Rules Implementing Section 34(h) of the NIRC

October 1, 1979 REVENUE REGULATIONS NO. 08-79 SUBJECT : Rules implementing Section 34(h) of the National Internal Revenue Code as amended by Batas Pambansa Blg. 37 TO : All Internal Revenue Officers and others concerned SECTION 1. Scope . Pursuant to Section 326, in relation to Section 4 of the National Internal Revenue Code, the following Regulations are hereby promulgated to implement the provisions of Section 34(h) of the said Code, as amended by Batas Pambansa Blg. 37, imposing a final schedular tax on capital gains realized by citizens and resident aliens from sales or other disposition of real property and shall be known as Revenue Regulations No. 8-79 . SECTION 2. Persons liable to the final capital gains tax . (a) Every individual who is a citizen of the Philippines or a resident alien individual deriving a net capital gain from the sale or other disposition of real property shall pay the final schedular income tax on such capital gain at the rates prescribed in Section 3 of these Regulations. (b) Non-resident aliens not engaged in trade or business in the Philippines deriving capital gains from sale of real property shall be subject to a tax equal to 30% of such capital gains, pursuant to Section 22(b) of the National Internal Revenue Code. Capital gains derived from real property transactions by a non-resident alien engaged in trade or business within the Philippines shall continue to be governed by Section 22(a) of the Tax Code. (c) The said capital gains tax shall be in lieu of the tax imposed under Section 21 of the National Internal Revenue Code and the capital gains shall not be included in his gross income for purposes of computing the taxpayers-sellers income tax liability under Section 21. However, an individual taxpayer may elect to declare gains realized from a sale or disposition of real property to the government or any of its political subdivisions or agencies or to government-owned or controlled corporations under Section 21 in relation to paragraphs (a), (b), (c), and (d) of Section 34 of the National Internal Revenue Code. SECTION 3. Rate of tax . A final capital gains tax is imposed upon the net capital gain realized by a citizen or resident alien from each sale or disposition of real property determined in accordance with the following schedule: Net Capital Gains Rates On the first P100,000 or less 10% On any amount over P100,000 20% SECTION 4. Computation of the tax. (a) Basis for determining net capital gain . (i) The schedular final capital gains tax prescribed in Section 34(h) of the Tax Code shall be based on net capital gains. For purposes of these Regulations the term "net capital gains" means the capital gain from the sale or other disposition of real property which is equal to the excess of the amount realized over the adjusted basis of the property, undiminished by any capital loss sustained from other capital asset transaction. (ii) The amount realized from the sale or other disposition of real property shall be any money received plus the fair market value of the property (other than money) received, reduced by commissions and other selling expenses. Interest included in installment payments shall not form part of the amount realized but shall be treated as ordinary income under Section 29 and taxable under Section 21 of the Tax Code. (iii) The basis for determining the gain shall be the basis as determined in accordance with Section 35 of the National Internal Revenue Code and adjusted for additional capital investment, depreciation, amortization, depletion and other recovery of capital by the taxpayer. (iv) The entire amount of the capital gain shall be subject to the final schedular tax without taking into account the period or duration during which the real property was held by the seller from the date it was acquired up to the date of its sale or disposition. (b) Installment sales of real property (i) Election to pay the capital gains tax in installment . An individual who sells real property under a deferred payment sale and is otherwise qualified to report the gains on installment basis may elect to pay the capital gains tax in accordance with the formula prescribed in subparagraph (b) (2) of this Section. For purposes of these Regulations, an individual is otherwise qualified to account for his gain on installment basis if the initial payment do not exceed 25% of the selling price. The term "initial payment" means the payment which the seller receives before or upon execution of the instrument of sale and payments which he expects or is scheduled to received in cash or property (other than evidence of indebtedness of the purchaser) during the taxable year of sale or disposition. Example : Assume that on October 15, 1979, an individual sold for P100,000, a real property with an adjusted basis of P60,000 under the following terms: P10,000 upon execution of sale; the balance of P90,000 in 18 equal monthly installments of P5,000 each beginning November 15, 1979. The taxpayer qualifies to pay the capital gains tax on installment because the initial payment consisting of the amount of P10,000 he received upon sale and the amounts he expects or is scheduled to receive P5,000 on November 15, 1979 and P5,000 on December 15, 1979, or a total of P20,000 during the year of sale will not exceed 25% of the selling price. (ii) Computation of amount of tax payable on installments . If the taxpayer elects and qualifies to pay the capital gains tax in installments, the final schedular capital gains tax shall be computed on the basis of the entire