than the benchmark price provided by the provincial People’s Committee on an annual basis. However, parties involved in real estate transfer transactions often insert in the transfer contract a transfer price lower than the actual price of the real property being transferred. In other words, the actual payment made by the buyer to the seller is much higher than the price for transfer of the real estate recorded in the contract.  Indeed, the parties have a financial interest in lowering the price of the real estate in the transfer contract: the seller pays a lower PIT and the buyer pays a smaller registration fee[6] proportionally.

People involved in a transfer of real estate will make up a transfer price approximate to the benchmark price provided by the People’s Committee, most likely equal or slightly higher than the benchmark price. The benchmark price promulgated by the provincial People’s Committee does not adhere to the market price and is normally lower than the market price.[7] Thus, the benchmark price and the transfer price that the parties arrange are both lower than the value of the property, and do not accurately reflect the property value and amount of money that the seller actually receives for his or her real estate. If the made-up price is equal to or higher than the benchmark set by the People’s Committee, the tax authority will accept the calculation of the tax and registration fee.  As a result, both the seller and the buyer in a real estate transaction take advantage of loopholes in the law, and the State fails to recover a tax to which it is entitled.

For example, two parties agree to sell and buy real estate with a market value of VND 2 billion. The value of the real estate to be traded by the parties is VND 2 billion. In order to reduce the taxable amount, the parties make VND 1 billion the transfer price of the real estate then record that as actual price for the transfer of real estate in the contract. This figure of 1 billion is actually quite close to the benchmark price of the same real estate in a similar location promulgated by the provincial People’s Committee. With this lower figure, the seller will pay a PIT of 2 percent[8] of the value of the real estate to be transferred and recorded in the contract (VND 20 million), while the buyer pays a registration fee of 0.5 percent[9] calculated on the value of the real estate (VND 5 million). However, if applying the actual value of the real estate traded in the market for the transaction of VND 2 billion, the PIT owed to the state by the seller would be VND 40 million, and the buyer would pay VND 10 million in registration fee.

Some recommendations

With the lack of feasibility of these provisions in mind, lawmakers should amend the Law on PIT in an effort to eradicate tax evasion.  In addition, the amendments should be structured so as to have the cooperation of state authorities in different scopes of management, such as the tax authorities and the local People’s Committees.

In the short term, the state authorities should compile a full and comprehensive database of information of individuals. Based on that, the tax authorities and the state bodies in charge of natural resources and the environment could better identify the number of properties that each taxpayer owns. Access to this information on taxpayers seeking to transfer real estate is crucial in order to mitigate adverse effects of the Law on PIT as it is written. This suggestion has been made several times before; however, the state authorities have shown no signs of implementing such a procedure.

The local authorities, in particular the provincial People’s Committees, within their functions and duties, should adopt a new benchmark tariff for transferring real estate, staying close to the market price to ensure that the taxable amount on property transfer is accurate and the people involved in these transactions could not make up or lower the price to avoid the tax.

As for the tax authorities, those who are responsible for managing collection of and ensuring proper payment of taxes, it is necessary for them to increase public information on PIT and the Law on PIT, making the regulations available to people across the country. In the meantime, however, the tax authorities should actively oppose any situation of tax evasion to ensure management of revenue for the state budget.-

[1] Partner, Leadco Legal Counsel (Hanoi, Vietnam).

[2] Law Clerk, Leadco Legal Counsel (Hanoi, Vietnam); Juris Doctor Candidate, International and Business Law Concentrations; University of the Pacific, McGeorge School of Law, Class of 2014, Sacramento, CA, USA.

[3] Law No.04/2007/QH12 on Personal Income Tax dated November 21, 2007.

[4] According to the Article 2.1 of the Law on PIT, “personal income taxpayer means any resident individual with taxable income arising either within or outside the territory of Vietnam…”

[5] Article 5 of Circular No. 161/2009/TT-BTC of the Ministry of Finance dated August 12, 2009, guiding PIT in some cases of transfer and receipt of inheritances or gifts being real estate provides that “the real estate transfer price used as a basis for PIT calculation is the price indicated in the transfer contract. If the contractual land price is lower than the land price prescribed by the provincial-level People’s Committee at the time of submission of valid dossiers to competent state agencies, tax shall be calculated based on the land price prescribed by the provincial-level People’s Committee. If the contractual land price is higher than the land price prescribed by the provincial-level People’s Committee, the contractual price shall apply.”

[6] According to Circular No.124/2011/TT-BTC of the Ministry of Finance dated August 31, 2012, guiding registration fee, land and house are subject to registration fee and individual or organization whose house or land is owned will have to pay registration fee of 0.5% of the value of the house or land.

[7] According to Government Decree No.188/2004/ND-CP dated November 16, 2004, on methods of determining land prices and assorted land prices brackets, the provincial People’s Committee is the authority that provides benchmark price of the land in its location on an annual basis. The benchmark price of the land is used as a basis for calculating the tax and registration fee and usually is lower than the market price of the land.

[8] According to Article 29 of the Law on PIT, “tax payable on a real property transfer in Vietnam by a non-resident individual shall be fixed as the transfer price multiplied by the tax rate of 2 percent.”

[9] See Footnote 7 (land or house is subject to registration fee of 0.5 percent).


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