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Cash Flow Statement – IAS 7

CASH FLOW STATEMENT

The objective of IAS 7  (PAS 7 in the Philippines) is to require the provision of information about the historical changes in cash and cash equivalents of an entity by means of a Cash Flow Statement which classifies cash flows during the period from operating activities, investing activities and financing activities.

BENEFITS OF CASH FLOW STATEMENT INFORMATION

Cash Flow Statement information is vital in assessing the ability of the entity to generate cash and cash equivalents and permits users to develop models to assess and compare the present value of the future cash flows of different entities.

PRESENTATION OF STATEMENT OF CASH FLOWS

The Cash Flow Statement shall report cash flows during the period and shall be divided into 3 sections:

  1. Operating activities;
  2. Investing activities; and
  3. Financing activities.

OPERATING ACTIVITIES

Cash flows from operating activities are primarily derived from the principal revenue-producing activities of the entity. These activities generally result from the transactions and other events that enter into the determination of profit or loss.

List of transactions included in Operating Activities:

(a) cash receipts from the sale of goods and the rendering of services;

(b) cash receipts from royalties, fees, commissions and other revenue;

(c) cash payments to suppliers for goods and services;

(d) cash payments to and on behalf of employees;

(e) cash receipts and cash payments of an insurance entity for premiums and claims, annuities and other policy benefits;

(f) cash payments or refunds of income taxes unless they can be specifically identified with financing and investing activities; and

(g) cash receipts and payments from contracts held for dealing or trading purposes.

Cash Flow Statement

Cash Flow Statement

INVESTING ACTIVITIES

Investing activities involve cash flows that represent the extent to which expenditures have been made for resources intended to generate future income and cash flows.

List of transactions included in Investing Activities:

(a) cash payments to acquire property, plant and equipment, intangibles and other long-term assets. These payments include those relating to capitalized development costs and self-constructed property, plant and equipment;

(b) cash receipts from sales of property, plant and equipment, intangibles and other long-term assets;

(c) cash payments to acquire equity or debt instruments of other entities and interests in joint ventures (other than payments for those instruments considered to be cash equivalents or those held for dealing or trading purposes);

(d) cash receipts from sales of equity or debt instruments of other entities and interests in joint ventures (other than receipts for those instruments considered to be cash equivalents and those held for dealing or trading purposes);

(e) cash advances and loans made to other parties (other than advances and loans made by a financial institution);

(f) cash receipts from the repayment of advances and loans made to other parties (other than advances and loans of a financial institution);

(g) cash payments for futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the payments are classified as financing activities; and

(h) cash receipts from futures contracts, forward contracts, option contracts and swap contracts except when the contracts are held for dealing or trading purposes, or the receipts are classified as financing activities.

FINANCING ACTIVITIES

These activities include cash flows by providers of capital to the entity. List of transactions included in Financing Activities are as follows:

(a) cash proceeds from issuing shares or other equity instruments;

(b) cash payments to owners to acquire or redeem the entity’s shares;

(c) cash proceeds from issuing debentures, loans, notes, bonds, mortgages and other short-term or long-term borrowings;

(d) cash repayments of amounts borrowed; and

(e) cash payments by a lessee for the reduction of the outstanding liability relating to a finance lease.




REPORTING CASH FLOWS FROM OPERATING ACTIVITIES

An entity shall report cash flows from operating activities using either:

(a) the direct method, whereby major classes of gross cash receipts and gross cash payments are disclosed; or

(b) the indirect method, whereby profit or loss is adjusted for the effects of transactions of a non-cash nature, any deferrals or accruals of past or future operating cash receipts or payments, and items of income or expense associated with investing or financing cash flows.

INTEREST AND DIVIDENDS

Cash flows from interest and dividends received and paid are disclosed separately. Each shall be classified in a consistent manner from period to period as either operating, investing or financing activities.

NON-CASH TRANSACTIONS

Investing and financing transactions that do not require the use of cash or cash equivalents shall be excluded from a statement of cash flows. Such transactions shall be disclosed elsewhere in the financial statements in a way that provides all the relevant information about these investing and financing activities.

