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CAPITAL GAINS TAX

Description
Capital Gains Tax is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the Philippines, including pacto de retro sales and other forms of conditional sale.

Capital Gains Tax for Onerous Transfer of Shares of Stocks Not Traded Through the Local Stock Exchange
Tax Form BIR Form 1707 - Capital Gains Tax Return (For Onerous Transfer of Shares of Stocks Not Traded Through the Local Stock Exchange) Documentary Requirements 1) One original copy and one photocopy of the Notarized Deed of Sale/ Exchange of shares of stock 2) Photocopy of the Deed of Acquisition or proof of cost/ fair market value of the stocks at the time of acquisition 3) Photocopy of certificate of shares of stock 4) Photocopy of evidences of expenses related to sale 5) Photocopy of the Audited Financial Statements of issuing corporation nearest the date of sale or transfer 6) Duly approved Tax Debit Memo, if applicable Additional requirements may be requested for presentation during audit of the tax case depending upon existing audit procedures. Procedures File the Capital Gains Tax return in triplicate (two copies for the BIR and one copy for the taxpayer) with the Authorized Agent Bank (AAB) in the Revenue District where the seller or transferor of stocks is registered. In places where there are no AAB, the return will be filed directly with the Revenue Collection Officer or Authorized City or Municipal Treasurer. Tax Rates For Shares of Stocks Not Traded in the Stock Exchange - Not over P100,000 - 5% - Any amount in excess of P100,000 - 10% Deadline Within 30 days after each sale or disposition of shares of stocks or real property. In case of installment sale, the return shall be filed within 30 days following the receipt of the first down payment and within 30 days following the subsequent installment payments. Only one return shall be filed for multiple transactions within the day.

Annual Capital Gains Tax for Onerous Transfer of Shares of Stocks Not Traded Through the Local Stock Exchange
Tax Form BIR Form 1707A - Annual Capital Gains Tax Return (For Onerous Transfer of Shares of Stocks Not Traded Through the Local Stock Exchange) Procedures File the Capital Gains Tax return in triplicate (two copies for the BIR and one copy for the taxpayer) with the Authorized Agent Bank (AAB) in the Revenue District where the seller or transferor of stocks is registered. In places where there are no AAB, the return will be filed directly with the Revenue Collection Officer or Authorized City or Municipal Treasurer. Tax Rates For Shares of Stocks Not Traded in the Stock Exchange - Not over P100,000 - 5% - Any amount in excess of P100,000 - 10% Deadline Individual Taxpayers On or before April 15 of each year covering all stock transactions of the preceding taxable year Corporate Taxpayers On or before the fifteenth (15) day of the fourth (4) month following the close of the taxable year covering all transactions of the preceding taxable year

Related Revenue Issuances


RR No. 2-98, RR No. 4-99, RR No.13-99, RR No. 7-2003 and RR No. 17-2003

Codal Reference
Sec. 24C, Sec. 24D, Sec. 27D(2), Sec. 27D(5), Sec. 28(A)(7)(c), Sec. 28(B)(5)(c) and Sec. 39A of the National Internal Revenue Code (NIRC)

Frequently Asked Questions


1) What is meant by capital asset? Capital asset means property held by the taxpayer (whether or not connected with his trade or business), but does not include a) stock in trade of the taxpayer or other 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; or b) property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business; or c) property used in the trade or business of a character which is subject to the allowance for depreciation provided in subsection (F) of Sec. 34 of the Code; or d) real property used in trade or business of the taxpayer.

2) What is meant by ordinary asset? Ordinary asset refers to all properties specifically excluded from the definition of capital assets under Sec. 39 (A)(1) of the NIRC. 3) Who are required to file the Final Capital Gains Tax return? Every person, whether natural or juridical, resident or non-resident, including estates and trusts, who sells, transfers, exchanges or disposes real properties located in the Philippines classified as capital assets, including pacto de retro sales and other forms of conditional sales or shares of stocks in domestic corporations not traded through the local stock exchange classified as capital assets. 4) Who/what are considered exempt from the payment of Final Capital Gains Tax? Dealer in securities, regularly engaged in the buying and selling of securities An entity exempt from the payment of income tax under existing investment incentives and other special laws An individual or non-individual exchanging real property solely for shares of stocks resulting in corporate control A government entity or government-owned or controlled corporation selling real property If the disposition of the real property is gratuitous in nature Where the disposition is pursuant to the CARP law

5) What is a Certificate Authorizing Registration? Certificate Authorizing Registration (CAR) is a certification issued by the Commissioner or his duly authorized representative attesting that the transfer and conveyance of land, buildings/improvements or shares of stock arising from sale, barter or exchange have been reported and the taxes due inclusive of the documentary stamp tax, have been fully paid. CARs shall now have a validity of one (1) year from date of issue. In case of failure to present the same to the Registry of Deeds (RD) within the one (1) year period, the same shall be presented for revalidation to the District Office where the CAR was issued. The revalidation, evidenced by stamping the phrase "revalidated on __________ to expire on ___________" in a conspicuous space in the CAR, shall be good for another one-year period, after which the CAR losses its validity. (RMO 15-2003)

