Capital gains tax in the Philippines applies to capital gains that are assumed to have been realized from the sale, exchange, or other disposition of real property located in the Philippines. To better appreciate this type of tax, let us share the following summary with you.

Tax on non-business assets or capital assets

The subject of the capital gains tax is actually non-business assets or property that is not used in trade or business or the practice of the profession. Technically called “capital assets” in the Philippines, they are broadly defined as property held by the taxpayer (whether or not related to his trade or business), but does not include:

1. stocks in commerce or other property of a type that would be properly included in the taxpayer’s inventory if it were available at the close of the taxable year;
2. property held by the taxpayer primarily for sale to customers in the ordinary course of their trade or business;
3. property used in trade or business of a character that is subject to the depreciation allowance provided in Subsection (F) of Section 34; Prayed,
4. real property used in the trade or business of the taxpayer

In other words, property not listed above is capital property that may be subject to capital gains tax in the Philippines.

Tax on two (2) specific types of properties

Suffice it to say that not all non-commercial assets are subject to capital gains tax because the Tax Code only limits those subject to two (2):

1. capital gains tax on the sale of real estate located in the Philippines and held as capital assets, and
2. sale of shares of a national corporation that are not sold through the local stock exchange.

The property must be real property, not used in trade, business, or the practice of a profession, and must be located in the Philippines. On the other hand, the shares must be from a national, unlisted corporation, and the sale must not be through the local stock exchange.

Tax on net earnings or presumed earnings

Capital gains tax on the sale of real estate located in the Philippines and held as capital assets is based on presumed gains. The rate is 6% capital gains tax based on the higher of gross sales price or fair market value. When calculating the capital gains tax, you simply determine the highest value of the property and simply multiply it by 6%. It would not matter how much the seller actually earned because the tax is based on the gross amount of the Philippine capital gains tax base.

For the sale of shares of a domestic corporation held as a capital asset, the tax is based on the net capital gains. This means that the cost of shares sold and incidental selling expenses must 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 net capital gains. This means that the cost of the shares and related selling expenses are deductible. In the event of underreporting of the actual sales price, the taxpayer would be subject to donor tax in the Philippines at a rate of 30% of the amount of the underreporting plus the usual penalties: 25% surcharge (50% for fraud), 20 % interest, and committed penalties.

Filing Capital Gains Tax Returns in the Philippines

For tax purposes, a capital gains tax return is required to be filed no later than thirty (30) days from the date of the taxable transaction, whether or not there is an amount payable. In the case of real property, it is the notarial certification that marks the taxable event due to the Philippine civil law rule that contracts relating to real property or interests therein must be made by means of a notarized document to be valid. . In practice, the taxable event of the sale of shares is also the date of notarization of the deed or transfer contract.

Securing the Certificate Authorizing Registration (CAR)

In order to effect the transfer of title from the registered owner of the property to the new owner, the Internal Revenue Bureau must issue a CAR. Such a CAR would certify that the Philippine capital gains tax and other necessary taxes and fees were paid with the BIR and are now ready to be transferred. Based on the CAR, the Philippine Registry of Deeds for real property, and the Corporate Secretary of the corporation owning the transferred shares will effect the transfer of title.

Sanctions for infractions

As you will notice, the Philippine tax system is based on voluntary compliance under the pay-as-you-go system, and to determine the degree of compliance, a check and balance mechanism was put in place. Failure to file and pay, late payment of Philippine capital gains tax, and underpayment are subject to a P200 – P50,000 commitment penalty, 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.