NECESSARY DISCLOSURES FOR CASH FLOW STATEMENT

  • An entity shall disclose the components of cash and cash equivalents
  • the amount of undrawn borrowing facilities that may be available for future operating activities and to settle capital commitments, indicating any restrictions on the use of these facilities
  • the aggregate amounts of the cash flows from each of operating, investing and financing activities related to interests in joint ventures reported using proportionate consolidation
  • the aggregate amount of cash flows that represent increases in operating capacity separately from those cash flows that are required to maintain operating capacity
  • the amount of the cash flows arising from the operating, investing and financing activities of each reportable segment
  • The separate disclosure of cash flows that represent increases in operating capacity and cash flows that are required to maintain operating capacity
  • The disclosure of segmental cash flows

IAS 2 – Inventories

IAS 2 – INVENTORIES

The objective of IAS 2 is to set the accounting treatment for inventories. A primary issue in accounting for inventories is the amount of cost to be recognized as an asset and carried forward until the related revenues are recognised. This Standard provides guidance on the determination of cost and its ensuing recognition as an expense, as well as any write-down to net realisable value. It likewise provides regulation on the cost formulas that are used to allocate costs to inventories.

MEASUREMENT

Under IAS 2, inventories shall be measured at the lower of:

  1. cost; or
  2. net realisable value.

COST OF INVENTORIES

The cost of inventories shall comprise all

  1. costs of purchase – encompass the purchase price, import duties and other taxes, and transport, handling and other costs directly attributable to the acquisition of finished goods, materials and services less trade discounts and like items.
  2. costs of conversion – consist of costs directly related to the units of production, such as direct labour. They also include a systematic allocation of fixed and variable production overheads that are used in converting materials into finished goods.
  3. other costs incurred in bringing the inventories to their present location and condition.

Cost of agricultural produce harvested from biological assets

In accordance with IAS 41 Agriculture, inventories comprising agricultural produce that an entity has harvested from its biological assets are measured on initial recognition at their fair value less costs to sell at the point of harvest.




COST EXCLUDED FROM INVENTORY

There are certain costs that are excluded from the cost of inventories and recognized as expenses in the period in which they are incurred. Examples of costs excluded from inventories are as follows:

(a) abnormal amounts of wasted materials, labour or other production costs;

(b) storage costs, unless those costs are necessary in the production process before a further production stage;

(c) administrative overheads that do not contribute to bringing inventories to their present location and condition; and

(d) selling costs.

COST FORMULAS

  1. Specific Identification – costs are attributed to specific items of inventory. This is the suitable treatment for items that are keep apart for a specific project, irrespective of whether they have been bought or produced. Take note that specific identification of costs is unsuitable if there are large numbers of items of inventory that are ordinarily interchangeable.
  2. First-in First-out Method – The FIFO method assumes that the items of inventory that were purchased or produced first are sold first, and consequently the items remaining in inventory at the end of the period are those most recently purchased or produced.
  3. Weighted Average Method – Under the weighted average cost method, the cost of every item is determined from the weighted average of the cost of similar items at the start of a period and the cost of similar items purchased or produced during the period.
IAS 2 Inventory

IAS 2 Inventory

NET REALIZABLE VALUE

The cost of inventories may not be recoverable if those inventories are damaged, if they have become wholly or partially obsolete, or if their selling prices have declined. The cost of inventories may also not be recoverable if the estimated costs of completion or the estimated costs to be incurred to make the sale have increased. The practice of writing inventories down below cost to net realizable value is consistent with the view that assets should not be carried in excess of amounts expected to be realised from their sale or use.

Estimates of net realisable value are based on the most reliable evidence available at the time the estimates are made, of the amount the inventories are expected to realize. These estimates take into consideration fluctuations of price or cost directly relating to events occurring after the end of the period to the extent that such events confirm conditions existing at the end of the period.

RECOGNITION AS AN EXPENSE

Once inventories are sold, the carrying amount of those inventories shall be recognized as an expense in the period in which the related revenue is recognized. The amount of any write-down of inventories to net realizable value and all losses of inventories shall be recognized as an expense in the period the write-down or loss occurs. The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value, shall be recognised as a reduction in the amount of inventories recognised as an expense in the period in which the reversal occurs.

According to IAS 2, some inventories can be allocated to other asset accounts, for example, inventory used as a component of self-constructed property, plant or equipment. Inventories allocated to another asset in this way are recognised as an expense during the useful life of that asset.

NECESSARY DISCLOSURES

Under IAS 2, the financial statements shall disclose:

(a) the accounting policies adopted in measuring inventories, including the cost formula used;

(b) the total carrying amount of inventories and the carrying amount in classifications appropriate to the entity;

(c) the carrying amount of inventories carried at fair value less costs to sell;

(d) the amount of inventories recognised as an expense during the period;

(e) the amount of any write-down of inventories recognised as an expense in the period;

(f) the amount of any reversal of any write-down that is recognised as a reduction in the amount of inventories recognized as expense in the period

(g) the circumstances or events that led to the reversal of a write-down of inventories; and

(h) the carrying amount of inventories pledged as security for liabilities.

