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 is territorial and we cannot impose
tax obligation (filing or withholding) against non-
resident subjects of foreign sovereignty. Hence, all
items of income earned 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 relieves the taxpayer of the
obligation to file an income tax return.
● This 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 final
wherein Philippine residents paying them income,
passive or active, are obligated to withhold the
following final tax:
Non-resident person not engaged General final tax rate
in trade or business.
Non-resident alien not engage in 25%
trade or business
Non-resident foreign corporation 30%
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 association, 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
 A resident taxpayer received a P16,000 interest income
● Interest income or yield from local currency bank
from a bank. Determine the final tax withheld at source.
deposits or deposit substitutes are subject to final
Solution:
tax as follows:
Gross interest income (P16,000/80%) P 20,000
Recipient
Multiply by: final tax rates 20%
Source of interest income Individuals Corporations Final tax withheld P 4,000

Short term deposits 20% 20%

Illustration 3
Long-term deposits/investment Exempt* 20% Banko Negro incurs the following interest in its savings
certificates and time deposit accounts from the following depositors:
Depositors Amount
Resident individuals P 600 000
Note: *Exemption does not include NRA-NETB Resident and domestic corporations 800 000
● Short term deposits are those made for a period of Non-resident aliens not engaged in business 200 000
Non-resident corporations 100 000
less than five years.
Total accrued interest expense P 1 700 000
● Long-term deposits or investment certificates refer
Required: Compute the total final income tax to be
to certificate of time deposit or investment in the
withheld by Banko Negro.
form of savings, common or individual trust funds,
Solution:
deposit substitutes, investment management
Depositors Amount Rate Final Tax
accounts, and other investments with a maturity of Resident individuals P 600,000 x 20% P120,000
not less than five years, the form of which shall be Resident/domestic corporations 800,000 x 20% 160,000
prescribed by the BSP and issued by banks only (not NRA-NETB 200,000 x 25% 50,000
by non-bank financial intermediaries or finance NRFCs 100 000 x 30% 30,000
companies) to individuals in denominations of Total accrued interest expense P1 700 000 360,000
P10,000 and other denominations as may be
prescribed by the BSP. (RMC 18-2011) Tax on pre-termination of long-term deposits of
Illustration 1 individuals
A taxpayer earned the following interest income from ● If the deposit or investment placement of individual
various time deposits:
taxpayers is pre-terminated before 5 years, any
6-month time deposit P 8,000
previously untaxed or exempted interest income will
2-year time deposit 12,000
be subjected to the following final taxes upon pre-
5-Year time deposit 40.000
termination:
Total interest income P 60,000
Holding period Final tax

Required: Compute the final tax if the taxpayer is an Less than 3 years 20%
individual and if a corporation.
3 years to less than 4 years 12%
Solution:
Individual taxpayers 4 years to less than 5 years 5%
6-month time deposit P 8,000 x 20% P 1,600
2-year time deposit 12,000 x 20% 2,400 5 years or more 0%
5-year time deposit 40,000 x 0% 0
Final withholding tax P 4,000 Illustration 1
On January 1, 2016, Alice invested P1,000,000 in Baguio
Corporate taxpayers P 60,000 x 20% P 12.000 Bank's 5-year time deposit. The deposit pays 10% interest
● The exemption of individuals on interest income on annually. Alice pre-terminated the deposit on July 1,
2019.
long-term deposits is anchored on the fact that long-
The final tax on pre-termination will be computed as
term deposits are usually channeled to the financing
follows:
of long-term projects such as infrastructures,
2016 interest income (P1,000,000 x 10%) P 100,000
property developments, and other construction
2017 interest income (P1,000,000 x 10%) 100,000
projects which are deemed essential to the
2018 interest income (P1,000,000 x 10%) 100,000
development of the country.
2019 accrued interest income
● Note that exemption is limited only to individuals to (P1,000,000 x 10% x 6 months/12 months) 50,000
the exclusion of corporations. Total interest income P 350,000
Illustration 2 Final tax rate applicable to less than
 4-year pre-termination 12% 1. Resident taxpayers include resident citizens,
Final tax P 42.000 resident aliens, domestic corporations and resident
The net proceeds of the deposit and accrued interest to foreign corporations.
be released to the depositor upon pre-termination shall 2. Non-residents taxpayers include non-resident
be: citizens, non-resident aliens and non- foreign
Principal balance P 1,000,000 resident corporations
Accrued interest for 2019 50,000 3. It should be emphasized that NRA-NETBs and
Final tax to be withheld ( 42,000) NRFCs are also exempt
Net proceeds to be released to the depositor P 1,008,000
4. There is no long-term or short-term classification of
Savings or time deposits with cooperatives are not foreign c exempt current, deposits.
subject to final tax
● The reduced final tax rates on interest income on
● The final tax is limited to banks and shall not be
foreign currency deposit and the exemption of non-
applied with time and savings account deposit resident depositors are intended to encourage the
maintained by members with cooperatives and by deposit of foreign currencies in our banks which will
primary cooperatives with their federations. be used in the financing of our international trades.
(Dumaguete Cathedral Credit Cooperative vs. CIR,
● Our Philippine peso is not a globally accepted
G.R. 182722)
Other applications of the final tax on interest currency.
1. Deposit substitute ● Our foreign trade will be limited without adequate
2. Government securities foreign currency reserves in our banking sector
3. Money market placements
4. Trust Funds Joint accounts on forex deposits
5. Other investment evidenced by certificates
● If the bank account is jointly in the name of a
prescribed by the Bangko Sentral ng Pilipinas
(BSP) non-resident taxpayer, 50% of the interest shall
be exempt while the other 50% shall be subject
● Deposit substitute means an alternative form of to the 15% final tax.
obtaining funds from at persons at any one time Illustration
other than deposits through the Issuance, endorse ' Mr. Siman is an Overseas Filipino Worker. He deposits all
acceptance of debt Instruments for the borrowers his savings in a savings account under the foreign
own account, for the purpose of relending or currency deposit unit (FCDU) of a domestic bank. During
purchasing of receivables and other obligations, or the month, the savings deposit account earned $1,000
financing their own needs or the needs of their agent interest equivalent to P41,500.
or dealer. Scenario 1: Mr. Siman deposited his savings through the
● Government debt instruments and securities account of his resident wife.
The final tax shall be computed as follows:
including Treasury bonds, Treasury bills and treasury
Interest income P 41,500.00
notes shall be considered as deposit substitute
Final tax rate 15%
irrespective of number of lenders at origination if
Final tax P 6,225.00
such debt instruments and securities are to traded or
Scenario 2: Mr. Siman deposited his savings through a
exchanged in the secondary market.
joint account with his resident wife.
Foreign currency deposit with foreign currency
The final tax shall be computed as follows:
depositary banks Interest income P 41,500.00
● The interest income from foreign currency Portion taxable 50%
deposits under the foreign currency deposit Taxable interest income P 20,750.00
system or expanded foreign currency deposit Multiply by: final tax rate 15%
system by residents subject to a final tax of 15%. Final tax P 3,112.50
Scenario 3: Mr. Siman deposited his savings account
● The old law imposed a rate of 7.5% until 2017.
through his own account.
Taxpayers Individuals Corporations In this case, the interest income shall be exempt from
final tax.
Residents 15% 15%
Interest income subject to regular tax
Non-residents Exempt Exempt Interest income from the following sources is subject to
regular income tax, not to final tax:
Note:
 1. Lending activities, whether or not in the course of
business
2. Investments in 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 corporation
4. Stock dividends - paid in the stocks of the
corporation
5. Liquidating dividends - distribution of corporate
net asset
As a rule, dividends are incomes subject to tax. However,
the following are tax 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 (i.e. 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.
b. If it 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 as capitalization of earnings
● Stock split results in reduction in the par value of
stock and 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 Individuals Corporation
s
Domestic corporation 10% final tax Exempt
Foreign corporation 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 NRA-NETB is subject to a 25%
final tax.
2. A NRFC is not exempt but is subject to the 30% general
final tax rate. However, the imposable dividend tax shall
be 15% when the tax sparing rule applies. This will be
discussed later.
Illustrative 1
Calbayog 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.
 ● This is form of direct duplicate taxation. To eliminate
The final tax to be withheld by Calbayog Company shall be:
Shareholders Amount Rate Amount the impact of double taxation, inter-corporate
Individual shareholders P 1,200,000 x 10% P 120,000 dividends such as those declared by A Corp. to B,
Corporate shareholders 800,000 x 0% 0 Inc. is exempted from final tax.
Final tax P 120,000
● When the dividend finally falls to an individual
Illustrative 2
Aborian Company declared a total of P1,000,000 shareholder, the 10% final tax applies.
dividends in March 2014. An analysis of the recipient ● This exemption extends to dividends received by
shareholders is as follows: business partnerships from domestic corporations
Shareholders Amount since business partnerships are considered
Resident aliens and citizens P 500,000 corporations under the NIRC.
NRAs engaged in trade or business 100,000
● However, the exemption does not extend to
NRAs not engaged in trade/business 50,000
Non-resident corporations 100,000 dividends received by general professional
Total dividends P 750,000 partnership, exempt joint ventures and exempt co-
ownership because they are not considered
The total final tax withheld by Aborian Company shall be: corporations under the NIRC.
Shareholders Dividends Rate Final Tax ● On the other hand, the exemption of inter-corporate
Resident aliens and citizens P500 000 x 10% P50 000
NRAs engaged in trade or business 100 000 x 20% 20 000
dividend does not apply to the share of a
NRAs – NETBs 50 000 x 25% 12 500 corporation from the net income of a business
NRFCs 100 000 x 30% 30 000 partnership due to absence of express legal
Total P750 000 P112 500 exemption.
