Selling a property or investment in the Philippines can be complex, considering several financial and legal factors. One of the most important factors to remember is the capital gains tax Philippines (CGT), which can significantly impact the profitability and feasibility of the sale.
In this comprehensive blog post, we will provide detailed information relating to CGT. So just scroll down to discover everything you need to know now!
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Capital Gains Tax Philippines: Overview
Capital gains tax is a type of income tax imposed on the difference between the selling price and the acquisition cost of a capital asset.
For a capital asset, it is any property not used in the ordinary course of trade or business, such as land, buildings, shares of stock, bonds, jewelry, artworks, etc.
The rate of CGT depends on the type and holding period of the capital asset. Generally, there are two categories of capital assets: real property and personal property.
Real property is a legal term that refers to land and any improvements attached to it, such as buildings, houses, condominium units, etc. The CGT rate for real property is 6% of the gross selling price or FMV – fair market value, whichever is higher.
The FMV is determined by the Bureau of Internal Revenue (BIR) or the local government unit (LGU), depending on the property’s location.
Personal property refers to any property other than real property, such as shares of stock, bonds, jewelry, artworks, etc. The CGT rate for a personal property depends on whether it is classified as short-term or long-term.
Short-Term Capital Gains Tax Rates
These rates are the taxes that apply to the profits from selling personal property that has been owned for less than a year. Personal property includes stocks, bonds, mutual funds, and other assets not used for business purposes.
Unlike long-term capital gains, which are taxed at preferential rates, short-term capital gains are taxed at the same rates as ordinary income. These rates vary depending on the taxpayer’s income level and filing status and can range from 0% to 35% for the 2023 tax year.
Long-Term Capital Gains Tax Rates
Long-term capital gains are those derived from the sale of personal property that is held for more than 12 months. The CGT rate for long-term capital gains is usually lower than the regular income tax rates. For example:
- The rate for stock shares listed and traded in the Philippine Stock Exchange (PSE) is 0.6% of the gross selling price.
- The rate for shares of stock that are not listed or traded in the PSE is 15% of the net capital gain (selling price minus acquisition cost).
- The rate for bonds and other debt instruments is 20% of the interest income or final withholding tax (FWT), whichever is applicable.
The Way To Calculate Capital Gains Tax In the Philippines
The computation of CGT depends on whether the capital asset is real or personal property. Here are some examples:
– For real property, CGT = 6% x (gross selling price or FMV, whichever is higher)
– For shares of stock listed and traded in the PSE, CGT = 0.6% x gross selling price
– For shares of stock not listed or traded in the PSE, CGT = 15% x (selling price – acquisition cost)
To illustrate, let us assume that you sold a condominium unit in Makati City for P10 million in January 2023. You bought it for P8 million in January 2020. The FMV of the unit, determined by the BIR, is P9.5 million. How much CGT do you have to pay?
Since your condominium unit is real, you must apply the 6% CGT rate on the higher amount between your selling price and FMV. In this case, your selling price (P10 million) is higher than your FMV (P9.5 million), so you must use your selling price to compute your CGT.
Therefore, your CGT = 6% x P10 million = P600,000.
Capital Gains Tax Returns In The Philippines
If you sell or exchange any of these assets, you must file a capital gains tax return and pay the corresponding tax to BIR. You have to pay CGT within 30 days after each transaction.
This means that the taxpayer is required to file a final capital gains tax return (BIR Form 1706 for real property and BIR Form 1707 for shares of stock) and attach the required documentary requirements, such as the deed of sale, tax declaration, certificate of title, official receipts or deposit slips, and other relevant documents.
In addition to these requirements, the taxpayer must secure an electronic certificate authorizing registration (eCAR) from the BIR before transferring the asset’s title to the buyer.
This electronic certificate proves that the CGT has been paid and is necessary to transfer the asset’s ownership.
The eCAR can be obtained from the BIR website, and the taxpayer must provide the transaction details and other necessary information.
See also: Income Tax Table 2022 Vs 2023
Who is Responsible For Paying The Capital Gains Tax In The Philippines?
In the Philippines, both natural and juridical persons (resident or non-resident) are required to file and pay capital gains tax.
Who is Exempt From Paying Cgt In The Philippines?
There are certain exemptions to the rule. For instance, a person is exempt from CGT if they are selling their property to buy or construct a new property, provided they have not availed of the tax exemption for the last decade.
Additionally, principal residences or family homes are exempted from CGT and dealers in securities who are regularly engaged in buying and selling securities.
Can CGT Be Offset With Losses In The Philippines?
Capital gains tax can be offset with losses. One way to do this is by crystallizing losses. However, it is critical to note that there are certain rules that must be followed when offsetting.
To sum up, capital gains tax Philippines is a tax imposed on the profit from selling certain types of assets in the Philippines. Knowing the rates, exemptions, and procedures for paying this tax is important to avoid penalties and comply with the law.
It can be a complex topic, so it is advisable to consult a professional tax adviser or accountant if you have any questions or doubts.