How Does Capital Gains Tax Work in the Philippines?

Capital gains tax is a component of the Philippine tax system imposed on the profit realized from the disposition of specific assets. It targets the gains from the sale of property classified as “capital assets” under the National Internal Revenue Code (NIRC). This tax is a final tax, meaning the rate applied is definitive and the income is not subject to further regular income taxation.

Assets Subject to Capital Gains Tax

The capital gains tax in the Philippines primarily targets two categories of assets. The first is real property, such as land and buildings, located within the Philippines. For the tax to apply, the property must be a capital asset, meaning it is not used in the ordinary course of a trade or business. Property used for business operations is considered an ordinary asset, and its sale is subject to different tax rules.

The second category involves shares of stock in a domestic corporation not traded on the Philippine Stock Exchange. A distinction is made based on how shares are traded. Shares listed and traded on the local exchange are subject to a different stock transaction tax, which focuses the capital gains tax on profits from privately-held domestic companies.

Calculating the Tax Due

The calculation method differs for real property and shares of stock. For real property sales, the tax is a fixed rate of 6%. The tax base is the highest of the gross selling price, the Bureau of Internal Revenue (BIR) zonal value, or the fair market value determined by the City or Provincial Assessor. This rule prevents property undervaluation to reduce tax liability.

For the sale of shares not traded on the stock exchange, the tax is 15% of the net capital gain. This gain is calculated by subtracting the seller’s acquisition cost from the gross selling price. This calculation requires documentation of the initial purchase price to substantiate the cost basis.

An exemption exists for the sale of a principal residence by an individual. Gains can be exempt from the 6% tax if the entire proceeds are used to acquire or construct a new principal residence within 18 calendar months of the sale. To qualify, the taxpayer must notify the BIR of their intention to use this exemption within 30 days of the sale. If the proceeds are not used for a new primary home within the specified period, the tax becomes due with penalties.

Required Documentation and Forms

For real property transactions, a seller must prepare the notarized Deed of Absolute Sale, the latest Tax Declaration for the property from the local assessor’s office, and proof of payment for other local taxes.

For the sale of shares of stock, required documents include the Deed of Sale for the shares. To establish the net capital gain, the seller must also provide proof of the original acquisition cost, such as a previous deed of sale or subscription agreement.

The Bureau of Internal Revenue (BIR) provides specific forms for these transactions. Taxpayers use BIR Form 1706 for real property sales and BIR Form 1707 for the sale of shares. These forms can be downloaded from the BIR website.

Filing and Payment Procedures

The tax return must be filed at the correct Revenue District Office (RDO). For real property sales, this is the RDO with jurisdiction over the property’s location. For share sales, it is the RDO where the seller is registered as a taxpayer.

The completed tax return and its attachments are submitted to the RDO for review. The tax must be paid at an Authorized Agent Bank (AAB) within 30 days of the transaction for both real property and share sales.

Upon payment, the taxpayer returns to the RDO with proof of payment to have the documents processed. The final step is the issuance of a Certificate Authorizing Registration (CAR). This certificate is proof that the capital gains tax has been paid and is required to transfer the title of real property or to record the transfer of shares.