Taxation of Net Capital Gains Derived from Stock Transaction.

November 14, 1980 REVENUE REGULATIONS NO. 14-80 SUBJECT : Taxation of Net Capital Gains Derived from Stock Transaction TO : All Internal Revenue Officers and Others Concerned SECTION 1 . Scope . Pursuant to the provisions of Section 8 of Presidential Decree No. 1739 and Section 326, in relation to Section 4 of the National Internal Revenue Code, as amended, these regulations are hereby promulgated to define the manner of taxation of net capital gains derived from stock transaction as provided for by Presidential Decree No. 1739. SECTION 2 . Definition of Terms . For the purpose of these regulations, unless the context otherwise indicates, the following definitions of terms are hereby adopted: aisa dc (a) " Closed corporation " is one whose articles of incorporation provide that: (1) All of the corporation's issued stock of all classes, exclusive of treasury shares, shall be held of record by not more than a specified number of persons, not exceeding twenty (20); (2) All of the issued stock of all classes shall be subject to one or more specified restrictions on transfer permitted by Title XII of the Corporation Code of the Philippines; and (3) The corporation shall not list in any stock exchange or make any public offering of any of its stock of any class. Notwithstanding the foregoing, a corporation shall be deemed not a close corporation when at least two-thirds (2/3) of its voting stock or voting rights is owned or controlled by another corporation which is not a close corporation within the meaning of this Code. (b) " Stock classified as capital assets " shall mean all stocks and securities held by taxpayers other than dealers in securities. (c) " Dealers in securities " includes all persons who for their own account are engaged in the sale of stock, bonds, exchange, bullion coined money, bank notes, promissory notes, or other securities as licensed by the Securities and Exchange Commission. Notwithstanding the foregoing, nothing in these regulations shall preclude the Commissioner of Internal Revenue from treating other taxpayer engaged in similar activities not licensed by the Securities and Exchange Commission as a dealer in securities. SECTION 3 . Persons Liable to the Final Capital Gains Tax . The following persons are subject to the final tax on capital gains derived from stock transactions as provided for in Section 4 of these regulations: (1) Any individual taxpayer, citizen or alien; (2) Any corporate taxpayer, domestic or foreign; (3) All other taxpayers not falling under (1) or (2) above, such as trust, estate, trust funds, pension funds, etc. SECTION 4. Imposition of the Tax . In general there shall be imposed on the net capital gains derived during the taxable year from sales, exchanges, transfer or similar transactions intended to convey ownership of, or title to, any share or shares of stocks classified as capital assets, tax of ten per centum (10%) on the net capital gains derived during the taxable year. However, if the net capital gains are realized from the sale of shares of stocks of a closed corporation, the rates of tax to be imposed shall be Net Capital Gains Rates On the 1st P50,000 or less 10% On any amount over P50,000 20% The tax above prescribed shall be due and payable only as regards sales, transfer or exchange of stocks classified as capital assets beginning after fifteen (15) days after publication of these regulations in a newspaper of general circulation or in the Official Gazette. Accordingly, any stock transaction effected prior to said date, shall remain to be subjected to the old rules as follows: cd (a) The sale or exchange of stocks acquired after November 5, 1970 shall be subject to the payment of 1/4 of 1% tax as provided under R.A. No. 6141, as amended by Presidential Decree No. 10; or (b) The sale or exchange of stocks acquired before November 5, 1970 shall be subjected to the ordinary income tax rates provided for by the National Internal Revenue Code. SECTION 5 . Exemption from the Final Capital Gains Tax on Stock Transactions . The tax herein imposed shall not apply to (1) the gains derived by dealers in securities which gains shall remain to be taxed as ordinary gain includible in the gross income of dealers in securities; and (2) the gains from sales of stock to the extent invested in new issues of shares of stocks in banks, non-bank financial intermediaries and corporations organized primarily to hold equities in banks, in accordance with Section 1 of Presidential Decree No. 1739 and the implementing regulations promulgated by the Ministry of Finance. SECTION 6. Manner of Computation of Tax Base . For purposes of Section 4 above, the tax base shall be computed in the following manner: (a) The term "net capital gain" shall mean (1) In the case of net capital gains arising from the disposition of shares of stocks of closed corporation, the amount equal to the excess of the capital gain realized over that of capital losses sustained in the disposition of shares of stocks of any corporation during the taxable year. (2) In the case of net capital gains arising from the disposition of shares of stocks of corporations not qualifying as a closed corporation, the amount equal to the excess of capital gains realized over that of capital losses sustained in the disposition of shares of stocks of another or the same corporations not qualifying as a closed corporation during the taxable year. SECTION 7. Determination of Capital Gains . In determining capital gains or capital losses, the following rules shall apply: aisa dc (a) Determination of selling price. (i) The selling price of the shares of stocks shall be the fair market value of the shares of stocks transferred or exchanged and not the fair market value of the property received in