Historical dividend tax rates ● Exemption is restricted to dividend declaration only.
The imposable final tax rates vary depending on the
source of the declared:
Dividends from cooperatives
Source Final tax ● Under RA 9520, the distribution of dividends by an
Earnings before January 1, 1998 Exempt exempt cooperative to its members either
Earnings from 19911 6% representing interest on capital or as patronage
Earnings from 1999 8% refunds shall not be subject to tax.
Earnings from 2000 and thereafter 10% ENTITIES TAXABLE AS CORPORATIONS ARE SUBJECT
TO 10% FINAL TAX
Any distribution made to the shareholders or members of
a corporation shall deemed to have been made from the ● The 10% final withholding tax also applies to
most recently accumulated profits or surplus. and shall dividends or share in the net income of entities
constitute a part of the annual income of the distribute considered corporations under the NIRC and special
for the year which received. (Sec, 73(0, NIRC) laws, such as:
1. Real Estate Investment Trusts
Exempt Dividends 2. Business partnerships
1. Inter-corporate dividends 3. Taxable associations
2. Dividends from cooperatives 4. Taxable joint ventures, joint accounts or
Inter-corporate dividends consortia
5. 5. Taxable co-ownerships
● Inter-corporate dividends received by a domestic
Real Estate Investment Trust or REIT
corporation and resident foreign corporation from a
domestic corporation are exempted under the NIRC ● A REIT is a publicly listed corporation established
to minimize double taxation. principally for the purpose of owning income-
Illustration generating real estate assets.
B, Inc. owns 100% of A Corp. During the year. A Corp. The following recipients of REIT dividends are exempt
declared P100 000 dividend to B, Inc.B, in turn declared from the final tax:
the same dividends to its shareholders. The following a. Non-resident alien individuals or non-resident foreign
table illustrates the double taxation: corporations entitled to claim preferential tax rate
A Corp. B. Inc pursuant to applicable tax treaty.
Dividends declared P 100 000 90 000 b. Domestic corporations or resident foreign corporations
Less: 10% dividends tax 10 000 9 000 c. Overseas Filipino investors - exempt from REIT dividend
Net dividends P 90 000 81 000
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 or co-ownerships
● Under Sec. 73 of the NIRC, the net income of these
entities is deem 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 provisors 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 And and
Mar based on their agreed profit distribution scheme is as
follows:
Andy Mar
Salaries to industrial partner P 40 000 P 0
Interest to capitalist partner - 12 000
Bonus to industrial partner 25 000 -
Residual profit sharing 8 000 24 000
Profit sharing P 73 000 P 36 000
Assuming the salaries, interest and bonus are not
expense in the book the 10% final tax shall be:
Profit sharing P 73 000 P36 000
Multiply by: Final tax rate 10% 10%
Final tax P 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 30% final tax rate.
The Improperly Accumulated Earnings Tax
● Domestic corporations cannot avoid the dividends tax
by simply not declaring dividends.
● Corporations which accumulate earnings beyond the
reasonable needs of business will be imposed the
10% Improperly Accumulated Earnings Tax, penalty
tax.
ROYALTIES
● Passive royalty income received from sources within
the Philippine if; subject to the following final tax
rates:
Recipient
Source of passive royalties Individuals Corporations
Books, literary works, & 10% final tax 20% final tax'
musical compositions
Other sources 20% final tax 20% final tax"
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 e-books are subject to the 20% final tax.
2. Royalties on cinematographic films and similar works
paid to NRA-ETBs, NRA-NETBs, or 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 accrues from an undertaking where
the taxpayer has active involvement, it is an active
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 of 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 final
withholding tax, but if the e-marketer is not a resident in
the Philippines, the passive 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 context. 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 a; condition to receiving the price or
reward.
Taxable prizes
● For individual income taxpayers, taxable prizes are
subject to either final tax or regular tax depending
on the amount of the prize.
● There may be events or competitions where
corporations earn prizes.
● However, there is no final tax imposition on
corporate prizes under the NIRC. Hence, the same
must be subject to regular income tax.
Recipient
Amount of taxable prize Individuals Corporations
Prizes exceeding P10,000 20% final tax Regular tax
Prizes not exceeding Regular tax Regular tax
P10,000
● 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 Philippine Charity
Sweepstakes Office (PCSO) or lotto winnings
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.
Recipient
Types of winnings Individuals Corporations
PCSO/lotto winnings not Exempt Exempt
exceeding P10 000
PCSO/lotto winnings exceeding 20% final tax 20% final tax
P10 000
Other winnings, in general 20% final tax Regular tax
● Note: PCSO or lotto winnings of NRA-NETBs and
NRFCs, regardless of array are respectively subject to
25% or 30% final tax.
● The tax rules on PCSO or lotto 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.
Illustration 2
Roy's raffle ticket was selected as the second winning
ticket in the raffle draw of ZFT 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 of the winnings were:
- EZ2 - P 4,000
- 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 P2OM amount of the winnings.
TAX INFORMER'S REWARD
 Note:
● A cash reward may be given to any person
1. The final tax applies to all individuals,
instrumental in the discovery of violations of the
regardless of classification.
National Internal Revenue Code or discovery and
2. There is no similar final tax provision for
seizure of smuggled goods.
corporate recipients of "tax-free" interest;
● The tax informer's reward is subject to 10% final tax. hence, the regular income tax shall apply.
Requisites of Tax Informer's Reward: EXCEPTIONS TO THE GENERAL FINAL TAX ON NON-
1. Definite sworn information which is not yet in the RESIDENT PERSONS NOT ENGAGED IN TRADE OR
possession of the BIR BUSINESS IN THE PHILIPPINES
2. The information furnished lead to the discovery of NRA-NERTB NRFC
fraud upon internal revenue laws or provisions
General Final Tax Rate 25% 30%
thereof.
3. Enforcement results in recovery of revenues, Exceptions:
surcharges, and fees and/or conviction of the guilty
1. Capital gain on sale 15% Capital gains 15% Capital
party or imposition of any fine or penalty.
of domestic stocks tax gains tax
4. The informer must not be a:
directly to buyer
a. BIR official or employee
b. Other public official or employee 2. Rentals on 25% of rentals 25% of
c. relative within the 6th degree of consanguinity cinematographic rentals
of those officials or employee in a. and b. films and similar
Amount of Cash Reward - whichever is the lower of works

the following per case: 3. Rentals of vessels 25% of rentals 4.5% of

1. 10% of revenues, surcharge, or fees recovered and rentals
or fine or penalty imposed and collected or
2. P1,000,000 4. Rentals of aircrafts, 25% of rentals 25% of
machineries, and rentals
The amount of cash reward is subject to 10% final other equipments
withholding tax which shall be withheld by the
5. Interest income Exempt Exempt
government.
under the foreign
Illustration currency deposit
system
Ms. Kirsten provided information to the MR leading to
the recovery of P12,000,000 unpaid taxes. The cash 6. Interest on foreign N/A
reward shall be computed as follow: loans
10% cash reward (P12,000,000 x10%)
Cash reward limit 7. Dividend income 25% 15% if tax
sparing rule
Cash reward (whichever is lower) is applicable
Less: 10% final withholding tax
Net amount to be released to the tax informer 8. Tax on corporate 30% 30%
bonds
TAX-FREE CORPORATE COVENANT BONDS
● Interest income of non-resident aliens, citizens or Capital gains tax
residents of the Philippines on bonds, mortgages, ● As a rule, NRA-ETBs and NRFCs do not file income tax
deeds of trust, or other similar obligations of
returns.
domestic or resident foreign corporations with tax-
free or tax-reduction provision where the obligor ● Exceptionally, NRA-NETBs and NRFCs are required to
shoulders in whole or in part any tax on the interest file income tax returns to report their gain from
shall be subject to a final withholding tax of 30%. dealings in domestic stocks directly to buyers.
Bond investor
● Ownership of the stocks shall not be transferred to
Individuals Corporations the assignee without the required return and tax
clearance (Certificate Authorizing Registration or
Tax on interest income 30% final tax Regular income
CAR) from the BIR that the tax on the transfer has
on tax-free corporate tax
covenant bonds been paid.
Illustration: NRA-NETBs
In 2020, Mr. Tih Wong, an NRA-NETB, was hired by Raha
Humabon Company (RHC), a domestic manufacturer, to
install his invention in RHC's factory. RHC pays him royalty
and the installation fees. Mr. Wong also agreed to design
RHC's website which he designed and completed abroad.
During Mr. Wong's visit, he purchased shares of RHMC
and subsequently sold them directly to a buyer.
Royalties from invention P 300,000
Installation fees 1,000,000
Website development fees 500,000
Gain on sale of domestic stocks directly to a buyer 40,000
RHC shall withhold the following final taxes:
Royalties from invention P 300,000
Professional fees 1,000,000
Total gross income P 1,300,000
Multiply by: final tax on NRA-NETB 25%
Total final withholding tax P 325 000
Note:
1. The final tax applies on gross income, whether
active or passive. The same rule applies with NRFC
except that the final tax rate is 30%.
2. 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. Wong shall file a capital gains tax return for the
gain on the sale of domestic stocks.
The Tax Sparing Mile
NFRCs shall be subject to a 15% final tax dividend income
instead of the 30% general final tax if the country of
domicile of the NFRC credits against the tax due of such
NFRC taxes presumed to have been paid by such NFRC
from the Philippines equivalent 15% of the dividends.
In applying the tax sparing rule, the Supreme Court ruled
that NIRC does not require that the foreign law of non-
resident corporation must give deemed paid tax credit for
dividend equivalent to the percentage points waived by
the Philippines pointing that the NIRC merely require the
country of the NFRC to a deemed paid tax equivalent to
that waived by the Philippines. (CIR vs. Procter & Gamble
Philippines Manufacturing Corporation and the CTA (G.R.
