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 property located in the Philippines. To better appreciate this tax type, let us share with you the following overview.
Tax on non-business asset or capital asset
The subject of capital gains tax are actually non-business assets or properties 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 property held by the taxpayer (whether or not connected with his trade or business), but does not include:
- stock in trade or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of taxable year;
- property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business;
- property used in trade or business of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or,
- real property used in trade or business of the taxpayer
In other words, those properties not falling within the above enumeration are capital assets that could be subject to the capital gains tax in the Philippines.
Imposed on two (2) specific kinds of properties
Suffice it to say, not all non-business assets are subject to capital gains tax because the Tax Code only limits the subjects to two (2):
- capital gains tax on sale of real properties located in the Philippines and held as capital assets, and
- sale of shares of stocks of a domestic corporation sold not through the local stock exchange.
Property must be a real property, must not be used in trade or business or practice of profession, and must be located in the Philippines. On the other hand, shares of stock must be that of a domestic corporation, non-listed, and the sale must be not through the local stock exchange.
Imposed on net gains or presumed gains
Capital gains tax on sale of real property 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 property, and simply multiply the same with 6%. It would not matter how much the seller actually 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 means that the cost of the shares of stock sold and incidental 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 means 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 subjected to 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 properties, it is the notarization that marks the taxable event because of the rule in Civil Law in the Philippines that contracts relating to real properties or interest therein must be through 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 transfer.
Securing Certificate Authorizing Registration (CAR)
To effect the transfer of title from the registered owner of the property 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 property, and the Corporate Secretary of the corporation owning the shares transferred will effect the transfer of title.
Penalties for violations
As you will note, 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 subject to compromise penalty of P200 – P50,000, 25% surcharge (or 50% if fraudulent), and 20% interest. Transfer of title by the Registry of Deeds or the Corporate Secretary without the Certificate Authorizing Registration (CAR) in the Philippines is also subject to penalty.