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Northern CPAR: Taxation Capital Gains Taxation

NORTHERN CPA REVIEW


th

4 Floor Pelizloy Centrum, Lower Session Road, Baguio City, Philippines


Mobile Numbers: SMART 09294891758 & GLOBE 09272128204
E-mail Address: ncpar@yahoo.com

REX B. BANGGAWAN, CPA, MBA


TAXATION
CAPITAL GAINS TAXATION
The assets of the business are classified as:
1. Ordinary assets includes:
a. stock in trade of the taxpayer, or other property of a kind which would properly be
included in an inventory of the taxpayer if on hand at the end of the taxable year
b. properties held by the taxpayer primarily for sale to customers in the ordinary
course of trade or business;
c. properties used in trade or business of a character which is subject to allowance
for depreciation; and
d. real properties used in trade or business
Examples: inventories, property, plant and equipment
2. Capital assets any other assets that does not fall under the definition of ordinary
assets
Examples: investment properties, notes receivables and investment in equity or debt
securities (for a non-security dealer taxpayer)
Gains arising from sale of ordinary assets are called ordinary gains. Gains arising from
sale of capital assets are called capital gains. All ordinary gains are taxable under
regular income taxation. Capital gains are taxable either under final tax or under regular
income tax.
CAPITAL GAINS SUBJECT TO FINAL TAX
A. Capital gains tax on sale, barter, exchange and other disposition of domestic
shares of stock directly to buyer
Requisites:
a. There is a net gain.
b. The capital asset sold is a domestic stock.
c. The sale is made directly to buyer.
Capital Gains Tax Rates:
First P100,000 of the net gain
Excess of the net gain over
P100,000

5%
10%

Note to candidates: This rule on capital gains on sale of domestic stocks directly to
buyer is uniform to all income taxpayers (individuals or corporate) regardless of
classification.
The rule do not applies to:
1. Gains on sale shares of stock is that is traded in the Philippine Stock Exchange
(PSE)
This is subject to a transaction tax (percentage tax) of of 1% of selling price.
2. Gains under similar conditions by security brokers or dealers
When to file the Capital Gains Tax Returns?
1. Per transaction basis: Within 30 days after each transactions
2. Annual basis:
a. For individuals On or before April 15 of the following year
b. For corporations On or before the 15 th day of the fourth month following the
close of the taxable year
When to pay the capital gains tax?
1. Lump sum Upon date of filing the return with the Bureau (within 30 days from
date of sale)
2. Installment tax on installments is due within 30 days from receipts of each
installments
Documentary Stamp Tax

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Northern CPAR: Taxation Capital Gains Taxation

Par value stock: P0.75/P200 or fractional part of the par value of due bill,
certificate of obligation or stock
No-par stock: 25% of the documentary stamp tax paid on the original issue of said
stock. (The documentary stock on original issue of non-par stock is based on actual
consideration for the issuance Sec. 174 NIRC)
Limit: Only one tax shall be collected on each sale or transfer of stock or
securities from one person to another regardless of whether or not a certificate of
stock is issued or obligation is issued, indorsed, or delivered in pursuance of such
sale or transfer.
Deadline: Documentary stamp tax return shall be filed within 10 days after the
close of the month when the taxable document was made, signed, issued, accepted
or transferred, and the tax thereon shall be paid at the same time the return is
paid.

B. Sale, exchange or other disposition of real property in the Philippines


classified as capital asset
Requisites:
a. The real property is located in the Philippines.
b. The property is classified as capital asset.
c. The taxpayer is an individual or a domestic corporation.
d. The taxpayer is other than a foreign corporation.
Tax Rate and Tax Basis: 6% x (the higher of Gross Selling Price or Fair

Market Value)
The fair market value for purposes of the capital gains tax is whichever is higher of:
1. Zonal value as prescribed by the Commissioner of Internal Revenue
2. Assessed value as determined by the Provincial or City Assessors Office
Gross selling price The amount of any money received plus the fair market value of
any property received. Interest on the selling price shall be treated separately as Other
Income taxable under regular income taxation.
Excess Mortgage Assumed
The excess of the mortgage assumed over the cost of the property is included both in
initial payment and selling since it is a constructive receipt of income; in other words,
it represents extra consideration.
Note to Candidates: The basis of the tax is on the gross selling price or gross fair
market value. This treatment presumes the existence of gain and is applied regardless
of the existence of actual gain.
SCOPE OF THE 6% CAPITAL GAINS TAX:
Individuals
Citizen
Alien
Location of
NonNRReal
Reside Reside Reside
ETB
Property
nt
nt
nt
Philippines