66836)
Illustration: The Tax Sparing Rule with NRRCs
An NFRC 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
corporation shall be 15%, not 30%, if the country of
domicile of the NRFC also reduces its income tax upon
the P1,000,000 dividend by at least 15%, the dividend tax
percentage waived by the Philippines from the 30%
general final tax rate. If the country of the NFRC does not
reduce its tax on the dividend by at least 15%, the
Philippines shall Impose the 30% final tax.
OTHER FINAL INCOME TAXES
1. Fringe benefits of managerial or supervisory
employees
2. 2. Income payments of residents other than
depositary banks under the expanded foreign
currency deposit system (EFCDS) to offshore
banking units (OBUs) and expanded foreign
currency deposit units (EFCDUs)
3. Income payments to oil exploration service
contractors or sub-contractors
FRINGE BENEFITS TAX
● Fringe benefits include all remunerations under a
employee-employee relationship that do not form
part of o compensation income. The fringe benefits
of managerial and supervisory employees are
subject to a final fringe benefits tax.
INTEREST AND OTHER INCOME PAYMENTS TO
DEPOSITARY 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 offshore banking
units (OBUs) and expanded foreign currency deposit
units (FCDUs).
INCOME PAYMENTS TO SUB-CONTRACTORS OF
PETROLEUM SERVICE CONTRACTORS
● 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 in petroleum operations in the Philippines
under Presidential Decree No. 87.
● Note that the 8% final tax applies only to
subcontractors, whether individuals or
corporations, resident or non-resident.
● Petroleum service contractors are subject to 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 or 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 WITHHOLDING 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 10th 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
c. The authorized city or municipality treasurer
within the revenue district 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
Group E- Eleven (11) days following the end of
the month
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 Chapter4 apply for non-withholding
or non-remittance of final taxes.
ENTITIES EXEMPT FROM FINAL INCOME TAX
1. Foreign governments and foreign government-
owned and controlled corporations
2. International missions or organizations with tax
immunity
3. General professional partnership
4. Qualified employee trust fund
● The first two categories are exempt on grounds of
international comity. General professional
partnerships 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 regular income tax.
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 the
ordinary course of his trade or business.
c. Real property used in trade or business of
a character which is subject to 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 sale 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 and 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
investments
b. Intangible assets - such as
patent, copyrights, leasehold
rights, franchise rights.
ANALYSIS OF PROPERTIES HELD BY TAXPAYERS
INDIVIDUAL TAXPAYERS
 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` business and its usage by
the business.
Example:
1. A domestic stock is an ordinary asset to a dealer
in securities but is a capital asset to a non-
security dealer.
 A "dealer in securities" is a merchant of
stocks or securities with a registered
place 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 re" 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 acquired (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 normally acquired and sold by banks in
their normal course of business.
 However, ROPA in the form of domestic stocks
held by banks are capital assets.
 Under RR6-2008, "stocks classified as capital
assets" means all stocks and securities held by
taxpayers other than dealers in securities.
Asset Classification Rules
A. A property purchased for future use in business is
an ordinary asset even though this purpose is
later thwarted by circumstances beyond the
taxpayer's control.
B. Discontinuance of the active use of the property
does not change its character previously
established as a business property.
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 a taxpayer not engaged in the
real estate business are automatically converted
to capital assets upon showing of proof that the
same have not been used in 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 there is a failure to take
depreciation during the period of ownership.
F. Real properties used by an exempt corporation in
its exempt operations are considered capital
assets. Exempt corporations are not business.
G. The classification of property transferred by sale,
barter or exchange, inheritance, donation, or
declaration of property dividends shall depend on
whether or not the acquirer uses it in business.
H. For real properties subject of involuntary transfer
such as expropriation and foreclosure sale, the
involuntariness of such sale shall have no effect
on the classification of such real property.
I. Change in business from real 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 real estate business.
 Taxpayers habitually engaged in real estate
business include those registered with the HLURB
or HUDCC as dealer or developer or those with at
 least 6 taxable real estate sales transactions in
the preceding year.
Illustration 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, 2015, Mr. Alfonso implemented a
shift in his business operations resulting to the relocation
of 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, 2017 (i.e. 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.
Illustration 2 - Property acquired to be used in business
In June 1, 2014, Mr. Alfonso purchased a building to be
used as a branch sales office. The building remained idle
as of December 31, 2017 due to an ongoing civil war.
Case 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 business.
Illustration 3 - Disposal of property
Juan, a realty dealer, donated one of his house and lot
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 3 realty leasing business.
 The house and lot shall be considered capital
asset to the son because he will not use kin
business. The house and lot donated to the
daughter shall be considered ordinary asset to
the daughter because she will use it in business.
Illustration 4 - Exempt non-business operation
Bantay Bata 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
commercial lessees.
 Building A-1 is a capital asset since it is employed
in non-taxable operations. Building A-2 is an
ordinary asset since it is employed in taxable
operations. Nonprofit entities are taxable to
income tax when they engage in a profit-oriented
or commercial activity.
TYPES OF GAINS ON DEALINGS IN PROPERTIES
1) Ordinary gain - arises from the sale, exchange
and other disposition including pacto de retro
sales and other conditional sales of ordinary
assets.
2) Capital gain - arises from the sale, exchange, and
other disposition including pacto de retro sales
and other conditional sales of capital assets.
Taxation of Gains on Dealings in Properties
Type of gain Applicable taxation scheme
Ordinary gains Regular income tax
Capital gains General Rule: Regular income 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 Tax Rates
 Gain on the sale, exchange, and 15% capital
other Disposition of domestic gains tax
stocks directly to buyer
 Sale, exchange, and other 6% capital gains
disposition of real property in the tax
Philippines
 Gains from other capital assets Regular income
tax
Note: The TRAIN law changed the two-tiered tax
structure (5% and 10%) capital gains tax to a flat 15% tax
effective January 1, 2018.
CAPITAL GAIN ON THE SALE, EXCHANGE AND OTHER
DISPOSITION OF DOMESTIC STOCKS DIRECTLY TO
BUYER
Domestic Stocks
Domestic stocks are evidence of ownership or rights to
ownership in a domestic 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, Worthlessness of stocks
recreation, or amusement club polo or similar  The value of stocks becoming worthless is
clubs) considered a capital loss subject to the rules of
The capital gains tax covers not only sales of domestic regular income tax.
stocks for cash but also exchange of domestic stocks in Redemption of stocks by the issuing corporation
kind and other dispositions such as:  Under RR6-2008, any gain or loss on the
1) Foreclosure of property in settlement of debt. mandatory redemption of stocks by the issuing
2) Pacto de retro sales - sale with buy back corporation for the purpose of stock cancellation
agreement. shall be subject to the rules of regular income tax
3) Conditional sales - sales which will be perfected to be discussed under Dealings in Properties in
upon completion of certain specified conditions. Chapter 12.
4) Voluntary buy back of shares by the issuing  It should be noted, therefore, that the gain by the
corporation - redemption of shares which may be investor on redemption of redeemable preferred
re-issued and not intended for cancellation. shares shall be subject to regular income tax.
The term other disposition does not include: Note, however, that this does not include the
1) Issuance of stocks by a corporation voluntary buy-back of the shares by the issuing
2) Exchange of stocks for services corporation to be held in treasury which may
3) Redemption of shares in a mutual fund later on be re-issued.
4) Worthlessness of stocks  The gain or loss realized by the investor on
5) Redemption of stocks for cancellation by the voluntary buy-back of shares by the issuing
issuing corporation corporation is taxable under capital gains
6) Gratuitous transfer of stocks taxation.
Issue of stocks including treasury stocks Gratuitous transfer of stocks
 The issue of stocks to stockholders by a  The gratuitous transfer of stocks either by way of
corporation is a financing transaction rather than donation inter-vivos or donation mortis causa is
a sale transaction. subject to transfer tax, not to income tax.
 The excess of fair value received over the par MODES OF DISPOSING DOMESTIC STOCKS
value of shares issued is an additional capital to Shares of stocks may be sold, exchanged or disposed:
the corporation. a) Through the Philippine Stock Exchange (PSE) or
 Stocks acquired by the corporation from its b) Directly to buyer
shareholders, treasury shares, cannot be TAX ON SALE OF DOMESTIC STOCKS THROUGH THE PSE
considered assets or investments in accounting  The sale of domestic stocks classified as capital
sense. assets through the PSE is not subject to capital
 The excess of the consideration received in the gains tax. It is subject to a stock transaction tax of
reissuance of treasury stocks called treasury 60% of 1% of the selling price effective January 1,
share premium is an additional capital and is not 2018.
income.  The old law imposed a rate of 50% of 1% on the
 Under US tax rules, treasury shares can be selling price.
considered as investments if the corporation Illustration 1: Non-dealer in stocks
trades on its shares as it would in the shares of Mr. San Juan, not a dealer in stocks, sold the following
other corporations. As such, the treasury share stock investments through the Philippine Stock Exchange:
premium is viewed as a capital gain.
 Under the NIRC and RR6-2008, however, there is Date Stoc Selling Cost Gain
no express provision taxing treasury share k price (Loss)
premium. Hence, treasury share premium should Code
4/5/202 AC 4,000,00 3,700,00 300,000
not be subjected to capital gains tax.
0 0 0
Exchange of stocks for services
4/5/202 SMB 3,000,00 3.200.00 (200.000
 The exchange or issue of stocks for services 0 0 0 )
cannot be considered as exchange for property. Total 7,000,00 6,900,00 100,000
 No gain or loss can be imputed as it involves 0 0
payment of expense in kind.
