CHAPTER 5 FINAL INCOME TAXATION

FEATURES OF FINAL INCOME TAXATION

1. Final tax
2. Tax withholding at source
3. Territorial imposition
4. Imposed on certain passive income and persons not engaged in business in the Philippines

The Final Withholding System

The final withholding system imposes upon the person making income payments the responsibility to
withhold the tax. The tax which will be deducted at source is final. The taxpayer receives the income net
of tax and there would be no need for him to file an income tax return to report the same.

The final withholding system is inherently territorial. It applies only to certain passive income earned
from sources within the Philippines. Note that taxation" territorial and we cannot impose tax obligation
(filing or withholding) against non-resident subjects of foreign sovereignty. Hence, all items of income
earn from sources abroad, passive or active, are subject to tax under the general scope of the regular
income tax.

Rationale of Final Income Taxation

The final withholding tax is built upon taxpayer and government convenience. It relieves the taxpayer of
the obligation to file an income tax return. This is very convenient for taxpayers who are limited by
distance, time and cost to comply. For the government, the final withholding system is the most
convenient and effective system in collecting taxes on income where there is high risk of non-
compliance or tax evasion.

Under the NIRC, final income tax is imposed on certain passive income and upon non-resident persons
not engaged in business in the Philippines.

Passive income

Items of passive income are earned with very minimal involvement from the taxpayer and are generally
irregular in timing and amount. Unlike items of active income, they are not usually specifically
monitored by taxpayers. When not recorded by the taxpayer, their existence can be difficult to predict
while their actual amount may be difficult to determine. Thus, the final withholding at source is the most
favored scheme in taxing items of passive income.

Non-resident persons not engaged in business in the Philippines

Non-resident persons not engaged in trade or business in the Philippines, such as non-resident aliens
not engaged in trade or business (NRA-NETBs) and non-resident foreign corporations (NRFCs), have high
risk of non-compliance. These taxpayers do not have offices or fixed places of business in the Philippines
making tax compliance very unlikely due to their absence and distance in the Philippines. Also, the
Philippine government cannot impose upon them the obligation to file return due to territorial
consideration.

Thus, the law subjects them to final income tax wherein Philippine residents paying them income,
passive or active, are obligated to withhold the following final tax:

Non-resident person not engaged in trade or business

Non-resident alien not engaged in trade or business

Non-resident foreign corporation

PASSIVE INCOME SUBJECT TO FINAL TAX

1. Interest or yield from bank deposits or deposit substitutes

2. Domestic dividends, in general

3. Dividend income from a Real Estate Investment Trust

4. Share in the net income of a business partnership, taxable associations, joint ventures, joint accounts,
or co-ownership

5. Royalties, in general

6. Prizes exceeding P10,000

7. Winnings

8. Informer's tax reward

9. Interest income on tax-free corporate covenant bonds

FINAL TAX ON INDIVIDUALS AND CORPORATIONS

Unless otherwise indicated, the final tax rates to be discussed in the following sections apply to all
taxpayers (individuals and corporations) other than:

a. Non-resident alien not engaged in trade or business (NRA-NETB), and

b. Non-resident foreign corporation (NRFC).

INTEREST INCOME OR YIELD

Interest income or yield from local currency bank deposits, deposit substitutes, trust funds and similar
arrangements are subject to final tax as follows:

Local currency deposits

On Interest income

Recipient

Corporations

From banks

Individuals

Short-term deposits/certificates Long-term deposits/certificates

From non-bank institutions

20% Exempt

20

RIT

Short-term deposits/certificates Long-term deposits/certificates

RIT RIT

RIT RIT

Note:

1. Per Section 3 of RR 14-2012 and reiterated under RMC 7-2015

2. The final tax on deposits applies only to those made with banks.

3. NRA-NETBs and NRPCs are subject to the 25% general final tax on their interest income.

Short term deposits are those made for a period of less than five years. Long-term deposits or
investment certificates refer to certificate of time deposit or investment in the form of savings, common
or individual trust funds, deposit substitutes, investment management accounts, and other investments
with a maturity of not less than five years, the form of which shall be prescribed by the BSP and issued
by bank only (not by non-bank financial intermediaries or finance companies) to individuals in
denominations of P10,000 and other denominations as may be prescribed by the BSP (RMC 14-2012)

ILLUSTRATION 1

A taxpayer earned the following interest income from various time deposits:
6-month time deposit

8,000

2-year time deposit 5-year time deposit

Total interest income

P12,000

40,000 60.000

Required: Compute the final tax if the taxpayer is an individual and if a corporation.

Solution:

Individual taxpayers

6-month time deposit

8 *20\%

epsilon 1, 600 2,400

2-year time deposit

12 *20\% 40 *0\%

5-year time deposit Final withholding tax

4,000

Carporate taxpayers

(P * 8K + P * 12K) *20\%

4.000

The exemption of individuals on interest income on long-term deposits is anchored on the fact that
long-term deposits are usually channeled to the financing of long-term projects such as infrastructures,
property developments, and other construction projects which are deemed essential to the
development of the country. Note that corporations are not exempt but are subject to regular tax on
interest income on long term deposit or investment certificates.

Illustration 2

A resident taxpayer received a P16,000 interest income from a bank. Determine the final tax withheld at
source.

Solution:

Gross interest income (P16,000/80%)

20,000

20%

4.000
Multiply by: final tax rates Final tax withheld

4.000

Illustration 3

Banko Negro incurs the following interest in its savings and time deposit accounts

from the following depositors

Depositors

Resident individuals

Amount... 600.000

100.000

Resident and domestic corporations Non-resident aliens not engaged in business

Non-resident corporations Total accrued interest expense

P1700.000

Required: Compute the total final income tax to be withheld by Banko Negro.

Solution:

Depositora
Amount

Rate Final Tax

Resident individuals Resident/domestic corporations

600,000 x 20% 800,000 x 20%

200,000

P 120,000 160,000

NRA-NETB

25% 100.000 25% 25.000

50,000

NRFC

Total accrued interest expense P 1.200.000

P 355.000

Savings or time deposits with cooperatives are not subject to final tax

The final tax is limited to banks and shall not be applied with time and savings account deposit
maintained by members with cooperatives and by primary cooperatives with their federations.
(Dumaguete Cathedral Credit Cooperative vs. CIR GR. 182722)
Deposit substitutes

Deposit substitute means an alternative form of obtaining funds from the public other than deposits
through the issuance, endorsement, or acceptance of debt instruments for the borrowers own account
for the purpose of relending or purchasing of receivables and other obligations, or financing their own
needs or the needs of their agent or dealer. Public means 20 or more corporate lenders at any one time.

The 19-lender rule

The mere flotation of a debt instrument is not considered to be a public borrowing and is not deemed a
deposit substitute if there are only 19 or less individual or corpora lenders at any one time

The 19-Jender rule does not apply to government securities

Government debt instruments and securities including Treasury bonds, Treasury bills and Treasury notes
shall be considered as deposit substitute irrespective of the number of lender at origination if such debt
instruments and securities are to be traded or exchanged in the secondary market.

Debt Instrument issued for interbank call loans with maturity of not more than 5 days to cover
deficiency in reserves against deposit liabilities, including those between or among banks and quasi-
banks, shall not be considered as deposit substitutes.

Classification of debt instruments

Issuer of debt instrument Corporate issuer

Number of barrera.at origination

19 or less

Private barrewing Deposit substitute Government including RSP Deposit substitute Deposit substinate

Note:

1. Origination means issuance

2. Interest on deposit substitute (i.e public borrowing) is subject to final tax. Interest on private
borrowing is subject to regular income tax.
Any person holding any interest, whether legal or beneficial, on a debt instrument or holding thereof
either by assignment or participation, with or without recourse, shall be considered as lender and thus
be counted in applying the 19-lender rule.

Thus, debt instruments may not be initially considered deposit substitute for failing the 19-lender rule
but may subsequently qualify as such when the number of lender increase to at least 20 when any of the
original lenders assigned, securitized or participated out the debt instrument.

Timing of withholding of final tax

1 . Zero coupon instruments or securities-upon origination

2. Interest-bearing instruments or securities-upon payment of interest

Sommary of tax rules on interest on debt instruments

Deposit substitutes

Issued by banks

Short term Long term

Individuals 20%

Exempt

Recipient

Corporations 20%

RIT

Issued by non-banks Short term

Long-term

20% 2095

20%

HIT

and by banks only

*Per Section 3 of R14-2012, exemption on long-term certificates or investments is limited to thos3

issued by banks only

Illustration 1

John earns interest income from the following investment placements in various debt

Instruments

Instrument

Remarks

Term

5 years

DI 1
BSP treasury bills

1 year 5 years

10 years

DI2

DI 3

DI4

Itogon Bank deposit certificates Ayala corporate bonds issued to the public

DIS

DI 6

3 years

2 years

8 years

BSP treasury notes

Securitized SB corporate bonds (100 lender) Promissory note negotiated by ABC Bank

KT Bank bonds participated out to 30 lenders

The interest income from the foregoing instruments shall be taxable as follows:

DINO

Debt instrument classification

Individual Exempt

20% FIT

Corporation RIT

20% FIT

DI 1 Long-term deposit substitute (BSP) DI 2 Short-term deposit substitute (BSP)

DI 3

DI 4

DI 5

Long-term bank deposit

Exempt 20% FIT

20% FIT

Long-term deposit substitute by a non-bank Short-term deposit substitute by a non-bank

20% FIT

DI 6 Private borrowing by a bank Long-term deposit substitute by a bank

RIT Exempt

Note: The final tax exemption on interest income derived from long-term certificates or debt
instruments refers only to those issued by bunks and applies only to individual taxpayers.

Illustration 2

ABC Company wants to take advantage of the decreasing interest rates. It disposed of its investment in
various short-term deposit substitutes. It gained total of P300,000 from the disposal inclusive of
P180,000 interest income. Only the P180,000 interest income shall be subject to 20% final tax. The
P120,000 (i.e. P300,000-P180,000) trading gain on the debt instruments shall be subject to regular
income tax. Also, forex gains on trading foreign currency denominated instruments, if any, shall likewise
be subject to regular tax.

Trust funds or investment management accounts

Investments in trust funds of banks (except qualified exempt employee trust funds), or investment
management accounts are subject to the same final tax rules. However, in order to claim final tax
exemption on long-term investment, it is also mandatory that

a. The investment of the individual investor in the common or individual trust fund

or investment management account must be held/managed by the bank for at least 5 years

b. The underlying investments of the Individual trust account or investm

management account must qualify as a deposit substitute issued by a bank

e. The individual trust account or investment management account must hold on to

such underlying investment for at least 5 years

Illustration 1

Mr. Acebo appointed the trust department of RCBC Bank to manage his money through a trust
agreement. The RCBC Bank trust department invested Mr. Acebe money in 5-year corporate bonds

Even if Mr. Aceho does not withdraw his money from the trust agreement for at least 5

years, his interest income from the trust agreement will still be subject to 20% final tr

since the underling instrument (ie, corporate bonds) is not issued by a bank.

Illustration 2

Assume instead that the RCBC trust department invested Mr. Acebo's money in a 10- year time deposit
under its own name without mentioning that it was in trust for him.

The investor in this case to the 10-year time deposit is the bank which is a corporate Baxpayer subject to
regular tax. Mr. Acebo would not qualify for exemption to the 20% final tax since the investment was
not made in trust for the name of specific and qualified individual

Blustration 3 Assume instead that RCBC trust department invested the money under the name of

Mr. Acebo's in a 10-year long-term deposit.

Mr. Acebo's interest income derived from the trust agreement shall be exempt from

income tax provided both he will hold such deposit or investment in a continuous and uninterrupted
period for at least 5 years. The trust must also hold the underlying instrument (10-year deposit) for at
least 5 years. Pre-termination of long-term deposits or investment of individuals

If the deposit or investment placement of individual taxpayers is pre-terminated before S years, any
previously untaxed or exempted interest income will be
subjected to the following final taxes upon pre-termination:

Holding period

Pre-termination tax

Less than 3 years 3 years to less than 4 years

4 years to less than 5 years

20%

12%

5%

5 years or more

0%

Illustration-long-term deposits

On January 1, 2020, Patricia invested P1,000,000 in Baguio Bank's 5-year time deposit. The deposit pays
10% interest annually. Alice pre-terminated the deposit on July 1,

2023.

