Chapter 6: Capital Gains Taxation acquired and sold by banks in their normal course

Classification of Taxpayer’s Properties of business.

1. Ordinary Assets - assets used in businesses such >ROPA in the form of Domestic Stocks held by banks
as: - classified as capital assets.
a. Stock in trade of taxpayer or other real
property of a kind which is included in Asset Classification Rules
inventory of taxpayer if on hand at the A. A property purchased for future use in business is
close of taxable year. an ordinary asset.
a. Real property of taxpayer held for sale in B. Discontinuance of the active use of the property
the ordinary course of his business. doesn’t change its character previously established
b. Real property used in business which is as a business property.
subject to the allowance for depreciation. C. Real property used, being used, or has been
c. Real property used in business of taxpayer. previously used, in trade of taxpayer is considered
Business is habitual arrangement in a commercial activity as ordinary asset.
involving regular sale of goods or services for profit. Non D. Property classified as ordinary asset for being used
profit entities are not business. in business by a taxpayer not engaged in real estate
Basically, ordinary assets are: business are automatically converted to capital
a. Assets held for sale - inventory asset upon showing proof that is not used for more
b. Assets held for use - supplies and item of than 2 years prior to the consummation of the
PPE taxable transaction involving the property.
2. Capital Assets - asset other than ordinary assets. E. A depreciable asset is an ordinary asset even if it
Basically, capital assets are: is fully depreciated or there is a failure to take
1. Personal (non business) assets of individual depreciation during the period of ownership.
taxpayer F. Real properties used by exempt corporations in their
2. Business assets of any taxpayer which are: exempt operations are considered capital asset.
a. Financial assets - cash, receivables, Exempt corporations are not business.
prepaid expenses, and investments G. Property transferred by sale, barter, or exchange,
b. Intangible assets - patent, copyrights, and inheritance, donation, or declaration of property
franchise rights dividend’s classification will depend whether or not
the acquirer uses it in business.
Analysis of Properties held by Taxpayers H. For real properties subject to involuntary transfer,
the involuntariness of such sale will have no effect
on the classification of the property.
I. Change in the business from real estate to non-real
estate business shall not change the classification of
ordinary asset previously held.
>Taxpayers engaged in real estate business includes real
estate dealer, real estate developer, real estate lessor, and
taxpayer habitually engaged in real estate business.
> Taxpayers habitually engaged in real estate business
include those registered with the HLURB or HUDCC as a
dealer or developer or those with at least 6 taxable real estate
Asset classification is relative transactions in the preceding year.
The classification whether ordinary or capital asset doesn’t ***Illustrations @page 174***
depend on the nature of property but on the nature of the
taxpayers business and its usage. Type of Gains on Dealings in Properties
1. Ordinary gain - arises from sale, exchange, and
>Real and Other Properties acquired (ROPA) by banks other disposition including pacto de recto sales and
- classify by revenue regulations as ordinary assets other conditional sales of ordinary asset.
even if banks is not engaged in the realty business.
This is due to the fact that ROPA are normally
 2. Capital gain - arises from sale, exchange, and other - Is a financing transaction rather than sale
disposition including pacto de recto sales and other transaction.
conditional sales of capital asset. - The excess FV received over the PAR value of
Taxation of Gains on Dealings in Properties shares issued is an additional capital to the
corporation.
Type of gain Applicable taxation scheme
- Stocks acquired by a corporation from its
Ordinary gains Regular income tax shareholders is non an assets or investments in the
accounting sense.
Capital gains General rule: Regular income tax
- The excess of consideration received in re-issuance
Exception rule: Capital gains tax of treasury stocks is called treasury share
premium, an additional capital and is not an
income. It should not be subjected to capital gains
Capital Gains subject to Capital Gains Tax
tax.
1. Capital gains on the sale of domestic
2. Exchange of stocks for services
stock directly to buyer.
- Is not considered as an exchange of property. No
2. Capital gains on the sale of real properties not
gain or loss imputed since it involves payment of
used in business.
expenses in kind.
Scope of Capital Gains Taxation
3. Redemption of shares in a mutual fund
Gains on dealings in capital assets Tax Rates - Gains from this are exempted by NIRC from
income taxation.
Gain on sale, exchange, and other disposition of 15% CGT
4. Worthlessness of stocks
domestic stock directly to buyer.
- Considered a capital loss subject to the rules of RIT.
Sale, exchange, and other disposition of real 6% CGT 5. Redemption of stocks for cancellation by the
property in the Philippines. issuing corporation
- Gain or loss from this for the purpose of stock
Gains from other capital assets. RIT
cancellation is subject to rules of RIT.
- Gain by the investor on redemption of redeemable
Capital Gain on the Sale, Exchange, and Other preferred shares is subject to RIT.
