Special

Topics in Income
Taxation
Ordinary v. Capital Assets
Capital Assets properties held by the taxpayer (whether or not
connected with his trade or business), but does not include the
following:
Stock in trade;
Property of a kind which would properly be included in the inventory;
Property held primarily for sale to customers in the ordinary course of
trade or business;
Property used in the trade or business subject to depreciation; and
Real property used in the trade or business. (NIRC, Sec. 39(A)(1)).
Ordinary vs. Capital Assets
The statutory definition of capital assets is negative in nature. If the
asset is not among the exceptions, it is a capital asset; conversely,
assets falling within the exceptions are ordinary assets. And
necessarily, any gain resulting from the sale or exchange of an asset
is a capital gain or an ordinary gain depending on the kind of asset
involved in the transaction (Tomas Calasanz, et al v. CIR, GR No. L-
26284, October 9, 1986)
Ordinary vs. Capital Assets
Net Capital Gain excess of the gains from the sales or exchanges of
capital assets over the losses from such sales or exchanges.
Net Capital Loss excess of the losses from sales or exchanges of
capital assets over the gains from such sales or exchanges.
Note:
Capital losses from sales or exchanges of capital assets shall be allowed
only to the extent of the gains from such sales or exchanges.
Ordinary losses can be offset against net capital gains if they are subject
to the same tax rate.
Shares of Stock Held as Capital Assets
RR No. 6-2008, as amended by RR No. 6-2013
In case the FMV of the shares of stock sold, bartered, or exchanged
is greater than the amount and/or fair market value of the property
received, the excess of the FMV of the shares of stock sold, bartered
or exchanged over the consideration received shall be deemed a gift
subject to donors tax
Shares of Stock Held as Capital Assets
RR No. 6-2008, as amended by RR No. 6-2013
FMV of the shares of stock sold shall be:
Listed shares sold, transferred, or exchanged outside of the trading
system and/or facilities of the Local Stock Exchange - the closing price
on the day when the shares are sold, transferred or exchanged or on the
day nearest to the date of sale, transfer or exchange
Unlisted shares the value of the shares of stock at the time of the sale
(using the Adjusted Net Asset Method, where the assets and liabilities
are adjusted to fair market values)
Shares of Stock Held as Capital Assets
RR No. 6-2008, as amended by RR No. 6-2013
Assume that Mr. X sold on April 30, 2013 5,000 shares of stock of A
Corporation. A Corporation has 10,000 outstanding shares. The
total assets and liabilities of A Corporation in its latest audited
financial statements are Php20M and Php5M, respectively.
Assuming further that the book value of all its assets and liabilities is
also the market value with the exception of its real property. Also,
the market value of the real properties of A Corporation are as
follows:
Shares of Stock Held as Capital Assets
RR No. 6-2008, as amended by RR No. 6-2013
Book Value MV per tax Zonal Independent Highest of Adjustment
per AFS declaration Valuation Appraiser the 3
Land A 2,000,000 2,500,000 5,000,000 6,000,000 6,000,000 4,000,000