amount of gain realized from the sale or disposition of the real property and the tax so computed may be paid in installments, the amount of each installment of which shall be the proportion of the tax so determined which (A) on the date of sale or disposition , first payment (amount received, including the excess of the mortgage, if any, assumed by the purchaser over the basis of the property sold) and (B) in succeeding payments, the installment payment received by the seller bears to the total selling price or the total contract price in case of a sale of mortgaged property where the property is taken subject to the mortgage or such mortgage is assumed by the purchaser. Illustrations Example 1 . Assume that on October 1, 1979 an individual sold a piece of real property with an adjusted basis of P60,000 for P100,000 under the following terms: P20,000 down payment; balance in five annual installments beginning 1980. Taxpayer elects and is qualified to pay the tax in installments. The periodic payment of the tax is computed as follows: Selling P100,000 Less: Adjusted basis 60,000 Net Capital Gain P40,000 Tax due at 10% P4,000 ======= Portion of the tax payable upon sale or upon receipt of first payment is determined as follows: First payment x Tax due = Portion of tax Selling price payable OR P20,000 x P4,000 = P800 P100,000 === Portion of the tax payable annually for five years beginning 1980 is computed as follows: a. Installment payment received P16,000 b. Total selling price P100,000 c. Total capital gains tax P4,000 d. Amount payable annually (a) divided by (b) multiplied by (c) P640 ====== Example 2. Assume that in 1961, an individual acquired a property for P60,000 and mortgaged it to a bank in 1978 for P40,000. In 1979, he sold the property for P100,000, the purchaser assuming the payment of the mortgage. Terms of sale: Down payment, October 1, 1979 P10,000; mortgage assumed, P40,000; balance payable in four annual installments beginning January 2, 1980. The taxpayer elects to pay the tax on the gain in installments. The tax payments on installments received is computed as follows: Computation of total tax Selling price P100,000 Less: Adjusted basis 60,000 Net Capital gain P40,000 Tax due at 10% P4,000 ====== Computation of taxes payable on installments (i) Upon receipt of first payment : (a) First payments received P10,000 (b) Total contract price: Selling price P100,000 Less: mortgage assumed by buyer 40,000 60,000 (c) Total capital gains tax P4,000 (d) Amount of tax payable: P10,000 (a) x P4,000 (d) P666.40 P60,000 (b) (ii) Amount of succeeding tax payments (a) Annual installment receipts P12,500 (b) Total contract price P60,000 ______ (c) Total capital gains tax P4,000 ______ (d) Annual tax payable on installments P12,500 (a) x P4,000 (d) P833.33 P60,000 (b) ======= Example 3 . Assume that in 1979, an individual sold for P100,000 a piece of real property which he bought in 1961 for P40,000. Prior to sale the property was mortgaged for P60,000. The terms of sale are as follows: Down payment, P10,000; assumption of unpaid mortgage, P50,000; balance of P40,000 payable in four semi-annual payments beginning January 15, 1980. The taxpayer elects to pay the tax in installments. Amount of tax payable in installments is computed as follows: Computation of total capital gains tax Selling price P100,000 Adjusted basis (cost) 40.000 Capital gains P60,000 Tax due @ 10% P6,000 ====== Computation of tax payment in the year of sale First payment : Cash P10,000 Excess of mortgage assumed by buyer over acquisition cost(P50,000-P40,000) 10,000 Total first payment P20,000 ====== Total Contract Price : Selling price P100,000 Less: mortgage assumed 50,000 P50,000 Add: Excess of mortgage assumed over basis of property sold 10,000 Total contract price P60,000 ====== Tax payable on first payment First payment P20,000 Contract price P60,000 Total capital gains tax P6,000 Amount of tax payable: P20,000 x P6,000 = P2,000 P60,000 ===== Semi-Annual tax payable on succeeding payments Installments received P10,000 Total contract price P60,000 Total tax due P6,000 Amount of tax payable semi-annually: P10,000 x P6,000 P1,000 P60,000 ====== SECTION 5. Capital gains tax returns; time and place of filing . (a) In general . Individuals subject to the final schedular capital gains tax shall, within thirty (30) days following each sale or other disposition of capital assets, file in duplicate a capital gains tax return on BIR Form No. 1701-E , showing, among others, the following information: name of seller and buyer; nature and location of property; amount realized (selling price of fair market value of other property received) and contract price; cost or adjusted basis; date of acquisition, sale or disposition thereof; and, terms of payment of the consideration for sale or disposition. The return shall be accompanied with a copy of the instrument of sale. (b) Returns for installment payments . The amount of tax to be paid corresponding to the installment received by the seller determined in accordance with Section 2 of these Regulations shall be declared in a return prescribed therefor (BIR Form No. 1701-E ) and shall be filed within thirty (30) days following the receipt of such installment payment by the seller. The dates shown in the instrument of sale or other disposition of the property prescribed for the payment of each installment by the buyer shall be presumed to be the date of actual receipt thereof unless the contrary is shown by the seller. (c) Place of filing . Except in cases where the Commissioner otherwise permits, the capital