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MMSU

MARIANO MARCOS
STATE UNIVERSITY
College of Business,
Economics and Accountancy

Tax 20: INCOME TAXATION


Academic Year 2018-2019
Capital Gains Taxation

Capital Gains Tax


A tax imposed on sale of shares of stock of a domestic corporation not listed and traded thru a local stock
exchange held as capital asset and sale of real property in the Philippines held as capital asset.

Ordinary Asset vs. Capital Asset


Ordinary Asset are those assets used in the business, such as:
1. Real property used in the trade or business of the taxpayer (Office Building, Warehouse)
2. Stock in trade of a taxpayer or other real property of a kind which would properly be included in the
inventory of the taxpayer if on hand at the close of the taxable year
3. Real property held by the taxpayer primarily for sale to customers in the ordinary course of his trade
or business (inventory)

Capital assets
1. Assets not classified as ordinary asset
2. Personal Assets

The classification of assets or properties as ordinary asset or capital asset depends upon the nature of
the taxpayer’s business. A domestic stock is an ordinary asset to a dealer in securities but is a capital
asset to a non-security dealer. A real property (house) is an ordinary asset to a real property developer
but is a capital asset to a non-real property developer.

Taxability on the Gains on Dealings of Properties


Gains Taxability
Ordinary Gains arises from the sale, exchange and Regular Income Tax
other disposition, including pacto de
retro sales and other conditional
sales, of ORDINARY ASSETS
Capital Gains arises from the sale, exchange and General Rule:
other disposition, including pacto de Regular Income Tax
retro sales and other conditional Exception
sales, of CAPITAL ASSETS (subject to Capital Gains Tax):

1. Sale of shares of stock of a domestic


corporation not listed and traded thru a
local stock exchange (sold directly to
the buyer)
2. Sale of real property in the Philippines

Capital Gains Tax


Shares of Stocks of a Domestic Corporation (directly to the buyer)

Capital Gain Old Law TRAIN Law


Gain* on the sale, exchange and other
disposition of shares of stocks directly to the Not over Php 100,000- 5%
15%
buyer (not listed and traded thru the local stock Excess of Php 100,000 -10%
exchange)
*Net Gain

Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph
MMSU
MARIANO MARCOS
STATE UNIVERSITY
College of Business,
Economics and Accountancy
Illustrations
Compute the tax on the following sales by J. Cruz of his stock investments in a year.

Selling Price of A Company shares, traded 200,000


Cost (100,000)
Net Gain 100,000

Capital Gains Tax 0


Since the shares are traded, the gain from this sale will not be subject to Capital Gains Tax. The tax to be paid will
be the Stock Transaction Tax.

Selling Price of A Company shares, traded 500,000


Cost (700,000)
Net Loss (200,000)

Capital Gains Tax 0


Since the shares are traded, the loss from this sale will not be subject to Capital Gains Tax. The tax to be paid will
be the Stock Transaction Tax.
Selling Price of A Company shares, not traded 100,000
Cost (80,000)
Net Gain 20,000

Old Law:
Tax on the first P100,000 (20,000 x 5%) 1,000
Capital Gains Tax 1,000

TRAIN Law:
20,000 x 15% 3,000

Selling Price of A Company shares, not traded 500,000


Cost (120,000)
Net Gain 380,000

Capital Gains Tax (OLD Law) 33,000


Capital Gains Tax (TRAIN Law) 57,000

Old Law:
Tax on the first P100,000 (100,000 x 5%) 5,000
Tax on the excess of P100,000 (280,000 x 10%) 28,000
Capital Gains Tax 33,000

TRAIN Law:
380,000 x 15% 57,000

Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph
MMSU
MARIANO MARCOS
STATE UNIVERSITY
College of Business,
Economics and Accountancy

Selling Price of A Company shares, not traded 200,000


Cost (250,000)
Net Gain (50,000)

Capital Gains Tax 0


The NIRC only tax gains from the sale of shares of stock, since the sale resulted to a loss, the capital gains tax is 0.

Installment payment of Capital Gains Tax


When domestic stock is sold in installment, the capital gains tax may also be paid in installments if the:
1. Selling price exceeds Php 1,000; and
2. Initial payment does not exceed 25% of the selling price. The initial payment refers to the collections
in the taxable year the sale is made.

Illustration:
On November 1, 2018, Mr. Been made a sale of domestic stocks, not traded, costing Php 7,000,000 for
Php 1,000,000. The buyer agreed to pay in P100,000 monthly installments starting November 30.
a. Is Mr. Been qualified for installment payment of the capital gains tax?