Redemption of shares in a mutual fund The stock transaction tax shall be computed as follows:
 Gains from redemption of shares in a mutual Total selling prices of stocks through the PSE 7,000,000
fund are exempted by the NIRC from income Multiply by: Transaction tax rate 0.6%
Transaction tax 42 000
taxation.
Note:
 1) The stock transaction tax applies on the selling Total 3 000 000
price regardless of loss on the sale transaction. What is the tax basis of stocks?
2) The P 58,000 net capital gains, computed as  If acquired by purchase, tax basis is the cost of
P100,000 less P42,000 tax, is exempt from capital the property which will be determined by the
gains tax or to regular income tax. following methods in descending order of
priority:
Illustration 2: Dealer in stocks  Specific identification, if the shares can
Assume the same data in the previous illustration except be specifically identified.
that Mr. San Juan is a deal, in stocks.  Moving average method, if books of
 Mr. San Juan shall not be subject to the stock accounts are maintained by the seller
transaction tax since stocks are ordinary assets to where transaction of every particular
a security dealer. The P300000 ordinary gain and stock is recorded.
the P100,000 ordinary losses are subject to the  First-in, first out method, if the stocks
rules of regular income tax. cannot be specifically identified.
 If acquired by devise, bequest, or inheritance,
CAPITAL GAINS TAX ON SALE, EXCHANGE, AND the tax basis is the fair value at the time of death
OTHER DISPOSITIONS OF DOMESTIC STOCK DIRECTLY of the decedent.
TO BUYER  If acquired by gift - the tax basis is the lower of
Nature of the CGT: the fair market value at the time of gift and the
1) Universal tax basis in the hands of the donor or the last
 It applies to all taxpayers disposing stocks preceding owner by whom it was not acquired by
classified as capital assets regardless of gift.
classification of the taxpayer.  If acquired for inadequate consideration, the tax
 By situs, the gain on sale of domestic basis is the amount paid by the transferee for the
stocks is within. The tax applies even if property.
the the sale is executed outside the  If acquired under tax-free exchanges, the tax
Philippines. basis is the substituted basis of the stocks.
2) Annual tax It is imposed on the annual net gain
on the sale of domestic stocks directly to buyer. Illustration 1: Cost of acquisition
The net gain is determined as follows: Mrs. La Carlota purchased 1,000 shares of Bacolod
Selling price xxx,xx Corporation for P100,000 and paid the broker's
x commission of P1,000. The stocks were subject to a
Less: chattel mortgage of P10,000 which Mrs. La Carlota
Basis of stocks disposed xxx,xxx assumed.
Selling expenses xxx,xxx
The cost or basis of the acquired Bacolod stocks shall be:
Documentary stamp tax on xxx xxx xxx xxx
the sale* Cash paid 100,000
Net capital gain (loss) xxx.xxx Obligations assumed on the property purchased 10,000
Direct acquisition costs - broker's commission 1,000
Total cost (Tax basis) 111,000
The documentary stamp tax is deducted if paid by the
Illustration 2: Costing procedures
seller.
Mr. Alcantara had the following purchases and sales of
Selling price shall mean:
shares of the stocks of El Dorado Corporation:
 In case of cash sale, the total consideration
Date Transaction Shares Price Cost
received per deed of sale. 01/01 Purchase 10,000 10.00 100,000
 If total consideration is paid partly in money and 03/01 Purchase 5,000 11.03 55,150
partly in property, the sum of money and fair 03/23 Purchase 20,000 12.00 240,000
value of property received. 04/04 Sale 25,000 15.00
 In case of exchanges, the fair value of the The cost of the shares sold shall be determined as
property received. follows:
Illustration: Mr. Cool sold his stocks receiving in exchange A. Assuming Mr. Alcantara identified that the shares
a building with a tax basis of P2,000,000 but with a fair sold were those bought March 1 and March 23,
value of P2,500,000, goods worth P100,000, and the applicable method is specific identification
P400,000 cash. The selling price shall be computed as method:
follows: Under specific identification, the actual cost of the shares
Fair value of building received 2,500,000 sold and the remain, stocks shall be:
Fair value of goods received 100,000 March 1 purchase 5,000 shares 55,150
Cash 400,000
 March 23 purchase 20,000 shares 240,000 Quantity and cost of 10,000 12.00 120.000
ending
Cost of 25,000 shares sold 295,150 share
Note:
Cost of remaining 10,000 stocks 100,000  The 10,000 and 5,000 shares from January 1 and
March 1 respectively are deemed first sold. The
The gain shall be computed as: other 10,000 shares sold are deemed coming
Selling price (25,000 shares x P15/share) 375,000 from the last purchase on March 23.
Less: Cost of shares sold (295,150)  The cost of the 10,000 shares in the last purchase
Gain 79,850
is computed as 10,000/20,000 x P240,000 =
P120,000.
B. Assuming Mr. Alcantara cannot identify the
shares actually sold but retain detailed records of
Illustration 3: Acquisition by gratuitous title
purchase and sale in the stocks of El Dorado, the
In March 2013, Mrs. Lipa received by way of donation
applicable method is the moving average
shares of stocks of Taal Corporation from her father, Don
method.
Bosco. Don Bosco also acquired the same shares by
Under the moving average method, the cost of the shares
donation in June 1999 from his mother, Dolia Karena,
sold and the remaining shares shall be computed as
who bought the shares for P400,000 in April 1996. The
follows:
shares had a fair value of P700,000 in June 1999 and
Date Transaction Shares Unit Cost
cost P2,500,000 in March 2013.
01/01 Purchase 10,000 10.00 100,000
03/01 Purchase 5,000 11.03 55,150 Assuming the shares were acquired by Mrs. Lipa from her
03/23 Purchase 20,000 12.00 240,000 father by way of:
35,000 11.29 395,150 a. Donation
Less: Cost of shares 25,000 11.29 (252,250) Assuming the shares were donated by Don Bosco
sold
to Mrs. Lipa in March 2013 — the basis of the
Quantity and cost of 10,000 11.29 112,900
ending shares shares to Mrs. Lipa shall be whichever is lower of:
Note: o P400,000, the basis in the hand of the
 Average unit cost =P395,150/35,000 = P11.29 last preceding owner (Dona Karena) who
 Under the moving average method, the average did not acquire the property by gift, and
unit cost of the stocks is determined after every o P2,500,000, the fair value at the date of
purchase. donation, hence, P400,000.
 The cost of ending shares can be computed as b. Inheritance
10,000 x P11.29. 176 Assuming the shares were inherited by Mrs. Lipa
when Don Bosco died in March 2013, the basis of
C. Assuming Mr. Alcantara cannot identify the the shares to Mrs. Lipa shall be P2,500,000, the
stocks sold and does not maintain detailed fair value at the date of death of Don Bosco.
records of transactions in the shares of El Dorado, c. Purchase for an inadequate consideration
the applicable method is the First-in, first-out Assuming the shares were bought by Mrs. Lipa
method. The cost of the shares sold shall be from Don Bosco for only P1,200,000, the basis of
presumed coming from the cost of the first the shares to Mrs. Lipa shall be P1,200,000, the
25,000 shares bought: actual price paid for them.
The computation of adjusted basis on tax-free exchanges
will be discussed under tax-free exchanges in this
chapter.
Date Transaction Shares Unit Cost Stocks sold for inadequate consideration
cost  The excess of the fair value of the stocks over the
01/01 Purchase 10,000 10.00 100,000 selling price is a gift subject, donor's tax if so
03/01 Purchase 5,000 11.03 55,150 intended by the seller as a donation.
03/23 Purchase 20,000 12.00 240,000
Illustration:
35,000 395,150
Less: Cost of shares sold: A seller sold his investment in domestic stocks directly to
January 1 purchase 10,000 10.00 100,000 a friend for P500,000 shares have a tax basis of P300,000
March 1 purchase 5,000 11.03 55,150 excluding P10,000 expenses on the date of sale.
March 23 (25K-10K- 10,000 12.00 120,000 Case 1: Assume that the shares are readily marketable
5K share first sold with many willing buyer or its fair value of P650,000 but
25,000 (275,000) the seller opted to sell the same to his friend.
 Fair value 650,000 The transactional capital gains tax would be computed as
150,000 gratuity follows under each of the following conditions:
subject to transfer 1. Selling price P180,000
tax Less: Cost and expenses
Selling price 500,000 Purchase cost 100,000
200,000 gain Commission expense 2,000
subject to capital Documentary stamp tax expense 500 102,500
gains tax Capital gain 77,500
Less: Cost and expense 300,000
First P100,000 of gain 77,500
 The rules on the determination of fair value of Multiply by applicable rate: 5%
stocks for purposes of donor's tax be discussed in Capital gains tax du 3,875
the book, Business and Transfer Taxation, by the Note: Gains is below P100,000 hence, 5% applies.
same author. 2. Selling price 240,000
Case 2: Assume that the shares have a fair value of Less: Cost and expense 102,500
P650,000 but the seller is under immediate need of cash Capital gain 137,500
forcing him to sell at a big discount
First P100,000 gain at 5% 100,00 5,000
In this case, the P200,000 gain will still be subject to Excess gain at 10% 37,500 3,750
capital gains tax but the P150,000 discount shall not be Capital gains tax due 8,750
considered donation subject to donor's tax since there is Note: Gains exceeds P100,000 hence, 5% and 10%
no donative intent in this case. applies.