Disposition of Domestic Stocks Directly to Buyer - Gain or loss realized by the investor on voluntary
Domestic Stocks - evidence of ownership or rights to buy-back of shares by the issuing corporation is
ownership in a domestic corporation regardless of its taxable under CGT.
features, such as: 6. Gratuitous transfer of stocks
1. Preferred stocks - Either by way of donation inter-vivos or donation
2. Common stocks mortis causa is subject to transfer tax.
3. Stock rights - If transferred for insufficient consideration or at
4. Stock options significant discount, the difference between FV and
5. Stock warrants SP is a donation subject to donor’s tax.
6. Unit of participation in any association, recreation,
or amusement club. Modes of Disposing Domestic Stocks
It also includes not only sales of domestic stock for cash but 1. Through Philippine Stock Exchange
exchange of domestic stocks in kind and other dispositions 2. Directly to buyer
such as: Tax on Sale of Domestic Stock classified as Capital Assets
1. Foreclosure of property in settlement of debt through the PSE - not subject to CGT but to a stock
2. Pacto de recto sales - sale with buy back transaction tax of 60% of 1% of the selling price.
agreement ***Illustration @page 177***
3. Conditional sales - sales which will be perfected
upon completion of certain specified conditions Capital Gains Tax on Sale, Exchange, and other Other
4. Voluntary buy back of shares by the issuing Dispositions of Domestic Stock Directly to Buyer
corporation - redemption of shares which may be Nature of the CGT:
re-issued and not intended for cancellation. 1. Universal Tax - applies to all taxpayers disposing
The term other disposition doesn’t include: stocks (even sale is executed outside the PH)
1. Issuance of stocks by a corporation
 classified as capital assets regardless of Stocks - registrable securities that require BIR tax
classification of taxpayer. By situs, gain on sale is clearance prior to their transfer of ownership.
within. - Filing of tax returns is a pre-condition to tax
2. Annual Tax - imposed on the annual net gain on clearance
the sale of domestic stocks directly to buyer. - Capital gains or losses are require to be reported
Net Gain is determined as follows: after each sales through capital gains tax retire, BIR
Selling Price xxx Form 1707
Less: 2. Annual Capital Gains Tax
Basis of stocks disposed (xx) - 15% CGT is an annual tax
Selling expenses (xx) - CGT is recomputed on annual net gains and
Documentary stamp tax reported through a final consolidated return (BIR
paid by seller (xx) Form 1017A) on or before 15th day of 4th month.
Net Capital Gain (Loss) xxx
No loss scenario - due to flat 15% tax, if all transaction
Selling price shall mean: during the year resulted to gain, no filing and CGT
● If cash of cash sale - total consideration received payable required in the final consolidated return.
per deed of sale ***Illustration @page 183***
● If total consideration is paid partly in money and With loss scenario - offset losses first with subsequent gains.
property - the sum of money and FV of property - Residual tax payable must be settled.
received - No tax payment should be made until it turns into a
● In case of exchanges - FV of property received net gain.
What is tax basis of stocks? - This intra-period loss carry-over procedure is
● Acquired by purchase - tax basis is the cost of necessary to avoid overpaying the government.
property which will determined by the following ***Illustration @page 184-186***
method by descending order of priority:
● Specific Identification - if shares can be Installment Payment of the Capital Gains Tax
specifically identified If domestic stock is sold in installment, it can be paid to
● Moving Average Method - if books of installment if the:
accounts is maintained by the seller and a. Selling price exceeds 1000
transaction of every particular stock is b. Initial payment doesn’t exceed 25% of selling price
recorded ***Illustration @page 186-188***
● First-in, First-out Method - if the stocks
cannot be specifically identified Special Tax Rules in Capital Gain or Loss
● Acquired by devise, bequest, or inheritance - tax Measurement
basis is the FMV at the time of death of the 1. Wash sales of stocks
decedent. Wash sales rule
● Acquired by gift - tax basis is the lower of FMV at - Wash sale of securities occur when within 30 days
the time of gift. before and 30 days after the losing sale of securities
● Acquired for inadequate consideration - tax basis (also referred to as 61-day period), taxpayer
is the amount paid by the transferee for the property. acquired the same substantially identical securities.