Yes, Mr. Been is qualified for installment payment since the total initial payment for the sale is less than the
threshold of 25%.
Initial Payment
First installment (November 30) 100,000
Second installment (December 31) 100,000
Total Initial Payment 200,000
Ratio of initial payment (200,000/1,000,000) 20%

b. How much is the net capital gains tax due on the second installment?

Selling Price 1,000,000

Less: Cost of shares sold 700,000

Net Capital Gain 300,000

Old Law:

Tax on the first P100,000 (100,000 x 5%) 5,000

Tax on the excess of P100,000 (200,000 x 10%) 20,000

Capital Gains Tax 25,000

TRAIN Law:

Capital Gains Tax (300,000 x 15%) 45,000

Old Law
Capital Gains Tax Payment for December 31

(100,000/1,000,000 x 25,000) 2,500

TRAIN Law

Capital Gains Tax Payment for December 31

(100,000/1,000,000 x 45,000) 4,500

Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph
MMSU
MARIANO MARCOS
STATE UNIVERSITY
College of Business,
Economics and Accountancy
Capital Gains Tax
Real Property in the Philippines

Capital Gain Old Law TRAIN Law


Sale, exchange and other disposition of real
6% 6%
properties in the Philippines

Tax base:
Gross selling price, or the current fair market value (assessed value vs. zonal value) at the time of sale,
whichever is higher.

Exemption:
Proceeds of sale of real property classified as principal residence and capital asset are exempt from the
6% capital gains tax if used to build or buy a new principal residence within 18 months from the date of
sale or of disposition.
• Sale was made by a natural person (individual) and the principal residence is located in the
Philippines
• The proceeds of the sale must be fully utilized in acquiring or constructing a new principal
residence within 18 calendar months from the date of sale
• 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
• The taxpayer must notify the Commissioner within 30 days from the date of sale or disposition of
his intention to avail of the tax exemption
• The tax exemption can be availed of only once every 10 years.

Illustration:
J. Cruz sold his residential house and lot located in Quezon City on January 5, 2018 for Php 8,000,000.
The property was purchased in 2008 for Php 2,000,000. The current market value at the time of sale
was: BIR Commissioner’s Zonal Valuation: Php 9,000,000; City Assessor’s schedule of values: Php
6,000,000.

A. Compute the final tax payable.


Commissioner's value Php 9,000,000
Assessor’s value 6,000,000
Selling price 8,000,000
Tax base (highest between the FMV and GSP) 9,000,000

Tax base 9,000,000


Rate 6%
Final Tax (Capital Gains Tax) 540,000

B. Suppose after 6 months from the sale, J. Cruz invested the proceeds of the sale of
Php 8,000,000 in a new residential house, what will be the tax consequences? What
will be the cost of the new residence for income tax purposes?

The sale will be exempt from capital gains tax. Provided that within 30 days from the date of
sale, J. Cruz duly notified the Commissioner, that he will use the proceeds to buy a new
residential house, through a prescribed form BIR Form 1706 and a “Sworn Declaration of
Intent.”

The cost of the new residence will be Php 2,000,000. The cost of the old residence will be
carried over to the new residence.

Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph
MMSU
MARIANO MARCOS
STATE UNIVERSITY
College of Business,
Economics and Accountancy

C. Suppose after 18 months, J. Cruz did not utilized the proceeds from the sale, what will be the tax
consequence?
In the event, however, that the seller fails to utilize the proceeds of the sale in full or in part within the
18-month reglementary period, his right of exemption from the capital gains tax is not valid. Therefore,
the tax due shall immediately become due and demandable on the 31st day after the date of sale.

J. Cruz shall immediately file and pay his capital gains tax. In addition to that, he will also pay a 25%
surcharge for late payment and 20% delinquency interest per annum computed based on the tax base
of the sale. Interest shall begin from the 31st day after the sale until the date of payment.
Tax base 9,000,000
Rate 6%
Final Tax (Capital Gains Tax) 540,000
Surcharge (9,000,000 x 25%) 2,250,000
Interest (9,000,000 x 20% x 1.5*) 2,700,000
Total Tax Consequence 5,490,000
18 months

D. Suppose after 18 months, J. Cruz only utilized half of the proceeds from the sale, what will be the tax
consequence?

If the proceeds of the sale are not fully utilized after 18 months, the unutilized amount will be taxable.
In addition to that, he will also pay a 25% surcharge for late payment and 20% delinquency interest
per annum computed based on the taxable portion of the sale.

