CLASSIFICATION OF TAXPAYER’S PROPERTIES 167

1.Ordinary assets - assets used in business, such as:

a. 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

b. Real property held by the taxpayer primarily for sale to customers in the

ordinary course of his trade or business

c. Real property used in trade or business of a character which ¡s subject to

the allowance for depreciation

d. Real property used in trade or business of the taxpayer

Business is habitual engagement in a commercial activity involving the regular sale

of goods or services for a profit. Non-profit entities are not businesses.

Basically, ordinary assets are:

a. Assets held for sale- such as inventory

b. Assets held for use - such as supplies and items of property, plant and

equipment like buildings, property improvements, and equipment

2.Capital assets- any asset other than ordinary assets.

Asset Classification Rules 169

A . Properly purchased for future use in business is an ordinary asset even though this purpose
is later thwarted by circumstances beyond the taxpayer’s control

B. Discontinuance of the active use of the property does riot change its character

previously established as a business property.

C. Real properties used, being used, or have been previously used, in trade of the

taxpayer shall be considered ordinary assets.

D. properties classified as ordinary assets for being used in business by a

taxpayer not engaged In the real estate business are automatically converted

to capital assets upon showing of’ proof that the same have not been used in

business for more than 2 years prior to the consummation of the taxable

transaction involving such property.

E. A depreciable asset is an ordinary asset even ¡fit is fully depreciated, or there

Is a failure to take depreciation during the period of ownership.

F. Real properties used by an exempt corporation in its exempt operations are

considered capital assets. Exempt corporations are not business.

G. The classification of property transferred by sale, barter or exchange,

inheritance, donation, or declaration of property dividends shall depend on

whether or not the acquirer uses it in business.

H. For real properties subject of involuntary transfer such as expropriation and

foreclosure sale, the involuntariness of such sale shall have no effect on the

classification, of such real property.

I. Change in business from real estate to non-real estate business shall not

change the classification of ordinary assets previously held.

Taxpayers engaged in real estate business includes real estate dealer, real estate

developer real estate lessor and taxpayers habitually engaged in real estate business.

Taxpayers habitually engaged in real estate business include those registered with the HLURB

or HUDCC as dealer or developer or those with at least 6 taxable real estate

transactions ¡n the preceding year.

Note, however that this does not include the voluntary buy-back of the shares by the

¡issuing corporation to be held in which may later on he re-issued. The gain or

loss realized by the investor on voluntary buy-back of shares by the issuing

corporation is taxable under capital gains taxation.

170

171

172

Gratuitous transfer of stocks 173

Worthless

Redemption

The gratuitous transfer of Stocks either by way of donation inter-vivos or donation

mortis causa is subject to transfer tax, not to income tax.

MODES OF DISPOSING DOMESTIC STOCKS

Shares of stocks may be sold, exchanged or disposed:

1. Through the Philippine Stock Exchange (PSE) or

2. Directly to buyer
TAX ON SALE OF DOMESTIC STOCKS THROUGH THE PSE

The sale of domestic stocks classified as capital assets through the PSE is not

subject to capital gains tax. It is subject to a stock transaction tax of 60% of 1% of

the selling price effective January 1, 2018. The old law imposed a rate of 50% of

1% on the selling price.

CAPITAL GAINS TAX ON SALE, EXCHANGE? AND OTHER DISPOSITIONS oi

DOMESTIC STOCK DIRECTLY TO BUYER

Nature of the CGT:

1. Universal tax

It applies to all taxpayers disposing stocks classified as capital assets

regardless of classification of the taxpayer. By situs, the gain on sale of

domestic stocks is within. The tax applies even if the the sale is executed

outside the Philippines.

2. Annual tax

It is imposed on the annual net gain on the sale of domestic stocks directly to

buyer.
What is the tax basis of stocks ? 175

If acquired by purchase, tax basis ÌS the cost of the property which will be

determined’ by the following methods in descending order of priority:

Specific identification, lithe shares can be specifically identified.

Moving average method, if books of accounts are maintained by the seller

where transaction of every particular stock ¡s recorded.

First-in, fist out method, if the stocks cannot be specifically identified.

If acquired by devise, bequest, or inheritance, the tax basis is the fair value at

the time of death of the decedent.

If acquired by gift — the tax basis is the lower of the fair market value at the

time of gift and the basis in the hands of the donor or the last preceding owner

by whom ¡t was not acquired by gift.

If acquired for inadequate consideration, the tax basis is the amount paid by

the transferee for the property.