Land B 2,000,000 2,200,000 4,000,000 3,500,000 4,000,000 2,000,000

Building A 1,000,000 2,400,000 3,000,000 3,000,000 2,000,000

Building B 500,000 2,000,000 1,950,000 2,000,000 1,500,000

TOTAL 5,500,000 15,000,000 9,500,000

Shares of Stock Held as Capital Assets
RR No. 6-2008, as amended by RR No. 6-2013
In the above case, the net assets of A Corporation is Php15M while
the adjusted net asset is Php24.5M. As such, the adjusted value per
share of stock of Php2,450 (from Php1,500), the FMV of the shares
sold was Php12,250,000 (5,000 shares at Php2,450 per share)
Real Properties
RR No. 7-2003
All real properties owned by taxpayers engaged in real estate
business ordinary assets
If not registered with the HLURB or HUDCC, consummation during the
preceding year of at least 6 taxable real estate sale transactions,
regardless of amount
Registration as habitually engaged in real estate business with the LGU
or BIR
Real Properties
RR No. 7-2003
All real properties which are for lease or being offered for lease or
otherwise, for use or being used in the trade or business of a real
estate lessor ordinary assets
Real properties which are used or being used or have been
previously used in the trade or business of the taxpayer of a taxpayer
not engaged in the real estate business - ordinary assets
Real Properties
RR No. 7-2003
Taxpayers changing business from real estate business to non-real
estate business the change of business or amendment of the
primary purpose of the business shall not result in the re-
classification of real property held by it from ordinary asset to capital
asset
Taxpayers originally registered to be engaged in the real estate
business but failed to subsequently operate all real properties
originally acquired by it shall continue to be treated as ordinary
assets
Real Properties
RR No. 7-2003
Abandoned and idle real properties real properties formerly forming
part of the stock in trade of a taxpayer engaged in the real estate
business, or formerly being used in the trade or business of a taxpayer
engaged or not engaged in the real estate business, which were later on
abandoned and became idle, shall continue to be treated as ordinary
assets
However, properties classified as ordinary assets for being used in business by
a taxpayer not engaged in real estate business are automatically converted
into capital assets upon showing of proof that the same have not been used in
business for more than 2 years prior to the consummation of the taxable
transactions involving said properties
Real Properties
RR No. 7-2003
Transfer of real properties that have been transferred to a buyer/transferee
real properties classified as capital or ordinary asset in the hands of the seller or
transferor may change their character in the hands of the buyer/transferee.
Real property transferred through succession or donation to the heir or donee who is not
engaged in the real estate business with respect to the real property inherited or donated,
and who does not subsequently use such property in trade or business capital asset in the
hands of the heir/donee
Real property received as dividends by the stockholders who are not engaged in the real
estate business and who do not subsequently use such real property in trade or business
capital asset
Real property received in an exchange shall be treated as ordinary asset in the hands of the
transferee in the case of a tax-free exchange by taxpayer not engaged in real estate business
to a taxpayer who is engaged in real estate business
Real Properties
RR No. 7-2003
Applicable Taxes
1. RC, NRC, RA, NRAETB
6% CGT for real properties located in the Philippines and classified as capital
asset (if buyer is Government or GOCC, the tax liability may be computed at
the option of the individual seller on the basis of either 6% CGT or the
graduated tax rates)
Ordinary income tax for real properties located in the Philippines classified
as ordinary assets
Ordinary income tax for real properties of RC located outsider the
Philippines
Real Properties
RR No. 7-2003
Applicable Taxes
2. NRANETB
6% CGT for real properties located in the Philippines and classified as
capital asset
Real Properties
RR No. 7-2003
Applicable Taxes
3. DC
6% CGT for real properties located in the Philippines and classified as
capital asset
Ordinary income tax sale of real properties located in and outside the
Philippines classified as ordinary asset
Real Properties
RR No. 7-2003
Applicable Taxes
4. RFC
Ordinary income tax sale of real properties located in the Philippines
regardless of classification
Real Properties
RR No. 7-2003
Applicable Taxes
5. NRFC
Final income tax sale of real properties located in the Philippines
Tax Exemption on the Transfer of
Condominium Units as Share in the JVA
BIR Ruling No. 263-2013, July 12, 2013
Issue: Whether the transfer of condominium units from a joint
venture, upon its liquidation, to Venturer D, and K, successor-in-
interest of L, as their shares in the JVA is subject to CGT, DST and
income tax
Held: Yes. To be a tax-exempt Joint Venture undertaking, a
construction project must satisfy or meet the conditions provided in
Section 3, RR No. 10-2012, implementing Section 22(B) of the Tax
Code.
Tax Exemption on the Transfer of
Condominium Units as Share in the JVA
BIR Ruling No. 263-2013, July 12, 2013
Held:
A joint venture or consortium formed for the purpose of undertaking
construction projects which is not considered as a corporation under Section
22 of the Tax Code should be:
For the undertaking of a construction project;
Should involve joining or pooling of resources by licensed local contractors that is licensed
as general contractor by the PCAB of the DTI;
The local contractors are engaged in construction business; and
The JV itself must likewise be duly licensed as such by the PCAB to the CIB
Tax Exemption on the Transfer of
Condominium Units as Share in the JVA
BIR Ruling No. 263-2013, July 12, 2013
Held:
The transfer of the condominium units from the joint venture to K shall be subject to
ordinary income tax based on the current FMV of the condominium units less the
FMV of the property contributed to the joint venture at the moment of death of L,
considering that K acquired the property by inheritance
Moreover, the transfer of condominium units by the JV to Venturer D is subject to
ordinary income tax on the part of the latter based on the current FMV of the
condominium units it received less the costs it actually, directly and exclusively
incurred for the construction of the condominium project
The subsequent sale of K and Venturer D of the condominium units are subject to
ordinary income tax, CWT, VAT and DST
Tax Exemption on the Sale of Real Property
under the Urban Development and Housing
Act of 1992
BIR Ruling No. 243-2016, June 7, 2016
Issue: Whether the socialized housing project of the NHA under the Yolanda
Housing Project is exempt from payment of CGT and project-related income
taxes pursuant to the Urban Development and Housing Act of 1992