THE CAPITAL GAINS TAX RATE Under the TRAIN Law

Tax Rates The transactional capital gains tax shall be simply
NIRC (old law) TRAIN law computed as follows:
Net gain up to 5% 15% 1. Selling price = P180,000
P100,000.00 Capital gain 77,500
Excess net gain 10% Multiply by: capital gains tax rate 15%
above P100,000 Capital gains tax due 11,625
 The NIRC imposed the two-tiered 5%-10% capital
gains tax to all taxpayer regardless of 2. Selling price = P240,000
classification. The TRAIN law simplified the rate Capital gain 137,500
to a flat 15 % rate but retained the old two-tiered Multiply by: capital gains tax rate 15%
5%-10% tax structure for foreign corporation. Capital gains tax due 20,625
 Consequently, there are two CGT rates now: Deadline of the transactional capital gains tax return
a) Foreign corporation - 5% & 10% CGT  The capital gains tax return (BIR Form 1707) shall
b) Individuals and domestic corporations - be filed within 30 days after each sale, exchange,
15% CGT and other disposition of stocks.
Tax compliance under the old Law  If the tax is qualified for payment under the
There are two aspects of compliance under the previous installment method, the tax is due within 30 days
law: after each installment.
 Transactional capital gains tax ANNUALIZED CAPITAL GAINS TAX FOR FOREIGN
 Annual capital gains tax CORPORATIONS
 The CGT is recomputed on the annual net gains
then previous tax payments are treated as tax
credit thereto.
TRANSACTIONAL CAPITAL GAINS TAX  After such credit, a residual tax due is paid While
 The capital gains or losses are required to be excess transactional payment is claimed as tax
reported after each sale, exchange, and other refund or tax credit.
dispositions through the capital gains tax return, Illustration:
BIR Form 1707. Assume a foreign corporation had the following
Illustration: Computation of Capital Gains Tax disposition of several equity securities directly to a buyer
A taxpayer disposed its investments in domestic stocks for the fiscal year ending June 30, 2020:
costing P100,000 directly to a buyer. It paid on the sale Date Equity Sellin Cost & Capita Capita
P2,000 and P500, respectively, for broker's commission securitie g expens l gain l gain
s price e (loss) tax
and documentary stamp tax expense.
1/12 Preferre 210k 100k 110k 6k
Under the NIRC d stock
 3/18 Common 80k 90k (10k) Suggestion
stocks  The elimination of transactional CGT cannot be
5/14 Stock 160k 70k 90k 4,500 an option due to the required tax clearance
rights
which requires filing of returns prior to transfer of
6/17 Stock 80k 100k (20k)
options stock ownership.
Tota 170k 10,500  The best procedure is to offset losses first with
l subsequent gains during the year.
Under the NIRC, the final capital gains tax payable  Further tax payments shall be made only when
(refundable) shall be: subsequent gains eventually exceed the losses.
Annual net capital gain 170,000  The benefit of this treatment is that it removes
the necessity of filing Form 1707A.
Less: First P100,000 net 100,000 X 5% 5,000
 Form 1707A would be required only when there
gain
Excess net capital gain 70,000 X 10% 7,000 is a net refund for the year.
Annual capital gains tax 12,000  It also ensures payment of the exact CGT while
due avoiding the incidence of piling tax refunds when
Less: Total transactional 10,500 there are previously reported losses.
capital gains taxes paid Illustration 1:
Capital gains tax payable 1,500 Assume the following series of capital gains and losses
(refundable
during the year:
Deadline of annual capital gains tax return
Gains (losses) Capital gains tax
The annual capital gains tax return, BIR Form 1707-A,
Transaction 1 200,000 30,000
shall be filed on or before the 15th day of the fourth Transaction 2 (40,000)
month following the close of the taxable year of the Transaction 3 30,000
taxpayer. Transaction 4 60,000 7,500
ANAVAL CAPITAL GAINS TAX FOR OTHER TAXPAYERS Yearly total 250,000 37,500
 The change to a 15% flat rate would mean 15% Note:
CGT when the transaction resulted to a gain but  Transaction 3 should not be required to pay CGT
would also instantly mean 15% CGT refundable since pay CGT since -P40,000 loss + P30,000 is still
when the transaction resulted to a loss. a net loss.
Illustration:  Transaction 4 should be required to pay CGT
Assume an individual taxpayer had the following since (-40,000 + P30,000+P60,000) is already a
transactions during the year: net gain of P50,000. The taxpayer shall pay
Date Equity Sellin Cost & Capita Capita P50,000 x 15% or P 7,500.
securitie g expens l gain l gain  This procedure will not cause unnecessary
s price e (loss) tax overpayment of tax which will be eventually
1/12 Preferre 210k 100k 110k 16,50 refunded
d stock 0
Illustration 2:
3/18 Common 80k 90k (10k)
Assume the following series of capital gains and losses
stock
5/14 Stock 160k 70k 90k 13,50 during the year:
rights 0 Gains (losses) Capital gains tax
6/17 Stock 80k 100k (20k) Transaction 1 200,000 30,000
options Transaction 2 (240,000)
Tota 170k 30k Transaction 3 30,000
l Transaction 4 60,000
Under the TRAIN law, the final capital gains tax payable Yearly total 20,000 30,000
(refundable) would be:
Annual net capital gain 170,000 Note:
Multiply by: CGT tax rate 15% 25,500  Transaction 3 should not be required to pay CGT
Less: Total transactional capital 30,000 since P240,000 + P60,000 is still a net loss.
gains taxes paid  With the year ending at a P20,000 annual gain.
Capital gains tax payable (4,500) The tax should be 15% x P20,000, thus a refund
(refundable)
would be necessary making Form 1707A a
The problem
necessity. The annual tax refund would be
 The incidence of a transactional loss under a flat
P20,000x 15% - P 30,000 = P 27,000.
tax rate would instantly mean tax refund if
INSTALLMENT PAYMENT OF THE CAPITAL GAINS TAX
transactions are separately accounted for similar
When domestic stock is sold in installments, the capital
to the NIRC procedure.
gains tax may also be paid in installments if the:
 a) Selling price exceeds P1,000; and
b) Initial payment does not exceed 25% of the
selling price.
Illustrative Case: Basic
On November 1, 2019, 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:
Selling price 1,000,000
Less: Cost of shares sold 700,000
Net capital gain 300,000
Multiply by: 15%
Net capital gains tax due 45,000
Illustration 1: No mortgage on the shares sold
Initial payment:
First installment (November 30) 100,000
Second installment (December 31) 100,000
Total initial payment 200,000
Ratio of initial payment 20%
(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
collectible from the contract.
 It is normally the selling price in the absence of
any indebtedness shares sold.
 Under the installment method, the capital gains
tax payable every installment shall be computed
as: Collection / Contract price x Capital gains tax
 The capital gains tax payable for every
installment shall be P 4,500 computed as
P100,000/P1,000,000 x P45,000.
 Note that the selling price is used to measure the
initial payment ratio, but the contract price is
used in determining the capital gains tax in
installment.
Illustration 2: With mortgage on stocks but not in excess
of cost
Assume the stocks were previously mortgaged for
P600,000 which the buyer assumed. The P400,000
balance is payable in monthly installments of P100,000
starting November 30, 2019.
The gain and the capital gains tax shall be the same as
P300,000 and P45,000 respectively. The contract price or
total sum collectible on the sale shall be:
Selling price 1,000,000
Less: Mortgage assumed 600,000
Contract price 400,000
 The capital gains tax payable every installment
shall be P 11,250 computed as
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 buyer assumed. The P250,000
balance is payable in monthly installments of P50,000
starting November 30, 2019.
The gain and the capital gains tax shall be the same as
P300,000 and P45,000 respectively. The excess of
mortgage over the basis of the stocks is an indirect down
Payment, a form of constructive receipt.
The contract price shall be computed as follows:
Selling price 1,000,000
Less: Mortgage assumed 750,000
Cash collectible 250,000
Constructive receipt 50,000
(P750K mortgage - P700K basis)
Contract price 300,000
The initial payment shall be computed as follows:
Indirect downpayment (constructive 50,000
receipt)
First installment (November 30) 50,000
Second installment (December 31) 50,000
Total initial payment 150,000
Ratio of initial payment 15%
(P150,000/P1,000,000)
 The taxpayer is qualified to pay capital gains tax
in installments.
The capital gains tax shall be as follows:
For the sale P50,000/P300,000 x P45,000 7,500
For every installment: P50,000/P300,000 x 7,500
P45,000
SPECIAL TAX RULES IN CAPITAL GAIN OR LOSS
MEASUREMENT
a) Wash sales of stocks
b) Tax-free exchanges
i. Exchange of stocks pursuant to a merger
or consolidation.
ii. Transfer of stocks resulting in corporate
control.
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
substantially identical securities.
 Capital losses on wash sales by non-dealers in
securities are not deductible against capital 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 or a feigned loss.
 Securities for purposes of the 61-day rule include
stocks and bonds.
 The wash sales rule has significance on the
recognition of reportable capital losses on
domestic stocks sold directly to buyer.
  For the purpose of this rule, substantially March 1, 2020 shall be:
identical means that stocks or bonds of the same Purchase price 32,800
class with the same features. Add: Deferred loss on March 18 wash sales 1,600
 A common stock is not substantially identical to Basis of 8,000 replacement shares 34,400
What if by specific identification the 10,000 shares
preferred stock
bought on March 1, 2020 were the same shares sold at a
 Participating and non-participating preferred
loss on March 18, 2020?
stocks are substantially identical.
 Note that wash sales involve the sale of shares at
Illustration 1: Acquisition of identical shares before a
a loss, but the same shares were effectively re-
losing sale
acquired before or after the sale by covering
In 2020, Mr. Toledo had the following transactions in the
acquisition. In this case, the P2,000 capital loss is
shares of Talisay, domestic corporation:
not a wash sales loss since there is no acquisition
Date Transaction Shares Price Cost
1/05 Purchase 10,000 4.00 40,000 of replacement shares within the 61-day period.
3/01 Purchase 10,000 4.10 41,000 Hence, the capital loss is deductible against
3/18 Sale 10,000 3.80 capital gains.