The final tax on pre-termination will be computed as follows: 2020 Interest income (P1,000,000 x 10%)
P

100,000

2021 interest income (P1,000,000 x 10%)

2022 interest income (P1,000,000 x 10%)

2023 accrued interest income (P1.000.000 x 10% x 6 months/12 months)

50.000

Total interest income

P 350,000

Final tax rate applicable to less than 4-year pre-termination Final tax

12% 42,000

The net proceeds of the deposit and accrued interest to be released to the deposite

upon pre-termination shall be:

Principal balance

P 1,000,000
Accrued interest for 2023

Final tax to be withheld

Net proceeds to be released to the depositor

50,000

42.000) P1,008.000

Pre-termination, transfer or negotiation of Investment certificates For purposes of applying the pre-
termination rates for individual taxpayers on long-term investment certificates, the remaining maturity
of the instrument must still satisfy the 5-year requirement.

illustration 1

A debt instrument with a maturity of 10 years was heid by Mr. X (a resident citizen) for 6 years then
transferred it to Mr. Y (another resident citizen) who in turn held it for 4 years until the instrument
matured

The final tax due on the interest income of each holder shall be as follows:

Holder

Mr.X

Mr. Y

Classification

RC
RC

Remaining maturity

10 years-long-term

4 years-short-term

Holding period

Final tax

Exempt

20% FWT

6 years 4 years

Note: Mr. Ya remaining maturity upon acquisition of the instrument is already less than 5 years so be is
now subject to 20% final tax (See Q&A Nes 2 and 3 of RMC 81-2012 dated December 10, 2012)

Illustration 2

A debt instrument with a maturity of 10 years was held by Mr. X (a non-residest citizen) for 3 years and
transferred it to Mr. Y (a resident alien). Mr. Y held it for two years before subsequently transferring it to
Mr. Z (a resident citizen) who held it until maturity or 5 years.

The final tax due on the interest income of each holder shall be as follows:
Holder

Classification NRC

Remaining maturity

Holding period

Final tax

Mr. Y

Mr. Z

NRA

10 years-long-term 7 years-long-term

RC 5 years-long-term

3 years 2 years

5 years

12% FWT

20% FWT

Exempt
Illustration 3

An instrument with a maturity of 10 years held by Mr. X (a NRA-NETB) for 3 years and transferred it to
Mr. Y (a NRA-ETB). Mr. Y held it for 2 years before subsequently transferring it to Mr.Z (a resident alien),
who pre-terminated it after 4 years.

The final tax due on the interest income of each holder shall be as follows:

Holder Mr.X

Classification NRA-NETH

Bemaining maturity 10 years-long-term

Holding period

Final tax

Mr. Y

Mr.Z

7 years-long-term

5 years-long-term

25% FWT

20% FWT
NRA-ETB RA

3 years

2 years

4 years

5%

Note: NRA-NETBs are not subject to the reduced pre-termination tax rate on long-term deposits or
investment certificates FCD

Foreign currency deposit with foreign currency depositary banks The interest income from foreign
currency deposits under the foreign currency deposit system or expanded foreign currency deposit
system by residents is

subject to a final tax of 15%

Taxpayer

Residents

Individuals

Corporations

Non-residents
15% Exempt

15% Exempt

Note:

Resident taxpayers include resident citizens, resident aliens, domestic corporations and resident

foreign corporations 2. Non-residents taxpayers include non-resident citizens, non-resident aliens and
non-resident foreign corporations

It should be emphasized that NRA-NETDs and NRFCs are also exempt

There is no long-term or short term classification of foreign currency deposits

The reduced final tax rates on interest Income on foreign currency deposit and the exemption of non-
resident depositors are intended to encourage the deposit of foreign currencies in our banks which will
be used in the financing of our international trades. Our Philippine peso is not a globally accepted
currency. Our foreign trade will be limited without adequate foreign currency reserves in our banking
sector.

Joint accounts on forex deposits

If the bank account is jointly in the name of a non-resident and a resident taxpayer, 50% of the interest
shall be exempt while the other 50% shall be subject

to the 15% final tax.

Illustration

Me. Seeman is an Overseas Filipino Worker. He deposits all his savings in a savings
count under the foreign currency deposit unit (FCDU) of a domestic bank. During

the month, the savings deposit account earned $1,000 interest equivalent to P41.500.

Scenario 1: Mr. Seeman deposited his savings through the account of his resident wife.

The final tax shall be computed as follows:

P 41,500.00 159%

P 6.225.00

. Seeman deposited his savings through a

The final tax shall be computed as follows:

Interest income

Final tax rate

Final tax

joint account

with his

Scenario 2: Mr resident wife.

Interest income
P 41,500.00

Portion taxable Taxable interest income

50% P 20,750.00

Multiply by: final tax rate Final tax

1596 P 3.112.50

Scenario 3: Mr. Seeman deposited his savings account through his own account.

In this case, the interest income shall be exempt from final tax.

Interest income subject to regular tax

Interest income from the following sources is subject to regular income tax, not to final tax: 1. Lending
activities, whether or not in the course of business

2. Investments in corporate bonds

3. Promissory notes

4. Foreign sources, whether bank or non-bank 5. Penalty for legal delay or default

DIVIDENDS

"Dividends" means any distribution made by a corporation to its shareholders out of its earnings or
profits and payable to its shareholders, whether in money or in other property. (Sec. 73, NIRC)

Types of dividends:
1. Cash dividends-paid in cash 2. Property dividends-paid in non-cash properties including stocks or
securities

of another corporation 3. Scrip dividends those paid in notes or evidence of indebtedness of the

corporation

3. Stock dividends-paid in the stocks of the corporation 5. Liquidating dividends-distribution of

corporate net asset

As a rule, dividends are income subject to tax. However, the following are not income for taxation
purposes: 1. Stock dividends

Stock dividends representing transfer of surplus to capital account shall not be subject to tax. Stock
dividends are in the form of increase in corporate value (Le. capital gain) which should be properly
taxable when realized through disposal or sale of the stocks investment. The distribution of stocks of
another corporation as dividends is a taxable

property dividend and not a stock dividend.

2. Liquidating dividends

Under the NIRC, the receipt of liquidating dividends is not viewed as income but as exchange of
properties. When the liquidating dividends exceed the cost of the investments, the excess is a taxable
capital gain, subject to regular income tax. Any loss is deductible only to the extent of capital gain.

Taxability of Stock Dividends

Normally, stock dividends are exempt from income tax Exceptionally, stock dividends are subject to tax
at the fair value

of the stocks received under the

following conditions: a Subsequent cancellation and redemption

If a corporation cancels or redeems stock issued as a dividend at such time and in such manner as to
make the distribution and cancellation or redemption, in whole or in part, equivalent to the distribution
of a taxable dividend, the amount so distributed shall be taxable to the extent it represents a
distribution of earnings or profit.

For instance, a corporation declared stock dividends and immediately called the stock dividends for
redemption and cancellation. This act is equivalent to

declaration of cash dividends & leads to substantial alteration in ownership in the corporation
Substantial alteration in ownership in a corporation may occur when stock

dividends are given in lieu of cash dividends or when the corporation declared

an optional stock or cash dividend

Stock dividend vs. Stock split

Stock dividend is a capitalization of earnings while stock split results in reduction in the par value of
stock and an increase in the number of shares of shareholders Assuming a 2-for-1 split, a shareholder
holding one P50-par value stock will be given Two P25-par value stocks. While stock dividend may be
taxable under certain conditions, stock split will never be subject to income tax.

Dividend Tax Rules

Recipient of dividends

Source of dividends Domestic corporation

Foreign corporation

Individuals
10% final taxt

Corporations Exempt

Regular tax Regular tax

Note:

1.

A NRA-ETB is subject to a 20% final tax on dividend, not to the usual 10% but an RA NETB is subject to a
25% final tax.

2. A NRFC is not exempt but is subject to the 25% general final tax rate. However, the imposable
dividend tax shall be 15% when the tax sparing rule applies. This will be discussed later.

3. With conditional exemption for reinvestment to be discussed in detail in Chapter 9

Illustrative 1

Mati Company declared a total of P2,000,000 dividends. P800,000 is due to corporate shareholders
while P1,200,000 is due to individual shareholders.

The final tax to be withheld by Mati Company shall be:

Shareholders

Individual shareholders

Corporate shareholders
Final tax

Amount

Rate Amount

x 10%

P 120,000

1,200,000 800,000 x 0%

P 120.000

Illustrative 2

Bayog Company declared a total of P1,000,000 dividends in March 2021. An analysi of the recipient
shareholders is as follows:

Shareholders

Resident aliens and citizens NRAS engaged in trade or business

NRAS not engaged in trade/business

Amount

P 500,000
50,000

P 750.000

Non-resident corporations Total dividends

The total final tax to be withheld by Bayog Company shall be:

Shareholders

Dividends.

Final Tax

Resident aliens and citizens

500,000

100,000

Rate

x 10% P 50,000

NRAS engaged in trade or business

x 20%
20,000

NRAS-NETBS

50,000 x 25% 12,500

NRFCS

100.000 x25% 750.000

Total

25.000 107.500

Presumptive source of dividend distribution Any distribution made to the shareholders or members of a
corporation shall be deemed to have been made from the most recently accumulated profits or surplus
and shall constitute a part of the annual income of the distributee for the year in

which received. (Sec. 73(C), NIRC)

Exempt Dividends

1. Inter-corporate dividends from domestic corporations-exempt from final tax 2. Dividends from
cooperatives-exempt from final tax 1. Qualified foreign-sourced dividends-exempt from regular tax

Inter-corporate dividends from domestic corperations

Inter-corporate dividends received by a domestic corporation and resident

foreign corporation from a domestic corporation are exempted under the NIRC to
minimize double taxation.

Illustration

B, Inc owns 100% of A Corp. During the year, A Corp declared P100,000 dividends to 8, Inc. B, Inc., in
turn, declared the same dividends to its shareholders. The following table illustrates the double
taxation:

Dividends declared

Len 10% dividends tax Net dividends

10.090

90.000

H. Loc. 90.000

This is a form of direct duplicate taxation. To eliminate the impact of double taxation inter-corporate
dividends such as those declared by A Corp. to Inc. is exempted from final tax When the dividend finally
falls to an individual shareholder, the 10%

final tax applies.

This exemption extends to dividends received by business partnerships from domestic corporations
since business partnerships are considered corporations under the NIRC. However, the exemption does
not extend to dividends received by general professional partnership, exempt joint ventures and exempt
co-ownership because they are not considered corporations under the NIRC

On the other hand, the exemption of inter-corporate dividends does not apply to the share of a
corporation from the net income of a business partnership due to absence of express legal exemption.
Exemption is restricted to dividend declaration only.

Dividends from cooperatives

Under RA 9520, the distribution of dividends by an exempt cooperative to its members either
representing interest on capital or as patronage refunds shall not

be subject to tax Dividends received by corporations from foreign corporations are generally

Inter-corporate dividends from foreign corporations

subject to regular income tax However, domestic corporate recipients of such

dividends may be exempted under certain conditions which will be discussed in

detail in Chapter 9. ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT TO 10% FINAL TAX

The 10% final withholding tax also applies to dividends or share in the net income

of entities considered corporations under the NIRC and special laws, such as 1 Real Estate Investment
Trusts

2 Business partnerships

13. Taxable associations

4 Taxable joint ventures, joint accounts or consortia

5. Taxable co-ownerships

Real Estate Investment Trust or REIT A REIT is a publicly listed corporation established principally for the
purpose of
owning income-generating real estate assets.

The following recipients of REIT dividends are exempt from the final tax: a Non-resident alien individuals
or non-resident foreign corporations entitled to claim preferential tax rate pursuant to applicable tax
treaty. b. Domestic corporations or resident foreign corporations

c. Overseas Filipino investors-exempt from REIT dividend tax until August 12.

2018 (7 years from the effectivity of RR13-2011 which took effect on August

12, 2011)

Business partnership, taxable associations, joint venture, joint accounts of co-ownerships

Under Sec. 73 of the NIRC, the net income of these entities is deemed constructively received by the
partners, members or venturers, respectively, in the same year the net income is reported. Hence, the
10% final tax applies at the point of determination of the income, not at the point of actual distribution.

Share in business partnership net income The share in net income includes the share in the residual
profit and provisions for salary, Interest and bonus to a partner. However, if the provisions for salaries
Interests, and bonuses are expensed as such in the book of the partnership, they are subject to regular
tax to the receiving partner, not to final tax. In this case, only the share in the residual income after such
provisions is subject to final tax

illustration The partnership profit distribution of partners Andy anil Mar based on their agreed

profit distribution scheme is as follows:

Andy 40,000 P

25,000 8.000

Mar
Salaries to industrial partner Interest to capitalist partner

Bonus to industrial partner

12.000

Residual profit sharing Profit sharing

24.000 73.009 36.009

Assuming the salaries, interest and bonus are not expense in the book, the 10% final tax shall be

Profit sharing

73,000 P

Multiply by: Final tax rate

36,000

Final tax

10% 7.300 P 3.600

Note: A partner, member or venture who is an NRA-ETB, NRA-NETB or NRFC shall be subject respectively
to 20%, 25% and 25% final tax rate.