● Acquired under tax-free exchanges - tax basis is - Capital losses on wash sales by non-dealers in
the substituted basis of the stocks securities are not deductible against capital gains
***Illustration @page 179-182*** because they are effectively unrealized.
- Immediate reacquisition of the shares makes the
Stocks sold for inadequate consideration - the excess of loss a theoretical or feigned loss.
the FV of the stocks over SP is a gift subject to donor’s tax - Securities in 61-day rule include stocks and bonds
if so intended by the seller as a donation. - Substantially identical - means stocks or bonds
***Illustration @page 182-183*** with the same class and same features.
example:
Tax Compliance >common stock and preferred stock are not
1. Transactional Capital Gains Tax substantially identical
 >participating and non-participating Initial Acquisition of Control
preferred stocks are substantially identical. - No gain or loss shall be recognized if property is transferred
***Illustration @page 188-191*** to a corporation by a person in exchange for the stocks.
-Control means ownership of stocks in corporation atleast
2. Tax-free exchanges 51% of the total voting power of all classes of stock entitled
A. Corporate reorganization to vote.
- No gain or loss shall be recognized on a corporation - This rule is relevant only to CGT
if is a party to a reorganization. ***Illustration @page 196***
Reorganization is defined: (detailed @pg 192)
1. A corporation exchanges property solely for stocks Exchange not solely for stocks
in a corporation. In tax-free exchanges, if exchange with other consideration
2. The acquisition by one corporation of stocks of such as cash and other properties, the gains (but not losses)
another corporation. are recognized up to the extent of the cash and other
3. The acquisition by one corporation of substantially properties received.
all of the properties of other corporation.
4. Are recapitalization or arrangement whether the Regulatory formula on Tax Substituted Basis of properties
stocks and bonds of corporation are re-adjusted as arising from tax free exchanges
to amount, income, or priority. Tax basis of old shares exchanged xxx
5. A reincorporation or the formation of the same Add: Gain recognized on the transfer xxx
corporate business with the same asset or the same Less: Cash and other properties received (xx)
stockholders surviving under a new charter. Tax basis of new shares received xxx
“Substantially all the properties of another corporation” ***Illustration @page 197-198***
means the acquisition by one corporation of at least 80% of
the asset including cash of another corporation which has the Minimum Public Float requirement of Publicly Listed
element of permanence and not merely momentary holding. Corporations
Mandatorily required to maintain a minimum ownership
Merger - occurs when one corporation acquires all or under PSE regulations.
substantially all of the properties of another corporation The minimum public ownership is higher of:
Consolidation - occurs when two or more corporation 1. The 10% of issued and outstanding shares
merged to form one corporation 2. The minimum public ownership required by the
SEC or PSE
Share-swap pursuant to a plan of merger or - Non-compliance will result in de-listing of
consolidation the stocks of the corporation in PSE.
- Gain or losses are not recognized for taxation purposes. - The sale of listed stocks which fall below
- Shareholders of the acquired corporation will be integrated the minimum requirement will be subject
in the acquiring corporation. to 15% CGT and not to the 6/10 of 1%
- The shares of the acquired corporations will be called in for stock transaction tax
replacement with the shares of the acquiring corporation. ***Comprehensive Illustration @page 199-200***
- Merely involves replacement of share of stocks of the
shareholder of the absorbed corporation. Person not liable to the 15% CGT
***Illustration @page 193*** 1. Dealers in securities
Share-swap resulting in control 2. Investors in shares of stocks in mutual fund
- Acquisition of control in another corporation achieved by company
acquisition of majority of its voting shares or by the 3. All other persons, whether natural or juridical, who
acquisition of substantially all of its asset is tax free if the are specifically exempt from national revenue taxes
acquiring corporations exchange therewith: under existing investment incentives and other
a. its own shares special laws such as
b. share of its controlling parent corporation a. Foreign governments and foreign
***Illustration @page 194-196*** government-owned and controlled
corporation
b. Qualified employee trusts funds
 c. Qualified Personal Employee Retirement Scope and Applicability of the 6% Capital Gains Tax
Account (PERA)
Location of the Taxpayers
Sale, Exchange, and Other Disposition of Real Property property
Classified as Capital Asset located in the PH Individuals Corporations
Subject to a tax of 6% of the selling price of the fair value,
Within the PH All individuals DC only
whichever is higher.
Under NIRC, the fair value of real property is whichever Outside the PH N/A N/A
higher of the:
The NIRC did not impose a final CGT for foreign
a. Zonal value, which is the value of prescribed by the
corporations. In cases where foreign corporation realized
Commissioner of Internal Revenue for real
gain from the sale of real property classified as capital asset,
properties for purposes of enforcement of internal
the capital gain is subject to RIT
revenue laws.
- Only land has zonal value.
Sale of real property abroad
b. Fair market value, as shown in the schedule of
- Not subject to CGT due to territoriality of taxation.
market values of the Provincial and City of
-For RC and DC, it is subject to RIT.
Assessors.
-For all other taxpayers, the capital gain is exempt.
- Both land and improvements have FMV
Exemption to the 6% Capital Gains Tax
For lands, the CGT is 6% whichever is highest of the SP,
1. Alternative Taxation Rule
Zonal value, or Provincial and City of Assessor’s FV.
