Accounting and Taxation – Page 3

If you have invested in stocks, there is a big chance that you encountered capital gains tax. In this guide, you'll learn what is (and what is not) subject to capital gains tax plus instructions on how to compute, file, and pay it. Disclaimer: This article is for general information only and is not substitute for professional advice. Go back to the main article: An Ultimate Guide to Philippine Tax: Types, Computations, and Filing Procedures What Is a Capital Gains Tax? Capital gains tax is a tax imposed on capital gains - which can be defined as an increase in wealth due to factors not related to employment, business or profession. What Assets Are Subject to Capital Gains Tax? There are only two sources of capital gains tax (CGT) in the Philippines: 1. Sale of shares of stock of a Domestic Corporation (DC) NOT traded through a local stock exchange Held as capital assets: means all stocks and securities held by taxpayers other than dealers in securities1. Not applicable: the Capital Gains Tax does not apply if the sale of shares of stock was made by A dealer in securities;Investor in shares of stock in a mutual fund company; andOther persons exempt under special law2. Tax Rate: 15% of the tax base if the seller is a domestic corporation or an individual. 5% and 10% if the seller is a foreign corporation. Tax base: is the net capital gain, which is the excess of the selling price/fair market value (less cost to sell) over the cost of the shares. Determination of cost/fair market value: the value of the shares of stock at the time of sale shall be the fair market value. In determining the value of the shares, the Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of the adjusted assets minus the liability values is the indicated value of the equity. The appraised value of the real property at the time of sale shall be the higher of – The fair market value as determined by the Commissioner, orThe fair market value as shown in the schedule of valued fixed by the Provincial and City Assessors, orThe fair market value as determined by Independent Appraiser3. Sale of stock options is treated as a sale of stock of a DC not traded through local stock exchange4. Shares listed or traded through the stock exchange: if the shares are disposed of through the stock exchange, the same is not subject to CGT but to the Stock Transaction Tax of ½ of 1% of the selling price. This tax constitutes the final tax on such sale since the Tax Code provides that the same shall be exempt from income tax. Thus, any gain resulting from such disposition will no longer be included in the taxpayer’s gross income subject to regular/graduated income tax. However, if the shares, although listed in the stock exchange, are sold over-the-counter, or directly to the buyer, and not through such stock exchange, then it will still be subject to the CGT. Not subject to the Capital Gains Tax on stocks The sale is made through the local stock exchange;The shares of stock are of a foreign corporation;The shares are NOT held as capital assets (e.g., the seller is a dealer in securities);The sale resulted in a capital loss. 2. Sale of real property located in the Philippines A 6% Capital Gains Tax is imposed on the presumed gain from the sale of real property, based on the gross selling price, the BIR zonal valuation or the assessed value of the property, whichever is highest. See RR 7-20035 to determine whether a particular real property is a capital asset or an ordinary asset. For individuals, the real property consists of ALL real properties classified as capital assets; whereas, for domestic corporations, the only real property subject to capital gains tax are LANDS and BUILDINGS. Meaning, sale of machinery, even though classified as a capital asset, shall be subject to the regular corporate income tax. Sale of real property to the government or any of its political subdivisions or agencies or GOCCs may be treated as subject to capital gains tax or ordinary income tax, at the option of the taxpayer6. Related: How to Apply for Pag-IBIG Housing Loan: An Ultimate Guide Sale of Principal Residence Sale of principal residence of natural persons, the proceeds of which are fully utilized in acquiring or constructing a new principal residence within 18 calendar months from the date of sale or disposition is not subject to the 6% CGT. Subject to the following requirements: The historical cost or adjusted basis of real property sold or disposed of is carried over to the new principal residence;The exemption can only be availed once every 10 years;The BIR is notified by the taxpayer within 30 days from the date of sale or disposition of his intention to avail of the tax exemption. If there is no full utilization of the proceeds, the portion of the gain presumed to have been realized from the sale or disposition shall be subject to the 6% CGT, as follows: Taxable Amount = (Unutilized Portion/Gross Selling Price) x CGT Base* *CGT (capital gains tax) base is the higher between the FMV (fair market value) and the Selling Price. The CGT then would be 6% of the Taxable Amount computed above. Not subject to Capital Gains Tax The real property sold was not held as a capital asset (e.g., used in business);The real property is located abroad;The real property sold was the principal residence of the taxpayer, where there is full utilization of the proceeds and all the above requisites are met;Sale of raw lands used for socialized housing or under RA 7279;Land transfers under Comprehensive agrarian reform law of 1988;Sold by foreign corporations: (a) By Resident Foreign Corporations (RFC) = subject to 30% CIT on gains; (b) By Non-resident Foreign Corporations (NRFC) = subject to 30% FWT on gains. Sale of Real Property NOT located in the Philippines Regardless of classification, the gain derived therefrom by a resident citizen shall be subject to ordinary income tax. In the case of domestic corporations, it will be subject to the RCIT or MCIT whichever is applicable. In the case of non-residents or aliens and foreign corporations (whether resident or not), the gain from the sale is exempt not being derived from sources within the Philippines7. Forced Sale of Real Property: the fact that the sale is involuntary, e.g., from