ROYALTIES
Passive royalty income received from sources within the Philippines is subject to the following final tax
rates:

Source of passive royalties Books literary works, and

Recipient

Individuals

Corporations

musical compositions 10% final tax 20% final tax

20% final tax 20% final tax

Other sources

Note:

1. Under the regulations, the 10% preferential royalty final tax on books and literary works

pertain to printed literatures. Royalties on books sold on e-copies or CDs such as hooks

are subject to the 20 final tax o

2 Royalties on cinematographic films and similar works paid to NRA-ETBs, NRA-NETBS of

NRFCS is subject to a final tax of 25%

Passive vs. Active royalties Royalties of a passive nature such as royalties of claim owners or land owners
of mining properties, royalties of inventors from companies that manufacture and

sell their invention, and royalty from licensing agreements that transfers the use of trademark or
technology are subject to 20% final tax. When royalties accre from an undertaking where the taxpayer
has active involvement, it is an acti income subject to the regular income tax

Illustration

E-Soft Inc. develops application programs for establishments. These programs were Individually tailored
to meet specific requirements of the establishments and required upgrades, occasional troubleshooting,
and adjustments for problems. The developer receives 1% of the sales of the establishment as royalty.

E-Soft also developed a utility program and assigned it to an e-marketer which sells

the utility program through the Internet. E-Soft receives 30% royalty on each copy at

the program sold.

The royalties from application programs are active income subject to regular income

tax. The royalty from the utility programs is passive income subject to li

withholding tax, but if the e-marketer is not a resident in the Philippines, the pave

income from abroad shall be subject to regular tax.

Royalties, active or passive, earned from sources abroad are subject to regular income tax.
PRIZES

The taxation of prizes varies. Prizes may be exempt from income tax or subject to either final tax or
regular income tax.

Exempt prizes

1. Prizes received by a recipient without any effort on his part to join a contest Examples include prizes
from such awards as Nobel Prize, Most Outstanding

Citizen, Most Benevolent Citizen of the Year, and similar awards. 2. Prizes from sports competitions that
are sanctioned by their respective national sport organizations

Requisite of exemption

1. The recipient was selected without any action on his part to enter the contest 2. The recipient is not
required to render substantial future services at a

condition to receiving the price or reward.

Taxable prizes

For individual income taxpayers, taxable prizes are subject to either final tax of regular tax depending on
the amount of the prize. There may be events of competitions where corporations earn prizes. However,
there is no final imposition on corporate prizes under the NIRC Hence, the same must be subject to
regular income tax.

Amount of taxable prize

Individuals

Recipient
Corporations

per Prizes exceeding P10,000 Prizes not exceeding P10,000

20% final tax Regular tax

Regular tax

Regular tax Recall also that final taxation does not apply to foreign passive income; hence, prizes from
foreign sources are subject to the regular income tax.

WINNINGS

For individual income taxpayers, winnings received from sources within the Philippines are generally
subject to 20% final tax, except winnings from Philippine Charity Sweepstakes Office (PCSO) games
amounting to P10,000 or less.

Similar to prizes, there is no final tax imposed on corporate winnings under the NIRC. Winnings that are
not subjected to final tax by the payor should be reported as part of the regular income. Also, winnings
from foreign sources are subject to

regular income tax.

Types of winnings

Recipient

PCSO winnings not exceeding P10,000

Individuals
Corporations

Exempt

20% final tax Regular tax

Exempt 20% final tax 20% final tas

PCSO winnings exceeding P10,000 Other winnings, in general

Note: PCSO winnings of NRA-NETBs and NRFCs, regardless of amount, are subject to 25% final

The tax rules on PCSO winnings shall be applied on a per ticket basis.

Illustration 1

Apolinario won P10,000 first place in the singing contest sponsored by Syd Company

during their company anniversary celebration.

Since results of singing contest is based on effort rather than chance, the P10,000 payment is a prize
which is not subject to 20% final tax since it is below the P10,000 threshold. Apolinario shall report the
prize in his regular income tax return. If the amount exceeded P10.000, Syd Company shall withhold 20%
final tax

lustration 2

Roy's raffle ticket was selected as the second winning ticket in the raffle draw of ZET
Mall for P10,000 dubbed as "2nd Prize". Since raffle draw results is not based on effort but on chance
the P10,000 payment is a winning which is subject to 20% final tax. The same shall be withheld by ZFT
Mall Note that the P10,000 threshold applies only on prizes, not on winnings.

Illustration 3

Mr. Dante Paya made three bets to the PCSO lotto draws. All tickets won. The details f

the winnings were: EZ2-P4,000

6/42-P10,000 (3-digit winning numbers)

6/45-P20,000,000 Grand prize (sole winner)

The 6/42 and EZ2 winnings are exempt since they did not exceed P10,000 in amount

PCSO shall withhold 20% final tax on the entire PZOM amount of the winnings.

TAX INFORMER'S REWARD

A cash reward may be given to any person instrumental in the discovery f violations of the National
Internal Revenue Code or discovery and seizure of

smuggled goods. The tax informer's reward is subject to 10% final tax.

Requisites of Tax Informer's Reward:

1. Definite sworn information which is not yet in the possession of the BIR 2. The information furnished
lead to the discovery of fraud upon internal
revenue laws or provisions thereof. 3. Enforcement results in recovery of revenues, surcharges, and fees
and/or

conviction of the guilty party or imposition of any fine or penalty.

4. The informer must not be a a. BIR official or employee

b. Other public official or employee

c relative within the 6th degree of consanguinity of those officials or employee in a. and b.

Amount of Cash Reward - whichever is the lower of the following per case 1. 10% of revenues,
surcharges, or fees recovered and or fine or penalty

Imposed and collected or 2 P1,000,000 The amount of cash reward is subject to 10% final withholding
tax which shall be

withheld by the government.

Illustration

Ms. Kirsten provided information to the BIR leading to the recovery of unpaid taxes. The cash reward
shall be computed as follows:

10% cash reward (P12,000,000 x10%) Cash reward limit

P.1.200.000 P1.000.000

Cash reward (whichever is lower)

Less: 10% final withholding tax

Net amount to be released to the tax informer

P1,000,000 100.000

P900.000

P12,000,000

TAX-FREE CORPORATE COVENANT BONDS

Interest income of non-resident aliens, citizens or residents of the Philippines on bands mortgages,
deeds of trust, or other similar obligations of domestic or resident foreign corporations with tax-free or
tax-reduction provision where the obliger shoulders in whole or in part any tax on the interest shall be
subject to a final withholding tax of 30%.

Bond investor

Tax on interest income on tax-free corporate covenant bonds

Individuals 30% final tax

Corporations Regular income

tax

Note:

1 The final tax applies to all individuals, regardless of classification There is no similar final tax provision
for corporate recipients of "tax-free" interest; hence, the regular income tax shall apply.
EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-RESIDENT PERSONS NOT

ENGAGED IN TRADE OR BUSINESS IN THE PHILIPPINES

General Final Tax Rate

25%

NRFC

Exceptions:

25%

1. Capital gain on sale of domestic

15% Capital gains tax

15% Capital gains tax

stocks directly to buyer

2. Rentals on cinematographic films and similar works

25% of rentals 25% of rentals

25% of rentals

3. Rentals of vessels
25% of rentals 4.5% of rentals

7.5% of rentals

4. Rentals of aircrafts, machineries, and other equipments

5. Interest income under the foreign

currency deposit system 6 Interest on foreign loans

Exempt N/A

Exempt

20% 15% if tax sparing rule is

7. Dividend income

25%

applicable 30%

8 Tax on corporate bonds

30%

Capital gains tax

As a rule, NRA-ETBS and NRFCs do not file income tax returns. Exceptionally, NRA- NETBS and NRFCs are
required to file income tax returns to report their gain from dealings in domestic stocks directly to
buyers. Ownership of the stocks shall not be transferred to the assignee without the required return and
tax clearance (Certificate Authorizing Registration or CAR) from the BIR that the tax on the

transfer has been paid.

Illustration: NRA-NETBS

In 2021, Mr. Wang Lu, an NRA-NETB, was hired by Raha Humabon Company (RHC) domestic
manufacturer, to install his invention in RHC's factory. RHC pays him a and the installation fees. Mr. Lu
also agreed to design RHC's website which be designed and completed abroad. During Mr. Lu's visit, he
purchased shares of RHM and subsequently sold them directly to a buyer.

Royalties from invention Installation fees

P 300,000

40,000

Website development fees

Gain on sale of domestic stocks directly to a buyer

RHC shall withhold the following final taxes:

Royalties from invention Professional fees

P 300,000 P1,300,000

Total gross income

Multiply by: final tax on NRA-NETB

Total final withholding tax

25% P325.000

Note:

1. The final tax applies on gross income, whether active or passive. The same rule and final tar

2.

rate apply with NRFC taxpayers

The website development fee is not subject to final tax since the same is earned abroad Note that the
service is rendered abroad, not in the Philippines.

3. Mr. Lu shall file a capital gains tax return for the gain on the sale of domestic stocks.

The Tax Sparing Rule

NRECS shall be subject to a 15% final tax on dividend income instead of the 25% general final tax if the
country of domicile of the NRFC credits against the tax de of such NRFC taxes presumed to have been
paid by such NRFC from the Philippines equivalent to 10% of the dividends.

In applying the tax sparing rule, the Supreme Court ruled that the NIRC does not require that the foreign
law of the non-resident corporation must give a deemed paid tax credit for dividend equivalent to the
percentage points waived by th Philippines pointing that the NIRC merely require the country of the
NRFC deemed paid tax equivalent to that waived by the Philippines. (CIR vs. Procter & Gamble
Philippines Manufacturing Corporation and the CTA (GR. 66836)) Thus, the requirement of the tax
sparing rule is deemed satisfied if the country which the NRFC is domiciled imposes no tax on dividends
from foreign sources
(BIR Ruling Nos. 104-2012, March 22, 2012)

Illustration: The Tax Sparing Rule with NRFCS NRFC is due to receive a dividend of P1,000,000 from a
domestic corporation. The final tax to be imposed by the Philippines which shall be withheld by the
domestic An corporation shall be 15%, not 25%, if the country of domicile of the NRFC also reduces its
income tax upon the P1,000,000 dividend by at least 10%, the dividend tax percentage waived by the
Philippines from the 25% general final tax rate. If the country of the NRFC does not reduce its tax on the
dividend by at least 10% the Philippines shall impose the 25% final tax.

OTHER FINAL INCOME TAXES

1. Fringe benefits of managerial or supervisory employees 2 Income payments of residents other than
depositary banks under the expanded foreign currency deposit system (EFCDS) and expanded currency
deposit units (EFCDUs) 3. lacome payments to oil exploration service contractors or sub-contractors

FRINGE BENEFITS TAX

Fringe benefits include all remunerations under an employer-employee relationship that do not form
part of compensation income. The fringe benefits of managerial and supervisory employees are subject
to a final fringe benefits tax. This will be discussed in detail in Chapter 11.

INTEREST AND OTHER INCOME PAYMENTS TO DEPOSITARY BANKS UNDER THE EXPANDED FOREIGN
CURRENCY DEPOSIT SYSTEM Residents, other than depositary banks under the expanded foreign
currency deposit system, shall withhold 10% final tax on income payments such as interest income on
loans from expanded foreign currency deposit units (FCDUs). The final taxation of FCDUs and EFCDUs
will be discussed in Chapter 15-A

INCOME PAYMENTS TO

CONTRACTORS

SUB-CONTRACTORS

OF PETROLEUM SERVICE

Under PD 1354, every subcontractor, whether domestic or foreign, entering into a contract with a
service contractor engaged in petroleum operations in the Philippines shall be liable to a final income
tax equivalent to eight percent (8%) of Its gross income derived from such contract, such tax to be in lieu
of any and all taxes, whether national or local.

Provided, however, that any income received from all other sources within and without the Philippines
in the case of domestic subcontractors and within the Philippines in the case of foreign subcontractors
shall be subject to the regular income tax under the NIRC.

The term "gross income" means all income earned or received as a result of the contract entered into by
the subcontractor with a service contractor engaged a petroleum operations in the Philippines under
Presidential Decree No. 87.

Note that the 8% final tax applies only to subcontractors, whether individuals corporations, resident or
non-resident. Petroleum service contractors are subject t the regular income tax.

Persons or entities contracted by a petroleum service contractor to locally supply goods and materials
that are required by and in, or that are inherently necessary or incidental to, its exploration and
development of petroleum mineral resources and are entitled to the preferential 8% final tax on their
gross income derived from such contracts. (BIR Ruling No. 024-2001, June 13, 2001)

Note on Special Aliens

Under the old law, employees of offshore banking units, regional operating regional administrative
headquarters of multinational companies, referred to as special aliens, are previously subject to 15%
final tax on gross compensation income. The special alien classification is now abolished by virtue of a
presidential veto to the TRAIN law. As such, these employees are now subject to regular income tax if
they are residents and 25% final tax if they are non-residents.

FINAL WITHOLDING TAX RETURN The final withholding tax return (BIR Form 0619-F). Monthly
Remittance Return

of Final Income Taxes Withheld, shall be filed in triplicate by every withholding agent or payor who is
either an individual or corporation for the first two months of the quarter.

