Scribd Logo
Upload

Welcome to Scribd!

  • Chapter 6-1 PDF

    Uploaded by

    Fely Maata
    330 views24 pages

    Original Title

    chapter 6-1.pdf

    Copyright

    © © All Rights Reserved

    Available Formats

    PDF or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    330 views24 pages

    Chapter 6-1 PDF

    Uploaded by

    Fely Maata

    Copyright:

    © All Rights Reserved
    Download as PDF or read online from Scribd
    Flag for inappropriate content
    of 24
    g - Capital Gains Taxation 6 apTER TAL GAINS TAXATION ee ooote? overview and Objectives a“ discusses the ite : th ee rules ofthe two types a pial tar a ae capital gains scarves areca J recite the asset classification rules Sapltal assets x memsponding ta ates acre Subject to capital gains tax and their ‘ oe ‘Sal ons ia Computations of the 5 and10% capital gains tax and the les on w: ; reine trent 6 the do & emorize the documentary stamp tax imposed onthe sale of stocks and rea Peper (ASSIFICATION OF TAXPAYER'S PROPERTIES 1, ordinary assets - assets used in business, such as: stock in trade of a taxpayer or other real property of a kind properly be included in the inventory of the atpaper ea athe close of the taxable year yand at the b, Real property held by the taxpayer primarily for sale to cust ordinary course of his trade or business eustomers in‘the Real property used in trade or business of acharacter whichis subject to the allowance for depreciation 4. Real property used in trade or business of the taxpayer a pusiness is habitual engagement in a commercial activity involving the regular sale of goods or services for. profit. Non-profit entities are not businesses. Basically, ordinary assets are: a. Assets held for sale ~ such as inventory ies and items of property plant and b. Assets held for use - such as supp! equipment like buildings, property improvements, and equipment 2. Capital assets - any asset other than ordinary assets 167 wuss 0" test BY TAXPAYERS ofindwida taxpayers se as cash, receivables, prey * such a Prepaid eae, My «such 5 PAEEME OPYTIRNS, leary “% _poIvibUAL TAXPAYERS aaron TE TARP ATERS [eammaase | [etal net dasicsienisrbatve The dasticaton of assets or properties as ordinary asset or ca depend i ample 1 Adomesuc stocks an ordinary asset to a dealer in securi 2 Avacam and unused lot esate busines such a nage nthe purchase of securities pital as ‘nature of the property but upon the nature an fs wageby he busines. of the taxpayers ities but is a capital ase ‘merchant of stacks oF sec a riered pee taxpayer engaged in the ral deal realty developer, or lessor but i setter rotenpged ee Felt developer, oF lessor But sa cpt estate business, 168 6 capital Gains Taxation ot of domestic stocks held by banks are capital assets, Under RRS-2008, ane fof em sified 5 capital a8ses" means all stocks and secunnes held By rc other than dealers insecurities 0 jon Rules Classification Ri Cay parchuse for MU WE in busines i an ordinary ast even Ah tis purpose is ater thwarted by circumstances beyond the taxpayer's onto: conte ance ofthe active use ofthe property dos not change its character Drrosaly established asa bsines property pre properties used, being used, or have been previously used, n trade of the CR Mer shall be considered ordinary assets swrmrties classified as ordinary assets for being used in business by a 1. Picpayer not engaged in the real estate business are automatically converted tarPapital assets upon showing of proof thatthe same have not been used in Tasiness for more than 2 years prior to the consummation of the taxable passaction involving such property. asst B g. A depreciable assets an ordinary asset even ifs fully depreciated, or there fea failure to take depreciation during the period of ownership. Real properties used by an exempt corporation in ts exempt operations are ‘considered capital assets. Exempt corporations are not business. G. The dassification of property transferred by sale, barter or exchange, inheritance, donation, or declaration of property dividends shall depend on Whether or not the acquirer uses stin business For real properties subject of mvoluntary transfer such as expropriation and foreclosure sale, the involuntariness of such sale shall have no effect on the classification of such real property. 