gains tax return required in the preceding subparagraphs (a) and (b) shall be filed with the Revenue District Officer, Collection Agent, or duly authorized Treasurer of the municipality in which such person has his legal residence or principal place of business in the Philippines, or if there be no legal residence or place of business in the Philippines, then with the Office of the Commissioner of Internal Revenue. (d) Information return to be filed by the buyer . In case of deferred-payment sales of real property where the vendor retains title to the property, the vendee shall file an information return (BIR Form No._____) together with a copy of the instrument of sale with the revenue officer mentioned in paragraph (c) of the preceding section, within the same period prescribed for the payment of the tax herein imposed. The information return shall contain the date of when each installment or periodic payments are to be made by the vendee in accordance with the agreement to sell. SECTION 6. When to pay the capital gains tax . (a) In general . The total amount of tax imposed under Section 34(h) of the National Internal Revenue Code shall be paid on the date the capital gains tax returns prescribed in the preceding Section is filed by the individual liable thereto. (b) Installment payments . In case the person elects and is otherwise qualified to report the gain by installment under Section 43(b) of the Tax Code, the tax due on each installment payment as determined in accordance with Section 2 of this Regulations shall be paid within thirty (30) days from the receipt of such installment payment. (c) Exceptions . No such payment shall be required in cases where the taxpayer shows that the capital gains realized from the sale or disposition of real property is exempt from income tax under existing special laws. The seller shall submit a sworn declaration (BIR Form No.____) stating therein the reasons why the capital gain derived by him is exempt from income tax. SECTION 7. Application for issuance of a certification . (a) Reasons for certification . The seller or buyer or both may apply for issuance of a certification by the Commissioner or by the Regional Director or the Revenue District Officer (hereinafter referred to as the "authorized revenue officer)" under whose administrative jurisdiction the taxpayer falls, for the following reasons: (1) The capital gains tax as declared in the return is fully paid. (2) Portions of the capital gains tax due or payable up to the time of certification are actually paid in cases where the taxpayer elected to pay the tax in installment. (3) The capital gains tax is exempt under Section 35 of the National Internal Revenue Code or under any other law. (4) The capital gains tax is not required to be paid because (i) the real property sold is used in the seller's trade or business (ii) the real property was held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business (e.g., the seller is engaged in the business of buying and selling real property) (iii) the real property was offered for rent (5) The seller elects to report the capital gain under Section 21, in relation to paragraphs (a), (b), (c) and (d) of Section 34 of the Tax Code, where the property was sold to the government or any of its political subdivisions or agencies or to a government-owned or controlled corporation. (6) The capital asset transaction resulted in a loss. (b) Documentary requirements for issuance of certification . (1) In cases where capital gains tax is required to be paid . The capital gains tax returns, when accompanied by the instrument of sale, shall constitute and will serve as a valid application of the seller or buyer or both for the issuance of certification by the Commissioner or his duly authorized internal revenue officer. The Revenue Tax Receipt(s), together with the Confirmation Receipt(s), or the Revenue Official Receipt(s), as the case may be, must be presented to the internal revenue officer authorized to issue the certification but the same shall be returned to the taxpayer-seller after the said internal revenue officer has noted the number and date of such receipts and the amount paid on the certification. (2) In cases where the capital gains tax is not required to be paid . If for any of the reasons stated in paragraph (a) of this section, the capital gains tax is not required to be paid, a sworn declaration of the reason for exemption from payment of the tax shall be filed with the duly authorized internal revenue officer and such sworn statement shall constitute a valid application for the issuance of the required certification. Any certification issued by the Commissioner or his duly authorized representative in accordance with this section shall be presented to the Register of Deeds for purposes of complying with the requirements of Section 34(h) of the National Internal Revenue Code prior to registration of any document transferring real property by sale, exchange or other disposition. SECTION 8. Effectivity . This Regulations shall apply to transactions involving sales or dispositions of real property entered into on or after September 7, 1979. A deed of conveyance of real property acknowledged before a notary public on or after September 7, 1979, shall be deemed to be a sale or disposition of real property on or after September 7, 1979. SECTION 9. Repealing Clause . All revenue regulations, orders and circulars which are inconsistent herewith are hereby modified accordingly. APPROVED: PEDRO ALMANZOR Acting Minister of Finance Recommended by: EFREN I. PLANA Acting Commissioner