Deadline and place for monthly manual filing The return shall be filed and the tax shall be paid or before

the 10 day of the

month following the month in which withholding was made with a. The authorized agent bank of the
revenue district office having jurisdiction over the withholding agent's place of business

b. In places where there are no authorized agent banks, to the revenue collection

officer The authorized city or municipality treasurer within the revenue distrid where the withholding
agent's place of business is located

Monthly deadline for eFPS filing

In accordance with the schedule set forth in RR No. 26-2002, the deadline for

filing of returns is as follows:

Group A-Fifteen (15) days following the end of the month

Group B-Fourteen (14) days following the end of the month

Group C-Thirteen (13) days following the end of the month Group D-Twelve (12) days following the end
of the month E-Eleven (11) days following the end of the month

Group Note: Please check the groupings of taxpayers under eFPS in Chapter 4

Quarterly filing

The withholding agent shall file (BIR Form 1601-FQ), Quarterly Remittance Return of Final Income Taxes
Withheld, on or before the last day of the month after each quarter.

Penalties for Late Filing or Remittance of Final Income Taxes Withheld

The same penalties for late payment of income taxes as discussed in Chapter 4

apply for non-withholding or non-remittance of final taxes.

ENTITIES EXEMPT FROM FINAL INCOME TAX 1. Foreign governments and foreign government-owned

corporations 2 International missions or organizations with tax immunity 1 General professional

partnership

4 Qualified employee trust fund

The first two categories are exempt on grounds of international comity. General professional
parmerships and qualified employee trust funds are expressly exempt from any income tax imposed
under the NIRC.

These entities are exempt not only to final tax but also to capital gains tax and regalar income tax

A comprehensive summary of final tax rates is presented in Appendix 1.

CHAPTER 6: CAPITAL GAINS TAXATION

CLASSIFICATION OF TAXPAYER'S PROPERTIES

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 de ordinary course of his trade or
business

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

equipment like buildings, property improvements, and equipment

2. Capital assets-any asset other than ordinary assets

Basically, capital assets are: 1. Personal (non-business) assets of individual taxpayers 2. Business assets
of any taxpayers which are:

a. Financial assets - such as cash, receivables, prepaid expenses and

Investments

b. Intangible assets - such as patent, copyrights, leasehold

franchise rights

ANALYSIS OF PROPERTIES HELD BY TAXPAYERS

INDIVIDUAL TAXPAYERS
rights;

Personal asset (All are capital assets)

Business asset

Ordinary assets

Capital assets

CORPORATE TAXPAYERS

Ordinary assets

Capital assets

Asset classification is relative The classification of assets or properties as ordinary asset or capital asset
does not

depend upon the nature of the property but upon the nature of the taxpayer's business and its usage by
the business. 1. A domestic stock is an ordinary asset to a dealer in securities but is a capital asset

Example:

to a non-security dealer. A "dealer in securities" is a merchant of stocks or securities with a registered

place of business, regularly engaged in the purchase of securities and their re-sale to customers.

2. A vacant and unused lot is an ordinary asset to a taxpayer engaged in the real

estate business such as realty dealer, realty developer, or lessor but is a capital
asset to those not engaged in the real estate business.

Interestingly, the revenue regulations classify real and other properties acquir (ROPA) by banks as
ordinary assets even if banks are not actually engaged in the realty business. This is an apparent
recognition of the fact that ROPA are normal acquired and sold by banks in their normal course of
business. However, ROPA the form of domestic stocks held by banks are capital assets. Under RR6-200
"stocks classified as capital assets" means all stocks and securities held b taxpayers other than dealers in
securities.

Asset Classification Rules

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

B. Discontinuance of the active use of the property does previously established as a business property.
not change its characte 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 taxpayer not engaged in the real estate business are automatically converte to capital assets
upon showing of proof that the same have not been used a

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 if it is fully depreciated, or then

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

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

considered capital assets. Exempt corporations are not business. G. The classification of property
transferred by sale, barter or exchang

Inheritance, donation, or declaration of property dividends shall dependa whether or not the acquirer
uses it in business. H. For real properties subject of involuntary transfer such as expropriation and
1

foreclosure sale, the involuntariness of such sale shall have no effect on t classification of such real
property. . Change in business from real estate to non-real estate business

change the classification of ordinary assets previously held.

shall

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

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

Taxpayers habitually engaged in real estate business include those registered with t HLURB or HUDCC as
dealer or developer or those with at least 6 taxable real esta sales transactions in the preceding year.

lustration 1-Property previously used in business Mr. Alfonso has a building which was previously used
as an office and is subject to periodic allowance for depreciation. In July 1, 2021, Mr. Alfonso
Implemented a strategic shift in his business operations resulting to the relocation of its administrative
office in another city and the resultant abandonment of his office.

Case 1: Mr. Alfonso is a not engaged in real estate business Effective July 2, 2023 (Le more than two
years from discontinuance of use), the old office building shall be reclassified as capital asset upon
showing of proof that the same has not been use for more than two years

Case 2: Mr. Alfonso is engaged in real estate business The old office shall continue to be an ordinary
asset despite the abandonment or idling of the property from active use

Blastration 2-Property acquired to be used in business In June 1, 2021. Mr. Alfonso purchased a building
to be used as a branch sales office. The building remained idle as of December 31, 2024 due to an
ongoing civil war.
Care 1: Mr. Alfonso is a not engaged in real estate business The property shall remain to be an ordinary
asset. The two-year rule applies only to properties which are classified as ordinary asset for being used
in business. A property purchased for future use in business even though this is later thwarted by
circumstances beyond the taxpayer's control, does not lose its character as an ordinary asset

Case 2: Mr. Alfonso is engaged in real estate business The property shall remain to be considered as an
ordinary asset. Properties acquired by taxpayers engaged in real estate business shall remain to be
ordinary asset even if discontinued from active use and even if they change the nature of their real
estate bustness

Mlustration 3-Disposal of property Juan, a realty dealer, donated one of his house and let inventory to
his son as dowry

for his upcoming marriage. His son shall use the same as his family residence. He also

donated another house and lot as initial capital of his daughter who will commence a

realty leasing business.

The house and lot shall be considered capital asset to the son because he will not use it in business. The
house and lot donated to the doughter shall be considered ordinary asset to the daughter because she
will use it in business lustration 4-Exempt non-business operation

Bantay Tanda Foundation owns Building A-1 which it uses for its non-profit

operations. It also owns another building, Building A-2, which it leased out to various

tommercial lessees

Buliding A-1 is a capital amet since it is employed in non-taxable operations. Building 2 is an ordinary
asset since it is employed in tarable operations. Non-profit enco arable to Income tax when they engage
in a profit-oriented or commercial activi
TYPES OF GAINS ON DEALINGS IN PROPERTIES 1. Ordinary gain-arises from the sale, exchange and other
disposition

pacto de retro sales and other conditional sales of ordinary assets 2. Capital gain- arises from the sale,
exchange, and other disposition includ pacto de retro sales and other conditional sales of capital assets

Taxation of Gains on Dealings in Properties

Type of gain Ordinary gains

Applicable taxation scheme Regular income tax

Capital gains General Rule Regular" ncome tax Exception rule: Capital gains tax

CAPITAL GAINS SUBJECT TO CAPITAL GAINS TAX

There are only two types of capital gains subject to capital gains tax:

1. Capital gains on the sale of domestic stocks sold directly to buyer

2. Capital gains on the sale of real properties not used in business

SCOPE OF CAPITAL GAINS TAXATION

Gains on dealings in capital assets Gain on the sale, exchange, and other disposition of domestic stocks
directly to buyer

Tax Rates 15% capital gains

tax

Sale, exchange, and other disposition

of real 6% capital gains

tax

property in the Philippines

Regular Income tax

The tax treatment of gains on dealings in other properties other than those s

Gains from other capital assets

to capital gains tax will be discussed in detail in Chapter 12. CAPITAL GAIN ON THE SALE, EXCHANGE AND
OTHER DISPOSITION DOMESTIC STOCKS DIRECTLY TO BUYER

Domestic Stocks

Domestic stocks are evidence of ownership or rights to ownership in a dem corporation regardless of its
features, such as:

1. Preferred stocks (participative, cumulative, etc.)

2. Common stocks
3. Stock rights
4. Stock options
5. Stock warrants
6. Unit of participation in any association, recreation, or amusement club (golf, polo or similar
clubs)

The capital gains tax covers not only sales of domestic stocks for cash but also exchange of domestic
stocks in kind and other dispositions such as:

1. Foreclosure of property in settlement of debt

2. Pacto de retro sales-sale with buy back agreement
3. Conditional sales-sales which will be perfected upon completion of certain specified conditions
 4. Voluntary buy back of shares by the issuing corporation - redemption of shares which may be re-
issued and not intended for concellation

The term other disposition does not include:

1. Issuance of stocks by a corporation

2. Exchange of stocks for services

3. Redemption of shares in a mutual fund

4. Worthlessness of stocks

5. Redemption of stocks for cancellation by the issuing corporation

6. Gratuitous transfer of stocks

Issue of stocks including treasury stocks

The issue of stocks to stockholders by a corporation is a financing transaction rather than a sale
transaction. The excess of fair value received over the par value of shares Issued is an additional capital
to the corporation.

Stocks acquired by the corporation from its shareholders, treasury shares, cannot be considered assets
or investments in accounting sense. The excess of the consideration received in the re-issuance of
treasury stocks called treasury share premium is an additional capital and is not income.

Under US tax rules, treasury shares can be considered as investments if the

hcorporation trades on its shares as it would in the shares of other corporations. As

such, the treasury share premium is viewed as a capital gain.

Under the NIRC and RR6-2009, however, there is no express provision taxing treasury share premium.
Hence, treasury share premium should not be subjected to capital

gains tax

Exchange of stocks for services

The exchange or issue of stocks for services cannot be considered as exchange for property. No gain or
loss can be imputed as it involves payment of expense in kind.

Redemption of shares in a mutual fund

Gains from redemption of shares in a mutual fund are exempted by the NIRC from

Income taxation.

Worthlessness of stocks

The value of stocks becoming worthless is considered a capital loss subject to the n of regular Income
tax. This will be discussed in Chapter 12.

Redemption of stocks by the issuing corporation Under RR6-2008, any gain or loss on the mandatory
redemption of stocks by the Issuing corporation for the purpose of stock cancellation shall be subject to
the rale of regular income tax to be discussed under Dealings in Properties in Chapter 12 should be
noted, therefore, that the gain by the investor on redemption of rede

preferred shares shall be subject to regular income tax Note, however, that this does not include the
voluntary buy-back of the shares by Issuing corporation to be held in treasury which may later on be re-
issued. The g loss realised by the Investor on voluntary buy-back of shares by the corporation is taxable
under capital gains taxation.

Gratuitous transfer of stocks

The gratuitous transfer of stocks either by way of donation inter vivos or doe mortis causa is subject to
transfer tax, not to income tax

If stocks are transferred for insufficient consideration or at significant discous their fair value, the
difference between fair value and selling price is a don
subject to donor's 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 subject to capital gains tax. It is
subject to a stock transaction tax of 60% of 1% the selling price effective January 1, 2018. The old law
imposed a rate of 50% d 1% on the selling price.

Illustration 1: Non-dealer In stocks Mr. San Juan, not a dealer in stocks, sold the following stock
investments through Philippine Stock Exchange:

Date

Stock Code

Selling price

Cost

Gain (Loss)

4/5/2020 4/5/2020

AC SMB
P4,000,000 3.000.000 P.7.000.000 2.6.900.000 P 100.000

P 3,700,000 3.200.000 C

P 300,000 200.000

The stock transaction tax shall be computed as follows:

Total selling prices of stocks through the PSE P 7,000,000 Multiply by: Transaction tax rate

Transaction tax

0.6% $2.000

Noter 1. The stock transaction tax applies on the selling price regardless of the existence of a gar Inss on
the sale transaction

2 The PS000 net capital gains, computed as P100,000 less P42,000 tax, is exempt from capital gains tax
or to regular Income tax

Mustration 2: Dealer in stocks

Assume the same data in the previous illustration except that Mr. San Juan is a dealer In stocks.

Mr. San Juan shall not be subject to the stock transaction tax since stocks are ordinary assets to a
security dealer. The P300,000 ordinary gain and the P100,000 ordinary losses

are subject to the rules of regular income tax CAPITAL GAINS TAX ON SALE, EXCHANGE, AND OTHER
DISPOSITIONS OF 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.

The net gain is determined as follows:

Selling price

Less

Basis of stocks disposed Selling expenses

Documentary stamp tax on the sale

Net capital gain (loss)

The documentary stamp tax is deducted if paid by the seller.

