LAW ON BUSINESS AND REAL ESTATE TAXES

FEB 17, 2023

LIMITATION OF TAXING POWER: taxation is bound in its exercise by its own nature, essential
characteristics and purpose

A) Public Purpose of taxation - in the imposition of taxes, it is presumed to be for public purpose

Tests to determine if for public purpose: whether further appropriation of public revenue by the State is
provided and whether the proceeds will directly promote welfare of the community in equal measure

B) Non-delegability of taxing power – general rule, may not be delegated by Legislature, exceptions
a) if expressly authorized by Congress, b) non-delegation does not apply in matters of local
concern/ necessary implication – that power to create political corporations carries with it the
authority to tax
C) Territoriality or Situs of Taxation – place of taxation/ necessarily implied to persons, property
and business within its jurisdiction. Considerations: a) Protection, b) Double taxation (taxing the
same person for the same purpose by the same taxing authority), c) movables follow the
person, d) legislative power to fix situs
D) Exemption of Government from taxation
E) International Comity – reciprocity
F) Constitutional limitations (e.g. due process, equal protection, freedom of speech, non-
impairment of contracts, non-imprisonment of debt, etc)

CAPITAL GAINS AND LOSSES

Classification of assets: a) ordinary assets – used in the ordinary course of business, b) capital asset – not
ordinary course of business

NOTE: Ordinary assets can become Capital asset if it ceases to be used in trade or business

It is important to determine the correct classification due to preferential treatment given to gains or
losses from sales or exchanges of capital assets vs. Ordinary assets – SEPARATE FILING OF RETURNS

Requisites for recognition of capital gain or loss

a) Transaction must involve property classified as capital asset

b) Arise from sale or exchange

NOTE: where taxpayer is individual, distinction is made between capital asset held for 12 months or less
and those more than 12 months. If Corporation, holding period is of no significance – Old rate (5-10%, if
gain up to 100K and in excess of 100K) NOW: 15% for all since Jan 1, 2018, because of train law and
same for foreign Corp since Aprill 11, 2021 onwards

Rules on capital gains or losses of Individuals and corporation for Personal Property

a) 15% rate on the gain

b) Capital losses shall be deducted only to the extent of gains
c) Net capital loss in a taxable year in an amount not in excess of taxable income shall be deducted
from the net capital gains of the next succeeding year (NOT APPLICABLE FOR CORPORATION)
 d) Ordinary losses are deductible from capital gains, but net capital loss cannot be deducted from
ordinary gain or income

Limitation on capital losses – allowed only to the extent of gains from such sales or exchanges. If
dealings in capital assets during the year results in net capital loss, such loss cannot be deducted from
his ordinary income in as much as capital losses are allowable only to the extent of capital gains

Exception: Loss sustained by domestic bank or trust company from sale of bonds, debentures, notes or
certificates or other evidence of indebtedness issued by any corporation including those issued by the
government is considered as ordinary loss and deductible from ordinary income. (Treated as ordinary
course of business)

Reason: tax rates on individual income gradually rise as taxable income goes up. Capital assets are
usually held longer such that the gain realized, or loss incurred is reported in the loss incurred in the
year the asset was sold or exchanged in spite of the fact that the increase in value has developed over
the years.

In as much as the gain is taxed in one year, a higher rate of tax would necessarily be paid than if a
portion of such gain were taxed each year the asset was held. To compensate, only 50% of gain or losses
is recognized in the year it was incurred.

CAPITAL GAINS TAX ON REAL PROPERTY

Basis of tax – 6% based on gross selling price or the current fair market value of the property sold
whichever is higher

1) Where the consideration of the sale is cash and property, the basis is the amount realized which
consists of the money received plus the fair market value of the property, received by the seller.
Interests included in installment payments shall not form part of the amount realized but shall
be treated as ordinary income
2) In case of exchange, the tax is based on the fair market value.
3) Transfer of real property without any monetary consideration but merely to acknowledge and
confirm the title and ownership is not subject to capital gains tax nor creditable withholding tax
4) Sale of rights over real property not subject to capital gains because situs follow their owner
who may not be located in the Philippines. Only real property located in Philippines is subject to
capital gains tax

WHO ARE LIABLE?

a) Citizen resident or non-resident

b) Aliens and
c) Estates and trust

NATURE OF THE TAX

1) Individuals, estates and trusts, and Domestic corporation subject to capital gains final tax when
imposed
 2) The tax shall be in lieu of income tax imposed/ gain on sale of real property shall not be included
in the gross income of the individual or corporation for purposes of income tax except if sold to
government
3) Taxes imposed on capital gains presumed to have been realized from sale, exchange or transfer

EXEMPTIONS

Capital gains presumed to have been realized from principal residence by natural persons, the proceeds
are fully utilized in acquiring or constructing new principal residence within 18 calendar months shall be
exempt provided: a) historical cost or adjusted basis shall be carried over to new principal residence, b)
Commissioner have been duly notified, c) only availed of once every 10 years, and d) if there is no full
utilization of proceeds, portion of the gain presumed have been realized shall be subject to capital gains
tax.

Filing of capital gains tax return – within 30 days following each sale or disposition via BIR Form 1701-E
In the revenue district where the property is located

No transfer will be issued by the RDO having jurisdiction over the property if: a) capital gains tax has not
been fully paid.

In cases where the capital gains is not required to be paid – sworn declaration of the reason for
exemption shall be filed with the revenue officer and shall constitute valid application for issuance of
required certificate