1 Change in business from reat estate to non-real estate business shall not change the classification of ordinary assets previously held. ‘Taxpayers engaged in real estate business includes real estate dealer, real estate developer, real estate lessor and taxpayers habitually engaged in realestate business. Taspoyers habitually enguged in rea! estate busine HLURB or HUDCC as dealer or developer or thos sales transactions in the preceding year. lude those registered with the least 6 taxable real estate ly used as an office and is subject to periodic allowance for depreciat 2015, Mr. Alfonso implemented a uy back of shares by th ing. corporation - rede ch may be re-issued and not rmption a aN led for cancellation "shares whi “Te erm other disposition does not include: 1 Issuance of stocks by a corporation services of other corporations. As gain. RR6-2008, however, there is no express provision taxing treasury nce, teasury share premium should not be subjected to capital ne sue of stocks for services cannot be considered as exchange fF Property No gino scan be imputed ast involves payment of expense ip Kind ‘Redemption of shares in @ mutual fund Gans trom redemy insane notion of shares in a mutual fund are exempted by the NIRC from m rapt 8 - Capital Gains Taxation dered 4 capita oss subject ote rues in Chapter 12. Hestto ther ‘kof the shares by the ‘issued, The gain or es by the issuing Mustration 1: Me San juan, not a dealer in stocks, sold the following stock investments through the Philippine Stock Exchange: —Date__ _StockCode Seliingorise Cost Gain (Loss). aC P 4,000,000 P 3,700,000 P 300,000 SMB 3.000.000 _3.200.000 (202000) E-zono.000 Leoueogo Bo jon9oe k transaction tax shall be computed as follows: ss through the PSE P 7,000,000 fet P8200 173 ne seling price cemardless ofthe existe, sont cot Stan i hans 00 less P42,004 Tenth st oR puted a5 00,000 ISS 742.000 ta, oy meee lp om 2 Te apanstacor to rena erinaocts ter: ron TOMEI home 7 se eransaction ( ii sence ch e080 cs er sei oS oda goo e020 ese heres ofr ie EE caPmTAL GAINS TAX ON SALE, EXCHANGE, AND OTHER DISPOSTTIONS gp care re OECTL TRUER ae of eT: tax fo all taxpayers disposing stocks clas as capital ase fication of the taxpayer. By situs, the gain on sale gf vs within, The tax applies even if the the sale is execu ‘outside the Philippines. nna tax posed onthe annual net gain on the sale of domestic stocks direct» buyer: “The net gains determined as follows: Seling price P woexee es: Basis of socks disposed P soa novox jenfary samptaxonthesale? youn _saauo et captal gain (loss) Pos ‘The documentary stamp taxis deducted If pad by the seller. Selling price stall mean: + incase ofash sale, the total considerat ved : jon received per deed of sale {fetal eomsderaion pid partly m manay and partyin propery the sume ___Rieyand far vate of property received In case of exchanges, the fair value ofthe property received 174 caster 6 Capital Gains Taxation stration rao his stocks receiving in exchange a build 3 aur value of P2.500,000, goods worth P100, gh ats ast 7200, 000, and P400,000 cash. soe P 200,000 100,000 the tax basis of stocks? red by purchase, tax basis is the cost Tfacquired ty devise, bequest oF inheritance, he tax bass he fat the time of death ofthe decedent. Ss te far value at basis isthe lower yy whorn st Was nota 1 acquired for inadequate consideration, the tax the transferee for the property acu unter txjre change, eax bans he seated as of the stocks. the amount paid by tustration 1: Cost: Irs La Carlota pur the broker's comm 710,000 which Mrs. ‘The cost or basis of the acquired Bacolod stocks shall be: Cash paid P 100000 Obligations assumed on the property purchased 30,000 Direct acquisition costs - broker's commission 1.000 Roauoae Total cost (Tax basts) Mlustration 2: Costing procedures Mr, Alcantara had the following put Dorado Corporation: chases and sales of shares of the stocks of EI 175 caper cx <8 THY sures Puce. —Cost__ Jenson $0000 P1000 P 100,009 saint Peta So09 1103 $8.150 frat BSE oon 1200 240,000 waits Se 25000 1500 doi scott estrersistabe derived fle ed that the shares sold were th (Aare ose 1 Asai ech emethod is specific dentition meg’,® actual cost ofthe shares s vse ge nen the actual co ld and he remy socks March purchase 5,000 shares arch 23 purchase 20,000 shares ‘ost of 25,000 shares sold Costafreninng 1000 stocks P 55,50 — 240.000 2.295.150 ‘E00.99 ‘Thegain shall be computed 25: Selig price (25,00 sharesxP1S/share) P 375,000 ess: Casa shares sold 295,150 Gan Bz98s0 2 Assuming Me. Akantara cannot identify the shares actully sold but rest Sea recs of purchase ad ae inthe soe of El Dorde the ‘method is the moving average method. “ a User ovig vragen the ast of the _ ‘shares shall be computed as follows: ‘hares sold andthe ™ jot — —lamaction_ _shares_ unitcast __cost__ frst Prtase 1,000 P 10.00 P 100000, fan Pein 5000 1103 55.150 20.000 _12.00 __240,000 35,000 P1129 P 395,150 —25.000 b.1i.29 (P_282.250) 0.000 P12 P1i2900 2 Average aio 2 Une te mong 9st S0/35.00 = PLL 29 aercvey png eth, the average unit cost of the stacks is deterase! 