Selling price shall mean:

In case of cash aule, the total consideration received per deed of sale , the sun
if total consideration is paid partly in money and partly in property money and fair value of property
received

In case of exchanges, the fair value of the property received Illustration

Mr. Real sold his stocks receiving in exchange a building with a tax basis of P2,000 but with a fair value of
P2,500,000, goods worth P100,000, and P400,000 cash

The selling price shall be computed as follows:

Fair value of building received Fair value of goods received

Cash

Total

P 2,500,000

400.000 P1.000.000

What is the tax basis of stocks?

If acquired by purchase, tax basis is the cost of the property which will b determined by the following
methods in descending order of priority: Specific identification, if the shares can be specifically
identified.

Moving average method, if books of accounts are maintained by the selle where transaction of every
particular stock is recorded. First-in, first-out method, if the stocks cannot be specifically identified.
If acquired by devise, bequest, or inheritance, the tax basis is the fair value r 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 by whom it was not acquired by
gift. ower

If acquired for inadequate consideration, the tax basis is the amount paid b the transferee for the
property

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

the stocks

Mustration 1: Cost of acquisition

Mrs. Excellence purchased 1,000 shares of Bacolod Corporation for P100,000 and the broker's
commission of P1.000. The stocks were subject to a chattel mortgag P10,000 which Mrs. Excellence
assumed.

The cost or basis of the acquired Bacolod stocks shall be Obligations assumed on the property purchased

Cash paid

Direct acquisition costs-broker's commission

Total cost (Tax basis)

P 100,000 10,000
1.000

Illstration 2: Costing procedures Mr. Online had the following purchases and sales of shares of the stocks
of El Dorado Corporation:

Date

Transaction

January 1 March 1

Purchase

Shares 10,000

Price

Cost

Purchase

Purchase

Sale

P10.00 P 100,000

5,000 11.03
March 23 April 4

20,000 25,000

12.00 15.00

240,000

The cost of the shares sold shall be determined as follows:

1. Assuming Mr. Online identified that the shares sold were those bought on March 1 and March 23, the
applicable method is specific Identification method.

Under specific identification, the actual cost of the shares sold and the remaining

stocks shall be.

March 1 purchase

5,000 shares

P 55.150

March 23 purchase 20,000 shares Cost of 25,000 shares sold

Cost of remaining 10,000 stocks

240.000 P.295.150
P100.000

The gain shall be computed as:

Selling price (25,000 shares x P15/share)

Less: Cost of shares sold

Gain

P 375,000

295.150 79,850

. Auming Mr. Online cannot identify the shares actually sold but retains detalled records of purchase and
sale in the stocks of El Dorado, the applicable method is the moving average method

Under the moving average method, the cost of the shares sold and the remaining

shares shall be computed as fellows

Date

Transaction

January 1 March 1

March 23
Purchase Purchase

Purchase

Shares Unit cost

Cost

10.000 5,000

P 10.00 P 100,000 11.03

55,150

240.000

20.000 12.00

35,000 P 11.29 P 395,150 P 11.29 (P 202.250) 2 1129 P 112.990

Less: Cost of shares sold Quantity and cost of ending

25.000 10.000

shares

Notes 1 Average unit cost-P395,150/35.000-P11.29

Under the moving average method, the average unit cost of the stocks is deter
after every purchass 1 The cost of ending shares can be computed as 10,000 x P11.29

3 Assuming Mr. Online cannot identify the stocks sold and does not m detalled records of transactions in
the shares of El Dorado, the applicable meth is the First-, Arst-out method. The cost of the shares sold
shall be pres coming from the cost of the first 25,000 shares bought:

Date

Transaction

Shares 10,000 P

Unit.cost.

10.00 P

5,000 11.03

Cest

January 1

March 1

March 23

Purchase

20.000
35,000

55,150

purchase Purchase

12.00

240.00% 395,150

Less: Cost of shares sold:

10,000

10.00 P

55.150

120,009

January 1 purchase March 1 purchase

5,000 11.03

March 23 (25K-10K-SK shares first) 10.000

25.000

(P 275.150)

Quantity and cost of ending shares

Note:

12.00

10.000

12.00 P 120.000

1. The 10,000 and 5,000 shares from January 1 and March 1 respectively are deve first sold. The other
10,000 shares sold are deemed coming from the last purda

March 23.

2. The cost of the 10,000 shares in the last purchase is computed as 10.000/20 P240,000-P120.000.

Illustration 3: Acquisition by gratuitous title

In March 2021, Mrs. REO received by way of donation shares of stocks of Tal Corporation from her
father, Don Bosco. Don Bosco also acquired the same shares by 2 donation In June 2007 from his
mother, Doña Karena, who bought the shares in P400,000 in April 2004. The shares had a fair value of
P700,000 in June 2007 P2,500,000 in March 2021.

Assuming the shares were acquired by Mrs. REO from her father by way of: 1. Donation
Assuming the shares were donated by Don Bosco to Mrs. REO in March 2021- basis of the shares to Mrs.
REO shall be whichever is lower of

P400,000, the basis in the hand of the last preceding owner (Doña Karm who did not acquire the
property by gift, and

P2,500,000, the fair value at the date of donation, hence, P400,000.

Inheritance

2. Assuming the shares were inherited by Mrs. REO when Don Bosco died in Mad 2013, the basis of the
shares to Mrs. Lipa shall be P2,500,000, the fair value at d date of death of Don Bosco.

3. Purchase for an inadequate consideration Assuming the shares were bought by Mrs. REO from Don
Bosco for only P1,200,000, the basis of the shares to Mrs. REO shall be P1,200,000, the actual price paid
for them.

The computation of adjusted basis on tax-free exchanges will be discussed under tax-free exchanges in
this chapter.

Stocks sold for Inadequate consideration

The excess of the fair value of the stocks over the selling price is a gift subject to donor's tax if so
intended by the seller as a donation.

Illustration

A seller sold his investment in domestic stocks directly to a friend for P500,000. The shares have a tax
basis of P300,000 excluding P10,000 expenses on the date of sale.

Case 1: Assume that the shares are readily marketable with many willing buyer at its fair value of
P650,000 but the seller opted to sell the same to his friend.
Fair value

Selling price

P 650,000

P150,000 gratuity subject to transfer tax

Less: Cost and expenses

P200,000 gain subject to capital gains tax

The rules on the determination of fair value of stocks for purposes of donor's tax will

be discussed in the book, Business and Transfer Taxation, by the same author.

Case 2: Assume that the shares have a fair value of P650,000 but the seller is under immediate need of
cash forcing him to sell at a big discount.

In this case, the P200.000 gain will still be subject to capital gains tax but the P150,000 discount shall not
be considered donation subject to donor's tax since there is no donative intent in this case.

THE CAPITAL GAINS TAX RATE The TRAIN law and CREATE law simplified the rate to a 15% flat rate.

Mustration

A taxpayer disposed his investments in domestic stocks costing P100,000 directly to a buyer for
P240,000. It paid on the sale P2,000 and P500, respectively, for broker's commission and documentary
stamp tax expense. The stocks have a fair value of P300,000 at the date of sale.
The capital gains tax shall be computed as follows:

Selling price

Less: Cost and expenses

Purchase cost Commission expense

Documentary stamp tax expense

P 100,000 2,000 500

102.500

Capital gain Capital gain

P 137,500 P 137,500

15%

P 20,625

Multiply by applicable rate:

Capital gains tax due

The P60,000 difference of the P300,000 fair value and P 240,000 selling price donation subject to
donor's tax. It must be noted that the basis of income tax realized gain.

Tax compliance
1.

Transactional capital gains tax Stocks are registrable securities which requires BIR tax clearance prior

their transfer of ownership. Filing of tax returns is a pre-condition to ta clearance. The capital gains or
losses are required to be reported after ex sale, exchange, and other dispositions through the capital
gains tax return, B Form 1707.

2. Annual capital gains tax

The 15% capital gains tax is an annual tax. The CGT is recomputed on the annual net gains and reported
through a final consolidated return (BIR Fre 1707A) on or before the 15th day of the fourth month
following the closed the taxable year of the taxpayer.

No loss scenario

Due of the flat 15% tax, there will be no capital gains tax payable in the fi consolidated return if all
transactions during the year resulted to a gain. Filing BIR Form 1707A may not even be necessary.

Illustration

Assume the taxpayer had the following disposition of several equity securities d to a buyer for the fiscal
year ending June 30, 2021:

Date Equity Securities

1/12

Preferred stock 3/18 Common stocks

Selling
P 200,000

Cost & Price expenses gainfloss)

Capital

P100,000

P 100,000 100,000 90,000 10,000 5/14 Stock rights 160,000 70,000 90.000

Transactional compliance: The following CGT shall be paid within 30 days of each sales transaction:

Daquity Securities Preferred stock

1/11

3/18

Common stocks

gallus) CCT.cat.

Transaction COT

P100,000 10,000

15,000

1500
13.500

30.000

x15N P

5/14 Stock rights

x15

90,000 815%

Annual compliance

Annual net gain

Multiply by: CGT tax rate

Annual capital gains tax due Les transactional capital gains tax paid

Capital gains tax payable

15% 30,000

30.000

with luss scenario

If there are losing transactions, it is best to offset losses first with subsequent gins Residual tax payable
must be settled. No tax payment should be made until the same turns into a net gain. This intra-period
lass carry-over procedure is necessary to avoid overpaying the government every time there is a gain
and seeking refunds at the end of the year for lesses incurred which could cause necessary workdnad for
both the taxpayer and the BIR

Illustration 1

Assume an individual taxpayer had the following transactions during the year:

Date Ety Securities

1/12

Preferred stock

1/18

Common stocks

8/24 Stock rights

11/17 Stock options

210,000 00,000

Cost &

Capital

100,000 90,000 10,000)

160,000 70,000

90,000

P 110,000

80,000 100,000 L 20.000) P170.000

Transactional compliance For every sales transaction, the taxpayer shall file BIR Form 1707

Dace Deadling 2/12

1/12

3/18

4/17

P16.500

The capital gains tax would simply be P110,000

x 15%

There would be no capital gains tax payable. The taxpayer will simply e B Form 1707 indicating thereis
the P10,000 loss Interim refund could not be allowed since the 15% CGT is an annual tax. The net gales is
inconclusive until year-end The P10,000 ss should be carried over in the next
Transaction.

8/14

Deadline

9/13

Capital gains tax

Erase

The taxable gain shall be (P90,000-P10,000) or P80,000. The taxpayer shall pay P80,000 x 15% P12,000.
There would be no capital gains tax payable. The taxpayer

11/17

12/17

simply file BIR Form 1707.

Annual compliance The taxpayer shall file BIR Form 1707A to claim refund for the tax overpayment:

Annual net capital gain

P 170,000

Multiply by: CGT tax rate Annual capital gains tax due
15% 25,500

Less: Total transactional CGT paid (P16.5K+ P12K)

Capital gains tax payable (overpayment)

28.500 (P 3.000)

The tax code does not allow Inter-period carry-over or the carry-over of capital i to succeeding taxable
year. The taxpayer could not roll-over the P20,000 capital loss t transactions of the following taxable
year.

Illustration 2

Assume the taxpayer had the following series of capital gains and losses on sair of domestic stocks
directly to buyers during the year:

Gains (Loss)

Transaction 1

(240,000) 60.000

P20.000

file Form 1707 and pay P 200,000 x 15% or P30,00

Transaction 2 Transaction 3

Yearly total
Transactional compliance Transaction 1 The taxpayer shall

capital gains tax

Transaction 2 The taxpayer shall pay zere tas Transaction 3 The taxpayer shall pay sero tas since
Po0,000-240.000 is still net

Annual compance The taxpayer shall file BIR Form 1707A to claim refund for the tax overpayment

Annual net capital gain Multiply by: CGT tax rate

20,000

Annual capital gains tax due Less Total transactional CGT paid

15% 3,000

Capital gains tax payable (overpayment)

30.000 (P27,000)

Illustration 3

Assume Instead that the taxpayer had the following series of capital gains and on sale of domestic stocks
directly to buyers during the year:

Golsa (Lower) (240,000) 300.000

60.000
Transaction 1 Transaction 2 Yearly total

Transactional compliances

Transaction Transaction 2 The taxpayer shall pay pero tas The taxpayer shall pay P60.000 15% or P9,000
capital gains tax

Annual.compliance

BIR Form 1707A may no longer be needed in this case since all capital gains tax has been paid for the
year and there is no possible claim for refund.

INSTALLMENT PAYMENT OF THE CAPITAL GAINS TAX When domestic stock is sold in installments, the
capital gains tax may also be

in installments if the

Selling price exceeds P1,000; and initial payment does not exceed 25% of the selling price.

lustrative Case: Basic

On November 1, 2021. Mr. Batanes made a sale of domestic stocks costing P700,000 directly to a buyer
for P1,000,000. The buyer agreed to pay in P100,000 monthly Installments starting November 30,

The capital gains tax shall be:

The capital gains tax shall be:

Selling price

Less Cost of shares sold

P 1,000,000

Net capital gain Multiply by

Net capital gains tax due

200.000

15%

$5.000

Bustration 1: No mortgage on the shares sold Initial payment:

First installment (November 30) Second installment (December 31)

P100,000 100.000

P200.000

Total Initial payment

20%

Ratio of initial payment (P200,000/P1,000.000) The taxpayer is qualified to pay capital gains tax by
installment.
Under the installment method, the tax will be paid based on the pattern of collection of the contract
price. The contract price is the total sum of money collectibile from the tract. It is normally the selling
price in the absence of any indebtedness on the

shares sold.