If acquired under tax-free exchanges, the tax basis is the substituted basis of

the stocks.
ANNUALIZED CAPITAL GAINS TAX FOR FOREIGN CORPORATIONS 180

The CGT ‘s recomputed on the annual net gains then previous tax payments are

treated as tax credit thereto. After such credit, a residual tax due is paid while

excess transactional payment is claimed as tax refund or tax credit.

ANNUAL GAINS TAX FOR OTHER TAXPAYERS 181

The change to a 15% flat rate would mean 15% CGT when the transaction

resulted to a gain but would also instantly mean 15% CGT refundable when the

transaction resulted to a loss.

The problem

The incidence of a transactional loss under a flat tax rate would instantly mean tax

refund if transactions are separately accounted for similar to the NIRC procedure.

Suggestion

The elimination of transactional CGT cannot be an option due to the required tax

clearance which requires tiling of returns prior to transfer of stock ownership. The

best procedure s to offset losses first with subsequent gains during the year. Further
tax payments shall be made only when subsequent gains eventually exceed the losses.

The benefit of this treatment ¡s that it removes the necessity of filing Form 1707A.

Form 1707A would be required only when there is a net refund [or the year. It also

ensures payment of the exact CGT while avoiding the incidence of piling tax refunds

when there are previously reported losses.

INSTALLMENT PAYMENT OF THE CAPITAL GAINS TAX 182

When domestic stock ‘s sold ¡n instalments, the capital gains tax may also be j

in instalments if the:

a. Selling price exceeds P 1,000; and

b. Initial payment does not exceed 25% of the selling price.

SPECIAL TAX RULES IN CAPITAL GAIN OR LOSS MEASLJREMENT 184

1. Wash sales of stocks

2. Tax-free exchanges

a. Exchange of stocks pursuant to a merger or consolidation

b. Transfer of stocks resulting in corporate control

WASH SALES RULE

Wash sale of securities is deemed to occur when within 30 days before and 3üdcs

after the losing sale of securities (also referred to as the 61-day period), the

taxpayer acquired or entered into a Contract or option to acquire the same

substantially identical securities. Capital losses on wash sales by non-dealers in securities

are not deductible against. Capital gains because they are effective

unrealized The taxpayer did totally let go of the shares The immediate

reacquisition of the shares makes the loss a theoretical or a feigned loss.

Rationale

TAX FREE EXCHANGES 188

Merger or Consolidation

Stockholders of a domestic corporation may exchange their stocks for the stock of another
corporation pursuant to a plan of merger or consolidation.

The gains or losses on share-for-share swaps pursuant to a plan of merger or consolidation will
not be recognition for taxation purposes. In a share-swap pursuant to a plan of merger or
consolidation, the shareholders of the acquired corporation will be integrated in the acquiring
corporation. The shares of the acquire corporations will be called in for replacement with the
shares of the acquiring corporation.
In effect, the transaction merely involves a replacement of shares of stocks of the

shareholders of the absorbed corporation With them being simply integrated as shareholders
of the acquiring corporation.

Initial Acquisition Of Control 189

No gain or loss shall also be recognized if property is transferred to a corporation by a person in

exchange for the Stocks or units of participation in such a corporation of which as a result of
such exchange said person, alone or together with others not exceeding four, gains control of
said corporation.

"Control" shall mean ownership of stocks ¡n a corporation which amount to at

least 51% of the total voting power of all classes of stocks entitled to vote.

This rule may be relevant only to the Capital gains tax or the recognition of capital

gains when stocks are exchanged in the acquisition of corporate control.

Exchange not solely for stocks

tax-free exchanges, if stocks are exchanged not solely for stocks but with other consideration
such as cash and other properties, the gains but not loss are recognized up to the extent of cash
and other properties received.
Regulatory Formula on Tax Substituted Basis 190

The regulations prescribe the following formula in computing the tax basis

properties arising from the tax-free exchanges:

Tax basis of old shares exchanged

Add: Gain recognized on the transfer

Less: Cash or other properties received

Tax basis of new shares received

Minimum public float requirement of publicly listed corporations 191

Listed corporations are mandatorily required to maintain a minimum public

ownership under Philippine Stock Exchange (PSE) regulations.

The minimum public ownership is the higher of:

1 The 10% of issued and outstanding shares and

2. The minimum public ownership required by the Securities and Exchange Commission or the
Philippine Stock Exchange.

Non-compliance to the minimum public ownership shall result ¡n the de-listing of

the stocks of the corporation in the PSE. Under RRI6-2012. the sale of listed

stocks which fall below their minimum public ownership requirement will be

subject to the 5%-10% capital gains tax and not to the ½ o’ 1% stock transaction

TAX ISSUE: SALE OF STOCKS DIVIDEND-ON TO A CORPORATE BUYER 193

Dividends may escape taxation when stocks are sold dividend-on by individual

taxpayers to a corporate buyer between the date of declaration and the date of record.

