SUMMARY OF TAX RATES 1. Individuals
a. On sale of shares of stock of a domestic corporation not listed and traded thru a local stock exchange, held as capital asset
On the Net Capital Gain
Not over P100,000 – FT of 5%
Amount in excess of P100,000 – FT of 10%
b. On sale of real property in the Philippines held as capital asset
On the gross selling price, or the
current fair market value at the
time of sale, whichever is higher – FT of 6%
2. Corporations
a. On sale of shares of stock of a domestic corporation not listed and traded thru a local stock exchange, held as capital asset
On the Net Capital Gain –
Not over P100,000 – FT of 5%
Amount in excess
of P100,000 – FT of 10%
b. On sale of land/building held as capital asset
On the gross selling price, or the
current fair market value at the
time of sale, whichever is higher – FT of 6%
(Reyes, Virgilio. Income Tax Law and Accounting – A New Approach, 2002)
CAPITAL GAINS AND LOSSES – IN GENERAL
CONCEPT OF CAPITAL ASSETS
Under the tax code, there is no
definition for the term "capital assets". What it gives is the meaning of ordinary assets:
a.
Ordinary assets (Sec. 39, NIRC)a. Stock in trade of the taxpayer or other properties of a kind which would properly be included in the inventory of the taxpayer; b. Property held by the taxpayer
primarily for sale to customers in the ordinary course of business; c. Property used in trade or
business and subject to depreciation; and
d. Real property used in trade or business.
b.
Capital Assets include all propertyheld by the taxpayer whether or not connected in trade or business but not including those enumerated above (#1) as ordinary assets.
The gain derived from the sale or exchange of capital assets.
The loss incurred from the sale or exchange of capital assets.
NET CAPITAL
GAIN NET CAPITAL LOSS
The excess of the gains from sales/ exchanges of capital assets over the gains from such sales/ exchanges.
The excess of the losses from sales or exchanges of capital assets over the gains from such sales or exchanges.
TRANSACTION RESULTINGIN TAXABLE GAINSBUT
NON-RECOGNITIONOF LOSSES
a. Sale or exchange between related parties;
b. Wash sales by non-dealers of securities and when not subject to the stock transfer tax;
c. Exchanges not solely in kind in merger and consolidation; and d. Sales or exchanges that are not
at arms length.
REQUISITES FOR RECOGNITION OF CAPITAL GAIN/LOSS
1. The transaction must involve property classified as capital asset; and
2. The transaction must be a sale or exchange or one considered as equivalent to a sale or exchange.
RULES ON THE RECOGNITION OF CAPITAL GAINS OR LOSSES
INDIVIDUAL CORPORATION Holding Period The percentages of gain or loss to be taken into account shall be the following:
Capital gains and losses are recognized to the extent of 100%. (There is no holding period) a.100% - if the capital assets has been held for 12 mos. or less; and b.50% - if the
capital asset has been held for more than 12 mos. Non- deductibility of Net Capital losses • Capital losses are allowed only to extent of the capital gains; hence, the net capital loss is not deductible.
• Capital losses are allowed only to extent of the capital gains; hence, the net capital loss is not deductible. Exception: If any domestic bank or trust company, a substantial part of whose business is the receipt of deposits, sells any bond, debenture, note or certificate or other evidence of indebtedness issued by any corporation (including one issued by a government or political subdivision) Net Capital Loss
Carry –Over
• Allowed
The net capital loss (in an amount not in excess of the taxable
income before
personal exemption for such year) shall be treated in the succeeding year (but not beyond 12 months) as a deduction as short-term capital loss (at 100%) from the net capital gains.
• Not allowed
See Annex U for illustration.The following are considered as sale or exchange of capital assets:
1. Retirement of bonds 2. Short sales of property
3. Failure to exercise privilege or option to buy or sell property
4. Securities becoming worthless
5. Distribution in liquidation of corporations
6. Readjustment of interest in a general professional partnership.
TAX FREE EXCHANGES
Sales or exchanges resulting in non- recognition of gains or losses:
1.