Under the installment method, the capital gains tax payable every instalimet dhat computed as:
Collection/Contract price x Capital gains tax

The capital gains tax payable for every Installment shall be P 4,500

P100,000/P1,000,000 x P45,000 Note that the selling price it used to measure the initial payment ratio,
but the co price is und in determining the capital gains tax in installmen

stration 2: With mortgage on stocks but not in excess of cost Asume the stocks were previously
mortgaged for P600,000 which the b assumed. The P400,000 halance is payable in monthly installments
of P100

starting November 30, 2021. The gain and the capital gains tax shall be the same as P300,000 and P45

respectively. The contract price or total sum collectible on the sale shall be

Selling price Less: Mortgage assumed

600.000

Contract price 400.000 The capital gains tax payable every installment shall be P 11,250 computed a

P100,000/P400,000 x P 45,000.

Illustration 3: With excess mortgage over cost Assume instead that the stock was subject to P750,000
mortgage which the be assumed. The P250,000 balance is payable in monthly installments of P50,000
starti
November 30, 2021 The gain and the capital gains tax shall be the same as P300,000 and P45,8

respectively. The excess of mortgage over the basis of the stocks is an indirect dow

payment, a form of constructive receipt.

The contract price shall be computed as follows

Selling price

P 1,000,000

750.000

250,000

Less Mortgage assumed

Cash collectible

Constructive recript (P750K mortgage-7700K basis)

50.000

300.000

Contract price

The initial payment shall be computed as follows:

P

Indirect downpayment (constructive receipt First installment (November 30)

50,000

50,000

Second Installment (December 31) Total Initial payment

50.000 150.000

tate of initial payment (P150,000/P1,000,000) The taxpayer is qualified to pay capital gains tax in
installments.

15%

The capital gains tax shall be as follows

P50,000/P300,000 P45,000 For every installment: P50,000/P300,000 P45,000 7500

For these

7500

SPECIAL TAX RULES IN CAPITAL GAIN OR LOSS MEASUREMENT

1 Wash sales of stocks 2 Tar-free exchanges

WASH SALES RULE

Wash sale of securities is deemed to occur when within 30 days before and 30 days 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 or stantially identical securities. Capital lomes on wash sales by can dealera
in zarit are not deductible against capital gains because they are effectively unrealized. The taxpayer did
totally let go of the shares. The immediate macquisition of the shares makes the lost a theoretical or a
jigned loss.

Securities for purposes of the 61-day rule Include stocks and bonds. The wash sales nude has
significance on the recognition of reportable capital losses on domestic stocks

sold directly to buyer. For the purpose of this rule, substantially identical means that stocks ur bonds of
the same class with the same features. A common stock is not substantially identical to a

referred stock Participating and non-participating preferred stocks are not

substantially identical.

stration 1: Acquisition of identical shares before a losing sale 2021. Mr. Donald had the following
transactions in the shares of Talisay, Inc., a domestic corporation

Date

January 5 10,000

Transaction Purchase

Shaces

P4.00 P

4.10
3.80

Cost

40,000

41,000

Mr. Donald uses the FIFO method in costing security transactions

Under the FIFO method, the 10,000 shares sold in March 18 came from the 10,000 shares bought on
January 5. The capital gain or loss on March 18, 2021 shall b computed as follows:

Selling price

Less: Cost of shares sold (from January purchase) Capital loss

P 38,000 40.000 2000

Pursuant to the wash sales rule, the P2.000 capital loss on the sale shall deductible in the computation
of the annual net capital gains in 2021 since the shar sold were fully replaced within the 61-day period.

There is a full replacement or full cover-up when the quantity of the shares acquired the 61-day period
is at least equal to the quantity of the shares sold. In this case, the loss shall be deferred and added to
the tax basis of the replacement shares because the loss is a fake loss since the taxpayer bought hack his
original position putting him the same position as before (Le still owning 10.000 shares).

The adjusted basis of the replacement shares acquired on March 1, 2021 shall be

Purchase price
Add: Deferred loss on March 18 wash sales Basis of replacement shares

P 41,000

2.0 F43.000

What if the replacement shares are less than the shares sold? Assume that the shares bought on March
1, 2021 were only 8,000 shares for P32.80

Only the portion covered with replacement shares shall be disallowed. The porti without replacement
cover is a deductible realized loss. Thus, the capital loss shall

split as follows:

Deferred loss (8.000 shares/10.000 shares x P2,000) P Deductible lass (2,000 shares/10,000 shares x
P2,000) Capital less

1,600 400

2.000

The adjusted basis of the replacement shares acquired on March 1, 2021 shall be

Purchase price

Add: Deferred loss on March 18 wash sales Basis of 8,000 replacement shares

P 32.800 1600
34.400

What if by specific identification the 10,000 shares bought an March 1, 2021 were these shares sold at a
loss on March 18, 20217

Now that wash sales lavolve the sale of shares at a loss, but the same shares were

vely re-acquired before or after the sale by a covering acquisition In this case, the P2,000 capital loss is
not a wash sales loss since there is no acquisition of replacement shares within the 61-day period.
Hence, the capital loss is deductible

against capital gains.

ustration 2: Acquisition of identical shares after a losing sale Is 2021. Mrs. Rachelle had the following
transactions in the stocks of Sta. Rita Corporation, a domestic corporation:

Date Transaction Shares

January 4

Purchase

10.000

Price

Cust

February 28

Sale Purchase
20.00

200,000

10.000 12.000 18.00 16.00 180.000 192.000 March 4

The capital gains or capital less shall be computed as follows:

Selling price Les Cast of shares

P180,000

Capital loss

200.000 (20.000)

sold

Since there is a full replacement cover (e. 12.000 shares) within the 61-day period

(ie, March 4, 2021), the capital loss shall be deferred and included as part of the cost

if the replacement shares.

The basis of the replacement shares purchased on March 4 shall be

Purchase price

P 192,000 20.000
Add: Deferred loss on wash sales Rasts of 12.000 replacement shares

P212.000

What if replacement shares are less than the shares sold?

Assume instead that only 7,000 shares were bought on March 4 for P110,000. In this

case, the capital loss shall be split as follow Deferred loss (7,000/10000 x P20.000)

P 14,000

6.000

Deductible loss (3.000/10,000 x P20,000) The adjusted basis of the replacement shares acquired

20.000

Capital loss

March 4, 2020

Purchase price

Add Deferred loss an wash sales Bass of 7,000 replacement shares

14.000
on

P121.000

Illustration 3 Acquisition of Identical shares before and after a losing sale In 2021, Mr. Windell had the
following transactions in the shares of Naga Corporat a domestic corporation:

Date

January 4

Transaction

Parchase

Price/share.

Value

Shares 15,000

P 20.00 P 300,000

February 15 Purchase Sale

5,000 21.00 105,000 216.000

February 28 March 4 Purchase

April 1 Purchase
12,000

1800

3,000 16.00 48,000

7,000 14.00 98.000

The shares sold on February 28 were the shares bought on January 4, 2021. Th capital loss is P24,000
computed as (P18/share selling price - P20/share.com) 12,000 shares sold.

There were 12.000 shares sold at a loss while there were a total of 8,000 replacem shares in the 61-day
period 5,000 shares acquired on February 15 (ie. before sale) and 3,000 shares acquired on March 4 (Le,
after the sale).

Since this is a partial replacement, the capital loss shall be split as follows Deferred loss (8,000
shares/12.000 shares P24K) P 16,000

Deductible loss (4,000 shares/12.000 shares x P24K) 8,000 Capital loss

P 24.000

The adjusted basis of the replacement shares acquired on February 15, 2021 shall be:

Purchase price

The adjusted basts of the replacement shares acquired on February 15, 2021 shall be Add: Deferred loss
(5,000 shares/8,000 shares x P16K). 10.000 Basis of the 5,000 replacement shares on February

P 105,000
15 2 115.000

The adjusted basis of the replacement shares acquired on March 4, 2021 shall be:

Purchase price Add: Deferred loss (3,000 shares/8,000 shares x P16K). 6.000 Basis of 3,000 replacement
shares on March 4

P 48,000

P54.000

Illustration 4: No replacement shares in the 61-day period On January 18, 2021, Mr. Real bought 10,000
shares of Gen. Luna Corporation P100,000. On February 6, 2021, he sold the same shares for P95,000.
On March 2021, he bought 5,000 shares for P55,000.

Note that the March 28 acquisition is beyond the 61-day period. Since there acquisition of replacement
shares within the 61-day period, the P5,000 is not a sales loss but a deductible realized loss against
capital gain from the sale of dome stocks directly to a buyer. The basis of the shares bought on March
28, 2021 shall r P55,000.

Rationale of the wash sales rule The wash sales rule is intended to prevent taxpayers from feigning
temporary Josses which could enable them to manipulate their reportable taxable net gain. Hence, the
prohibition against the claim of wash sales is not an absolute rule but is a form of deferral of loss
intended to reflect the economic substance of the transaction.

The wash sales rule is not applicable to dealers in securities as it is a normal way of business for them to
buy and sell stocks and as a result realize gains or Incur losses within short duration of time.

TAX FREE EXCHANGES

A Corporate reorganization
Initial acquisition of control

CORPORATE REORGANIZATION

No gain er loss shall be recognized on a corperation or on its stocks or securities if such corporation is a
party to a reorganization and exchanges property in pursuance of a plan of reorganization solely for
stocks or securities in another corporation that is a party to the reorganization.

Reorganization is defined as: 1. A corporation, which is a party to a merger or consolidation, exchanges

property

solely for stocks in a corporation, which is a party to the merger or consolidation

or 2. The acquisition by one corporation, in exchange solely for all or a part of its voting stocks, or in
exchange solely for all or part of the voting stocks of a corporation which is in control of the acquiring
corporation, of stocks of another corporation If, immediately after the acquisition, the acquiring
corporation has control of such other corporation whether or not such acquiring corporation had
control Immediately before the acquisition.

1. The acquisition by one corporation, In exchange solely for all or a part of its voting

stocks, or in exchange solely for all or part of the voting stocks of a corporation

which is in control of the acquiring corporation, of substantially all of the

properties of another corporation.

4 A recapitalization or an arrangement whereby the stocks and bonds of a corporation are readjusted as
to amounts, Income, or priority or an agreement of all stockholders and creditors to change and
increase or decrease the capitalization or debts of the corporation or both; or

SA reincorporation or the formation of the same corporate business with the same
asset or the same stockholders surviving under a new charter.

Substantially all the properties of another corporation means the acquisition by corporation of at least
80% of the assets, including cash, of another corporation whi has the element of permanence and not
merely momentary holding. (BIR Genent Circular No. V-253, July 16, 1957)

In determining whether the exchange is solely for stock, the assumption by acquiring corporation of a
liability of the others shall be disregarded.

Merger or consolidation A merger occurs when one corporation acquires all or substantially all of
properties of another corporation. A consolidation occurs when two or corporations merged to form
one corporation. The term "securities" Include bonds or debentures but does not include notes of
whatever class or duration.

The gains or losses on share-for-share swaps pursuant to a plan of merger consolidation will not be
recognized for taxation purposes. In a share-wa 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 acquired 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 r shareholders of the
absorbed corporation with them being simply integrated shareholders of the acquiring corporation.

Illustration

Mr. Fernando was required to surrender his Zambales Inc. shares in exchange

Baler shares with total fair value of P1,200,000 pursuant to the merger of Zambie

Inc. and Bataan Inc. The Zambales shares were previously purchased by Mr. Fersash

for P1,000,000.

Fair value of Baler shares received (selling price) P 1,200,000 Less: Cost of Zambales shares exchanged
Indicated gain
200.000

The P200,000 Indicated gain is not taxable as the exchange involves stocks for sta Similarly, an Indicated
loss shall not likewise be recognized. The P1,000,000 of the Zambales shares given shall be carried over
as the substituted basis of the Ba shares received.

Share swap resulting in a control

The acquisition of control in another corporation achieved by acquisition of maj of its voting shares or by
the acquisition of substantially all of its assets is tax fr the acquiring corporation exchanged therewith:

a its own shares, or

b. shares of its controlling parent corporation

Whestration 1-share swap for control Subsico is 60% owned by its parent company Parenco and 40% by
an Investor, Invesco. Subsico also bought and held as investment shares of Parenco and Invesco.
Subsequently, Subsico acquired 30% share ownership in Affico and 60% share ownership in Newsubsico.