3. Theos end 'e hares can be computed as 10,000 x P11 29. es: Costofshares sold (Quanity and cost of ending shares, Note 176 nono - capital Gans Taxation sning Mr. Alcantara cannot identify the stocks sold and does not maintain fed records of transactions in the shares of El Dorado, the apsicable went Firstin, first-out method. The cost ofthe shares sold shal be preeenod trom the cost ofthe irst 25,000 shares bought pein _pate_— ——jasactin — Shares Unltcnst. Cont _ janvary 1 10000 P1006 F 100900 rant purchase 5000 1103 S550, March 23 Purchase 20.000 __1200 __2401009 35,000 F495.150 Less: Cost of shares sold: fanoary | purchase 16000 P1000 P 100000 Maren purchase 5000 i103” "35350 March23 (25K 10K-SKshoresfirstsold) 19009 1200 _20900 —aso00 e2z550) ‘quantity andeostofendingshares 10.090 1200 p_zaqua Note: Wore 10,000 and 5,000 shares from January 1 and March 1 respectively are deemed firs sold. The other 10,000 shares sold are deemed coming from the last purchase on March 23. ‘2, The cost of the 10,000 shares n the last purchase s computed as 10:000/20,000 x 240,000 = P120,000. iustration 3: Acquisition by gratuitous title In March 2013, Mrs. Lipa received by way of donation shares of stocks of Taal Corporation from her father, Don Bosco. Don Bosco also acquired the same shares by June 1999 from his mother, Doia Karena, who bought the shares for ‘April 1996. The shares had a fair value of P700,000 in june 1999 and inMarch 2013. Assuming the shares were acquired by Mrs. Lipa from her father by way of: 1, Donation “Assuring the shares were donated by Don Bosco to Mrs. Lipa n March 2013 - the basis of the shares to Mrs. Lipa shall be whichever is lower of. ‘+ 400,000, the basis in the hand of the last preceding owner (Dofa Karena) Who did not acquire the property by gift, and ‘+ 2,500,000, the fair value atthe date of donation, hence, P400,000. 6 Inheritance Assuming the shares were inherited by Mrs. Lipa when Don Bosco died in March 2013. the basis ofthe shares to Mrs. Lipa shall be P2.500,000, the far value a the ate of death of Don Bosco. Purchase for an adequate consideration ‘Assuming the shares were bought by P1,200,000, the basis of the shares to Mt rice paid for them. Mrs. Lipa from Don Bosco for only 5 Lipa shall be P1,200,000, the actual aw com cn os 8 nen Te encom pe ewe ee a twefree exchanges wil Be discussed ang, atic stocks directly t0 a fiend for P500.000, thy westment in domes stent in dove luding P10,000 expenses on the date of ale, asi af P0000 exc re really marketable with many willing buyer ase 1; Assume that the shares ar Cr fae of Paso 000 bt theseler oped sll te same 9 his lend Fair valve 1 Si) psnaan asi cnet toon ng pice 500.000 ai J r2nn900 guste toca gansta Less Costand expenses 300,000 ‘The rules on the determinat be discussed in che ook. Bus ose 2: Assume that the shares have a fair value of P650,000 but the seller is cader immediate need ofcash forcing him to sell ata big discount. inthis case, the P200,000 gai wil stl be subject to cap 150,000 e considered donation subject to donor's tax since there isnot value of stocks for purposes of donor's tax wt ‘Transfer Tanation, by the same author. a corporation ~ 5% & 10% COT Individuals and domestic corporations - 15% CGT ve cnapter8- Capital Gans Taxation axcompllance under the ld Law Tar gare two aspects of compliance under the previous law: Transactional 2 5, annual capital gains tax ‘RansACTIONAL CAPITAL GAINS TAX or losses are reguied to be reported a ns through the capa ganstacraurm Bateea nae of aptal Galns Tex vee n dete sock ety le P2000 aed Stn respecte. or ekerseomaes ot igprice = P180,000 selling price ess: Cost and expenses Purchase cost 180,000 P 100,000 ‘Commission expense 2,000 Documentary stamp tax expense 500 Capital gain taza E7500 P 77500 —% ams ‘Note: Gains is below P100,000 hence, 59% applies. 2. Selling price = P240,000 Selling price Less: Cost and expenses Capital gain First P100,000 gain at 5% Excess gain at 1096 Capital gains tax due ‘Note: Gains exceeds P100,000 hence, ¥% and 10% applies, ‘Under the TRAIN Law ‘The transactional capital gains tax shal be simply computed as follows: 179 240,000 102.500, Busz.500 P 190,000 P 5.000 Anson 450 boazo Chapter 6- Capt! Gains Taxation apt 6 - Capital Gans Taxation 1. Selling price = P180,000 % iso axa CAP OTE ars ——15% The change ‘would mean 15% CGT when the transact Eanes andy mean Non restaction resulted toa loss. tly mean 159% CGF refundable when the smustration aie P 137,500 [ssume an individual taxpayer had he following ransacons during te year: Mulipy by: capital gas taxrate ij Selling costs Capital gains tax due EROS pate Baul Secunties — Price — execs, areca " 10.000 P 100000 Deadline ofthe transactional capital gains» Lory 80.000 90,000 160000 70,000 13500 Stock options 80,000 100.000 (___20.000)___ Total Rtog00 p30.000 under the TRAN law, the inal capital gains tax payable (refundable) would be P 170000 lowing disposition of several equity securities ing June 30, 2020: Cost& Capital Capital quitySecunties Price expenses. —gain(loss)_ gains tax. stock 210,000 P 100,000 P 110,000 P 6,000 sume a foreign corporation had ly toa buyer for the “ommon stocks 80000 90,000( 10,000) Stock rights 160.000 70,000 90,000 4.500 6/17 Stock options ‘80,000 100,000 (___20.000) Total Eazooug P_10.500- Under the NIRC, the final capital guins tax payable (refundable) shall be ‘best procedi tax payments shall be made only wher Deaditne of annual capital gains tax return ‘The annual capital gains tax return, BIR Form 1707-4 Il be filed on or before the 15% day of the fourth month following the close of the taxable year of the taxpayer. 