 Mr. Toledo uses the FIFO method in costing Illustration 2: Acquisition of identical shares after a
security transactions. losing sale
 Under the FIFO method, the 10,000 shares sold in In 2020, Mr. Balangkayan had the following transactions
March 18 came from the first 10,000 shares in the stocks of Sta. Rita Corporation, a domestic
bought on January 5. The capital gain or loss on corporation:
March 18, 2020 shall be computed as follows: Date Transaction Shares Price Cost
Selling price 38,000 1/4 Purchase 10,000 20.00 200,000
Less: Cost of shares sold (from January (40,000) 2/28 Sale 10,000 18.00 180,000
purchase) 3/4 Purchase 12,000 16.00 192,000
Capital loss 2,000
 Pursuant to the wash sales rule, the P2,000 The capital gains or capital loss shall be computed as
capital loss on the sale shall not be deductible in follows:
the computation of the annual net capital gains in Selling price 180,000
2020 since the shares sold were fully replaced Less: Cost of shares sold (200,000)
within the 61-day period. Capital loss (20,000)
 There is full replacement or full cover-up when  Since there is a full replacement cover (i.e. 12,000
the quantity of the shares acquired in the 61-day shares) within the 61-day per (i.e., March 4,
period is at least equal to the quantity of the 2020), the capital loss shall be deferred and
shares sold. In this case, the loss shall be deferred included as part of the cost of the replacement
and added to the tax basis of the replacement shares.
shares because the loss is a fake loss since the The basis of the replacement shares purchased on March
taxpayer bought back his original position putting 4 shall be:
him in the same position as before (i.e. still Purchase price 192,000
Add: Deferred loss on wash sales 20,000
owning 10,000 shares).
Basis of 12,000 replacement 212,000
The adjusted basis of the replacement shares acquired on shares
March 1, 2020 shall be: What if replacement shares are less than the shares
Purchase price 41,000 sold?
Add: Deferred loss on March 18 wash sales 2,000 Assume instead that only 7,000 shares were bought on
Basis of replace 43,000
March 4 for P110,000. In this case, the capital loss shall
What if the replacement shares are less than the shares
be split as follows:
sold?
Deferred loss (7,000/10000 x P20,000) 14,000
Assume that the shares bought on March 1, 2020 were
Deductible loss (3,000/10,000 x P20,000) 6,000
only 8,000 shares for P32,800. Capital loss 20,000
Only the portion covered with replacement shares shall
be disallowed. The portion without replacement cover is
a deductible realized loss. Thus, the capital loss shall be
split as follows: The adjusted basis of the replacement shares acquired on
Deferred loss (8,000 shares/10,000 shares x P2,000) 1,600March 4, 2020:
Deductible loss to (2,000 shares/10,000 shares x 400 Purchase price 110,000
P2,000) Add: Deferred loss on wash sales 14,000
Capital loss 2,000 Basis of 7,000 replacement shares 124,000
The adjusted basis of the replacement shares acquired on Illustration 3: Acquisition of identical shares before and
after a losing sale could enable them to manipulate their reportable
In 2020, Mr. Inga had the following transactions in the taxable net gain.
shares of Naga Corporation, a domestic corporation:  Hence, the prohibition against the claim of wash
Date Transaction Shares Price/share Value sales is not an absolute rule but is a form of
1/4 Purchase 15,000 20.00 300,000 deferral of loss intended to reflect the economic
2/15 Purchase 5,000 21.00 105,000 substance of is transaction.
2/28 Sale 12,000 18.00 216,000
 The wash sales rule is not applicable to dealers in
3/4 Purchase 3,000 16.00 48,000
4/1 Purchase 7,000 14.00 98,000 securities as it is a normal way of business for
 The shares sold on February 28 were the shares them to buy and sell stocks and as a result realize
bought on January 4, 2020. The capital loss is gains or incur losses within short duration of
P24,000 computed as (P18/share selling price - time.
P20/share cost) x 12,000 shares sold. TAX FREE EXCHANGES
 There were 12,000 shares sold at a loss while Merger or Consolidation
there were a total of 8,000 replacement shares in  Stockholders of a domestic corporation may
the 61-day period: 5,000 shares acquired on exchange their stocks for the stocks of another
February 15 (i.e., before the sale) and 3,000 corporation pursuant to a plan of merger or
shares acquired on March 4 (i.e., after the sale). consolidation.
Since this is a partial replacement, the capital loss shall be  The gains or losses on share-for-share swaps
split as follows: pursuant to a plan of merger or consolidation will
Deferred loss (8,000 shares/12,000 shares x 16,000 not be recognized for taxation purposes.
P24K)  In a share-swap pursuant to a plan of merger or
Deductible loss (4,000 shares/12,000 shares 8,000 consolidation, the shareholders of the acquired
x P24K) corporation will be integrated in the acquiring
Capital loss 24,000
corporation.
 The shares of the acquired corporations will be
The adjusted basis of the replacement shares acquired on
called in for replacement with the shares of the
February 15, 2020 shall be:
acquiring corporation.
Purchase price 105,000
Add: Deferred loss (5,000 shares/8,000 10,000  In effect, the transaction merely involves a
shares x P16K) replacement of shares of stocks of the
Basis of the 5,000 replacement shares on 115,00 shareholders of the absorbed corporation with
February 15 them being simply integrated as shareholders of
the acquiring corporation.
The adjusted basis of the replacement shares acquired on Illustration:
March 4, 2020 shall be: Mr. Santiago was required to surrender his Carranglan
Purchase price 48,000 Inc. shares in exchange for Baler shares with total fair
Add: Deferred loss (3,000 shares/8,000 6,000 value of P1,200,000 pursuant to the merger of Carranglan
shares x P16K)
Inc. and Baler Inc. The Carranglan shares were previously
Basis of 3,000 replacement shares on March 54,000
4 purchased by Mr. Santiago for P1,000,000.
Illustration 4: No replacement shares in the 61-day Fair value of Baler shares received (selling 1,200,000
period price)
Less: Cost of Carranglan shares exchanged (1,000,000)
On January 18, 2020, Mr. Mulanay bought 10,000 shares
Indicated gain 200,000
of Gen. Luna Corporation for P100,000. On February 6,  The P 200,000 indicated gain is not taxable as the
2020, he sold the same shares for P95,000. On March 28, exchange involves stocks for stocks. Similarly, an
2020, he bought 5,000 shares for P55,000. indicated loss shall not likewise he recognized.
Note that the March 28 acquisition is beyond the 61-day The P 1,000,000 tax basis of the Carranglan
period. Since there is no acquisition of replacement shares given shall be carried over as the
shares within the 61-day period, the P5,000 is not a wash substituted basis of the Baler shares received.
sales loss but a deductible realized loss against capital
gain from the sale of domestic stocks directly to a buyer. Initial Acquisition of control
The basis of the shares bought on March 28, 2020 shall
 No gain or loss shall also be recognized if
be P55,000
property is transferred to a corporation by a
Rationale of the wash sales rule
person in exchange for the stocks or units of
 The wash sales rule is intended to prevent participation in such a corporation of which as a
taxpayers from feigning temporary losses which result of such exchange, said person, alone or
 together with others not exceeding four, gains
control of said corporation.
 "Control" shall mean ownership of stocks in a
corporation which amount to at least 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 gains when
stocks are exchanged in the acquisition of
corporate control.
Illustration:
Mr. Gapan exchanged his shares in Cabanatuan
Corporation costing P2,000,000 in exchange for the
shares of Dingalan Corporation with a fair value of
P1,800,000.
The transfer resulted in Mr. Gapan acquiring 51%
ownership (corporate control) in Dingalan Corporation.
Total consideration received or selling 1,800,000
price
Less: Cost of Cabanatuan stocks (2,000,000)
exchanged
Indicated loss (200,000)
 The P200,000 indicated loss shall not be
recognized. Any indicated gain shall not also be
recognized.
 The law views initial acquisition of corporate
control by not more than 5 persons as an
investing transaction rather than an income
generating transaction.
 The tax basis of the Dingalan shares received shall
be P2,000,000, the same as the tax basis of the
Gapan shares exchanged.
Exchange not solely for stocks
 In tax-free exchanges, if stocks are exchanged not
solely for stocks but with other consideration
such as cash and other properties, the gains but
not losses are recognized up to the extent of cash
and other properties received.
Illustration 1: Cash and property received exceed
indicated gain
Assume that pursuant to the plan of merger between
Carranglan Inc. and Baler Inc., Mr. Santiago was required
to surrender his Carranglan Inc. shares costing P1,000,000
in exchange for Baler shares with total fair value of
P900,000 plus P100,000 cash and P200,000 worth of
goods.
Total consideration received or selling 1,200,000
price(P900,000 + P100,000 + P200,000)
Less: Cost of stocks exchanged (1,000,000)
Indicated gain 200,000
 The amount of cash and other properties
received is considered realization „, the extent of
the indicated gain. The excess amount of cash
and other -1 received is a return of capital.
Hence,
Realized return on capital 200,000
(to the extent of the indicated gain)
Return of capital (in excess of the indicated 100,000
gain)
Total cash and other properties received 300,000
The P200,000 gain shall be reported as a capital gain.
Baler shares received in the exchange shall be:
Basis of the Carranglan shares exchanged 1,000,000
Add: Basis of other properties exchanged 0
Less: Return of capital (100,000)
Basis of the Baler shares received 900,000
Regulatory Formula on Tax Substituted Basis
 The regulations prescribe the following formula
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 Baler shares received may be
computed following the foregoing regulatory formula as
follows:
Tax basis of Carranglan shares exchanged 1,000,000
Add: Gain recognized on the transfer 200,000
Less: Cash or other properties received (300,000)
Tax basis of the Baler shares received 900,000
Illustration 2: Indicated gain exceeds cash and other
properties received.