Invesco

40%

Parenco

60%

Subsico
+60%

Newsubsico

Affico

The following illustrates the tax treatment of the foregoing share swaps on Subsico's investment
acquisitions under the following scenario:

Share acquisitions

Shares given in gachangs Subsico own shares

Income tax status Exempt

60% control in NewSubsico

Investment in Parenco shares

Exempt

Exempt

Investment in Invesco shares Subsien own shares

Exempt Taxable

Taxable
Note:

1. The rechange of shares rendting in the acquisition of corporate control is empt. 2 Though apparently
silent in the law, Subsico's own shares are set is assets. This is equity ance rather than a property
disposidon; hence, no gain should be recognized for come

tax purposes 1 Since no corporate control was acquired, this is an ordinary exchange of property subject
to income tax (ie. capital gains tax)

Mastration 2-share swap for control

Assume that after the acquisition of initial 60% NewSubsico and 30% Affico, Subsico made a second
share swap for another 10% NewSubsice and 25% Affico, Subice now have 70% controlling interest in
Newsubsico and 55% controlling Interest in Affico.

The following table illustrates the tax treatment of the foregoing share swaps on Subsico's additional
Investment acquisitions under the following scenario:

Share acquisitions +10% NewSubsico

(Increase of controlling

Interest)

+25% shares of Affice resulting in 55% controlling

Interest

Shares given in exchange Subsico own shares

Income tax st

Investment in Parenco shares Investment in Invesco shares

Exempe Exempt

Exempt

Subsico own shares

Exempt Exempe

Exemp

Investment in Parenco shares Investment in Invesco shares

Note:

1. Note that no gain will be recognized when there is a pre-existing control pursuant to second type of
corporate reorganization.

2. No gain shall be recognized in step up acquisitions resulting in acquisition of compen control

Illustration 3-swap for assets

Assuming further the same data in flustration 1, except that instead of th ownership, Subsico acquired
the warehouse building of Newsubsico and the net an of Affice by acquiring all its assets and assuming
its liabilities by exchanging shares

Asset acquisitions

Shares given in shaner

Subsico own shares

Income tax state Exempt

Warehouse building of Newsubsico

Investment in Parenco shares

Tarable

Taxable

Exemp

Investment in Invesco shares

Subaico own shares

Net assets of Affico

Investment in Parenco shares Investment in Invesco shares

Exempt Taxable

Note: 1. Only the acquisition of substantially all assets of another corporation in tar-bw v

subject to tax
parent share or own shares are given in exchange. The mere acquisition of a 2. In determining whether
the exchange is solely for stocks, the assumpton by the at corporation of a Kability of the others shall be
daregarded.

Mustration 4-recapitalization

Trupeta Company sustained continuous gargantuan losses forcing it to eater capital restructuring
agreement which reduces its par value of stocks from P share to P10 per share in order to wipe out
P24,000,000 of accumulated losses b

алго

The P24 reduction in share capital and the resultant elimination of the accum deficit shall not be
recognized as gain in the book of Tupete Company.

Illustration 5 – recapitalization

Romeo Company sustained continuous operating losses which casts doubt about its ahilty to meet
short-term and long-term commitments it entered into a troubled debt restructuring with its creditors
to convert P40.000.000 debts to equity by the c af P10-par value common stocks. As a result, 4,000,000
common stocks were issued to creders. The stocks have a fair value of P11 per share at the time of
restructuring

No gain or lost shall be recognized for the conversion of debt to equity

stration 6-reincorporation Yehey Corporation is an internet service provider with a franchise to operate
granted

by the government. After years of dormancy due to failure to commence operation, the government
revoke its franchise. Yehey Carperation decided to dissolve its charter and incorporate an Apollo Global
Corporation. Yebey's P100M assets and P1OM abilities are transferred into Apolle Global Corporation
Apollo Global P100M par value shares in exchange

No gun shall be recognized on the reincorporation of Tekey Corporation into a new

charter

INITIAL ACQUISITION OF CONTROL

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

by 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

"Central shall mean ownership of stocks in a corperation which amount to at

beast 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 pains when stocks are
exchanged in the acquisition of corporate control.

Estration

Mr. Capan exchanged his shares in Cabanatuan Corporation mating P2,000,000 in change for the shares
of Maharlika Corporation with a fair value of P1,800,000. The

der resulted in Mr. Gapan acquiring 51% ownership (corporate control) in

Maharka Corporation Total consideration received or selling price Les Cost of Cabanatuan stocks
changed Indicated loss

1,800,000

(P200.0003
The P200,000 indicated less shall not be recognized. Any indicated gain shall not alo gled. The law views
initial acquisition of corporate control by not more than 5 persons as an Iventing transaction rather than
an income generating transaction.

The tax basis of the Maharlika shares received shall be P2,000,000, the bests of the Capan shares
exchanged.

Exchange not solely for stocks

In tax-free exchanges, if stocks are exchanged not solely for stocks but with consideration such as cash
and other properties, the gains, but nul recognized up to the extent of cash and other properties
received

Bistration 1: Cash and property received exceed indicated gain

Assume that pursuant to the plan of merger between Zambales and Hat Mr. Fernando was required to
surrender his Zambales lec. shares costing PL In change for Bats shares with total fair value of P900,000
plas P100.00

and P200,000 worth of goods

Total consideration received or selling price

(P900,000 P100,000-P200.00)

1,200,000

Less Cost of stock exchanged Indicated gain

P200.000
The amount of cash and other properties received indeed realization of the extent of the indicated gals.
The excess amount of cash and other progerie reed is a return of capital. Hemen,

Reed returs en capital

(to the extent of the indicated gain) Return of capital (in excess of the indicated gain) Total cash and
other properties received

P200,000

100.000

E. 300.000

The P200,000 gain shall be reperted as a capital gain. The substituted best of Bataan shares received in
the exchange shall be

Hasts of the Zambales shares exchanged

Add: Basta of other properties changed Less Return of capital

Basis of the Bataan shares receted

P 1,000,000

100.000

Regulatory Formula on Tax Substituted Basts The regulations prescribe the following formula in
computing the t 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

The substituted basis of the Bataan shares received may be computed following the foregoing
regulatory formula as follows:

Tax basis of Zambales shares exchanged Add Gain recognized on the transfer Less Cash or other
properties received Tax basis of the Bataan

P 1,000,000

300.000

shares received

900.000

Illustration 2: Indicated gain exceeds cash and other properties received Assume that pursuant to the
plan of merger between Zambales Inc. and Bataan Inc. Mr. Fernando was required to surrender his
Zambales, Inc. shares costing P1,000,000 exchange for Bataan shares with total fair value of P1,050,000
plus P150,000 cash.

Total consideration received or selling price (P1,050.000+P150,000) Less: Cost of stocks exchanged

Indicated gain

P 1,200,000

P200.000
The indicated gain is recognized to the extent of the cash and/or other properties

received. The indicated gain is considered as follows:

Realized gain (up to the value of cash and other properties received) Unrealized return on capital (in
excess of the

150,000

the value of cash and other properties received) Total indicated gain

50.000

The tied tan base of the Batam shere received shall be

Rad of the Zambales shares changed Ats of other properties exchanged La Return of capital

Bts of the Bataan shares received

Thats of Tambales shares changed

Ad Gais recognized on the transfer

Cash or other properties reced

Tar has oft

100.000

150.000

Mistum public float requirement of publicly listed corporations ted corporations are mandatory required
te maimana minimum publi werchip under Philippine Stock Bachange (PS) regulations.

The minimum public ownership in the higher of

1. The 10% of issued and outstanding share and 2. The minimum pabic ownership required by the
Securities and Commission or the Philippine Stack Exchange

Non-complace to the minimum public ownership shall result in the deb the stocks of the corporation in
the PSE Under AR16-2012, the se stocks which fall below their minimum public ownership requirement
w subject to the 15% capital gains tax and not to the 6/10 of 1% stock tran

Comprehensive Illustrations

hestration 1:Sale by escurity dealer Benjamin, a sety dealer, and various domestic stocks for P1,200,000,
net af a

expenses. The stocks were acquired at a cost of P900,000.

The capital gains tax is all because domestic stocks are ordinary assets to a secur

dealer. The P400.000 net gain is an ordinary gain subject to regular income tax

Illustration 2: Sale of domestic bonds

Nonoy, not a security dealer, sold domestic bonds directly to a buyer at a net gain P200,000. Nonoy is
not a dealer of domestic bonds. The capital gains tax is mil. The gain on the sale of domestic bonds is a
capital go subject to regular income tax. Note that the bond is a debt instrument rather than
equity Instrument like stocks

Illustration 3: Exchange of stocks for other securities

Debbie Wong, an NRA-NETB, exchanged her domestic stocks costing P300,000

bonds with a fair value of P400,000.

The P100,000 capital gain is subject to capital gains tax since it is not a share-for-the swap pursuant to a
plan of merger or consolidation. The same rule applies for share share swap not pursuant to a plan of
merger or consolidation. Non-resident persons engaged in business in the Philippines such as NRA-NETR
and NRFC are subject to capital gains tax and are required to file the capital gains tax return

Illustration 4: Issuance of stacks

the Inc, a domestic corporation, issued 10,000 P10-par ordinary shares in exch for a vacant lot owned by
KIT, Inc. The vacant lot has a fair value of PA Compute the capital gains tax.

The transaction involves issue by Iba Inc. of its own shares of stocks. These stock d

represent investment in the shares of another corporation. The share premium of P300,000, (P500,000-
(10,000 x P10)), is part of Iba's corporate capital, not an Income Heace, it is not subject to capital gains
tax

Illustration 5: Sale of stocks ex-dividend Ms. Pearl bought 10,000 shares of Zuma, a domestic
corporation, at P10/shares. On February 14, 2021, Zuma declared a dividend of P2/share with record
date of March 20, 2021 and payment date of April 20, 2021. On April 2, 2021, Ms. Pearl sold all the
shares for P15 per share directly to a buyer. The selling expenses were P 5,000.

The shareholders' right to dividend accrues at the date of declaration. The stocks may

pass through different hands anytime. However, those who are registered as
shareholders of the corporation at record date shall receive the dividends.

Between the date of record and the date of payment, stocks are said to be selling ex- dividend. The
seller receives the dividends. The price of the stocks on those dates includes only the selling price of the
stocks

Thus, the capital gain shall be normally computed as follows: Total selling price (P15x10,000)

P 150,000 Les Cost of stocks and expenses (P10 x10,000+P5,000) 105.000

Capital gaira

45.000

In this case, the dividends to be received by Ms. Frari shall be subject to the 10% final tax to be withheld
by Zama Corporation.

Persons not liable to the 15% capital gains tax

1. Dealers in securities 2. Investors in shares of stocks in a mutual fund company in connection with

gains realized upon redemption of stocks in the mutual company

3. All other persons, whether natural or juridical, who are specifically exempt from national revenue
taxes under existing investment incentives and other

special laws, such as:

& Foreign governments and foreign government-owned and controlled corporations

Qualified employee trust funds

SALE, EXCHANGE, AND OTHER DISPOSITION OF REAL PROPERTY CLASSIFIED AS CAPITAL ASSET LOCATED
IN THE PHILIPPINES

The sale, exchange, and other disposition of real property capital assets in the Philippines is subject to a
tax of 6% of the selling price or the fair value, whichever higher.

Under the NIRC, the fair value of real property is whichever is higher of the a Zonal valor, which is the
value prescribed by the Commissioner of Wa Revenue for real properties for purposes of enforcement
of Internal ter

laws, and b Fair market value, as shown in the schedule of market values of the Provin and City
Assessors

Normally, only land has zonal value but both land and improvements have fair wa value in the Provincial
or Assessor's Office

For lands, the capital gains tax is 6% of whichever is the highest of the sell price (bid price in the case of
foreclosure sales), zonal value, or Provincial or Cry Assessor's fair value.

Note that Independent appraisal valuation, the fair value commonly used financial reporting, is not used
in the computation of the capital gains tax

lustration 1-Land only Terry sold a vacant agricultural land for P5,000,000. The land was previou
purchased by Terry at P4,000,000 and had an appraisal value of P8,000,000 and to value of P7,000,000.
The property had a fair value of P6,000,000 in Province Assessor's Office and an assessed value of
P2,400,000.