180 ‘Chapter 6- Capital Gains Taxation : since Not nsacion 3 shoud note rege 0 TT 2 Teen 4 soul be ved 9.08 Ge etgnn of 75000. Te aupayer hal a 5 ea Onn ee cate ener nega of UF whch IBF evra, refined stration 2 iusto cllowing series of capital gas and tosses during he Year: Gonstlosses) — Capitalgainsiax du Transaction 1 ? 200.000 P 30,000 Transaction 2 (240,000) : Transaction 3 * ep.000 Yaryeet ea 20.009 Ba.000 Note: red topay CoT nce -P240,000 + P60,0 ‘Sanaa gain The tax stud be 15% ran acces. The Arnal (2x refurd would be P2000 1 Transaction 3 should pot be rut 2 White year ending a2 #20000 ‘Would be necessary making Frm Tse P 30,000 =P 27.000 INSTALLMENT PAYMENT OF THE CAPITAL GAINS TAX ‘When domestic stock is sold in installments, the capital gains tax may also be paid price exceeds P1,000; and al payment does not exceed 25% of the selling price. Uuserative Case: Basic On November 1,2019, Mr. Batanes made a sale of domestic stocks costing P700,000, direcdiy to a buyer for P1,000,000. The buyer agreed to pay in PL00,000 monthly installments starting November 30, ‘The capital gains tax shall be: P 3,000,000 700.000 lustration 1: No mortgage on the shares sold P 100,000 Total initial payment Eaan009 Rano of initial payment (P200,000/?1,000,000) 20% 182 cnapter 6 Captal Cars Taxation me taxpayer is availed 0 ay capita gains tax by insealiment, {based on the pater of colton of sum of money collectible from the Absence of any indebtedness on the thod, the cap i, the capital gains tax payable every installment shall be ‘ontract price x Capital gains tax fe capital gains tax payable for every installment si Te cpu 00.000xP45.00. * hall be P4500 computed as oe thatthe selling price is used to measure rice is used in determining the capital gains tox amustration 2: With mortgage on Stocks Bat notin ences fcst Wgyme the stocks were previously mortgaged for P600.000 which 1000 which the bayer ASomed. The PA00,000 balance 1s payable in monthiy installme oat arting November 30 2019, tly installments of 100,000 ‘the gain and the capital gains tax shall be the same as 300.000 and Tespectively. The contract price or total sum collectible onthe sale shall be Piso selling price Tess: Mortgage assumed Contract price ce ‘The capital guins tax payable every installment shall be P 11,250 computed as 7100,000/6400,000 x P 45,000. lustration 3: With excess mortgage over cost AKussmne instead that the stack was subject to P750,000 mortgage which the buyer eeimed, The P250,000 balance is payable mn monthly installments of P50,000 starting, November 30, 2019, ‘The gain and the capital gains tax shall be the same as 300.000 and 45.000 respectively. The excess of mortgage over the basis ofthe stacks i an indirect down payment, a form of constructive receipt ‘The contract price shall be computed a5 follows: P 1,000,000 151.000 250,000 Seling price Less: Mortgage assumed Contract price ‘Chapter 6 - Capital Gams Taxation be computed as follows: “The initial payment Indirect downpayine (onsracive coh) » saooe jovember 30) Bo Aso.n0g Ratio of initial payment (P150,000/?1,000.000) 15% “The taxpayer is qualified to pay capital gains tx in installments ‘The capital gains tax shall be as follows: For the sole 50,000/300,000%45,000 B__Z.509 For every nstaliment P50,000/P300,000 xP45.000 Lah? SPECIAL TAX RULES IN CAPITAL GAIN OR LOSS MEASUREMENT 1. Wash sales of stocks 2. Tax-free exchanges ‘a. Exchange of stocks pursuant to a merger or consolidation '. Transfer of stocks resulting n corporate control WASH SALES RULE ‘Wash sale of securities 1s deemed to occur when within 30 days before and 30 days after the losing sole of secures (also referred to as the 61-day period), the ract oF option to acquire the same or losses on wash sale: n-dealers in tal gains because they are effectively Unrealized ‘The taxpayer did totally let go of the shares, The immediate reacquisition of the shares makes the loss a theoretical ora feigned loss. nen eec enna eee | Dayof |....---.-.