Train Law for Minimum Wage Earners

A Minimum Wage Earner (MWE) is a worker in the private sector who is paid the statutory minimum wage, (SMW) or to an employee in the government with compensation income that does not exceed the statutory minimum wage in the non- agricultural sector where the person is assigned. A list of updated minimum wage rates could be found in the DOLE website.

Exemptions from Gross Income

The following receipts of income by a minimum wage earner shall be exempt from tax:

  1. Basic Wage/Salary
  2. Overtime Pay
  3. Holiday Pay
  4. Night Shift Differential
  5. Hazard Pay

Income from all other sources shall be taxable either Final Tax, Capital Gains Tax or Regular Tax for individuals as long as such income is not expressly exempted by law.

Minimum Wage Earner

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Old Law vs. TRAIN Law

There have been no changes to the rules regarding Minimum Wage Earners. The exemptions are still the same and the computation of tax is still the same (if such minimum wage earner receives income that is not exempt from tax). The new graduated rates for individuals shall apply for income that may be subject to regular tax.

Illustrative Tax Problem: Minimum Wage Earners

MWE Illustration 1
Mr. Agcipet, a minimum wage earner makes P300 per day. He worked for 24 days a month and 12 months in 2018. Aside from his basic salary, Mr. Agcipet also received P50,000 as tips from customers and P20,000 overtime pay for the year. In October, 2018, Mr. Agcipet bought a lotto ticket and won a prize of P100,000 before any tax deductions. Mr. Agcipet also received P210,000 commissions from referring friends to Real Estate Brokers. How much income is exempt from income tax?

Click to show the Answer
  • The basic salary P300 x 24 days x 12 months = P86,400 is exempt from tax. And so is the P20,000 overtime pay. The total income exempt from tax is 106,400.
  • Tips from customers and commissions received from real estate brokers are taxable regular income tax.
  • The P100,000 lotto prize is subject to 20% Final Tax

Updated Fringe Benefit Tax – Train Law

Fringe Benefits are those benefits given by an employer to an employee that are not considered as de minimis benefits. Fringe Benefits that are given to Rank and File Employees are subject to regular income taxation (graduated tax rate) while fringe benefits given to Managerial and Supervisory Employees are subject to Fringe Benefit Tax (also considered a final tax) which was amended by the Train Law.

List of Fringe Benefits

  1. Housing Benefits
  2. Expense Account
  3. Membership and other fees paid by employer for social/athletic clubs
  4. Household personnel such as maid or driver
  5. Interest grant on a loan, for the difference between the market rate and actual interest grant
  6. Vehicles of Any Kind
  7. Expenses for foreign travel
  8. Holiday and Vacation Expenses
  9. Educational assistance to the employee or his dependents
  10. Life/health/other non-life insurance premiums in excess of what law allows



General Rule on Valuation of Fringe Benefit

  1. If the Fringe Benefit is given in cash, the value is the total amount of the cash received by the employee, except if the cash would be used to pay rent. If cash is given to be used for rental payment, only 50% of the cash received will be recognized as the value of the fringe benefit.
  2. If non-cash asset is given such as vehicle or house and lot, the value of the non cash asset would be considered as the value of the fringe benefit.
  3. If a managerial or supervisory employee is given free use of a non-cash asset, such as use of a car, the fringe benefit would be 50% of the rental value or depreciation value of the asset. Vehicles would be depreciated over five years while real property would be depreciated over 20 years.

Computation of Updated Fringe Benefit Tax

There are 3 steps in computation of Fringe Benefit Tax

  1. Determine the value of the fringe benefit.
  2. Compute the grossed up monetary value.
  3. Multiply the grossed up monetary value by the rates applicable for each individual. The rate for all individuals excluding nonresident aliens not engaged in trade or business and special aliens is 35%. The Fringe Benefit tax rate for NRA-NETBs is 25% while the FBT rate for special aliens is 15%.
Fringe Benefit Tax Computation

Fringe Benefit Tax Computation

 

Updated Final Tax Rates on Passive Income – Train Law

Final Tax is the tax on Passive Income earned within the Philippines. The train law made some changes regarding certain rates. The differences between the old law and the TRAIN law will be discussed in detail in this post.

What is Passive Income?

Passive income is income that is earned with very minimal to no effort. Examples of passive income include prizes from competitions, winnings from raffle draws, dividend income, interest income, royalties and the like. It is different from active income wherein there is material participation by the person involved in earning such income. Examples of active income include compensation income,business income, and income from practice of profession.

Updated Final Tax Rates on Passive Income

Changes Made by the Train Law

PCSO Lotto Winnings

Before the train law was implemented, all PCSO Lotto winnings were exempt from tax. When the Train Law presented the updated final tax rates, it has limited the exemption of the winnings to the first P10,000. A final tax of 20% is now imposed on the PCSO lotto winnings of Citizens and Resident Aliens on the excess of P10,000.

