The article titled: “Personal income tax with respect to the authorization of real estate: Would rather wrongly collecting than missing out!” from Lawyer Lac Thi Tu Duy, is published on Sai Gon economic times, dated 9 Jun 2018.
General Department of Taxation: levy tax even on the authorization of real estate!
According to current regulations, with respect to the real estate transfer, the transferor being an individual shall pay personal income tax (PIT) either at the rate of 2% of the selling price or at the rate of 25% of the gain. To evade PIT, the transferor and the transferee often agree to sign a contract of authorization of real estate instead of a real estate transfer contract, according to which the transferor has the right to be on behalf of the transferee to use and determine the real estate (such as transferring, donating, contributing as capital, etc.) (temporarily called as real estate authorization) as provided in Article 581 of the current Civil Code.
In order to prevent this situation, in Official Letter No. 1133/TCT-TNCN replying to the Tax Department of Hanoi City on 05 April 2011 (Official Letter 1133), the General Department of Taxation stated that real estate authorization in nature is a form of real estate transfer, so the authorised representative must pay PIT like the case of real estate transfer.
In the viewpoint of the General Department of Taxation, the authorization contract of real estate in which the real estate owner assigns the person being authorized to fully dispose the real estate (including the renting, lending, transferring, exchanging, donating, mortgaging, etc.) and not to have to return the real estate to the real estate owner and the benefits from the authorization, is just a contract of real estate transfer pretended as an authorization contract and such a contract shall be subject to PIT applicable to the real estate transfer.
In reality, the guidelines of the General Department of Taxation made some local taxation authorities and people involving into this form of transaction confused and causes a lot of arguments. This makes many housing dossiers relating to contracts of real estate authorization which have been received by housing management authorities of at district level and have been forwarded to local tax authorities halted to wait for specific instructions from upper-level tax authorities.
Legal matters to be discussed
It can see that the opinion of the General Department of Taxation seems to be subjective and imposed rather than basing on legal basis.
Firstly, in the viewpoint of the law, the owner of any property has full right of possessing, using and disposing his/her property. Under the authorization activity, the real estate owner has the right to authorize another person to be on behalf of the real estate owner to possess, use and dispose the real estate, including the renting, lending, transferring, exchanging, donating, mortgaging. In general, there is no provision limiting the scope of authorization of the real estate owner.
Therefore, in the above case, even when the person being authorized does not have to return the real estate and the benefits gained from the authorization to the real estate owner, the authorization contract is still valid and may not be interpreted as a contract of real estate transfer.
Secondly, in the legal viewpoint, transfer and authorization are independent institutions in the Civil Code, to be designed to create different rights and obligations. The equation of authorization contract and transfer contract will imperceptibly break the civil law system and we are afraid that the losses from the broken transactions will be many times greater than the money amount collected from PIT.
It is though that appropriate measures to increase tax collection effectiveness of local tax authorities are necessary. However, breaking clear regulations of the law for the purpose of tax collection (even if those regulations are inadequate) and causing difficulties to normal operation of the law system as well as to taxpayers and tax authorities is not reasonable.
In case the State management body is in doubt that an authorization contract is affected, it should show real convincible proofs and signs so that the person on whom the tax is levied would admire and respect. Besides, the law has provided specifically on affected contracts, leading to ineffectiveness at Article 129 of the Civil Code and provided sanctions and arrears collection to the deed of tax dodging. The discovery and sanction of deeds violating the law in general and deeds violating laws on taxation in particular need consistence among regulating laws and the guiding instruments as well as among the management bodies, and may not be imposed in the way of “would rather wrongly collecting than missing out” that both violates the laws and sets a bad precedent in observance of the law in the future.
Also, with a viewpoint disagreeing with the tax levy on the activities of authorization of real estate transactions, in Official Letter No. 227 dated 18 February 2011 making a suggestion to the Ministry of Finance, the Ministry of Construction confirms that a contract of authorization of real estate transfer shall not be deemed as a contract of real estate transfer. Firstly, because a contract of authorization of real estate transfer is a legal form of contract and permitted by the laws. Besides, according to the Ministry of Construction, there is no ground to levy PIT on this activity as on the transaction of real estate transfer, since it is clear that this sanction “does not give rise to the movement of the right of ownership and right of using of the real estate from the real estate owner to the person being authorized, and it is only the change of the subject realizing the rights of the real estate owner”.
Disadvantages for bona fides
In reality not all authorization contracts (including possessing, using and disposing the real estate) are affected with the purpose of tax evasion.
In fact, the demand of authorizing real estate transactions of people is not small because of many reasons such as the real estate owner has some problems with his/her health, is too old or faces difficulty in travelling, etc., while the person being authorized is often close and trustworthy to him/her. However, if Official Letter 1133 is applied, these bona fide authorization contracts shall be subject to PIT such as the activities of real estate transfer.