------- 0 days | losing sate 30 days > clude stocks and bonds. The wash sales sportable capital losses on domestic stocks purposes of the 61-day rul ‘substantially ident preferred stocks 2 caster 6 - Captal Gains Taxation ao a Arka Abbe PS pS iment Parchase 10.000” ga” 40008 Meent8 Sale 10900 380 ieee aie Toledo uses the FIFO method in costing security transaction under the FIFO method, the 10.000 shares sold in 000 shares bought on January 5. The capital gain or computed as follows March 18 came from the frst loss on March 18, 2020 shall be seling price iiss. Cost of shares sold (from Jonuary purchase) Capital loss 38.000 40.000 poo wash sles rule, the P2000 capital loss on the sale shall ot be iputation of the annual net eaptal gains in 2020 since the shares ed within the 61-day period. -up when the quantity of the quantity of the shares the tax basis ofthe replace ike loss since the taxpayer bought back his original posit the same position as before (1. still owning 10,000 shares) ‘The adjusted basis of the replacement shares acquired on March 1, 2020 shall be: Purchase price ‘Add: Deferred loss on March 18 wash sales Basis of replacement shares What ifthe replacement shares are less than the shares sold? Assume that the shares bought on March 1, 2020 were only 8,000 shares for P32,800, Only the portion covered with replacement shares shall be disallowed, The portion without replacement cover is a deductible realized loss. Thus, the capftal loss shall be split as follows’ 1055 (6,000 shares/10,000 sharesx P2000) P 1,600 le 1oss (2,000 shares/10,000 shares x P2,000) ___ 400 ss Poo 185, Chapter 6 - Capital Gains Taxation teshares acquired on March 1, 2020 shall be ‘he adjusted basis ofthe replacement Foiepe P 32800 renase pice Fd Deere os on March 18ash sles i Basis of 8000 replacement shares Eau vat iby speci tentiicatson the 10,000 shores bought on March I, 2020 yey ‘the same shares sotd at a loss on March Note that wash sales involve the sal effectively re-acquired before or after In this case, the P2,000 capi res within the 10 acquisition deduetibie after alosing sale Mlustration 2: Acquisition of ident ‘transactions in the stocks of Sta. Rita ‘In 2020, Mr. Balangkayan had the Corporation, a domestic corporation: Tamwary4, ~ Purchase 10,000 P2000 P 200.000 February 28 Sale 10,000 18.00 180,000 March Purchase §=—«*12,000- «1600 192,000 “The capital gains or capital los shall be computed as follows: Selling price P 180,000 Less: Cost of shares sold ——200.000 Capital loss (E2000) ‘ince there is full replacement cover (Le. 12,000 shares) within the 61-day period (ie, March 4, 2020}, the capital loss shall be deferred and included as part of the cost of the replacement shares. ‘The basis of the replacement shares purchased on March 4 shall be: 192,000 Purch: Add losson was! sales 20.009 Basis 10 replacement shares P2200 Whac if replacement shares are less than the shares sold? res were bought on March 4 for P110,000. In this P 14,000 ——£.000 20.009 186 chapter 6 - Captal Gains Taxation -ghe adjusted basis of the replacement shares acquired on March 4, 2020: 110,000 ares L000 Raazt009 re and after atosi ig sale he shares of Naga Corporation, a itiustration 3: Acquist tn 2020, Mr. Iriga had the domestic corporation, 2100 05.000, 1800216009 1600 “49,000, 98.000 ight on Jenuary 4, 2020. The cling price ~ P20/share cost) x B_2s.000 ‘The adjusted basis ofthe replacement shares acquired on February 15, 2020 shall be: Purchase price P 108,000 ‘Add: Deferred loss (5,000 shares/8,000 6K) __10.000 1e 5,000 replacement shares on February 1S B_1S.000. ‘The adjusted basts ofthe replacement shares acquired on March 4,2020 shall be: e P 48,000 (3,000 shares/8,000 sharesx P16K) __6.000 Ro San00 Purchase ‘Add: Det ‘Basis of 3,000 replacement shares on March 4 lon 4: No replacement shares tu the 64-day period ry 18, 2020, Mr. Mulanay bought 10,000 en. Luna Corporation for 100.000. On February 6, 2020, he sokd the sam 3F P9500. On March 28, 2020, he bought 5,000 shares for P55,000. 187 Chapter 6 -Capital Gans Taxation stocks directly toa buyer. 1 55,000. Ravonale ofthe wash ales ale ‘The wach sles ue fer nich cad enue te mane “he proton against theca ofa aerate eral of bss intended to reflect the economic si transaction. Teeth le ae napa dec nal en rant ee gar ‘TAX FREE EXCHANGES Merger or Consolidation Stockholders of a domestic corporation may exchange their stocks for the stocks ‘of another corporation pursuant to plan of merger of consolidation ‘The gains or losses on share-for-share swaps pursuant to @ plan of merger or consolidation will not be recognized for taxation purposes. In a share-swap pursuant to 2 plan of merger or consolidation, the sharcholders of the acquired corporation wall 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 the shareholders of the absorbed corporation with them being simply integrated as shareholders ofthe acquiring ccsporation. do surrender his Carranglan Inc. shares in exchange for ralue of P1.200,000 pursuant to the merger of Carranglan Baler nc. The Carranglan shares were prenously purchased by Mr sett 000,000. r a m id Baler shares recewved (selling price) Carranglan shares exchanged Indicated gan P 1200000 —1o00.000 in dO0.008 188. chapter 6 - Capital Gains Taxation 1 P200,000 indicated gain is not be Jicated loss sha the exchat be RE invoIves stacks Fecognized. The P1 000,000, Initial Acquisition of control [No gain or loss shall also be recognized if pro . son in exchange fa begs ry is transferred to a cor SOCKS OF nts of parienn