Abroad

Corporation
NRNETB

Domest
ic

Reside
nt

Nonresiden
t
Not Applicable

Note to Candidate: Regular income taxation, being the general rule, applies where the
6% final capital gains tax do not apply. Under regular taxation, the actual net gain is
subject to regular income tax.
How is the capital gains tax paid?
1. The tax is withheld at source the seller and buyer files a joint capital gains tax return
(one return per sale or foreclosure sale).
2. Installment (one return for each installment payment receive)
The tax is withheld at source in installments when the taxpayer qualifies and opted to
be taxed on installments.
Alternative Taxation:
The actual net gain on the sale of real property may be included under progressive
income taxation.
Requisites:
a. the seller is an individual

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Northern CPAR: Taxation Capital Gains Taxation

b. the buyer is the government, its political subdivisions or agencies or GOCCs


Tax Exemption:
The sale may be exempted from the payment of capital gains tax provided the following
conditions are met:
1. The seller is an individual citizen or resident alien.
2. The real property sold is his principal residence.
Principal Residence the place where an individual person resides comprising of the
house and the lot to where it erects; in case the interest on the land component is held
by other persons, only the dwelling house is considered principal residence.
The residential address indicated in the latest income tax return immediately before
the date of sale is conclusive presumed to be the true residence. The Barangay
Captain Certification or Building Administrator Certification in the case of
condominium residences is no longer honored.
3. The full proceed of the sale is utilized in acquiring another residence.
4. A new residence must be acquired or constructed within 18 calendar months from the
date of sale.
5. The BIR is duly notified by the taxpayer of his intention to avail of the tax exemption
within 30 days from the date of sale through a prescribed return.
6. The capital gains tax thereon is held in escrow in favor of the government.
7. The exemption can only be availed once every 10 years.
8. The historical cost or adjusted basis of the real property (principal residence) sold
shall be carried over to the new principal residence built or acquired
Should there be any portion of the proceeds of sale not utilized for the reconstruction
of a new residence, the same shall be taxable. The tax on the unutilized portion shall
be determined as follows:
Gross selling price or
Fair Market Value at
the date of sale,
whichever is higher

Unutilized portion
Gross selling
price

6%

Tax Basis of New Principal Residence:


Tax Basis refers to the cost or adjusted cost of a property for tax purposes and hence the
amount deductible for tax purposes in determining gain or losses in disposal of the
related property if the related transaction is taxable under the progressive system of
taxation. Generally, when a property is acquired by purchase, the cost is the tax basis.
A tax basis reduction may result if the proceeds of the disposition of a principal residence
is not fully utilized in the acquisition or construction of a replacement. Likewise a tax
basis increase results when additional expenditures were incurred by the taxpayer in
securing a replacement principal residence.
Less than full utilization of proceeds:
New cost
basis

Utilized Selling

Gross Selling
Price
More than full utilization of proceeds:

Basis of the old


principal residence

Basis of the old


Additional expenditure
New cost
= principal residence +
in excess of the
basis
proceeds
Documentary Stamp Tax
Amount:
P15 if selling price after allowance for encumbrances does not exceed P1,000
P15 for each P1,000 or fractional excess above P1,000 of such selling price
Deadline: Documentary stamp tax return shall be filed and the tax thereon paid
within 5 days after the close of the month when the taxable document was made,
signed, issued, accepted or transferred.
DRILL PROBLEMS: ORDINARY OR CAPITAL ASSETS

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Northern CPAR: Taxation Capital Gains Taxation