Interest Income from a Depository Bank under a Foreign Currency Deposit System

The previous final tax rate for Citizens and Residents on interest received under a FCDS was 7.5%. The Train Law doubled the said rate and made it 15% except for nonresident aliens and foreign corporations.

Capital Gains Tax

Capital Gains Tax on the sale of Unlisted Domestic Stocks was also amended under the Train Law. For a complete discussion of Capital Gains Tax, click here.

*For board exam purposes, all final tax rates should be memorized by the examinee.

Sample CPA Board Exam Questions on Final Tax

FINAL TAX EXERCISE 1
Mr. Agcipet, a resident citizen, joined a singing contest held in Magic the Super Mall, Philippines where there were 3 contestants. He won third place in the said contest and received cash net of tax amounting to P12,000. How much is the final tax that was withheld?

Click to show the Answer
Final Tax on Passive Income is withheld at source. To compute for the amount of final tax withheld, simply divide P12,000 by 80% then multiply the tax rate for prizes which is 20%.
FINAL TAX EXERCISE 2

Mr. Edami, a Resident Citizen, earned the following interest income gross of taxes:

  • Interest from savings deposit in Landbank of the Philippines P10,000
  • Interest income earned from lending business P80,000
  • Interest income earned from a bank outside the Philippines P20,000

How much is the final tax on passive income to be paid?

Click to show the Answer

The computation should be P10,000 x 20% = P2,000

Interest income earned from lending business and from bank outside the Philippines is subject to regular tax here in the Philippines.

Individual Income Taxation – Train Law Tax for Individuals

The Train Law which was executed in 2018 has amended a lot of the tax rules incorporated in the NIRC. One of the major changes that was made in the TRAIN Law was the complete revamp of Individual Income Taxation which will be discussed in detail in this post.

Types of Individual Income Earners

  1. Compensation Income Earner – this is an individual who is purely earning compensation income. He has no other income aside from salary and other benefits received by means of employment.
  2. Self-Employed/Businessman – this individual is not an employee, but rather he or she has his/her own business or is practicing his or her profession.
  3. Mixed Income Earner – this individual is earning a salary under an employer – employee relationship and at the same time is practicing his/her profession and/or has a business.
  4. Minimum Wage Earner – this is a compensation income earning individual with earnings that does not exceed the Statutory Minimum Wage in a certain location.

Individual Tax Rates (Tax Regimes) Under the Train Law

Graduated Income Tax Rate for Individual Income Taxation

The table below presents the current and updated graduated tax rates to be used by individual income earners. This table incorporates an exemption of P250,000 on income.

Tax Schedule Effective January 1, 2018 until December 31, 2022:
Not over P250,000 0%
Over P250,000 but not over P400,000 20% of the excess over P250,000
Over P400,000 but not over P800,000 P30,000 + 25% of the excess over P400,000
Over P800,000 but not over P2,000,000 P130,000 + 30%  of the excess over P800,000
Over P2,000,000 but not over P8,000,000 P490,000 + 32% of the excess over P2,000,000
Over P8,000,000 P2,410 + 35% of the excess over P8,000,000

8% Income Tax Regime

Individuals may also opt to use the 8% income tax regime on Gross Receipts and Other Non Operating Income subject to certain rules and conditions.

Individual Income Taxation Rules

Compensation Income Earners

Pure compensation income earners are allowed to use the graduated income tax rate ONLY. They do not have the option to use the 8% income tax regime as stated in the Train Law.

Self Employed Professionals and Businessmen

Self Employed professionals and those individuals engaged in business have the option to use the graduated income tax rates or the 8% income tax regime.

Mixed Income Earners

Mixed income earners shall be taxed using the graduated rate on their compensation income. While they have the option to use the graduated rate or the 8% income tax rate for their business or professional income.

Minimum Wage Earners

The following income earned by a minimum wage earner is exempt from income tax:

  1. Basic Wage/Salary
  2. Overtime Pay
  3. Holiday Pay
  4. Night Shift Differential
  5. Hazard Pay

For a more in-depth discussion of Minimum Wage Earners, click here.

8% Income Tax Regime Rules for Individual Income Taxation

  1. The taxpayer should be earning business income or income from profession
  2. The gross sales or receipts of the taxpayer should not exceed P3M for the taxable year
  3. The intention to avail of the 8% income tax regime should be communicated to the BIR via the first quarter income tax return to be filed on or before May 15 of the current year.
  4. A deduction of P250,000 from the Gross Receipts or Gross Sales is allowed for those purely earning business income or income from profession.
  5. Mixed income earners are not allowed to deduct P250,000 from their business income or income from profession.

