We sold a property and paid the BIR taxes, then the sale got cancelled, can we get a refund of the taxes paid?

If there’s anything that we can learn from 2020, it’s that things don’t always go according to plan. The pandemic has affected all of us, and, if we could, we’re pretty sure that some of us would want to turn back time and re-do some of our decisions.

Such is the case of 2 parties who entered into a contract of sale over a house and lot. Because of a change in circumstances, largely due to the pandemic, the parties agreed to mutually cancel or rescind the sale. And while the purchase price can easily be returned to the (former) buyer, what of the taxes that were paid to the government through the Bureau of Internal Revenue (BIR)?

Every sale or conveyance of real property gives rise to the obligation to pay capital gains taxes  and documentary stamps taxes to the BIR. If a sale gets cancelled or rescinded, are these taxes refundable?

Yes and no.

Capital gains taxes on the sale of real estate are refundable if the sale gets rescinded. However, documentary stamps taxes paid are not.

Capital gains tax is a tax on the gain from a sale. When a sale gets cancelled or rescinded, the (former) seller will have to return the proceeds of the sale to the (former) buyer. This has the effect of negating any gain from the sale transaction. Therefore, there will be no basis for the imposition of capital gains tax, which will then considered as an “erroneous or illegal” tax, and may be subject to a claim for refund.

Documentary stamps tax, on the other hand, is a tax on the sale document, not on the transaction. It becomes irrelevant whether or not the transaction is declared later on as void, unenforceable or is eventually cancelled by the parties. The basis for the imposition of the tax is the execution of the document or instrument to which it attaches. Unlike the capital gains tax, it does not become an “erroneous or illegal” tax if the sale is cancelled. That is why it cannot be refunded.

As a final note, it must be kept in mind is that tax refunds are strictly construed against the claimant, and that the process of securing one takes some time. There is a specific list of documents that must be submitted and a process that must be followed. So, please take care to safekeep original copies of your documents and to manage your expectations to avoid frustration.