Assume that pursuant to the plan of merger between
Carranglan Inc. and Baler to Mr. Santiago was required to
surrender his Carranglan, Inc. shares costing P1,000,000
in exchange for Baler shares with total fair value of
P1,050,000 plus P150,000 cash
Total consideration received or selling price 1,200,000
(P1,050,000+P150,000)
Less: Cost of stocks exchanged (1,000,000)
Indicated gain 200,000
The indicated gain is recognized to the extent of the cash
and/or other property received. The indicated gain is
considered as follows:
Realized gain (up to the value of cash and
other properties received) P 150,000
Unrealized return on capital (in excess of the
the value of cash and other properties received)
Total indicated gain
The substituted tax basis of the Baler shares received
shall be:
Basis of the Carranglan shares exchanged 1,000,000
Add: Basis of other properties exchanged 0
Less: Return of capital (0)
Basis of the Baler shares received 1,000,000
Alternatively,
Tax basis of Carranglan shares exchanged 1,000,000
Add: Gain recognized on the transfer 150,000
Less: Cash or other properties received (150,000)
Tax basis of the Baler shares received 1,000,000
Minimum public float requirement of publicly listed
corporations
Listed corporations are mandatorily required to maintain
a minimum public ownership under Philippine Stock
Exchange (PSE) regulations.
The minimum public ownership is the higher of:
a) The 10% of issued and outstanding shares and
b) The minimum public ownership required by the
Securities and Exchange Commission or the Philippine
Stock Exchange.
 Non-compliance to the minimum public
ownership shall result in the de-listing of the
stocks of the corporation in the PSE.
 Under RR16-2012, the sale of listed stocks which
fall below their minimum public ownership
requirement will be subject to the 5%-10% capital
gains tax and not to the Y2 of 1% stock
transaction tax.
Comprehensive Illustrations
Illustration 1: Sale by a security dealer
Benjie, a security dealer, sold various domestic stocks for
P1,200,000, net of selling expenses. These stocks were
acquired at a cost of P800,000.
 The capital gains tax is nil because domestic
stocks are ordinary assets to a security dealer.
The P400,000 net gain is an ordinary gain subject
to regular income tax.
Illustration 2: Sale of domestic bonds
Carlo, not a security dealer, sold domestic bonds directly
to a buyer at a net gain of P200,000. Carlo is not a dealer
of domestic bonds.
 The capital gains tax is nil. The gain on the sale of
domestic bonds is a capital gains subject to
regular income tax. Note that the bond is debt
instrument rather than on equity instruments like
stocks.
Illustration 3: Exchange of stocks for other securities
Debbie, an NRA_NETB, exchanged her domestic stocks
costing P300,000 for 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-share swap
pursuant to a plan of merger or consolidation.
The same rule applies for share-for-share swap
not pursuant to a plan of merger or
consolidation. Non-resident person not engaged
in business in the Philippines such as NRANETBs
and NFRCs are subject to the capital gains tax and
are required to file the capital gains tax return.
Illustration 4: Issuance of stocks
HKG Inc., a domestic corporation, issued 10,000 P10- par
ordinary shares in exchange for a vacant lot owned by
KIT, Inc. The vacant lot has a fair value of
P500,000.Compute the capital gains tax.
 The transaction involves issue by HKG Inc. of its
own shares of stocks. These stocks do not
represent investment in the shares of another
corporation. The share premium P300,000,
[P500,000 - (10,000 x P10)], is part of HKG's
corporate capital, not an income. Hence, 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, 2016, Zuma
declared a dividend of P2/share with record date of
March 20, 2016 and payment date of April 20, 2016. On
April 2, 2016, Ms. Pearl sold all 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
dividend. The seller receives the o payment,
stocks are said to be selling ex-dividends. The
seller receives the dividends. The price of the
stocks those dates includes only the selling price
of the stocks.
Thus, the capital gain shall be no computed as follows:
Total selling price (P15 x 10,000) 150,000
Less: Cost of stocks and expenses (P10 (105,000)
x10,000 + P5,000)
Capital gains 45,000
 In this case, the dividends to be received by Ms.
Pearl shall be subject to the 10% final tax to be
withheld by Zuma Corporation.
Illustration 6: Sale of stocks dividend-on
Ms. Pearl owns 10,000 P10- par value shares of Zuma a
domestic corporation. On February 14, 2016, Zuma
declared a dividend of P2/share with record date of
March 20, 2016 and payment date of April 20, 2016. On
February 18, 2016, Ms. Pearl sold all shares for P15 per
share directly to Mr. Lover. The selling expenses were P
4,000.
 Between the date of declaration and the date of
record, stocks are said to be selling dividend-on;
that is, the buyer shall receive the dividends.
 The selling price of stock on these dates includes
both the price of the stocks and the dividends on
the stocks.
Thus, the capital gains of Ms. Pearl on the disposition of
the stocks dividend-on shall be determined as follows:
Total selling price (P15 x 10,000) 150,000
Less: Cost and expenses (P10 x10,000 + (104,000)
P4,000)
Net dividends receivable (P2 x 10,000 x (18,000)
90%)
Capital gains 28,000
  It should be noted that the dividends to be
received by Pearl is net of the 10% final
withholding tax on dividends of individual
taxpayers.
TAX ISSUE: SALE OF STOCKS DIVIDEND-ON TO A
CORPORATE BUYER
 Dividends may escape taxation when stocks are
sold dividend-on by individual taxpayers to a
corporate buyer between the date of declaration
and the date of record.
 At the date of record, the corporate buyer will be
listed as shareholder in the corporate books and
will not be subjected to the 10% dividend tax.
Assuming the same data under Illustration 6, the capital
gain shall be computed as follows:
Total selling price (P15 x 10,000) 150,000
Less: Costs and expenses (P10 x10,000+ 104,000
P4,000)
Dividends receivable (P2 x 10,000 x 100%) 20,000
Capital gains 26,000
 Note that the individual seller effectively realizes
the entire dividend income under the cloak of the
dividend exemption of the corporate buyer who
will be registered as shareholder at the date of
record.
How should the dividend on the stocks sold be taxed?
 Under the NIRC, all income not expressly
exempted or not subjected to final tax or capital
gains tax must be included in gross income
subject to regular income tax.
 The individual seller shall report the P20,000
domestic dividend in gross income subject to
regular income tax.
Persons not liable to the 15% capital gains tax
a) Dealers in securities
b) Investors in shares of stocks in a mutual fund
company in connection with gains realized upon
redemption of stocks in the mutual company.
c) 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:
i. Foreign governments and foreign
government owned and controlled
corporations.
ii. 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 is higher.
 Under the NIRC, the fair value of real property is
whichever is higher of the:
a. Zonal value, which is the value
prescribed by the Commissioner of
Internal Revenue for real properties for
purposes of enforcement of internal
revenue laws, and
b. Fair market value, as shown in the
schedule of market values of the
Provincial and City Assessors.
 Normally, only land has zonal value but both land
and improvements have fair market value in the
Provincial or Assessor's Office.
 For lands, the capital gains tax is 6% of whichever
is the highest of the selling price (bid price in the
case of foreclosure sales), zonal value, or
Provincial or City Assessor's fair value.
 Note that independent appraisal valuation, the
fair value commonly used in financial reporting, is
not used in the computation of the capital gains
tax.
Illustration 1- Land only
Terry sold a vacant agricultural land for P5,000 , 000. The
land was previously purchased by Terry at P4,000,000
and had an appraisal value of P8,000,000 and zonal value
of P7,000,000. The property had a fair value of
P6,000,000 in Provincial Assessor's Office and an assessed
value of P2,400,000.
 The highest of the selling price (RN), zonal value
(P7M) and Assessor's fair value (P6M) is the
P7,000000 zonal value. Hence, the capital gains
tax would be computed P7,000,000 x 6%; hence,
P420,000.
Illustration 2 - Land and improvement
Anjo sold his residential house and lot for P5,000,000.
Anjo purchased the lot when it 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:
BIR Valuation Assessor's valuation
Zonal Fair value Assessed
value value
Lot
House
Selling price
Zonal Assessor's Fair value
value fair value
Land
House (improvement)
Total fair value (HIGHER)
Multiply by: CGT rate
Capital gains tax
Illustration 3:
A real 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 at the date of sale.
 The capital gains tax is nil. The condo unit is an
ordinary asset to a realty dealer, lessor or
 developer. The actual gain of P300,000
(P1,500,000 - P1,200,000) is an ordinary gain
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
authorized representative has certified that such
transfer has been reported, and the capital gains
or creditable withholding tax, if any, has been
paid. (Sec. 58(E), 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 loss.
 Gain is always presumed to exist.
 The basis of taxation is the selling price or
fair value whichever is higher, not the
actual gain.
b) Non-consideration to the involuntariness of the
sale
 The capital gains tax applies even if the
sale is involuntary or is forced
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 the
seller and remit the same to the
government.
SCOPE AND APPLICABILITY OF THE 6% CAPITAL
GAINS TAX
Location of the Taxpayers
property Individuals Corporations
Within the Philippines All Domestic
individual corporation only
Outside the Philippine Not Not Applicable
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 on
foreign corporations.
 However, in cases where foreign corporations
realize 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 tax since withholding of
the capital tax cannot be imposed abroad due to
territorial 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 is taxable on global income such as
resident citizens and domestic corporations.
 For all other taxpayers, the capital gain realized
abroad is exempt.