Held: Yes. Under Section 20(d) of RA No. 7279, members of the private sector
participating in socialized housing shall be given the incentive of exemption from
the payment of the following:
Project-related income taxes;
CGT on raw lands used for the project;
VAT for the project contractor
Sale of Real Property Classified as Capital
Assets
BIR Ruling DA (C-015) 071-2010, May 21, 201
Issue: Whether the proceed from the sale of real properties by Company
P, a non-stock, non-profit corporation committed to social development, is
not subject to income tax, particularly, CGT

Held: Pursuant to Section 30 of the Tax Code, the income of whatever

kind and character of associations organized for non-profitable purposes
from any of its properties, real or personal, or from any of its activities
conducted for profit, regardless of the disposition made of such income,
shall be subject to tax.
Sale of Real Property Classified as Capital
Assets
BIR Ruling DA (C-015) 071-2010, May 21, 201
Held: Hence, the sale of Company P of its 3 contiguous lots is
subject to CGT based on the gross selling price or current FMV,
whichever is higher.
Non-Redemption of Properties Sold
During Involuntary Sales
RR No. 9-2012
In case of non-redemption of properties sold during involuntary
sales, regardless of the type of proceedings and personality of
mortgagees/selling persons or entities, the CGT imposed under the
Tax Code if the property is a capital asset shall become due.
The buyer, who is deemed to have withheld the CGT due from the
sales, shall then file the CGT return and remit the said tax to the BIR
within 30 days from the expiration of the applicable statutory
redemption period.
Non-Redemption of Properties Sold
During Involuntary Sales
RR No. 9-2012
The CGT shall be based on whichever is higher of the consideration
(bid price) or the FMV or zonal value
CGT Exemption on the Conveyance of the
Title of the Property to the Trustor from the
Trustee
BIR Ruling No. 067-2014, February 20, 2014
Issue: Whether the conveyance of the title of the property from the
trustee to the trustor is exempt from CGT
Held: Yes. The transfer of the property by the trustee to the trustor,
as the true and beneficial owner is without monetary consideration
and is merely a confirmation of title in favor of the beneficial owner
thereof. Thus, the same is not subject to CGT.
Tax Exemption of the Assignment of Rights
over Certain Real Properties covered by
Different Titles to a DC
BIR Ruling No. 290-2013, July 29, 2013
Issue: Whether the assignment of rights made by Company S to Company B
prior to the expiration of redemption period is still subject to CGT
notwithstanding that CGT has been paid already on a prior foreclosure sale and
that only rights on properties were assigned
Held: The Deed of Assignment executed by Company S to Company B can be
treated as contract of sale notwithstanding that the former had only inchoate
rights over the subject properties and the latter merely steps into the shoes of
the assignor without acquiring a better right than what the assignor had in the
property to which the assigned right pertains. Upon the expiration of the
redemption period, Company Ss inchoate rights and interest over the foreclosed
properties effectively conveyed ownership of the properties to it from Company
S.
Tax Exemption of the Assignment of Rights
over Certain Real Properties covered by
Different Titles to a DC
BIR Ruling No. 290-2013, July 29, 2013
Held: Accordingly, the assignment by Company S to Company B over
the said property is subject to CGT and DST.
Exemption from CGT and DST of the sale
of Agricultural Land
BIR Ruling No. 134-2013, April 5, 2013
Issue: Whether the sale of agricultural land by L Bank under RA No. 6657 (CARL)
in favor of Mr. F, pursuant to Department of Agrarian Reform Order of Award
dated March 20, 2006, is exempt from the payment of CCGT and DST
Held: Yes. The transfer is exempt from CGT and DST pursuant to Section 66 of
CARL, which provides that transactions involving a transfer of ownership,
whether from natural or juridical persons, shall be exempted from taxes arising
from capital gains.
The said transaction shall also be exempted from registration fees, and all other
taxes and fees for the conveyance or transfer thereof, provided, that all
arrearages in RPT, without penalty or interest, shall be deductible from
compensation.
Exemption from CGT and DST of
Reconveyance of Titles by Virtue of the
Rescission of a Contract of Sale
BIR Ruling No. 178-2013, May 17, 2013
Issue: Whether the reconveyance of the TCTs from the sale of 2 parcels of
land between A Co. and B Co., both DCs, due the failure of B Co. to comply
with certain obligations in the contract resulting in the rescission of such
by virtue of a court order, is subject to CGT and DST
Held: No. The rescission of a contract would not give rise to a taxable
event for 2 reasons: (a) the result of rescission is as if there was no sale,
transfer or exchange; hence, no income is realized; (b) the return of the
object of the rescinded contract is not for monetary consideration and is
merely an acknowledgment or confirmation of the title and ownership of