The highest of the selling price (PSM), zonal value (PM) and Assessor's fair value (P is the P7,000,000
zonal value Hence, the capital gains tax would be compl

P7,000,000 x 6% hence, P420,000

Blustration 2-Land and improvement Anjo sold his residential house and lot for P5,000,000. Anjo
purchased the lot whet

was worth P1,000,000 and constructed on it the house at a total cost of P2,500,000 The following fair
value details were available for the property:

Illustration 3

Amal property desier sold a condo unit costing P1,200.000 to a client for PL500,000 The unit has a fair
value of P1,800,000 at the date of sale

The spital pains tax ini. The condo unit is an ordinary at to a reely deler, loper. The actual gain of
P300,000 (P1,500,000-P1,200,000) is an ardinary

subject to regular income tax

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

Register of Deeds unless the Commissioner or his duly authorised representative has certified that such
transfer has been reported, and the capital gains or creditable withholding tax, if any, has been paid
(Sec. 58(8), NIRC) 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 of capital gains

The 6% capital gains tax applies even if the sale transaction resulted to a less Gain is always presumed to
exist. The basis of taxation is the selling price or fair value whichever is higher, not the actual gain

Non-consideration to the involuntariness of the sale The capital gains tax appiles even if the sale is
voluntary or is forced by circumstances such as in the case of expropriation sale, foreclosure sale
dispositions by judicial order, and other forms of forced disposition. It also applies to conditional sales
and pacto de retro sales

c. Final tax The capital gains tax shall be withheld by the buyer against the selling price of

the seller and remit the same to the government.

SCOPE AND APPLICABILITY OF THE 6% CAPITAL GAINS TAX

Location of the

Taxpayers

Corporations

property Win the Philippines Oute the Philippines

All Individuals Domestic corporation a Not applicable

Not applicable

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 e foreign corporations. However, in cases
where foreign corporations realise 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 withholding of the capital tax
cannot be imposed abroad due to er consideration. Hence, the actual gains realted on the sale,
exchange, and dispositions of properties abroad are subject to the regular income ta tupeyer la taxable
on global income such as resident citizens and d corporations. For all other taxpayers, the capital gain
realized abroad is a

EXCEPTIONS TO THE 6% CAPITAL GAINS TAX 1. Alternative taxation rule

2. Exemption rules

Exemption under the NIRC b. Rxemption under special laws

ALTERNATIVE TAXATION

An individual seller of real property capital assets has the option to be tunda

either:

a. 6% capital gains tax or b. The regular income tax

It should be noted that this is permissible only when 1. The seller is an individual taxpayer, and

2. The buyer is the government, its instrumentalities or agencies Indu

government-owned and controlled corporations

Illustration

Gretchen sold to the government a vacant lot for P800,000. The lot was purchase

P200,000 in 1900 and had an Assessor's fair value of P400,000 and nonal value P500,000 at the date of
sale.

Gretchen may opt to be subject to tax at 6% of 1000.000 or report the P (P800,000-P200,000) actual
capital gain in her annual regular income tax retu

Basis of Alternative Taxation

The alternative taxation is intended to ease the burden of gover expropriation where taxpayers may
incur losses on the forced expropriation and are still required to pay tax

Illustration

An Individual taxpayer bought a house and lot near a highway at a cost of P2,00 After several years, the
government invoked its power of eminent domain to b property for the expansion of the highway,

Auming the property has a fair value of P1,800,000 for purposes of the expre the payer would be forced
to incur P200,000 loss (P1AM-P2.0M) and mill

Capital pens tax This would be too oppressive to the upeyer. With the hernative regular Income tax
option, the taxpayer would be given the benefit of deduction of the P20,000 capital loss without being
imposed the 66 capital gains 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 be 6% capital gains tax.

Principal residence

Principal residence means the bouse 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 allen 2 The sale involves the principal residence of the seller-
taxpayer.

1 The proceeds of the sale is stlized in acquiring a new principal residence. The BIR is duly notated by the
taxpayer of his intention to avail of the tax
exemption within 30 days of the sale through a prescribed return (Form 1706) and "Swarn Declaration
of Intent" 5 The reacquisition of the new residence must be within 18 months from the

date of sale

The capital gain is held in escrow in favor of the government.

7 The exemption can only be availed of once in every 10 years

The historical cost or adjusted basis of the principal residence sold shall be

carried over to the new principal residence built or acquired.

It must be emphasized that the sale of principal residence must precede the acquisition of the new
principal residence to be campe. (BR Ruling No. 638-2015)

dence built or acquired.

Mastration 1

Gamboa sold her principal residence with a fair market value of P6,000,000 for

P5.000.000, Gamboa purchased the residence for P3,000,000 several years ago The

imposable capital gains tax is 6% of P6,000,000 or P360,000.

Gamboa should indicate her intention to apply for examples in the capital gains tes turn to be flied and
bmit a Sworn Declaration of fates She will be required to deposit the P360,000 capital gains in an escrow
account in five the government
Full utilization of proceeds is exempt Assuming Gamboa acquires a new principal residence for
P5,200,000 within 18 months, the P360,000 capital gains tax in escrow will be released to her.

Gamboa does not acquire a new principal residence within 18 months, the c gs tax te escrow will be
taken by the government.

Busts of new residence with full utilization If the proceeds to fully utilised, the tax basis of the new
residence shall be the old resdence plus additional cost incurred by the taxpayer in acquiring t

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

over the selling price of the old residence. Thus, the tax basis of the new residence shall be:

Basis of old residence Ad Additional out-of-pocket costs (PS2M-PSM) Basis of new residence

P 3,000,000

200.000 2.3.200.000

Tax basis has no relevance for real property capital assets because the actual g un the sale is irrelevant
to capital gates taxation. However, when the real prope capital assets subsequently qualifies as ordinary
assets such as when they a later employed in business, the tax basis of the property becomes necessary
gain or loss measurement. That's why the basis of the new property needs to b

monitored.

Partial utilization of proceeds is partially exempt Assume Gambua uses only P4,500,000 out of the
P5,000,000 proceeds in acquiring new residence. The portion representing the unused proceeds shall be
subject to The capital gains tax held in escrow account including any accrued interent shal

allocated as follows:

To the government
Total amount in escrow

Note: Any Interest which might have accrued on the escrow fund shall be released

the taxpayer. The government is entitled to the amount of the unpaid tax only Tar basis of the new
residence with less than full utilization

If the proceeds is not fully utilised, the tax basis of the new residence shall be redu accordingly by
prorating the old basis as follows:

Tax basis of old residence x utilized proceeds/total proceeds The tax basis of the new principal residence
shall be computed as P3,000.0 P4.500.000/P5,000,000-F2,700,000.

lustration 2

Fakundo sold his residential lot with a fair value of P1,000,000 for P2,000.00 purchased a new residence
for P1.500.000 within 18 months

Fakundo will be required to pay P120,000 (P2,000,000 x 6%) capital gains tax whether or not he utilized
the proceeds to acquire a new residence. Note that the exemption rule envisager a sale of a principal
residence for the acquisition of a new principal residence

Bustration 3

Afraid of ghosts that frequently appear in his mansion residence, Moonday left his mansion and bought
a new home for P17,000,000 as his principal residence. Within 3 months, Moonday was able to sell his
mansion for P40,000,000.

The sale of the mansion will be subject to 6% capital gains tax. For purposes of the

exemption, the sale of the old residence must precede the purchase of the new residence. CAPITAL
GAINS TAX EXEMPTION UNDER SPECIAL LAWS
1. Sale of land pursuant to the Comprehensive Agrarian Reform Program 2. Sale of socialized housing
units by the National Housing Authority

Sale of land under the Comprehensive Agrarian Reform Program The sale of agricultural lands by land
owners pursuant to the Comprehensive Agrarian Reform Program of the government shall be exempt
from capital gains tax. Similarly, Interest income on the selling price that may have been agreed by the
land owner and the tenant-buyer shall be exempt from income tax.

Sale of socialized housing units by the National Housing Authority The sale of socialized housing units for
the underprivileged and homeless citizens by the National Housing Authority (NHA) pursuant to the
Urban Development and Housing Act of 1992 is exempt from the capital gains tax.

This exemption is limited to socialized housing units only. The BIR ruled that the sale of the NHA of
commercial lots which is not part of the socialized housing project for the poor and homeless is subject
to capital gains tax or regular tax and documentary stamp tax.

To qualify for exemption, the socialized housing units of the NHA must comply with price ceilings set by
the NIRC and other special laws.

PAYMENT OF THE 6% CAPITAL GAINS TAX IN INSTALLMENT

The capital gains tax may be paid in installment 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.

llustration 1: Without mortgage

On December 1, 2021, Ms. Batangas sold for P4,000,000 an unused lot with a cost and fair value of
P2.000,000 and P5,000,000, respectively. The buyer agreed to pay P500,000 monthly installments
starting December 31, 2021.

Capital gates tax P5.000.000 x 6%

Initial payment (December Installment)

P500,000 12.50%

Ratio of initial payment P500,000/P4,000,000 The instalment le quales under the ratio celling hence, the
capital gains

paid in bullet The capital gains tax payable every installment shall be P computed as
P500,000/P4.000.000x P300,000

Mustration 2: With mortgage not in excess of cost

Assume that the lot in the previous illustration is mortgaged for P1,000,000 buyer assumed and the
buyer agreed to pay the P3,000,000 balance in P

monthly installments starting December 31, 2021 Capital gains tax-P5,000,000 x 6%

P300,000

Initial payment (December installment) Ratio of initial payment (P300,000/P4,000,000)

The contract price shall be computed as follows

7.5%

Selling price Les Mortgage assumed by buyer

P4,000,000
The capital gains tax payable every installment shall be P30,000 comput

Contract price

P300,000/P3,000,000 & P300,000 capital gains tax Illustration 3: With mortgage in excess of cost Asume
further that the lot is mortgaged for P2.500.000 which the buyer and

the buyer agreed to pay the P1.500.000 balance in P300,000 monthly instal starting December 31, 2021.

It should be recalled that the excess of the mortgage over the tax basis of the prot

is an indirect downpayment which must be included in the initial paymast a

contract price Capital gains tax is P5,000,000 a 6% or P 300,000.

The contract price shall be computed as follows

Selling price

P 4,000,000

2.500.000

P1,500,000

Les Mortgage assumed Cash collectible

Add: Constructive downpayment excess mortgage

(P2.SM mortgage-P2.0M cost) Contract price

The initial payment shall be computed an

Constructive downpayment (excess mortgage)

500.000 P.2.000.000

December 31 installment Initial payment

P 500,000

300.000

Rade of Initial payment P800,000/P4,000,000

20%

The installment plan qualifies under the ratio celling hence, the capital gains tax can be paid in
Installment

Under the installment method, the capital gains tax payable shall be

for the sole For every installment

:P500,000/P2,000,000 x P300,000 75.000 : P300,000/P2,000,000 x P300,000

45.000
Mustration 4: Initial payment exceeds 25% of selling price Asume that the initial payment on the sale of
Ms. Batangas exceeds 25% of the selling

The sale would be taxed as if it were a cash sale. The capital gains tax shall be paid in lump sum upon
filing of the capital gains tax return. This applies without regard to whether or not any mortgage on the
property ancreds the cost of the property disposed

Deadline for payment of the capital gains tax 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 foredasure sales, it is due within 30 days from the expiration
of the applicable statutory redemption period. When the tax on the sale is qualified for installment
payment, it is dae 30 days upon receipt af every installment

Statutory redemption period on foreclosure sole

Foreclosed properties are subject to a right of redemption by individual mortgagor within one year
counted not from the date of sale but from the time of registration of the sale in the Office of the
Registry of Deeds (Sentar vs Register of Deeds of Manila) Tur jaridical persons, redemption must be
made before the registration of the certificate of foreclosure sale with the applicable Register of Deeds
or within 3 months from foreclosure, whichever is earlier.

DOCUMENTARY STAMP TAX ON THE SALE OF CAPITAL ASSETS

Documentary stamp tax on the sale, exchange, and other dispositions of demestic stocks directly to a
buyer The sale of domestic stocks is subject to a documentary stamp tax of P1.50 for

ry P200 of the gaz value of the stocks sold. (RA 10963) The

ustration
Apayer said domestic stocks with total par value of P900,000 for P1,200,000. have a fair value of
P1.250,000 and were acquired for P1,000,000 The documentary stamp tax shall be P6000 computed as
P1.50/P200 000,000

Documentary Stamp Tax on the Sale of Real Properties The sale of real property capital assets is subject
to a documentary stamp t the gross selling price or fair market value whichever is higher.

The documentary stamp tax is P15 for every P1,000 and fractional parts of the basis thereof. However, if
the government is a party to the sale, the basis sh the consideration paid.

Illustration

A taxpayer disposed a real property capital asset acquired for P2.000.000 10 years

for P4,000,000. The property has a zonal value of P5,000,000 and declared

property value per real property tax declaration of P3,000,000.

The documentary stomp tax shall be computed from the fair value since it is higher de the selling price.
Hence, the documentary stamp tax shall be P75.000 compute P15/P1.000 x P5.000.000

PENALTIES FOR LATE/NON-FILING OR NON-PAYMENT OF CAPITAL GAINS TAI 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 The same lists of entities exempt from final tax in Chapter 5
are likewise exemp from capital gains tax

COMPARISON OF THE 6% CGT AND 15% CGT

Tax object

Basis of the tax Nature of the tax

Frequency of

payment

6% CGT

Gain on real property

Presumed gain

Final tax Per transaction

15% CGT Gain on sale of stocks

Actual gain Self-assessed tax