ROPA in the form of shares of stock: capital or ordinary assets? by Edward L. Roguel (The author is a senior tax manager at Punongbayan & Araullo) To improve tax collection and administration, the Bureau of Internal Revenue (BIR) has been issuing regulations, memoranda and circulars to clarify or address the tax issues on particular transactions and industries. For this year, the BIR has already issued three Revenue Regulations (RR) and five Revenue Memorandum Circulars (RMC) on the taxation of certain industries and transactions. The latest that was published yesterday, March 5, is RR 6-08 entitled "Consolidated Regulations prescribing the rules on the taxation of sale, barter, exchange or other disposition of shares of stocks held as capital assets." One of the interesting features of the RR is the definition of "stock classified as capital assets." Under this RR, "stock classified as capital assets" has been defined to refer to all stocks and securities held by taxpayers other than dealers in securities. Accordingly, stock and securities owned by banks shall be considered as stock classified as capital assets, because banks are not considered dealers in securities. Banks, however, acquire some share of stocks from settlements of loans and/or through foreclosure of collaterals of client borrowers who were unable to pay their loans. (these are also known as real and other properties acquired, or ROPA previously ROPOA). These ROPA are normally considered as part of the inventory of banks since these will eventually be sold to the public. In the case of ROPA in the form of real properties, the BIRs position has been clarified in various rulings that it has issued. These shall be treated as "ordinary assets." Therefore, the sale, exchange or disposition of such real properties will not be subject to the capital gains tax. Although the rulings relate to real properties considered as ROPA, it would be most logical that the treatment should also be applicable to shares of stock classified as ROPA held for sale. That is: sale of shares of stock considered as ROPA of the banks should also be treated as ordinary assets, rather than capital assets. Therefore, the sale should be subjected to regular income tax and not to the capital gains tax (which is considered a final tax). It is critical to determine whether the shares of stocks are ordinary assets or capital assets because the tax rate and tax base will differ depending on said classification. Sale of share of stock classified as

ordinary assets is subject to the regular income tax. Hence, any gain or loss derived from such sale is included in computing the net taxable income subject to 35% tax (30% effective January 1, 2009). On the other hand, the tax rate on sale of shares of stock classified as capital assets will depend on whether or not the shares are listed and traded through the local stock exchange. If the shares of stocks are listed in the local stock exchange and the sale is also made through the local stock exchange, the sale is subject to the stock transaction tax of 1/2% based on the selling price. Otherwise, the net gain from the disposition is subject to a capital gains tax of 5% on first P100,000 of the gain, and 10% on the gain in excess of P100,000. Both the stock transaction tax and capital gains tax are considered final taxes. As RR 5-08 has already defined that only shares held by dealers in securities can qualify as ordinary assets, can the issue on the classification of shares of stock held by banks as ROPA held for sale, as well as the applicable tax treatment, be put to rest now? Determining the capital gain from sale of shares of stock by Catherine C. Quilantang This is a sequel to the article published last week discussing the newly issued Revenue Regulations (RR) No. 6-2008 which consolidates the income tax rules for shares of stock classified as capital asset. As mentioned, the new regulation did not merely consolidate the existing income tax rules but also introduced new rules intended to clarify once and for all the treatment of certain transactions. This issue focuses on the changes in the determination of the selling price of shares of stock. Under the new regulations, the following rules shall apply in determining the selling price of the shares disposed: In case of cash sale the selling price is the total consideration as indicated in the deed of sale; If the consideration is partly in money and partly in kind the selling price is the cash or money received plus the fair market value of the property received; In case of exchanges the selling price is the fair market value of the property received. If the fair market value of the shares of stock disposed is higher than the amount of amount and/or fair market value of the property received, the excess of the fair market value of the shares of stock disposed over the amount of money and the fair market value of the property, if any, received as consideration shall be deemed a gift subject to the donors tax.

Although the rule on the imposition of the gift tax on sales for less than the fair market value is already provided in the Tax Code (Sec. 100), this had not been applied on sale of shares because RR No. 2-82, as amended (Taxation of Sales of Shares of Stocks Classified as Capital Asset), already provides that the selling price of the shares of stock shall not be less than the fair market value of the shares of stocks transferred or exchanged. As defined in the new regulations, the fair market value in the case of listed shares not traded through the Local Stock Exchange shall be the closing price on the day when the shares are sold, transferred, or exchanged. When no sale is made in the Local Stock Exchange, the closing price on the day nearest to the date of sale, transfer or exchange of the shares is taken. In the RR 2-82, amended, the fair market value is the highest closing price. For shares of stock not listed and traded through the Local Stock Exchange, it was clarified in the new regulation that the fair market value is the book value of the shares of stock as shown in the financial statements duly certified by an independent certified public accountant nearest to the date of sale.

The regulation illustrated the case of a corporation using calendar year as accounting period. When its shares were sold on March 31, 2008, the audited financial statements for calendar year 2007 have not yet been issued. The regulations rule that the book value of the shares sold shall be based on the unaudited financial statements for taxable year 2007. However, once the audited 2007 financial statements is issued, adjustment to the book value shall be made for any difference. The new regulation, however, did not retain the condition under RR 2-82 allowing for a fair market value lower than the book value under certain conditions. Under RR 2-82, a lower fair market value may be justified based on various factors affecting the valuation of shares of stock of closed corporations as enumerated in the regulation. Sufficient evidence should however be submitted to support such lower fair market value. On the other hand, the cost basis for determining the capital gains or losses if acquired by purchase is still the same. However, aside from the shares acquired by purchase, the new regulation has specifically provided for the cost basis for shares of stock acquired by devise, bequest or inheritance, acquired by gift and those acquired for inadequate consideration. There were no changes introduced on the rules on the determination of the substituted basis of shares in tax-free exchanges pursuant to Section 40(C)(2) of the Tax Code. Taxpayers should be aware that RR 6-08 did not merely consolidate the existing income tax rules on the sale, exchange or disposition of shares of stocks held as capital assets. There were new rules that were introduced. As these supersede the rules provided in the previously issued regulations, these should be followed. (The author is a senior tax manager at Punongbayan & Araullo, a member firm within Grant Thornton International Ltd. For comments and inquiries, please e-mail the author or call 886-5511.)