a court order of foreclosure sale, does not affect the classification of the property in the hands of the seller, either as a capital asset or ordinary asset and are thus subject to the rules applied therefore. How To File Capital Gains Tax in the Philippines I. For the sale of stocks of a domestic corporation not traded through the local stock exchange Tax Form – BIR Form 1707 Documentary Requirements. a. Mandatory Requirements [additional two (2) photocopies of each document] Taxpayer Identification Number (TIN) of Seller/s and Buyer/s;Duly Notarized Original Deed of Absolute Sale/Document of Transfer;Stock certificate;Proof of acquisition cost (i.e. Deed of Sale: fair market value at the time of acquisition);Validated return and Original Official Receipt/Deposit Slip as proof of payment; for no payment return, copy of Acknowledgment Receipt of return filed thru eBlRForms;Secretary’s Certificate or Board Resolution, approving the sale/transfer of the shares of stocks and indicating the name and position of the authorized signatory to the Deed of Sale/Assignment if the seller/transferor is a corporation;Duly Notarized Special Power of Attorney (SPA) for the transacting party if the person signing is not one of the parties to the Deed of Transfer; b. Additional Requirements, if applicable [additional two (2) photocopies of each document] For claiming expenses of sale - Proof of claimed deductions such as official receipt and/or invoices;For shares of stocks not listed/not traded - Latest Audited Financial Statement of the issuing corporation with computation of the book value per share;For shares of stocks listed/traded - Price index from the Philippine Stock Exchange (PSE)/latest FMV published in the newspaper at the time of the transaction;For club shares - Price published in newspapers on the transaction date or nearest to the transaction date;Notarized Original Special Power of Attorney (SPA), if the person transacting/processing the transfer is not a party to the transaction;Certificate of Exemption/BIR Ruling issued by the Commissioner of Internal Revenue or his authorized representative, if tax-exempt;Such other documents as may be required by law/rulings/regulations/etc. When and Where to file? BIR Form 1707 must be submitted to the Revenue District Office (RDO) where the seller is registered and must be paid to any Authorized Agent Bank (AAB) within 30 days from sale, barter or exchange. This may also be done via eBIRForms and paid electronically. II. For the sale of real property held as a capital asset Tax Form - BIR Form 1706 Documentary Requirements a. Mandatory Requirements [additional two (2) photocopies of each document] Taxpayer Identification Number (TIN) of Seller/s and Buyer/s;Duly Notarized Original Deed of Absolute Sale/Deed of Transfer;Certified True Copy/ies of the Tax Declaration at the time or nearest to the date of the transaction issued by the Local Assessor’s Office for land and improvement;Certified True Copy/ies of Original/Transfer/Condominium Certificate/s of Title (OCT/TCT/CCT);Sworn Declaration of No Improvement by at least one (1) of the transferees or Certificate of No Improvement issued by the Assessor’s Office, if applicable;Validated return and Original Official Receipt/Deposit Slip as proof of payment; for no payment return, copy ofAcknowledgment Receipt of return filed thru eBlRForms;Acknowledgment receipt of proceeds of sale from the seller;Secretary’s Certificate or Board Resolution, approving the sale/transfer of the real property and indicating the name and position of the authorized signatory to the Deed of Sale/Assignment, if the seller/transferor is a corporation;Duly Notarized Original Special Power of Attorney (SPA) from the transacting party/ies if the person signing is not one of the parties to the Deed of Transfer; b. For sales made in prior years [additional two (2) photocopies of each document] Certified True Copy of Deed of Sale/Assignment/Exchange; orCertification of notarization issued by the Clerk of Court of City/Municipality or Regional Trial Court (RTC) or the Office of the Executive Judge of the City/Municipality where the Notary Public is registered; orCertification of notarization from the National Archives Office. c. Other Additional Requirements, if applicable [additional two (2) photocopies of each document] Duly Notarized Original Special Power of Attorney (SPA), if the person transacting/processing the transfer is not a party to the transaction;Certification from the Philippine Consulate if the document is executed abroad;Location Plan/Vicinity map issued by the Local Assessor’s Office if the zonal value cannot be readily determined from the documents submitted;Certificate of Exemption/BIR Ruling issued by the Commissioner of Internal Revenue or his authorized representative, if tax-exempt;Such other documents as may be required by law/rulings/regulations/etc. When and Where to File? BIR Form 1706 must be submitted to the Revenue District Office (RDO) where the seller is registered and must be paid to any Authorized Agent Bank (AAB) or Revenue Collection Officer (RCO) within 30 days from sale, barter or exchange. This may also be done via eBIRForms and paid electronically. In cases where there is more than one property, the BIR has also created a “fast lane”8. “For transactions covered by one (1) Deed of Sale/Exchange/Donation involving one (1) to three (3) properties, the taxpayer can avail of the ‘fast lane’ pursuant to Revenue Memorandum Circular (RMC) No. 43-2018, as amended by RMC No. 107-2018. Payments amounting to twenty thousand pesos (P 20,000.00) and below shall be paid in cash while payments above twenty thousand pesos (P 20,000.00) shall be made through Manager’s Check or Cashier’s Check to the RCO of the RDO having jurisdiction over the place where the property being transferred is located.” Frequently Asked Questions 1. I bought US stocks and closed my position at a capital gain. Do I still have to pay a tax and file a tax form? No. The only taxable earnings from foreign stocks are Dividends actually received and Gains from the sale of the said stock. So as long as you haven't received any dividends or sold any stock at a gain, you do not have to declare the same in your tax return. References