S in a corporat classes of stacks e “control” shall mean ownership of stocks Jeast 51% of the total voting power of ch amount to at led to vote, ‘This rule may be relevant oni ‘when stocks are exchar ‘ax o the recognition af capital N of corporate control Corporation costing 2.000000 in with a fair value of P1,800,000. The 51% ownership (corporate control} in selingprice 1.800000 Gost of Cabanatvan stocks exchanged oa o09 indicated oss oe, ‘The P200,000 indicated loss shall not be recognized, Any be recognized. The law views income generating transaction the Dingalan shares received shall be 2,000,009, the same a the Gapan shares exchanged. Exchange not solely for stocks In tax-free exchanges, if stocks are exchanged nots consideration such as cash and other properties, recognized up to the extent of cash and other properties received. Wlustration 1: Cash and property received exceed indicated gain ‘Assume that pursuant (© the plan of merger CCarranglan tne and Baler Ine Mr. Santiago was required to surrende 3 Inc. shares costing P3,UU.000 1m exchange for Baler shares with total fir value of P500,000 plus P100,000 cash and 200,000 worth of goods. 1% consideration received or: (900,000 + 100,000 + 200,000) Less: Cost of stocks exchanged Indicated gain P 1.200.000 1.000.000 Ezap.a00 189 chapter 6 - Captal Gains Taxation ‘Theamount of cash roperties received 15 cOnS! 1 tn oF Blogg Proper P 200,000 100.000 2ane.n00 od as a capital gain. The substituted basts ofthe shall be: in) indicated gain) ‘The P200,000 gata shall be FePot he excha ‘Basis ofthe Carranglan shares exchanged » 1000000 of ties exchanged other proper 00.000 B_a00.000 ‘Regulatory Formula on Tax Substituted Basis Fre regutions prescribe the following formula in computing the tax basis of ‘properties arising from the exchanges: Pex recogni vo0L.0u ess: Cash or other properties received ams Tax basis of new shares received 2 eouoo ‘The substituted basis of the Baler shares received may be computed following the P 1,200,000 --haow.oe E—a0an00 ‘The indicated ga i recog received. The indicated gains consi el apes 6 Capital Gans Taration ich minimum public ownership requirement “subject to the 59-10% capital gains tax and not to the ¥ of 1% sto ax. Comprehensive tMlustrations py 0 security dealer ler, sokd various domestic stocks for P1,200,000, net of selling tired at a cost of P800,000. The capital gains tax srl because domestic stocks are ordinary assets to a Secunty dealer The 400,000 net gain Is an ordinary gain subject ta regular Income tax lMustration 2: Sale of domestic bonds Carlo, not a security dealer, sold domestic bonds directly toa buyer at 3 net gain of 200/000. Carto is nota dealer of domestic bonds. 11 the sale of omestc bonds 6a capital go, gains tox nil The 8 he bd 8 debt IMSLTUMIENEFother thn oh subject to regular wncome tax Note that th ‘equi instrument lke stocks on cocks froter securities Mhuerason 3: Exchange er dmestic sXe Costing 300.000 for bong, ” nc mei i st ring i mcr ni ata moe etcetera peer _swop pursuont IMustration 4: Issuance of stocks KG Inc, a domestic corporat far 2 vacant lot owned by Compute the capital gains tax. The transaction involves isue by HKG ine. ofits awn shares of stocks, These stocks do no, represent tnvesoment in the shores of another corporation The share premium of 'P300,000, [P506,000 ~ (10,000 x PLO). is part of HKG's corporate capita, not an income Hence, irs not subject 0 capitol gains tax ‘sued 10,000 P10-par ordinary shares in exchange The vacant lot has a fair value of P5000, Mlustration 5: Sole of stocks ex-dividend Ms, Pear! bought 10,000 shares of Zuma, 2 domestic corporation, at P10/sha February 14, 2016, Zuma declared a dividend of P2/share with record date of 20.2016 and payment date of April 20, 2016, On April 2, 2016, Ms. Pearl shares for PLS per share directly toa buyer. The selling expenses were P 5,000. ‘The shareholders’ ight to dividend accrues atthe date of declaration. The stocks may pass through diferent hands anycime. However, those who are registered as shareholders ofthe corporation at record date shall receive the dividends. ord and the date of payment, stocks are said to be selling ex receives the dividends. The price of the stocks on those dates \ncludes oniy the selling price ofthe stocks. ‘Thus, the capital gain shall be normally computed as follows: hag pce (P15x 10.000) 150.000 bes ostofacs and expense (21010000 + P5000) 10.000 pial gins Bo s5000 in se, the dividends to be received by Ms. Peatl shall be subject to the 10% Binal Zama Corporation, 192 chapter 6 - Capital Gains Taxation stocks dividend-on 1 decay ite shares of Zum, a domeatic corporation 0 eo P2/share with record date of March ely ta oo FSEUNY 18,2016, Ms Pear sold al Selling expenses were P 4,000. Between the date of declaration and the date of ddividend-on the huyer shall reeewe th Gnthese dates includes both the price ofthe ord, stocks