exchanged. If the total consideration of the sale or disposition are partly in cash or money plus other properties, the rule in determining the selling price, shall nonetheless be, the selling price is equal to the fair market value of the shares disposed. (ii) In the case of shares traded through the stock exchange, "fair market value" shall consist of the actual selling price as shown in the sales confirmation issued by the stock broker of a stock exchange where the sale was effected. (iii) In the case of sales not traded through the stock exchange, but listed in one or more stock exchanges, the highest closing price on the day when the shares are sold, transferred or exchanged, shall be the "fair market value." When no sale is made in any stock exchange, the highest closing price on the day nearest to the day of sale, transfer or exchange of the shares shall be the fair market value. (iv) In the case of sale, transfer or exchange of shares not listed in the stock exchange, the fair market value shall be determined by considering the nature and history of the business, book value of the stock earning and dividend paying capacity of the company, goodwill, and shares of both the stock to be valued and that of companies similarly situated. (b) Determination of cost . The cost basis for determining the capital gains or losses shall be the basis as determined in accordance with the provisions of Section 35 of the Tax Code and its implementing regulations applied in the following manner: (i) If the stocks can be identified, then the cost shall be the actual purchase price plus all costs of acquisition such as commission, documentary tax, transfer fees, etc. (ii) If the stocks cannot be properly identified, then the cost to be assigned shall be computed on the basis of the first-in first-out (FIFO) method. However (iii) If books of accounts are maintained by the seller where every transaction of a particular stocks are recorded, then the moving average method shall be applied rather than the first-in, first-out (FIFO) method. cdt (iv) In all cases, stock dividends received must be assigned a corresponding cost by allocating the original cost of acquisition to the total number of shares composed of the original shareholdings plus the number of shares of stock received as stock dividend. (c) In determining the deductibility of capital losses, the following rules shall apply: (i) the provisions of Section 33 of the Tax Code and its implementing regulations on the non-deductibility of losses on cash sales; (ii) the deductibility of capital loss arising from the sale or disposition of shares of stocks of closed corporations against capital gains derived from any stock transactions. (iii) the deductibility of capital losses sustained in a stock transaction of any corporation failing to qualify as a closed corporation shall be allowed only as a deduction against capital gains arising from the sale or disposition of shares of stocks of another similar corporation failing to qualify as a closed corporation. (iv) the net capital losses sustained during the quarter shall be allowed as a capital loss deductible in any quarter of the same taxable year only. (d) The entire amount of capital gains and capital loss shall be considered without taking into account the period or duration during which the stocks were held by the seller up to disposition for purposes of computing net capital gains. (e) In cases of gains arising from installment sales of shares of stocks, the provisions of Section 43 of the Tax Code and its implementing regulations shall apply. SECTION 7-A. Limitation on Substantiation Requirements ; Penalty for Violation Thereof . For purposes of imposing the capital gains tax realized from stock transactions, only the selling price, acquisition cost and the allowable deductible expenses may be looked into in the verification of tax returns. In no case shall the inquiry be made as to the sourcing of funds used in the stock exchanged. Any officer or employee in the Bureau of Internal Revenue who violates this prohibition shall be subject to removal or suspension from office." (As amended by Section 1, Revenue Regulations No. 3-81 dated May 29, 1981.) aisa dc SECTION 8. Manner of Filing Returns and Payments of Taxes . The final capital gains tax herein imposed shall be paid upon filing of return, in duplicate, with the Revenue District Officer, or the Collection Agent concerned or duly authorized Treasurer of the Municipality where the taxpayer's principal office is located and where its books of accounts are kept on or before the fifteenth day of the fourth month following the close of the taxable year. The return (B.I.R. Form No. ___) shall cover all transactions of stock classified as capital assets effected during the taxable year and shall be filed whether the taxpayer realized capital gains or sustained losses during the year for which a return is filed. If a taxpayer elects and is qualified to pay the capital gains tax on stock transaction on installments, the amount of the tax due on its installment payment shall be determined as follows: The final capital gains tax shall be computed on the basis of the entire amount of gain realized from the sale or disposition of share of stock and the tax so computed may be paid in installments. The amount of the tax on each installment shall be the proportion of the tax so determined which bears to the total installment payment received over the total selling price or, to the total contract price in case of sale of mortgaged shares of stock or where the mortgage on such shares is assumed by the purchaser. For this purpose, installment received shall mean (a) On the date of sale or disposition First payment received, including the excess of the mortgage, if any, assumed by the purchaser over the basis of