Difference: Train Law and Old Law for Individual Income Taxation

  Old Law Train Law
Personal Exemption P50,000 None
Additional Exemption P25,000 per child or PWD relative None
Health/Hospitalization Insurance P2,400 None
Highest Rate in Tax Table 32% 35%
Exemption in the tax table None First P250,000
8% optional rate Not Applicable Applicable

Computation of Annual Individual Income Tax

EXAMPLE 1: MWE

Mr. Early Bird, works at CPARTC Inc. He is not engaged in business nor has any other source of income other than his employment. For 2018, Mr. Early Bird earned a gross compensation income of P135,000 for 12 months (including benefits). The minimum wage in his place of work is P450 per day. Mr Early Bird has worked for 24 days every month. The taxpayer contributed to the SSS, Philhealth and HDMF amounting to P5,000 during the year and has received 13th month pay of P11,000. Compute for the Income tax payable.

Click to show the Answer
The MWE is exempt from tax
EXAMPLE 2: SELF EMPLOYED

Mr. Agcipet Bird, a professional entertainer, had the following data for 2018:

  • Gross Sales P1,500,000
  • Operating Expenses  300,000
  • Direct Cost 800,000

Compute the total tax to be paid of Mr. Agcipet Bird for the taxable year 2018 assuming that he used:

  1. Graduated Tax Rate
  2. 8% Flat Rate
Click to show the Answer

OPTION 1 (Graduated)

OPTION 2 (8%)

       

EXAMPLE 3: VAT THRESHOLD

Mr. Agamote is a prominent contractor who offers architectural and engineering services. Since his career kickstarted, his total receipts amounted to P4,250,000 for taxable year 2018. His recorded cost of services and operating expenses were P2,150,000 and P1,000,000 respectively. Can Mr. Agamote avail of the 8% tax rate?

Click to show the Answer

The BIR will not allow Mr. Agamote to use the 8% tax rate because his total receipts exceeded the P3 million VAT threshold.

EXAMPLE 4: MIXED INCOME EARNER

Mr. Old Bird, has total taxable salary for 2018 amounting to P1,500,000. He also has a canteen which generated gross sales of P2,500,000 with direct costs of P800,000 and operating expenses of P300,000. Compute for the income tax due assuming that he:

  1. Used the graduated tax rate for business income
  2. Used the 8% flat rate for business income.
Click to show the Answer

Solution:

Requirement 1

Requirement 2

individual income taxation

 

 

 

 

 

 

Capital Gains and Losses – Tax Rules on Sale of Capital Assets

*This post deals with the sale of capital assets except Real Property and Shares of Stocks. The taxation rules for these two assets are discussed another post: Capital Gains Tax – Train Law Updates

Capital Asset vs Ordinary Asset

Ordinary assets are assets that are used in the ordinary course of business such as office equipment, factory building, delivery truck, and merchandise inventory. Capital assets on the other hand are assets that are not used for business like jewelry and a personal car. Residential house and lot and unlisted domestic stocks that are NOT owned by dealers are considered as capital assets but are governed by special taxation rules and therefore discussed in another post.

EXERCISE 1

Exercise: Determine if the following is either a Capital Asset or an Ordinary Asset

  1. Factory Building
  2. Delivery truck
  3. Personal car
  4. Unlisted Stocks held by a dealer or broker
  5. Merchandise inventory
  6. Residential House and Lot
  7. Antique piano used as display in home
  8. Family home
Click to show the Answer
  1. Factory Building – ordinary asset
  2. Delivery truck – ordinary asset
  3. Personal car – capital asset
  4. Unlisted Stocks held by a dealer or broker – ordinary asset since it is held by a dealer
  5. Merchandise inventory – ordinary asset
  6. Residential House and Lot – capital asset subject to 6% capital gains tax
  7. Antique piano used as display in home – capital asset
  8. Family home – capital asset subject to 6% capital gains tax

Computation of Capital Gains Gains and Losses

The sale of a capital asset may either result to a gain, a loss, and neither a gain nor a loss.

  • A sale results in a gain if the Selling Price (SP) is greater than the Cost (C)
  • A sale results in a loss if the Selling Price is less than the Cost
  • There is no gain or loss if the Selling Price is equal to Cost

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Tax on Capital Gains and Losses

Gains on sale of capital assets are taxable regular income tax – either graduated rate or the 8% Income Tax regime for individuals and 30% tax rate for corporations. Tax on sale of real property and unlisted domestic stocks classified as capital assets are taxed a final Capital Gains Tax discussed in another post. Capital losses are of course, not taxable and may be used as a deduction.