At the date of record, the corporate buyer will be listed as shareholder in the

corporate books and will not be subjected to the 10% dividend tax.

Note that the individual seller effectively realizes the entire dividend income under

the cloak of the dividend exemption of the corporate buyer who will be registered as

shareholder at the date of record.

Should the dividend on the stocks sold be taxed?

Under the NIRC, all income riot expressly exempted or not subjected to final tax or

capital gains tax must be included in gross ¡income subject to regular income tax. The

¡individual seller shall report the P20.000 domestic dividend in gross income subject to

regular income tax.

BIR Tax Clearance 195

No registration of any document transferring real property shall be effected by the

Register of Deeds unless the Commissioner or his duly authorized representative

has certified that such transfer has been reported and the capital gains or
creditable withholding tax, if any, has been paid. (Sec. 58(E), N!RC)

The certificate for purposes of this legal requirement is referred to as the

certificate Authorizing Registration (CAR)”.

NATURE OF THE 6% CAPITAL Gains TAX

a. Presumption 01 capital gains

The 6% capital gains tax applies even if the sale tlans1Ofl resulted to a loss.

Gain is always presumed to exist. The basis of taxation s the selling price or

fair value whichever is higher not the actual gain.

SCOPE AND ALLICABILITY OF THE 6% CAPITAL GAINS 196

The 6% capital gains tax is applicable to all individual taxpayers but it applies only

to domestic corporations. The NIRC did not impose final capital gains tax n

foreign corporations. However, in cases where foreign corporations realize gains

from the sale of real property classified as capital assets, the capital gain shall be

subject to the regular income tax.

The sale of real property located abroad is not subject to capital gains tax since

withholding of the capital tax cannot be imposed abroad due to territorial

consideration. Hence, the actual gains realized on the sale, exchange, and other

dispositions of properties abroad are subject to the regular income tax ¡f the

taxpayer is taxable on global income such as resident citizens and domestic

corporations For all other taxpayers, the capital gain realized abroad is exempt.

Basis of Alternative Taxation 197

alternative taxation ¡S intended to ease the burden of government

where taxpayers may incur losses on the forced expropriation sale

and are still required to pay tax.

EXEMPTION TO THE 6% CAPITAL GAINS TAX UNDER THE NIRC

The sale, exchange and other disposition of a principal residence for the re

acquisition of a new principal residence by individual taxpayers is exempt from

the 6% capital gains tax.

Principal residence

Principal residence means the house and lot which is the primary domicile of the

taxpayer. If the taxpayer has multiple residences, his principal residence is

deemed that one shown in his latest tax declaration.

Requisite of exemption:
1. The seller must be a citizen or resident alien.

2. The sale involves the principal residence of the seller- taxpayer

3. The proceeds of the sale ¡s utilized in acquiring a new principal residence.

4. The BIR is duly notified by the taxpayer of his intention to avail of the tax

exemption within 30 days of the sale through a prescribed return

Basis of new residence with full utilization 199

If the proceeds is fully utilized, the tax basis of the flew residence shall be the basis of

the old residence plus additional cost incurred by the taxpayer in acquiring the new

residence. The additional cost is the excess of the purchase price of th0 new residence

over the selling price of the old residence.

PAYMENT OF THE 6% CAPITAL GAINS TAX IN INSTALLMENT 200

The capital gains tax may be paid in instalment if, under the payment terms, 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.

Deadline for payment of the capital gains tax 201

The 6% capital gains tax will be 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

DOCUMENTARY STAMP TAX ON THE SALE OF CAPITAL ASSETS 202

Documentary stamp tax on the sale, exchange, and other dispositions of

domestic stocks directly to a buyer

The sale of domestic stocks is subject to a documentary stamp tax of P 1.50 of

every P200 of the par value of the stocks sold. (RA 9243)

Documentary Stamp Tax on the Sale of Real Properties

The sale of real property capital assets is Subject to a document stamp tax on

the gross selling price or fair market value Whichever is high

The documentary stamp tax ¡s P15 for eve P1,000 and fractional parts of the tax basis

thereof. However, ¡f the government is a party to the sale , the basis shall be

the consideration paid.

PENALTIES FOR LATE/NON-FIILING OF NON-PA YMENT OF C APITAL GAINS TAX

The late filing and payment of Capital gains tax at the time or times required by
law is subject to the same penalties discussed in Chapter 4.

ENTITIES EXEMPT FROM CAPITAL GAINS TAX 203

The same lists of entities exempt from final tax in Chapter 5 are likewise exempt

from capital gains tax.