the property sold. (b) Succeeding installments Installment payments actually received by the seller. Illustration: Assume that on October 29, 1980, taxpayer A sold shares of stock which he acquired for P50,000 for P100,000, payable under the following terms: P20,000 down, balance payable in four annual installments beginning 1981. If Mr. A elects to pay in installments being qualified to do so in the above example, the periodic payment of the tax, assuming that no other stock transactions were effected, shall be computed as follows: Selling price P100,000 Less: Cost 50,000 Capital gain P 50,000 Tax due P 5,000 The tax payable upon sale is computed as follows: First payment Portion of x Tax due tax payable Selling price OR P 20,000 x 5,000 P1,000 P100,000 The same formula shall apply to subsequent installments. (As amended by Section 1, Revenue Regulations No. 4-81 dated January 24, 1981). SECTION 9. Nature and Treatment of Net Capital Gains and Taxes Imposed . The net capital gains realized on stock transaction, shall not be included in the gross income of the seller in computing his income tax liability. casia The tax on capital gains on stock transactions shall be considered as a final tax which shall, in no case, be allowed as a deduction against income or credit against income tax or any other taxes. "Sec. 19. Penalties . In addition to civil and criminal penalties for violations of the Income Tax Laws as provided for under Sections 73, 74 and 337 of the Tax Code of 1977, the following administrative penalties incident to delinquency or deficiency prescribed in Sections 51 and 72 of the Tax Code of 1977 shall be imposed. These penalties shall be collected at the same time, in the same manner and as part of the tax. " (a) Surcharges . In case of any failure to make and file a return within the time prescribe by law, not due to willful neglect, there shall be added to the tax twenty-five (25%) per centum of its amount, except that when a return is voluntarily and without notice from the Commissioner or any other revenue officer filed after such time, and it is shown that the failure to file it was due to a reasonable cause, no such addition shall be made to the tax. In case of failure to make and file a return due to willful neglect or in case a fraudulent return is willfully made, there shall be added to the tax or to the deficiency tax, in case any payment has been made on the basis of such return before the discovery of the falsity or fraud, a surcharge of fifty (50) per centum of the amount of such tax or deficiency tax. (b) Interest on deficiency tax . Where a deficiency tax is determined to exist, there shall be collected as part of the tax, deficiency interest at the rate of twenty (20%) per centum per annum from the date prescribe for the payment of the tax to the date the deficiency is assessed: Provided , That the maximum amount of interest that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three (3) years. (c) Additions to tax in case of non-payment . (1) Tax shown on the return . Where the amount determined by the taxpayer as the final capital gains tax is not paid on or before the date prescribed for its payment, there shall be collected as part of the tax, interest upon such unpaid amount at the rate of twenty (20%) per centum per annum from the date prescribed for its payment until it is paid: Provided , That the amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three (3) years. casia (2) Deficiency . Where a deficiency, or any interest assessed in connection therewith, or any addition to the final capital gains tax provided herein is not paid in full within thirty days from the date of notice and demand from the Commissioner of Internal Revenue, there shall be collected upon the unpaid amount, as part of the tax, interest at the rate of twenty (20%) per centum per annum from the date of such notice and demand until it is paid: Provided , That the maximum amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three years. (3) Surcharge . If any amount of the final capital gains tax included in the notice and demand from the Commissioner of Internal Revenue is not paid in full within thirty days after notice and demand, there shall be collected in addition to the interest prescribed herein and in paragraph (b) above and as part of the tax a surcharge of ten (10%) per centum of the amount of tax unpaid. SECTION 11 . * Records to be Kept . Every taxpayer required to file a return pursuant to these regulations shall maintain records as well as all the supporting data used in preparing the returns required to be filed which must be made readily available at its principal place of business. All stock brokers, or transfer agents, or secretary of any corporation, shall maintain records of transactions of all shareowners which must be made readily available at its principal place of business upon specific request of the Commissioner of Internal Revenue or his duly authorized representative. SECTION 12 . Abolition of Transactions Tax . The 1/4 of 1% transaction tax imposed under the provisions of Republic Act No. 6141, as amended by Presidential Decree No. 10 is hereby deemed abolished upon the effectivity of these regulations. SECTION 13 . Repealing Clause . All regulations, rules, orders or portions thereof which are inconsistent with the provisions of these regulations are hereby revoked or amended accordingly. cdt SECTION 14 . Effectivity . These regulations shall take effect and the rates provided in Presidential Decree No. 1739 shall be imposed fifteen (15) days after the publication of these regulations in any newspaper of general circulation in the Philippines or in the Official Gazette. (SGD.) CESAR A. VIRATA Secretary (now Minister) of Finance Recommended by: (SGD.) MISAEL P. VERA Commissioner of Internal Revenue