are said to be selling © seling price of stocks idends on the stocks. the ‘tus, the copital gains of Ms Pearl onthe di determined 0s follows: Total sling price (P15 1.000) d expenses (P10 x10.000 + P,000) livdends receivable (F2 10.000 x 90%) 000 gains aT ould be noted that the drvidends to be rece rived by Pearls net of the 1096 fnat withholding tx on dividends of individual taxpayers Tt MEE f the 10% fi 'sposition ofthe stacks divdend:om shall be P 150000 304000 Tease ALY STORES DAO. ONTOAconoRAE RR i eco 4s shareholder in the tbe Subjected to the 10% dividend tax ‘Assurning the same data under Illustration 6, the capital gain shall be computed as follows: ‘Total selling price (P15 x 10,000) idends receivable (P2 x 10,000 x 100%) Copital gains ies the entire dividend income under Mow should the dividend on the stocks sold be taxed? Under the NIRC, all income not expressly exempted or not subjected to final tax or must be ineluded in gross income suoject to regular income tox. The er shall report the P20,000 domestic dividend in gross income subject to regular income tax. 193 Chapter 6 - Capital Gains Taxation Je to the 15% capital gains (2% vf stocks mn te mutual company PO ede resatural oF juridical. who are specifically exemp der existing investment incentives and othe gains re - 3, All other persons, whether 0 from national revenue taxes uné special laws, such as: ‘a. Foreign government corporations bb. Qualified employee trust funds ‘SALE, EXCHANGE, AND OTHER DISPOSITION OF REAL PROPERTY CLASSIFIED [AS CAPITAL ASSET LOCATED IN THE PHILIPPINES ‘exchange, and other disposition of real property capital assets in the exis subject to atax of 6% ofthe selling price Or the fair value, whichever 1s and foreign government-owned and controleg Under the fair value of real property is whichever is higher of the a. Zonal value, Revenue for real properties for purposes of enforcement laws, and b. Farr market value, as shown in the schedule of market values of the Provinciat and City Assessors. ‘only land has zonal valve but both land and improvements have fair market Provincial or Assessor's Office. For lands, the capital gains tax 1s 6% of whichever is the highest of the selling price (bid price un the case of foreclosure sales), zonal value, or Provincial or City ‘Assessor's far value. Note that independent apprais:1 valuation, the fair value commonly used in financial reporting, is not used in the computation of the capital gains tax, {strain 1 -Land oly Terry sold a vacant agricultural land for P5,000,000. The land was previously Dorchased by Fry at 4.00.00 and had an appraisal vale of P0000 and sonal talue of 7.000000. The property had «ai value of PSOOD000 in Provan Assessor's Ofce and an sere vale of P2 400,000, 1 ihe ofthe sen re (PS) zl ale (27) ad Aes vale P84) 1s the P7.000.000 zon voe ence the cap z rm -P7,000,000 x 6%; hence, P420,000. oe genteel, be org 194 chapter 6 -Captal Gans Taxation id and improvement ustration 2 house and lot for ald Me ftoworth 000. Anjo purchased the ot wh ‘constructed on it the 300000" ted oni the house at aatal eon of P2900 008 ‘the following fir value deta were available forthe property dono! value Assessed value a Fairvalve vet 4.000000 pa son000 00000 House na 2,000,000 1,200,000 setting price esonn.000 donalvalue Assessor's fair value Fau-value a 4000.00” P3s00000 P 4000000 Hause [improvement) ° 2000000 2000009 Total fir value (HIGHER) Esoono00 Multiply by: CGT rate — Capital gains tox esooeo mustration 3 {Areal property dealer sold a condo unit costing P1,200,000 to a client for P1,500,000. ‘The unit has a fair value of P1,800,000 atthe date of sale. ‘The capital gains tax is nil. The condo wnt fs an ordinary asset to realty dea or developer. The uctual gain of P300,000 (P, $00,000 - PI,200,000) isan ord subject to regular income tax. BIR Tax Clearance No registration of any document: Register of Deeds unless the Commissioner or his has certified that suc creditable withholding. be effected by the ly authorized representative transfer has been reported, and the capital gains or any, has been paid. (Se. 58(6), 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 @. Presumption of capital gains ‘The 6% capital gauns tax apphes even ifthe salt transaction resulted to a loss. Gain 1s always presumed to exist. The taxation is the selling price or fair value whichever is higher, not the actual gain. 195, Chapter 6 - Capt Gains Texaton tariness of the sale a Non-consideration tothe inolunl af the sale 1s involuntary oF is force ‘The capital gains tax appl se le yo % circumstances such as in the cas cn y dispositions by } der, and other forms of forced di = “pplies to condional sales and pacto de retro sales eo arccetal gains tax salle withheld bythe buyer against the seling prog the seller and remit the same to the government. SCOPE AND APPLICABILITY OF THE 6% CAPITAL GAINS TAX ‘Not applicable ‘The 