Net Capital Loss Carry Over

A net capital loss for the current year may be deducted against the net capital gain of the succeeding year given the following rules:

  • The loss may be deducted in the next year ONLY.
  • Net capital loss may be claimed as deduction by individuals ONLY. Corporations are not allowed to carry over capital losses to the next year.
  • The amount to be deducted would be the lower among the following amounts: the net capital gain of the succeeding year, the net capital loss carry over or the net income in the year the net capital loss carry over was incurred.

Holding Period Rule

The holding period rule is unique to sale of capital assets and is applicable to INDIVIDUALS ONLY. The holding period rule is not applicable for corporations. Here are the rules:

  • If the capital asset sold was held by the individual for 1 year or less (short term), 100% of the gain or loss on such sale is recognized in the income tax return.
  • If the capital asset sold was held by the individual for more than 1 year (long term), 50% of the gain or loss on such sale is recognized in the income tax return.

*Note that the Holding Period Rule and the Net Capital Loss Carry Over Rule is not applicable for Real Property and Unlisted Domestic Stocks classified as capital asset.

EXERCISE 2

Problem: Capital Gains and Losses from Sale of Capital Asset

Data of the gains and losses from the sale of capital assets of Mr. J are as follows:

  • Residential House and lot (holding period 6 years, cost P500,000) at a gain of P100,000
  • Personal Car (holding period 3 years, cost P800,000) at a loss of P100,000
  • Jewelry (holding period 6 months, cost P400,000) at a gain of P250,000
  • Unlisted domestic stocks (holding period, 1 year, cost P200,000) at loss of P80,00
  • Antique furniture (holding period, 2 years, cost P500,000) at a gain of P300,000

How much is the net capital gain or loss subject to regular tax?

Click to show the computation
  • Personal Car – (100,000/2) long term holding period (P50,000)
  • Jewelry – short term holding period P250,000
  • Antique furniture – (300,000/2) long term holding period P150,000

Net capital gain subject to regular tax = 250,000 + 150,000 – 50,000 = P350,000

*Sale of residential house and lot is subject to 6% Capital Gains Tax.

*Sale of unlisted domestic stocks is subject to 15% Capital Gains Tax.

Capital Gains Tax – Train Law Update

CAPITAL GAINS TAX

Capital Gains Tax (CGT) is the tax on gains from sale of the following Capital Assets:

  • Real Property located in the Philippines – CGT rate is 6% of FV or SP whichever is higher
  • Unlisted Domestic Shares of Stock (whether preferred or common) – updated CGT rate is 15% of the gain

Sale of other personal properties classified as capital assets are subject to regular income tax.

Capital Gains Tax on Sale of Real Property

The sale of Real Property in the Philippines classified as a capital asset is taxed 6% capital gains tax based on the highest among the following values:

  • Zonal Value as determined by the BIR
  • Assessed value as per assessor’s office
  • Selling Price

Sample Problem – Capital Gains Tax on Sale of Real Property

Mr. Don Alak sold his residential house and lot at a Selling Price of P5M. The Zonal Value as per BIR at the time of sale was P4.5M while the assessed value amounted to P6M. The house and lot was purchased at a cost of P3M. The Capital Gains Tax would be computed as follows:

Assessed Value of P6M x CGT Rate of 6% = P360,000

Note that the gain on sale (P5M selling price less P3M cost) is irrelevant in computing for the CGT on sale of real property.

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Exemption from 6% CGT on Sale of Real Property

If the seller of the real property uses the proceeds to purchase a new principal residence, the sale would be exempt from the 6% capital gains tax provided that:

  1. the seller must be a citizen or resident alien
  2. the sale involves the principal residence of the seller
  3. the proceeds are utilized to purchase a new principal residence
  4. the BIR is notified by the taxpayer of his intention to avail of the exemption within 30 days of the sale
  5. the reacquisition of the new residence must be within 18 months from the date of sale
  6. the capital gains tax is held in escrow in favor of the government
  7. the exemption can be availed once every 10 years
  8. the historical cost or adjusted basis of the principal residence shall be carried over to the new principal residence.

Let us assume that in the above example, Don Alak used all the proceeds to purchase a new residence.

  1. What amount should be deposited in escrow? – the amount to be deposited in escrow is the total capital gains tax amounting to P360,000.
  2. How much is the exemption? – if Don Alak is able to comply with all the requisites, the sale would be exempt from the 6% capital gains tax and all of the P360,000 deposited in escrow would be returned to him.
  3. How much is the exemption if only P4M of the proceeds of sale was utilized to purchase a new residence? – the exemption would be computed as follows: P4M/P5M x P360,000 = P288,000. The CGT to be given to the BIR would be P360,000 – P288,000 = P72,000.