Realty
Developer

Security
Dealer

Merchandiser

Vacant lot
Office supplies
Domestic stocks
Bonds
Accounts/notes receivables
Office building
Office equipments
Land where the office building stands
Personal car of the business
proprietor-taxpayer
Personal house and lot of the
proprietor-taxpayer
Jewelry of the proprietor-taxpayer
DRILL PROBLEMS: CAPITAL GAINS ON THE DISPOSAL OF DOMESTIC STOCKS
A. Transactional Capital Gains Tax
For each of the following scenarios, compute the capital gains tax:
Illustrative Cases
1. Andy sold domestic stocks through the PSE at a gain of P400,000
2. Andy, a security dealer, sold domestic stocks through the PSE at a gain
of P400,000
3. Andy, a security dealer, sold domestic stocks directly to a buyer at a
gain of P400,000
4. Andy, a realty dealer, sold domestic common stock to DEF, Inc. at a
gain of P300,000.
5. ABC, Inc. sold domestic stocks though the PSE at a gain of P400,000
6. ABC, Inc. issued its shares of stock at P300,000 in excess of its par
value.
7. ABC, Inc. exchanged the shares of DEF, Inc. it acquire for P1,000,000
for a lot valued at P1,400,000.
8. Andy sold his investment in domestic stocks to the issuing Company,
ABC, Inc. The transactions realized a gain of P300,000.
9. Andy sold domestic bonds through the PDEX at a gain of P100,000.
10.Andy sold domestic bonds directly to buyer at a gain of P400,000
11.Andy sold his interest in a partnership for P400,000. His interest had a
tax basis of P300,000 at the date of sale.
12.ABC, Inc. acquired DEF stock rights for P200,000. ABC subsequently
disposed this rights for P400,000.
13.Andy purchased a stock option from DEF, Inc. Subsequently, Andy sold
this options at a gain of P50,000.
14.Andy purchased domestic common stock for P100,000 and sold the
same for P180,000. At the date of sale the stock has a fair market
value of P210,000.
15.Andy purchased ordinary shares for P200,000 from DEF, Inc., a
resident corporation operating in the Philippines. After 2 years, it sold
the same directly to buyer for P300,000 when the fair market value
was P280,000.

Capital
Gains Tax

B. Annualized Capital Gains Tax


Andrix, resident alien, taxpayer made the following dispositions of shares of stock
during 2009:
Capital
Date
Security
Selling
Cost
Mode of
Gains Tax
price
settlement
1/18/9
Domestic common
P P120,0
Directly to
stocks
400,000
00
buyer
2/12/9
Domestic bonds
200,000 180,00
Directly to

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Northern CPAR: Taxation Capital Gains Taxation


0
buyer
3/14/9 Domestic preferred
300,000 250,00
Through PSE
stocks
0
4/22/9
Resident corp.
180,000 120,00
Directly to
stocks
0
buyer
6/18/9
Domestic stock
150,000 120,00
Directly to
options
0
buyer
8/15/9
Resident corp.
200,000 240,00
Directly to
bonds
0
buyer
9/2/9
Domestic common
300,000 320,00
Through PSE
stocks
0
9/24/9 Domestic preferred
280,000 300,00
Directly to
stocks
0
buyer
10/28/9
Domestic stock
100,000 120,00
Directly to
rights
0
buyer
12/11/ Domestic preferred
400,000 380,00
Directly to
9
stocks
0
buyer
Assume all capital gains or losses are long-term and that the taxpayer has other
regular income of P300,000.
Required: Compute the following:
1. Capital gains tax payable at year-end ___________
2. Total percentage tax paid
___________
3. Total regular income of the taxpayer ___________
C. Special Cases
1. ABC, Inc., a domestic non-security dealer, had the following transactions involving
the securities of non-listed domestic corporations during 2010:
Date
2/4/9

Purchas
e
10,000

Sale

Price

3/6/9
4/5/9

1,000
-

10,000

4/15/9
10/28/
9
11/15/
9
11/23/
9
12/5/9
12/14/
9

10,000

600
-

400

10,000

500
8,000

Security

Capital Gains
Tax

P
10
1,000
21

GSM common
stocks
PLDT bonds
GSM common
stocks
1,100 PLDT bonds
16 GSM common
stocks
980 PLDT bonds
12 GSM common
stocks
950 PLDT bonds
13 GSM common
stocks