6% capital gains taxis applicable to ail individual taxpayers but it applies only to domestic corporations. The NIRC did not impose final capital gains tax on foreign corporations. However, in cases where foreign corporations ri froi the sale of real property classified as captal assets, the capital gain shal be subjectto the regular income tax ‘The sale of real property located abroad is not subject to capital gains tax since withholding of the capital tax cannot be imposed abroad due to terntorial consideration. Hence, the actual gains realized on the sale, exchange, and other dispositions of properties abroad are subject to the regular income tax if the taxpayer 1s taxable on global income such as resident citizens and domeste corporations. For all other taxpayers, the capital gain realized abroad 1s exempt. EXCEPTIONS TO THE 6% CAPITAL GAINS TAX 1. Alternative taxation rule 2. Exempuon rules a. Exemption under the NIRC. b. Exempnon under spec ALTERNATIVE TAXATION ‘An individual seller of real either: 2.696 capital gains tax or The regular income tax Property capital assets has the option to be taxed at [e should be noted that ths is permissible only when: 1. The seller is an individual taxpayer, and 196 tee 6 Capita Gains Taxation the goveram buyer 2 TH ned and contro AS snstrumentalitie governme! corporations SO agencies including musteation ‘sold to the government a vacant lt for P Gretchen sold th F800.000. The lot was purchased for 99.900 in 1980 and had an Assessors far value of paoU.oGg any 700.000 athe date of sale 900 and zonal value of chen may OE 10 be Subject to tox ot 6% of 7800.000 oF report {000-P200,000) actual capital gain in her an er ne eeao08 al regular income or reture pasls of Alternative Taxation taxation 1s intended to ease the burden of ‘government re taxpayers may incur lasses on the for sal re taxpayers ced expropnation sale ha house and lot near a highway ata cost of P2,000,000, went ynvoked ts power of emnent domain to buy the highway Assuming the property has 0 flr value of Pt 800,000 for purposes ofthe. the tazpayer would be Jorced to incur #200 00 ‘oxpayer ayer would be given the benefit of deduction of the 1g imposed the 6% copital gains tox EXEMPTION TO THE 6% CAPITAL GAINS TAX UNDER THE NIRC vwhuch is the primary domicile of the lences, his principal residence 1s deemed that one shown in his latest tax declaration. Requisite of exemption: 1. The seller must be The sale involves the exemption within 30 days of the through a pres 1706) and “Sworn Declaration of I ‘bed return (BIR Form 197 Chapter 6 - Capital Gans Taxation The reaquston af te et residence ust BE WAIN IB ORIN rag date of. ‘The capita gan ‘The exemption can only be ‘The histoncal cost or ahs carried over tothe new principal hat the sale of prineipal residence must precede am tobe exempt. BIR Ruling No. 036-29) nescrow favor ofthe goverament hor cei every 10 yeas we principal Festdence sold ‘built or acquired. hall by It must be emphasize’ ‘acquisition of the new principal residence sas reap ede th 4 he ut a of 66800 1 hr rl en er Je a 46 of P6,000,000 or P 360,000. 5,000,000, Helen purchased limposable capital gains axis 6 Helen should indicate her intention to apply for exemption Inthe capital gains tx ray be fed ond submit a Sworn Decoration often. She will Be required to deposit iy 'P360,000 capital gains tax in on escrow ‘account in favor of the government. motors chy eect ‘the P360,000 capital gains tax in escrow willbe released to her. If Helen does not acquire a new principal residence within 18 months, the capita gains tax in escrow will be taken by the government Basis of new residence with full villiztion {Hehe proceeds is fll utilized, the tx basis ofthe new residence shall be the basis the old residence plus additional cost incurred by the taxpayer im acquiring the new residence. The additional cost isthe excess ofthe purchase price of the new residence over the selling price of the old residence. ‘Thas, the tax basis of the new residence shall be: idence out-of-pocket costs (P5.2M - PSM) idence P 3,000,000 200.000 EAz00.000 ‘Tax basis has no relevance for real property capital assets because the actual gain on the sale 1s relevant to capita gains taxation However, when the real property capital assets subsequentiv qualifies as ordinary assets such as when they art later employed in business, the tax basis of the property becomes necessaty for gain or oes measurement. Thats wy the basis of the new property neds (a monitor 198 caster 6- Capilal Gans Taxation partial lization of proceeds is partaly exempt resin an S088 FE pce residence. The porvon representing t race are he unsed prec m Tepital gains tax held in escrow account mere Rec a P 324,000 36.000 Baeo.009 te: Any interest which might have accrued on the ex Nettaxpayer The government ise * ToHelen othe government ymount in escrow (35193760 00 (Posh Pst eae

    You might also like