The Train Law did not make any changes regarding sale of real property classified as capital asset.

Capital Gains Tax on Sale of Unlisted Domestic Stocks

The old BIR law indicated that the sale of unlisted domestic stocks would be taxed as follows regardless of classification of taxpayer:

  • 5% on the first P100,000 gain
  • 10% on the gain in excess of P100,000

The Train Law has amended this rule to simplify the sale of Unlisted Stocks. For all types of individual taxpayers and also for domestic corporations, the CGT on the sale of unlisted domestic stocks would be 15% of the gain. For foreign corporations, the old law still applies.

Sample Problem – Capital Gains Tax on Sale of Unlisted Domestic Stocks

Ben Mel sold stocks of Rams Corp which cost P300,000 for P700,000. How much is the capital gains tax assuming the sale was made on:

  1. 2017
  2. 2018
Click to show the Answer

Computation of CGT if sale was made in 2017:

  • P700,000 – p300,000 = P400,000 gain
  • P100,00 x 5% = P5,000 tax on first P100,000 gain
  • P300,000 x 10% = P30,000 tax on excess over P100,000 gain
  • P5,000 + P30,000 = P35,000 total Capital Gains Tax

Computation of CGT if sale was made in 2018:

  • P400,000 x 15% = P60,000 Capital Gains Tax

 

BIR Train Law Revenue Regulations PDF Download

Revenue Issuances

Revenue Regulations

No. of Issuance Subject Matter Date of Issue
RR No. 15-2018 Amends RR No. 8-2018 particularly on the due date for the updating of registration from VAT to Non-VAT
(Published in Manila Bulletin on April 7, 2018)
Digest | Full Text
April 5, 2018
RR No. 14-2018 Amends the provisions of RR No. 11-2018, particularly Sections 2 and 14 relative to withholding of Income Tax
(Published in Manila Bulletin on April 7, 2018)
Digest | Full Text
April 5, 2018
RR No. 13-2018 Prescribes the Regulations implementing the Value-Added Tax (VAT) provisions under RA No. 10963 (TRAIN Law), which further amends RR No. 16-2005 (Consolidated VAT Regulations of 2005), as amended
(Published in Manila Bulletin on March 19, 2018)
Digest | Full Text
March 15, 2018
RR No. 12-2018 Consolidates Revenue Regulations on Estate Tax and Donor’s Tax incorporating the amendments introduced by RA No. 10963 (TRAIN Law)
(Published in Manila Bulletin on March 19, 2018)
Digest | Full Text
March 15, 2018
RR No. 11-2018 Amends certain provisions of RR No. 2-98, as amended, to implement further amendments introduced by RA No. 10963 (TRAIN Law) relative to withholding of Income Tax
(Published in Manila Bulletin on March 19, 2018)
Digest | Full Text | Annex A | Annex B-1 | Annex B-2 | Annex B-3 | Annex C | Annex D | Annex E | Annex F
March 15, 2018
RR No. 9-2018 Prescribes the rules and regulations implementing the increase in the Stock Transfer Tax pursuant to RA No. 10963 (TRAIN Law)
(Published in Manila Bulletin on February 28, 2018)
Digest | Full Text
February 26, 2018
RR No. 8-2018 Implements the amended provisions on Income Tax pursuant to RA No. 10963 (TRAIN Law)
(Published in Manila Bulletin on February 22, 2018)
Digest | Full Text
February 20, 2018
RR No. 5-2018
Implements the adjustment of rates on Excise Tax on Automobiles pursuant to the provisions of RA No. 10963 (TRAIN Law), amending for the purpose Revenue Regulations No. 25-2003
(Published in Manila Bulletin on January 18, 2018)
Digest | Full Text
January 15, 2018 
RR No. 4-2018
Provides the rules and regulations implementing the Documentary Stamp Tax rate adjustment under RA No. 10963 (TRAIN Law)
(Published in Manila Bulletin on January 18, 2018)
January 15, 2018 
RR No. 3-2018
Provides the revised tax rates on Tobacco Products pursuant to the provisions of RA No. 10963 (TRAIN Law), amending for the purpose Revenue Regulations No. 17-2012
(Published in Manila Bulletin on January 18, 2018)
January 15, 2018 
RR No. 2-2018 Provides the revised tax rates  and other implementing guidelines on Petroleum Products pursuant to the provisions of RA No. 10963 (TRAIN Law)
(Published in Manila Bulletin on January 26, 2018)
Digest | Full Text | Annex A
January 24, 2018 
RR No. 1-2018
Provides the revised tax rates on Mineral Products pursuant to the provisions of RA No. 10963 (TRAIN Law), amending for the purpose Revenue Regulations No. 13-94
(Published in Manila Bulletin on January 18, 2018)
Digest | Full Text
January 15, 2018 