EXCEPTIONS TO THE 6% CAPITAL GAINS TAX
 Alternative taxation rule
 Exemption rules
o Exemption under the NIRC
o Exemption under special laws
ALTERNATIVE TAXATION
An individual seller of real property capital assets has the
option to be taxed at either:
o 6% capital gains tax or
o The regular income tax
It should be noted that this is permissible
 The seller is an only when: individual taxpayer,
and
 The buyer is the government, its instrumentalities
or
 agencies including government-owned and
controlled corporations
Illustration:
Gretchen sold to the government a vacant lot for
P800,000. The lot was purchased for P200,000 in 1980
and had an Assessor's fair value of P400,000 and zonal
value of P500,000 at the date of sale.
 Gretchen may opt to be subject to tax at 6% of
P800,000 or report the P600,000 (13800,000
P2001000) actual capital gain in her annual
regular income tax return.
Basis of Alternative Taxation
 The alternative taxation is intended to ease the
burden of government expropriation where
taxpayers may incur losses on the forced
expropriation sale and are still required to pay
tax.
Illustration:
An individual taxpayer bought a house and lot near a
highway at a cost of P2,000,000. After several years, the
government invoked its power of eminent domain to buy
the property for the expansion of the highway.
Assuming the property has a fair value of P1,800,000 for
purposes of the expropriation, the taxpayer would be
forced to incur P200,000 loss (P1.8M-P2.0M) and still pay
the 6% capital gains tax. This would be too oppressive to
the taxpayer. With the alternative regular income tax
option, the taxpayer would be given the benefit of
deduction of the P200,000 capital loss without being
imposed the 6% 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 the 6% capital gains tax.
Principal residence
 Principal residence means the house 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:
 The seller must be a citizen or resident alien.
 The sale involves the principal residence of the
seller taxpayer.
 The proceeds of the sale is utilized in acquiring a
new principal residence.
 The BIR is duly notified by the taxpayer of his
intention to avail of the tax exemption within 30
days of the sale through a prescribed return (BIR
Form 1706) and "Sworn Declaration of Intent."
 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.
 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 t, acquisition of the new
principal residence to be exempt. (BIR Ruling No.
038-2015)
Illustration 1:
Helen sold her principal residence with a fair market
value of P6,000,000 for P5,000,000. Helen purchased the
residence for P3,000,000 several years ago. The
imposable capital gains tax is 6% of P6,000,000 or
P360,000.
 Helen should indicate her intention to apply for
exemption in the capital gains tax return to be
filed and submit a Sworn Declaration of Intent
She will be required to deposit toP360,000 capital
gains tax in an escrow account in favor of the
government
Full utilization of proceeds is exempt
Assuming Helen 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.
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 utilization
 If the proceeds is fully utilized, the tax basis of the
new residence shall be the basis of the old
residence plus additional cost incurred by the
taxpayer in acquiring the residence.
 The additional cost is the excess of the purchase
price of the new residence. over the selling price
of the old residence.
Thus, the tax basis of the new residence shall be:
Basis of old residence 3,000,000
Add: Additional out-of-pocket costs (P5.2M 200,000
- P5M)
Basis of new residence 3,200,000
 Tax basis has no relevance for real property
capital assets because the actual gain on the sale
is irrelevant to capital gains taxation.
 However, when the real property capital assets
subsequently qualifies as ordinary assets such as
when they are later employed in business, the tax
basis of the property becomes necessary for gain
or loss measurement. That's why the basis of the
new property needs to be monitored.
Partial utilization of proceeds is partially exempt
Assume Helen uses only P4,500,000 out of the
P5,000,000 proceeds in acquiring her new residence. The
portion representing the unused proceeds shall be
subject to tax.
The capital gains tax held in escrow account including any
accrued interest shall be allocated as follows:
To Helen 324,000 (P4.5M/P5MxP360,000)
To the government 36,000 (P0.5M/P5MxP360,000)
Total amount in 360,000
escrow
Note: Any interest which might have accrued on the
escrow fund shall be released to the taxpayer. The
government is entitled to the amount of the unpaid tax
only.
Tax basis of the new residence with less than full
utilization
If the proceeds is not fully utilized, the tax basis of the
new residence shall be reduced 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 P3,000,000 x
P4,500,000/135,000,000 = P2,700,000.
Illustration 2:
Alberto sold his residential lot with fair value of
P1,000,000 for P2,000,000. He purchased a new
residence for P1,500,000 within 18 months.
 Alberto 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
envisages a sale of a principal residence for the
acquisition of a new principal residence.
Illustration 3:
Afraid of ghosts that frequently appear in his mansion
residence, Raymund left his mansion and bought a new
home for P17,000,000 as his principal residence. Within 3
months, Raymund 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
 Sale of land pursuant to the Comprehensive
Agrarian Reform Program
 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.
Illustration 1: Without mortgage
On December 1, 2016, Ms. Batanes 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,
2016.
Capital gains tax = P5,000,000 x 6% 300,000
Initial payment (December installment) 500,000
Ratio of initial payment = P500,000/P4,000,000 12.50%
 The installment sale qualifies under the ratio
ceiling; hence, the capital gains tax can be paid in
installment.
 The capital gains tax payable every installment
shall be P37,500 computed as
P500,000/P4,000,000 x P300,000.
Illustration 2: With mortgage not in excess of cost
Assume that the lot in the previous illustration is
mortgaged for P1,000,000 which the buyer assumed and
the buyer agreed to pay the P3,000,000 balance in
P300,00° monthly installments starting December 31,
2016.
Capital gains tax = P5,000,000 x 6% 300,000
Initial payment (December installment) 300,000
Ratio of initial payment (P300,000/P4,000,000) 7.5%
The contract price shall be computed as follows:
Selling price 4,000,000
Less: Mortgage assumed by buyer (1,000,000)
Contract price 3,000,000
 The capital gains tax payable every installment
shall be P30,000 computed as
1)300,000/P3,000,000 x P300,000 capital gains
tax.
Illustration 3: With mortgage in excess of cost
Assume further that the lot is mortgaged for P2,500,000
which the buyer assumed and the buyer agreed to pay
the P1,500,000 balance in P300,000 monthly installments
starting December 31, 2016.
It should be recalled that the excess of the mortgage over
the tax basis of the property is an indirect downpayment
which must be included in the initial payment and
contract price. Capital gains tax is P5,000,000 x 6% or P
300,000.
The contract price shall be computed as follows:
Selling price 4,000,000
Less: Mortgage assumed (2,500,000)
Cash collectible 1,500,000
Add: Constructive downpayment-excess 500,000
mortgage cost (P2.5M mortgage - P2.0M)
Contract price 2,000,000
The initial payment shall be computed as:
Constructive downpayment (excess mortgage) 500,000
December 31 installment 300,000
Initial payment 800,000
Ratio of initial payment = P800,000/P4,000,000 20%
The installment plan qualifies under the ratio ceiling;
hence, the capital gains tax can be paid in installment.  The documentary stamp tax is P15 for every
Under the installment method, the capital gains tax P1,000 and fractional parts of the tax basis
payable shall be: thereof. However, if the government is a party to
For the sale : P500,000/P2,000,000 x P300,000 75,000 the sale, the basis shall be the consideration paid.
For every installment : P300,000/P2,000,000 x 45,000 Illustration:
P300,000 A taxpayer disposed a real property capital asset acquired
for P2,000,000 10 years ago for P4,000,000. The property
Illustration 4: Initial payment exceeds 25% of selling
has a zonal value of P5,000,000 and declared real
price
property value per real property tax declaration of
Assume that the initial payment on the sale of Ms.
P3,000,000.
Batanes exceeds 25% of the selling price.
The documentary stamp tax shall be computed from the
 The sale would be taxed as if it were a cash sale.
fair value since it is higher than the selling price. Hence,
The capital gains tax shall be paid in lump sum
the documentary stamp tax shall be P75,000 computed
upon filing of the capital gains tax return. This
as P15/P1,000 x P5,000,000
applies without regard to whether or not any
PENALTIES FOR LATE/NON-FILING OR NONPAYMENT OF
mortgage on the property exceeds the cost of the
CAPITAL GAINS TAX
property disposed.
 The late filing and payment of capital gains tax at
Deadline for payment of the capital gains tax
the time or times required by law is subject to the
 The 6% capital gains tax will be filed through BIR
same penalties discussed in Chapter 4.
For 1706 and is due within 30 days from the date
ENTITIES EXEMPT FROM CAPITAL GAINS TAX
of sale or exchange. For foreclosure sales, it is
The same lists of entities exempt from final tax in Chapter
due within 30 days from the expiration of the
5 are likewise exempt from capital gains tax.
applicable statutory redemption period. When
COMPARISON OF THE 6% CGT AND 15% CGT
the tax on the sale is qualified for installment
6% CGT 15% CGT
payment, it is due 30 days upon receipt of every Tax object Gain on real Gain on sale of
installment. property stocks
Statutory redemption period on foreclosure sale Basis of the tax Presumed Actual gain
 Foreclosed properties are subject to a right of gain
redemption by individual mortgage within one Nature of the tax Final tax Self-assessed tax
year counted not from the date of sale but from
Frequency of Per Transactional and
the time of registration of the sale in the Office of payment transaction annual tax
the Registry of Deeds. (Santos vs. Register of
Deeds of Manila) For juridical 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 domestic stocks directly to a buyer
 The sale of domestic stocks is subject to a
documentary stamp tax of P1.50 for every P200
of the par value of the stocks sold. (RA 9243)
Illustration:
A taxpayer sold domestic stocks with total par value of
P800,000 for P1,200,000. The stocks have a fair value of
P1,250,000 and were acquired for P1,000,000.

The documentary stamp tax shall be P 6,000 computed as

P1.50/P200 x P800,000.

Documentary Stamp Tax on the Sale of Real Properties

 The sale of real property capital assets is subject
to a documentary stamp tax on the gross selling
price or fair market value whichever is higher.