Capital gains tax in the Philippines is imposed upon capital gains presumed to have been realized from the sale, exchange, or other disposition of real character located in the Philippines. To better appreciate this tax kind, let us proportion you the following overview.
Tax on non-business asset or capital asset
The subject of capital gains tax are truly non-business assets or similarities not used in trade or business or practice of profession. They are technically termed as “capital assets” in the Philippines and are broadly defined as character held by the taxpayer (whether or not connected with his trade or business), but does not include:
- stock in trade or other character of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of taxable year;
- character held by the taxpayer chiefly for sale to customers in the ordinary course of his trade or business;
- character used in trade or business of a character which is unprotected to the allowance for depreciation provided in Subsection (F) of Section 34; or,
- real character used in trade or business of the taxpayer
In other words, those similarities not falling within the above enumeration are capital assets that could be unprotected to the capital gains tax in the Philippines.
Imposed on two (2) specific kinds of similarities
Suffice it to say, not all non-business assets are unprotected to capital gains tax because the Tax Code only limits the subjects to two (2):
- capital gains tax on sale of real similarities located in the Philippines and held as capital assets, and
- sale of shares of stocks of a domestic corporation sold not by the local stock exchange.
character must be a real character, must not be used in trade or business or practice of profession, and must be located in the Philippines. however, shares of stock must be that of a domestic corporation, non-listed, and the sale must be not by the local stock exchange.
Imposed on net gains or presumed gains
Capital gains tax on sale of real character located in the Philippines and held as capital asses is based on the presumed gains. The rate is 6% capital gains tax based on the higher amount between the gross selling price or fair market value. In computing the capital gains tax, you simply determine the higher value of the character, and simply multiply the same with 6%. It would not matter how much the seller truly earned because the tax is based on the gross amount of the taxable base for capital gains tax in the Philippines.
For sale of shares of stock of a domestic corporation held as capital asset, the tax is based on the net capital gains. This method that the cost of the shares of stock sold and minor point selling expenses are to be deducted for capital gains tax purposes. The tax rate is 5% for the first P100,000 and 10% in excess of P100,000 of the net capital gains. This method that the cost of the shares and the related selling expenses are deductible. In case of under declaration of the actual selling price, the taxpayer would be placed under donor’s tax in the Philippines at the rate of 30% of the amount of under declaration plus the usual penalties – 25% surcharge (50% for fraudulent), 20% interest, and compromise penalties.
Filing of capital gains tax returns in the Philippines
For tax purposes, a capital gains tax return is required to be filed not later that thirty (30) days from the date of the taxable transaction – whether or not there is a payable amount. For real similarities, it is the notarization that marks the taxable event because of the rule in Civil Law in the Philippines that contracts relating to real similarities or interest therein must be by a notarized document to be valid. In practice, taxable event of sale of shares of stock is also the notarization date of the deed or contract of move.
Securing Certificate Authorizing Registration (CAR)
To effect the move of title from the registered owner of the character ot the new owner, the Bureau of Internal Revenue shall issue a CAR. Such CAR would certify that capital gains tax in the Philippines and other necessary taxes and fees had been paid with the BIR and is now ready to be transferred. Based on the CAR, the Registry of Deeds in the Philippines for real character, and the Corporate Secretary of the corporation owning the shares transferred will effect the move of title.
Penalties for violations
As you will observe, Philippines tax system is based on voluntary compliances under pay-as-you-file, and to determine extent of compliance, a check-and-balance mechanism is put in place. Failure to file and pay, late payment of capital gains tax in the Philippines, and underpayment is unprotected to compromise penalty of P200 – P50,000, 25% surcharge (or 50% if fraudulent), and 20% interest. move of title by the Registry of Deeds or the Corporate Secretary without the Certificate Authorizing Registration (CAR) in the Philippines is also unprotected to penalty.