ABC, Inc. had P300,000 operating income. GSM and PLDT are both domestic
corporations.
Required: Compute the following
1. Capital gains tax per transactions where applicable
2. Annual capital gains tax payable or (refundable) _________
3. 2010 taxable income of the taxpayer
_________
4. Tax basis of the GSM common stocks
_________
5. Tax basis of the PLDT bonds
_________
2. Andy exchanged his DEF, Inc. shares which he previously acquired at P200,000 for
the shares of ABC, Inc. valued at P300,000 in pursuant to a merger agreement
between DEF, Inc. and ABC, Inc. Compute the capital gains tax. __________
3. On July 1, 2010, Andy sold his domestic stocks with aggregate par value of
P250,000 and acquisition cost of P300,000 to Betty for P500,000. Betty made a
downpayment of P50,000 and signed a note for the balance payable in 9 semiannual installments starting December 31, 2010.

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TAX 6

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Northern CPAR: Taxation Capital Gains Taxation


Required:
1. Compute the 2010 capital gains tax
2. Compute the documentary stamp tax

on the sale

__________
__________

DRILL PROBLEMS: CAPTIAL GAINS TAX ON THE DISPOSAL OF REAL


PROPERTY
A. Scope of the 6% Capital Gains Tax
Illustrative Cases:
1. ABC, Inc. disposed a vacant lot costing P2,000,000 at a gain of
P1,000,000. The lot has a fair value of P2,500,000 at the date of
disposal.
2. ABC, Inc. disposed its old office building with a carrying amount of
P2,000,000 at a gain of P1,000,000. The lot has a fair value of
P2,500,000 at the date of disposal.
3. DEF, Inc., resident foreign corporation, disposed its headquarter with
carrying amount of P2,000,000 at a gain of P1,000,000. The
headquarter has a fair value of P4,000,000 at the date of disposal.
4. Andy sold his old residence for P4,000,000 to finance his business. His
old residence has an appraisal value of P5,000,000, assessed value of
P3,000,000 and zonal value of P4,500,000.
5. Andy, a dealer of personal property, sold a vacant lot in Baguio City at
a gain of P400,000. The lot cost him P600,000 and has an assessed
value and zonal value of P800,000 and P1,200,000, respectively.
6. Andy wishes to expand business. He sold his warehouse consisting of
a lot and building for P5,000,000. The lot and building has assessed
value of P4,000,000 and zonal value of P4,500,000.
7. Andy sold one of his house and lot in Japan at a gain of P2,000,000.
This property has an appraised value of P5,000,000 and were
acquired at P3,000,000.
8. ABC Realty Corporation sold an undeveloped lot in Pangasinan. The
lot cost P2,000,000 and were sold at its current fair value of
P3,000,000.

Capital
Gains Tax

B. Special Cases
1. Scope of Exemption
Information for the property disposed of:
Zonal value
P
3,000,000
Assessed value
2,500,000
Appraised value
3,500,000
Cost
2,000,000
For each of the following independent, indicate the capital gains tax:
Illustrative Cases:
1. Andy sold his principal residence for P4,000,000. He immediately
repurchased a new residence for P4,200,000.
2. Andy sold his principal residence for P2,500,000. He immediately
repurchased a new residence for P2,000,000.
3. Andy sold his principal residence for P2,500,000. He immediately
repurchased a new residential lot for P2,000,000.
4. Andy sold one of his residential property for P4,000,000. He
immediately repurchased a new residence for P4,200,000.
5. Andy sold his residence lot for P4,000,000. He immediately
repurchased a new residence for P4,200,000.
6. DEF, Inc. sold a vacant lot for P4,000,000. Within 18 months, it
used the proceeds to purchased residential houses for its directors
and officers.
7. Andys house and lot was one of the several properties to be
expropriated by the government to build on an airport. The
government paid Andy P3,000,000. Andy leases his residence since
then. Andy opted to be subjected to capital gains tax.
8. Andys house and lot was foreclosed after his failure to pay the

CGT

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Northern CPAR: Taxation Capital Gains Taxation