- All of the individual seller of real property capital
assets has the option to be taxed at either:
Note that independent appraisal valuation, the FV is
a. 6% CGT
commonly used in financial reporting and is not used in
b. RIT
computation of capital gains tax.
- This is only permissible when:
***Illustration @page 201-202***
a. The seller in individual taxpayer
b. The buyer is the government, its
BIR Tax Clearance
instrumentalities and agencies including
No registration of any document transferring real property
GOCC
shall be affected by the Register of Deeds unless the
Basis: To ease the burden of government expropriation
Commissioner has certified that such transfer has been
where taxpayer may incur losses on the forced
reported and the capital gains or creditable withholding tax,
expropriation sale and are still required to pay tax
if any, has been paid.
***Illustration @page 203-204***
Certificate Authorizing Registration (CAR) - certificate
for purposes of this legal requirement.
2. Exemption Rules
Nature of 6% Capital Gains Tax
A. Under NIRC
A. Presumption of Capital Gains
-The sale, exchange, and other disposition of principal
-6% CGT is applied even if the sale transaction
residence for the re-acquisition of new principal residence
resulted in a loss.
by individual taxpayers is exempt from 6% CGT.
-Gain is always presumed to exist.
Principal residence - House and lot which is the primary
-The basis of taxation is the SP or FV, whichever is
domicile of taxpayer. If it has multiple, the principal
higher. Not the actual again
residence is the one shown in his latest tax declaration
B. Non-consideration to the involuntariness of the
Requisite of Exemption
sale
1. Seller must be citizen or resident alien
-CGT is applied even if the sale is involuntary or is
2. Sale involves the principal residence of the seller-
forced by circumstances.
taxpayer
-It also applies to conditional sales and pacto de
3. Proceeds of the sale is utilized in acquiring new
recto sales.
principal residence
C. Final Tax
4. BIR is duly notified by the taxpayer of his intention
-CGT shall be withheld by the buyer against the SP
to avail the tax exemption within 30 days through a
of the seller and remit the same to the government
prescribe return (BIR Form 1706) and Sworn
Declaration of Intent
 5. Reacquisition of new principal residence must be Statutory redemption period on foreclosure sale
within 18 months from the date of sale Foreclosed properties are subject to a right of redemption
6. Capital gain is held in escrow in favor of the by individual mortgagor within one year counted from the
government time of registration of sale in the Office of the Registry of
7. Exemption can only availed once every 10 years Deeds.
8. Historical cost or adjusted basis of the principal
residence sold shall be carried over to the new For juridical persons, redemption must be made before the
principal residence built or acquired registration of the certificate of the foreclosure sale with the
It must be emphasized that the sale of principal residence applicable Register of Deeds or within 3 months from
must precede the acquisition of new principal residence to foreclosure, whichever is earlier.
be exempt
***Illustration @page 204-206*** Documentary Stamp Tax on the sale of Capital Assets
The sale of domestic stock is subject to a documentary
B. Under Special Laws stamp tax of P1.50 for every P200, or fractional parts of
1. Sale of land under the Comprehensive Agrarian the par value of the stock sold.
Reform Program ***Illustration @page 208***
- Sale of agricultural land is exempt from CGT. Documentary Stamp Tax on the sale of Real Properties
- Similarly, interest income on the selling price that Subject on the gross selling price or FMV, whichever is
may have been agreed by land owner and tenant- higher.
buyer shall be exempt from income tax ***Illustration @page 209***

2. Sale of socialized housing units by the National Penalties for Late/Non-Filing or Non-Payment of CGT
Housing Authority Same as discussed to Chapter 4
- The sale to the underprivileged and homeless
citizen is exempt from CGT in pursuant to Urban Entities Exempt from CGT
Development and Housing Act of 1992. Same list of entities exempt in final tax of Chapter 5
- This exemption is limited to socialized housing
only. Comparison of 6% and 15% CGT
- BIR ruled that sale of commercial lots of NHA is
6% CGT 15% CGT
subject to CGT or RT and Documentary Stamp
Tax. Tax object Gain on real property Gain on sale of stocks
- To qualify for exemption, socialized housing of
Basis of tax Presumed gain Actual gain
NHA must comply with the price ceiling set by
NIRC and other special laws. Nature of tax Final tax Self-assessed tax

Payment of the 6% CGT on Installment Frequency of Per transaction Transactional and annual
Installment is applicable if the initial payment did not payment tax
exceed 25%. Initial payment is the total payment received
on the year of sale.
***Illustration @page 206-208***

Deadline of Payment of the CGT

-Filed through BIR Form 1706 and is due within 30 days
from the date of sale or exchange.
-For foreclosure sales, it is due within 30 days from the
expiration of the applicable statutory redemption
period.
-If qualified for installment payment, it is due 30 days
upon the receipt of every installment.