Understanding the difficulties of the tax system, particularly the Capital Gains Tax, is crucial when dealing with real estate and other assets in the Philippines, especially for foreign investors. The Capital Gains Tax is imposed on the presumed gains sellers realize from the sale, exchange, or other disposition of capital assets in the Philippines, including pacto de retro sales and other forms of conditional sales. This article will discuss the complete guide to the Capital Gains Tax in the Philippines.
What is Capital Gains Tax in the Philippines?
The Bureau of Internal Revenue (BIR) defines the Capital Gains Tax (CGT) as a tax levied on the estimated profits a seller attains from the sale, exchange, or any other transfer of capital assets in the Philippines.
For tax purposes, capital assets refer to all properties the taxpayer holds, excluding those primarily held for sale to customers in the ordinary trade or business or those that form part of the taxpayer’s inventory or stock in trade. The most common examples of capital assets are lands and buildings.
The Capital Gains Tax in the Philippines is only imposed on two types of capital assets: real properties and shares of stocks.
Who pays the Capital Gains Tax in the Philippines?
The seller or transferor typically shoulders the Capital Gains Tax in the Philippines. It is applied to those who sell, exchange, or dispose of capital assets located within the country, regardless of whether they are a natural or juridical entity, resident or non-resident, including estates and trusts.
It’s applied to the gains presumed to have been realized from the sale, exchange, or other means of disposal of capital assets. Notably, the term sale includes pacto de retro sales and other forms of conditional sales. A pacto de retro sale is a contract in which ownership of the property being sold is immediately vested in the buyer, subject to the condition that the seller may repurchase it within a certain period.
Therefore, anyone selling, exchanging, or otherwise disposing of capital assets in the Philippines should expect to pay Capital Gains Tax.
How much is the property Capital Gains Tax in the Philippines?
The Capital Gains Tax on real property in the Philippines is set at a flat rate of 6%. This rate applies to the gross selling price, the Bureau of Internal Revenue (BIR) zonal valuation, or the property’s fair market value, whichever is highest.
How to compute Capital Gains Tax in the Philippines?
To compute the Capital Gains Tax in the Philippines, follow these steps:
- Determine the taxable base: This is the higher value between the gross selling price of the property and the current fair market value as determined by the BIR.
- Calculate the tax due: Apply the 6% rate to the taxable base. This will give you the amount of Capital Gains Tax to be paid.
For example, if you sell a property with a gross selling price of ₱ 2 million ($36,000) but the current BIR fair market value is ₱ 2.5 million ($45,000), your tax base would be ₱ 2.5 million ($45,000). The Capital Gains Tax due would be ₱ 2.5 million ($45,000) * 6% = ₱ 150,000 ($2,700).
Capital Gains Tax requirements and exceptions
Understanding the Capital Gains Tax in the Philippines will help ensure proper compliance with the law and determine possible exemptions. The Capital Gains Tax requirements consist of different documentation, this includes:
The required documentation includes:
- TIN of sellers and buyers. TIN, short for Taxpayer Identification Number, is a unique code used to identify sellers and buyers for tax purposes.
- Notarized Deed of Absolute Sale or Deed of Transfer.
- Certified True Copies of the Tax Declaration at the time or nearest to the transaction date, issued by the Local Assessor’s Office for land and improvement.
- Certified True Copies of Original/Transfer/Condominium Certificates of Title (OCT/TCT/CCT)
- If applicable, a Notarized Special Power of Attorney (SPA) from the transacting party.
- For cases wherein there is no improvement on the land, either a Sworn Declaration of No Improvement by at least one of the transferees or a Certificate of No Improvement issued by the Assessor’s Office.
- Official Receipt/Deposit Slip and duly validated return as proofs of payment of taxes.
- If the seller or transferor is a corporation, a Secretary’s Certificate or Board Resolution approving the sale/transfer of the real property and indicating the name and position of the authorized signatory to the Deed of Sale/Assignment.
Foreigners may be granted exemption from Capital Gains Tax in the Philippines if they obtain a Certificate of Exemption or BIR Ruling from the Commissioner of Internal Revenue or the authorized representative.
How to pay property Capital Gains Tax in the Philippines: 4 steps
Here are four steps for paying the Capital Gains Tax in the Philippines:
Step 1: File the Capital Gains Tax Return
The Capital Gains Tax Return (BIR Form No.1706) shall be filed within 30 days following the sale, exchange, or disposition of real property. You can file this with any Authorized Agent Bank (AAB) or Revenue Collection Officer (RCO) of the Revenue District Office (RDO) having jurisdiction over the location of the transferred property.
Step 2: Submit BIR-prescribed deposit slip
When filing the return with an AAB, you must accomplish and submit the BIR-prescribed deposit slip. The bank teller will machine-validate this as proof of payment receipt by the AAB. The AAB receiving the tax return will stamp the return with the word “Received,” and the machine validates it as proof of the filing and payment.
Step 3: Make use of electronic filing and payment
Alternatively, filing and payment can also be made using the BIR’s electronic filing and payment facilities (i.e., EFPS/eBIRForms and G-cash, credit, debit card/prepaid card).
Step 4: Follow the ‘fast lane’ for certain transactions
For transactions involving one to three properties covered by a single Deed of Sale/Exchange/Donation, taxpayers can avail of the ‘fast lane’ according to Revenue Memorandum Circular (RMC) No. 43-2018, amended by RMC No. 107-2018. Payments amounting to ₱ 20,000 ($360) and below can be paid in cash. In comparison, those exceeding twenty thousand pesos must be made through the manager’s or cashier’s check to the RCO of the RDO that has jurisdiction over the location of the transferred property.
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Get help with property taxes in the Philippines
In conclusion, the Capital Gains Tax in the Philippines is a tax imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets located in the country. The tax rate for selling real property is 6%, based on the higher amount between the gross selling price and the fair market value. This tax is an essential aspect of the Philippine taxation system and should be considered when dealing with financial transactions involving capital assets.
Frequently Asked Questions (FAQs)
What is the penalty for late payment of Capital Gains Tax in the Philippines?
Failure to file and pay the Capital Gains Tax in the Philippines, late payment, or underpayment may result in a compromise penalty ranging from ₱ 200 ($3.60) to ₱ 50,000 ($900). A 25% surcharge (or 50% if found fraudulent) and a 20% annual interest rate may apply. Attempting to transfer the title through the Register of Deeds or the Corporate Secretary without a Certificate Authorizing Registration is also subject to penalties.
Who pays Capital Gains Tax in the Philippines, the buyer or seller?
The seller usually pays the Capital Gains Tax in the Philippines. The tax is imposed on the gains presumed to have been realized by the seller from the sale, exchange, or other disposition of capital assets in the country.
Do you pay Capital Gain Tax on the sale of property in the Philippines?
Yes, the seller must pay the CGT on the sale of property in the Philippines. The tax rate is typically 6% of the property’s selling price, zonal value, or fair market value, whichever is higher.