P2,000,000 mortgage on the property. The bank paid him P500,000
for after the auction sale.
2. With mortgage
Andy sold his house and lot with fair value of P2,500,000 for P3,000,000 on July 1,
2010. The house and lot, which was subject to P2,000,000 mortgage was acquired
for P1,500,000 in 2005. The buyer assumed the mortgage on the property and
signed a note payable for the balance payable in 5 semi-annual installments.
Required: Compute the following:
1. Initial payment
_________
2. Contract price
_________
3. Capital gains tax in 2010
_________
3. Installment
Ms. Shiela Longboan sold her residential house under the following terms:
Cash received, January 10, 2006

P
100,000
100,000
600,000

Amount received, June 10, 2006


Installment due, June 10, 2007
Additional Information:
Cost of the land
Mortgage assumed by the buyer
Mortgage on the land executed by the
buyer in
favor of the seller to guarantee
payment

P
150,000
200,000
600,000

Required: Compute the following:


1. Selling price
a. P 750,000
b. P 800,000

c. P 850,000

d. P1,000,000

2. Contract price
a. P 750,000

b. P 800,000

c. P 850,000

d. P1,000,000

3. Initial payments
a. P 100,000

b. P 200,000

c. P 250,000

d. P 150,000

4. Capital gains tax in 2006


a. P15,000

b. P17,647

c. P22,333

d. P 60,000

5. Documentary stamp tax


a. P12,000

b. P12,750

c. P14,325

d. P15,000

CPA EXAM DRILL PROBLEMS:


1. The term capital assets includes
a. Stock in trade or other property included in the taxpayers inventory.
b. Real property not used in the trade or business of the taxpayer.
c. Real property primarily use for sale to customers in the ordinary course of trade or
business.
d. Property used in the trade or business of the taxpayer and subject to depreciation.
2. Lots being rented when subsequently sold are classified as
a. Capital assets
b. Liquid assets
c. Ordinary assets
Fixed assets

d.

3. Which is an ordinary asset for a realty developer?


a. Accounts receivables
c. Real property held for development and
subsequent sale
b. Construction machineries
d. Head office building of the developer
4. Which of the following accounting assets is not an ordinary asset?
a. Investment property
c. Property, plant and equipment
b. Inventory
d. Trading securities by a stock brokerage firm
5. On July 1, 2009, Crislyn Riego sold shares of stock for P200,000. The shares which
were acquired for P140,000 acquire on June 1, 2007, have a par value of P150,000,
were held as investment, and were sold to a buyer under the following terms:
Downpayment, July 1, 2009

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Northern CPAR: Taxation Capital Gains Taxation


20,000
30,000

Installment due, October 10,


2009
Installment due, October 10,
2010
Installment due, October 10,
2011

75,000
75,000

How much was the capital gains tax due in 2009?


a. P 500.00
b. P 450.00
c. P625.00
6. How much was the documental stamp tax due?
a. P 600.50
b. P 525.25
c. P 562.50

d. P750.00
d. P 612.50

7. To facilitate the disposal of his shares, Freddie sold his shares for P360,000 at 10%
discount from its fair value. Even at discounted price, Freddie reports a gain of
P160,000. Compute the capital gains tax on the transaction.
a. P 21,000
b. P 11,000
c. P 16,000
d. P 15,000
8. Which of the following is not a requisite of installment payment of capital gains tax in
installment involving the sale of personal property?
a. Downpayment must not exceed 25% c. The item sold is not inventoriable
b. Selling price must exceed P1,000
d. Initial payment must not exceed
25%
9. Abdul Rhamanam Ahmin, a non-resident alien disposed his stock investments in a
domestic corporations to Juan dela Cruz, a non-resident citizen, at a gain of P300,000.
Which statement is correct?
a. The sale is not subject to capital gains tax since the property involved is a personal
property is deemed located abroad.
b. The sale is not subject to capital gains tax as Juan dela Cruz, the buyer, is a nonresident individual.
c. The sale is subject to capital gains tax even if the sale occurred outside the
Philippines.
d. None of these.
10.Meiko Acebo is a stock broker and holds 10,000 ordinary stock of San Miguel
Corporation, a domestic corporation, acquired at P100 per share. His valuation for
San Miguel Corporation indicates that San Miguels stocks will decline in the near
future. If Meiko sells his stock investment directly to a buyer, Zeus Millan, at P115 per
share, how much is the capital gains tax payable on the transaction?
a. P5,000
b. P10,000
c. P5,750
d. P 0
11.Mr. Acebo, a non-security broker or dealer, made the following dispositions directly to
buyer:
Date
2/4/8