Revenue Memorandum Circulars

No. of Issuance
Subject Matter
Date of Issue
RMC No. 54-2018 Clarifies the imposition of penalties and interest on the filing of an amended return pursuant to the provisions of RA No. 10963 (TRAIN Law)
Digest | Full Text 
June 21, 2018
RMC No. 50-2018 Provides clarifications on certain provisions of RR Nos. 8 and 11-2018 implementing the Income Tax provisions of RA No. 10963 (TRAIN Act) 
Digest | Full Text
June 8, 2018
RMC No. 39-2018 Reiterates the imposition of Value-Added Tax on goods disposed of or existing as of the date of change in or cessation of status of a person as VAT-registered taxpayer pursuant to TRAIN Law
Digest | Full Text
May 24, 2018
RMC No. 32-2018 Prescribes and circularizes the Revised BIR Form No. 1701Q (Quarterly Income Tax Return) January 2018 (ENCS)
Digest | Full Text
May 9, 2018
RMC No. 28-2018 Advises taxpayers to disregard the penalties computed by the Electronic Filing and Payment System (eFPS) in BIR Form Nos. 1602 and 1603 of the eFPS
Digest | Full Text
April 30, 2018
RMC No. 27-2018 Circularizes the new and revised BIR Forms affected by the TRAIN Law
Digest | Full Text | 1601-EQ | 1601-EQ/Guidelines | 1601-FQ | 1601-FQ/Guidelines | 1602-Q | 1603-Q | 1601-C
April 27, 2018
RMC No. 26-2018 Circularizes the Revised BIR form No. 2551Q (Quarterly Percentage Tax Return) January 2018 (ENCS)
Digest | Full Text | Annex A | Guidelines
April 25, 2018
RMC No. 17-2018 Amends RMC No. 89-2017 and certain provisions of RMC No. 54-2014 regarding the processing of claims for issuance of tax refund/Tax Credit Certificate in relation to amendments made in the NIRC of 1997, as amended by RA No. 10963 (TRAIN Law)
Digest | Full Text | Annex A.1 | Annex A.1.1 | Annexes A.1.2-A.1.12 | Annex A.2 | Annex B | Annex C | Annex D | Annex E | Annex F
March 8, 2018
RMC No. 4-2018
Provides the transition procedures for all eFPS filers in the filing of tax return affected by the revised Excise Tax rates on cigars and cigarettes, petroleum products, automobiles, non-essential services (invasive cosmetics procedures), sweetened beverages and mineral products pursuant to RA No. 10963 (TRAIN Law)
Digest | Full Text
January 11, 2018
RMC No. 3-2018
Provides the transition procedures for all taxpayers affected by the revised tax rates on Documentary Stamp Tax pursuant to the provisions of RA No. 10963 (TRAIN Law)
January 9, 2018 
RMC No. 2-2018
Prescribes the transition procedures for all taxpayers filing tax returns affected by the revised tax rates pursuant to the provisions of RA No. 10963 (TRAIN Law)
January 8, 2018 
RMC No. 1-2018
Prescribes the procedures on the use of Withholding Tax Table on Compensation Income and advises on the change of Creditable Withholding Tax Rate on certain income payments to individuals
Digest Full Text Withholding Tax Table
January 4, 2018 
RMC No. 105-2017
Prescribes the Revised Withholding Table on Compensation pursuant to the amendments to the NIRC of 1997 introduced by RA 10963 (TRAIN Law)
December 29, 2017

Revenue Memorandum Orders

No. of Issuance
Subject Matter
Date of Issue
RMO No. 23-2018 Prescribes the policies, guidelines and procedures in the availment of the eight percent (8%) Income Tax Rate option for individuals earning from self-employment and/or practice of professions
Digest | Full Text
May 21, 2018
RMO No. 16-2018 Modifies the Alphanumeric Tax Code for sweetened beverage
Digest | Full Text
April 5, 2018
RMO No. 14-2018 Creates the Alphanumeric Tax Code of selected revenue source under RA No. 10963 (TRAIN Law)
Digest | Full Text
March 9, 2018
RMO No. 9-2018 Creates and modifies the Alphanumeric Tax Code (ATC) of selected revenue source under RA No. 10963 (TRAIN Law)
Digest | Full Text 
February 6, 2018
 RMO No. 1-2018
Creates the Alphanumeric Tax Code (ATC) for sweetened beverages
Digest | Full Text
January 8, 2018 

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Forms

Excise Tax

Form No.
Form Title
 BIR Form No. 2200-S
Excise Tax Return for Sweetened Beverages 

 

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