Exchange solely in kind in legitimatemergers and consolidation;
includes:
a. Between the corporations which are parties to the merger or consolidation (property for stocks);
b. Between a stockholder of a corporation party to a merger or consolidation and the other party corporation (stock for stock);
c. Between a security holder of a corporation party to a merger or consolidation and the other party corporation (securities for securities)
2.
Transfer to a controlled corporation – exchange of property for stocks resulting in acquisition of corporate control by a person, alone or together with others not exceeding four.“Control” means ownership of
stocks in a corporation amounting to at least 51% of the total voting power of all classes of stocks entitled to vote.
SALEOR EXCHANGEOF ORDINARY ASSETS
General rules of income taxation apply to both gain and loss.
See Annex D (Gross Income – Gains from dealings in property)SUMMARY OF TAX TREATMENT OF GAINS/LOSSES IN THE EXCHANGE OF PROPERTIES
General Rule: Upon the sale or
exchange of property, the entire gain or loss, as the case may be, shall be recognized. [Sec. 40 (C, 1)]
Exceptions:
1. Transactions where gains and losses are not recognized –
a. Exchange solely in kind in legitimate mergers and consolidation
b. Transfer to a controlled corporation [Sec. 40(C, 2)]
1. Transactions where gain is recognized but not the loss – a. Transactions between related
taxpayers [Sec. 36]
b. Illegal transactions [Sec. 96, Rev. Reg. 2]
c. Exchanges of property, not solely in kind, in pursuance of corporate mergers and consolidations [Sec. 40, (C, 3)]
IMPORTANT DISTINCTION
If it is an ordinary asset, the ordinary gains and losses are considered in determining income or loss from trade, business or profession. (See Secs. 32A, 34D)
If it is a capital asset, determine further whether or not it is a real property located in the Philippines. If it is, then it is subject to capital gains tax. (See Secs. 24D, 27D5) (See also Sec s. 24C, 27D2) If not, the capital gains and losses are considered in determining the taxable income. (Sec. 39)
CAPITAL GAINS AND LOSSES – SHARES OF STOCK
The taxation of shares of stock whether or not listed and traded in the stock exchange is subject to final tax.
WHOARELIABLETOTHETAX
1. Individual taxpayer, citizen or alien 2. Corporate taxpayer, domestic or
foreign
3. Other taxpayers such as estate, trust, trust funds and pension among others.
RATESOFTAX
1.
Shares of stock not traded through a local stock exchange – Net capitalgains derived during the taxable year from sale, exchange, or transfer shall be taxed as follows (on a per transaction basis):
Not over P 100,000 - 5%
Over P 100,000 - 10%
2.
Shares of stock listed through a local stock exchange – ½ of 1% ofthe gross selling price of the stock.
EXCEPTIONSTOTHE TAX
1.
Gains derived by dealers in securities.2. All other gains which are specifically exempt from income tax under existing investment incentives and other special laws.
BASISFORCOMPUTINGGAINORLOSS (BIR RULING
146-98)
• The fair market value (FMV) of the sale of shares not traded but listed in the stock exchange is the highest closing price on the day the shares were sold, transferred or exchanged.
• When no sale is made in the stock exchange, the FMV shall be the highest selling price on the day nearest to the day of sale, transfer or exchange.
• For shares not listed in the exchange, the FMV shall be the book value nearest the valuation date
The above rules shall be used in computing for the net capital gain/loss for disposition of shares.
IMPORTANT FEATURES
1.
Sale of shares of stock of a domestic corporation listed and traded in a local stock exchange and that of initial public offering shall be subject to Percentage tax (Business Tax)2.
Capital losses sustained during the year (not listed and traded in a local stock exchange) shall be allowed as a capital loss deductible on the same taxable year only (no carry-over)3.
The entire amount of capital gain and capital loss (not listed and traded in a local stock exchange) shall be considered without taking into account holding period irrespective of who is the taxpayer (all 100%)4.
Non-deductibility of losses on wash sales.FILINGAND PAYMENTOF TAX