The following formula is used to arrive at the taxable portion:

/012343567 89:102
!"#"$%& ()*+,)- = x Higher of GSP and FMV
;<:== >6430? @<30A6

Taxable Portion (4,500,000 x 6%) 270,000


Surcharge (4,500,000 x 25%) 1,125,000
Interest (4,500,000 x 20% x 1.5*) 1,350,000
Total Tax Consequence 2,745,000
18 months

Installment payment of Capital Gains Tax


When real property is sold in installment, the capital gains tax may also be paid in installments if the
initial payment does not exceed 25% of the selling price. The initial payment refers to the collections in
the taxable year the sale is made.

Illustration:
On December 1, 2018, Ms. Been sold for Php 4,000,000 an unused lot with a cost and fair value of Php
2,000,000 and P5,000,000, respectively. The buyer agreed to pay P500,000 monthly installments
starting December 31.
A. Is Ms. Been qualified for installment payment of the capital gains tax?

Yes, Mr. Been is qualified for installment payment since the total initial payment for the
sale is less than the threshold of 25%.

Initial Payment
First installment (December 31) 500,000
Ratio of initial payment (500,000/4,000,000) 12.5%

Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph
MMSU
MARIANO MARCOS
STATE UNIVERSITY
College of Business,
Economics and Accountancy

B. How much is the net capital gains tax due in 2018?

Gross Selling Price 4,000,000

Fair Market Value 5,000,000

Tax Base (higher between GSP and FMV) 5,000,000

Capital Gains Tax (5,000,000 x 6%) 300,000

Capital Gains Tax Due in 2018

(500,000/4,000,000 x 300,000) 37,500

Filling and Payment of Capital Gains Tax

Shares of Stocks
BIR Form 1707
a. The return shall be filed within thirty (30) days after each sale, barter, exchange or other disposition
of shares of stock not traded through the local stock exchange.
b. In case of installment sale where the taxpayer is legally allowed to pay the tax by installment under
certain conditions and requirements, the return shall be filed within thirty (30) days following the
receipt of the first down payment and within thirty (30) days following each subsequent installment
payment.
c. This return shall be filed in triplicate.
d. The return shall be filed and paid by the seller with any Authorized Agent Bank (AAB) under the
jurisdiction of the Revenue District Office (RDO) where the seller/transferor is required to register.

Real Property
BIR Form 1706
a. The return shall be filed within thirty (30) days after each sale, barter, exchange or other disposition
of the real property
b. In case of installment sale where the taxpayer is legally allowed to pay the tax by installment under
certain conditions and requirements, the return shall be filed within thirty (30) days following the
receipt of the first down payment or following each subsequent installment payment, whichever is
applicable.
c. This return shall be filed in triplicate.
d. The return shall be filed and paid by the seller with any Authorized Agent Bank (AAB) under the
jurisdiction of the Revenue District Office (RDO) where the seller/transferor is required to register.

Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph
MMSU
MARIANO MARCOS
STATE UNIVERSITY
College of Business,
Economics and Accountancy
Capital Gains Tax Drills

1. Mr. Dionisio sold domestic stocks directly to a buyer at a mark-up on cost of P200,000. He paid
P5,000 broker’s commission and P8,000 documentary tax on the sale. Compute the capital gains
tax.
2. Mr. Abdul, a non-resident alien, sold domestic stocks directly to a buyer at a net gain of P70,000.
Compute the capital gains tax.
3. Mr. Panay, a non-resident citizen, sold domestic stock rights directly to a buyer at a net gain of
P320,000. Compute the capital gains tax.
4. Mr. Digos sold shares of a resident foreign corporation directly to a buyer. The shares were
purchased for P100,000 and were sold at a net selling price of P210,000. Compute the capital gains
tax.
5. Y owns a house and lot which he used as residence. They were acquired in 2003 at a cost of
P1,200,000. In the year 2018, he sold the property to W Corporation for P1,000,000 which was
higher than the zonal value of P900,000.Was the transaction subject to capital gains tax?
6. A is the owner of a residential house and lot in Quezon City which he acquired on 2005 at a cost of
P700,000. He sold it to B for On December 15, 2018 at P800,000. At the time of sale, the lot had a
BIR zonal value of P600,000 and an assessed value of P250,000.
a. What kind of tax is imposed on the sale of the said residential house and lot?
b. Who is liable for the tax?
c. What is the basis and the rate of the tax?
d. Compute the tax due on the sale.
e. Assuming A will use the proceeds of the sale to build a new residential house and lot on
January 2019, how much is the tax due?
f. In connection with letter e, assuming A was not able to build the residential house and lot in
the year 2019 and only commenced construction in the year 2021, how much is the tax
due? When will it be due?

Brgy. Quiling Sur, City of Batac, 2906 Ilocos Norte, Philippines Telephone: (077) 670-1874
E-mail Address: cbea@mmsu.edu.ph Website: www.mmsu.edu.ph