Domestic securities
Abacus ordinary shares

5/8/8
7/15/8

PLDT bonds
Globe preferred shares

9/20/8
11/15/8

Globe common shares


Metrobank ordinary
shares

Gain/(Loss)
P
150,000150,000(
80,0
00)
50,00080,000-

Compute the amount of capital gains tax payable (refundable) of Mr. Acebo for the
year 2008.
a. (P1,500)
b. P15,000
c. P 0
d. P38,000
12.Which of the following entities is not exempt to the final capital gains tax imposed on
the sale, exchange and other disposition of real property?
a. Banks on their sale real and other assets acquired in the Philippines
b. Resident corporations on their land not used in business in the Philippines
c. Real estate developer or dealer on their sale of condo units
d. Resident citizen on his sale of one of his residence under foreclosure sale
13.The actual capital gain derived by an individual taxpayer may be included to all
income subject to progressive income tax when

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Northern CPAR: Taxation Capital Gains Taxation


a.
b.
c.
d.

It
It
It
It

involves
involves
involves
involves

sales of real property to non-residents


sales of real property to the government
sales of personal property to non-residents
sale of domestic stocks directly to taxpayer

14.Ms. Janet Ranillo, a real estate dealer, sold a real property for P200,000 on October
29, 2007 in installment. The cost of the property was P150,000. The terms of the sale
agreed upon by Ms. Ranillo an the buyer were:
Downpayment
P 40,000
Balance, payable in monthly installments
of P10,000
160,000
beginning November 29, 2007 until
fully paid
How much income will be reported in 2007?
a. P12,500
b. P15,000

c. P50,000

d. P75,000

15.Ms. Lyn Rosales, a real estate dealer, sold a real estate for P2,000,000 on November
29, 2007. The cost of the property was P1,500,000. The terms of the sale were as
follows:
Downpayment
P
400,000
Balance, payable in monthly installments
of P100,000
1,600,00
beginning December 29, 2007 until
0
fully paid
How much was the income to be reported in 2007?
a. P100,000
b. P112,000
c. P125,000
16.Compute the capital gains tax in the above case.
a. P 30,000
b. P 40,000
c. P120,000

d. P140,000
d. P 0

The following problems relates to numbers 17 through 20:


17.Raff Escuela sold his principal residence for P5,000,000. His principal residence was
acquired at P2,000,000 and has a fair market value of P6,000,000 at the date of sale.
Within 18 months, Raff reconstructed his new principal residence for P4,500,000.
Compute the capital gains tax to be deposited in escrow.
a. P 270,000
b. P 300,000
c. P360,000
18.The cost basis of the new residence is
a. P1,800,000
b. P1,500,000
P4,500,000

d. P 0

c. P3,750,000

19.The amount of capital gains tax to be released to Raff is


a. P240,000
b. P270,000
c. P300,000

d.

d. P324,000

20.Compute the cost basis of the new residence if it was acquired for P5,200,000.
a. P2,000,000
b. P2,200,000
c. P1,733,333
d.
P4,333,333
21.Which is not a requisite of the wash sales rule of securities?
a. The sale or other disposition of securities resulted to a loss
b. There was an acquisition or contract or option for acquisition of stock or securities
within 30 days before the sale or after the sale.
c. The stock or securities sold were substantially the same as those acquired within
the 61-day period.
d. The seller must be a dealer in securities in a short sale transaction.
22.The following are not substantially identical securities, except one
a. Common stock and preferred stock
b. Voting and non-voting common stock
c. Bonds with different interest rates or secured and unsecured bonds
d. Similar bonds with different maturity dates
23.To which of the following is the capital gains tax required to be filed? (Select the
exception.)
a. Authorized Agent Bank under the jurisdiction of the RDO where the seller is
required to register

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TAX 6

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Northern CPAR: Taxation Capital Gains Taxation

b. Revenue collection officer


c. Duly authorized City or Municipal Treasurer of the RDO where the seller is
required to register
d. Office of the Commissioner of Internal Revenue
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Driven for real excellence!


Batch HQ05

TAX by Rex B. Banggawan, CPA, MBA

TAX 6

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