the original owner of the property. Hence, the reconveyance of TCTs by
virtue of a rescission of the contract of sale is not subject to CGT and DST.
Exchange of Properties without
Monetary Consideration
BIR Ruling No. 042-2012, February 9, 2012
Issue: Whether the exchange of real properties without monetary
consideration by 2 different spouses because of the mistake in
relocating their respective lots during a relocation survey made by a
licensed geodetic engineer is exempt from CGT
Held: No. The BIR ruled that since the exchange transaction is
without any monetary consideration and considering further that
the execution of the Deed of Exchange is merely to correct the
mistake resulting from the designation of the lot, the same is not
subject to DST
Sale of Shares of Stock Classified as
Capital Assets
Not Traded in the PSE
A final tax at the rates prescribed below is imposed upon the net
capital gains realized during the taxable year from the sale, barter,
exchange or other disposition of shares of stock in DC
First Php100K 5%
Greater than Php100K 10%
Same rates for all kinds of taxpayers
Sale of Shares of Stock Classified as
Capital Assets
Traded in the PSE
A tax at the rate of of 1% of the GSP or gross value in money of the
shares of stock, sold, bartered or exchanged or otherwise disposed
which shall be paid by the seller or transferor
Liquidating Dividend
BIR Ruling No. 363-2014, September 22, 2014
Issue: Whether the transfer of Company P, the liquidating corporation, of a
parcel of land to its stockholder, Mr. X, by way of liquidating dividend, (a)
generates a gain or less on the part of Company P and (b) generates a capital
gain or loss on the part of Mr. X.
Held: (a) No. The transfer by a liquidating corporation of its assets to its
stockholders in exchange for the surrender and cancellation of the shares held
by the stockholders is not a sale, and therefore is exempt from corporate income
taxes, creditable withholding tax and DST. Thus, a liquidating corporation does
not realize gain or loss in a partial or complete liquidation. Conversely, a
liquidating corporation is not subject to tax on its receipt of the shares
surrendered by its shareholders pursuant to a partial or complete liquidation.
Liquidating Dividend
BIR Ruling No. 363-2014, September 22, 2014
Held: (b) Yes. Under Section 73(A) of the Tax Code, where a
corporation distributes all of its assets in complete liquidation or
dissolution, the gain realized or loss sustained by the stockholder
shall be treated as capital gain or loss subject to regular income tax
rates under the Tax Code, and not to the CGT on the sale of shares.
The liquidating gain shall be the difference between the adjusted
cost basis of the shares and the FMV of the property received as
liquidating dividends
CGT on Shares of Stock
MCQ (a Filipino citizen who is a compensation income earner) holds
shares of stock in C Corporation and ADB Company Ltd (both DCs) as
investments. In 2013, MCQ decided to sell 11,000 common shares in
C Corporation, bought in 2011 at Php550K to Joan Sunico at
Php800K. Moreover, in the same year, MCQ also sold the shares of
ADB Company Ltd through the local stock exchange at Php600K,
which is Php100K more than its cost and incidental expenses.
How much is the CGT on the sale of stock in C Corporation and in
ADB Company Ltd., if any.
Sale of Capital Assets Other than Real
Property and Shares of Stock that are Subject
to a Special CGT Rate
The net capital gain realized from the sale of assets (other than real
property located in the Philippines) and shares of stock of DCs
classified as capital assets shall be subject to ordinary income tax
MCIT Persons Liable
DC and RFC
Whenever such corporation has zero or negative taxable income
Whenever the amount of MCIT is greater than the normal income tax due
from such corporation
MCIT Limitations
The MCIT shall apply only to DCs and RFCs subject to the normal
corporate income tax
In the case of a DC whose operations or activities are partly covered
by the RCIT and a special income tax system, the MCIT shall apply on
operations covered by the RCIT
MCIT Commencement
Beginning on the fourth taxable year in which the corporation
commenced business operations
From the time of registration with the BIR, not the start of
commercial operations
MCIT Exempted Entities
DCs operating as proprietary educational institutions subject to tax
at 10% on their taxable income
DCs engaged in hospital operations which are nonprofit subject to
tax at 10% on their taxable income
DCs engaged in business as depositary banks under the expanded
foreign currency deposit system on their income from foreign
currency transactions which has been subjected to final income tax
at 10%.
MCIT Exempted Entities
RFCs engaged in business as international carrier subject to tax at
2 % of their Gross Philippine Billings
RFCs engaged in business as Offshore Banking Units on their income
from foreign currency transactions which has been subjected to a
final income tax at 10% of such income
RFCs engaged in business as ROHQs subject to tax at 10% of their
taxable income
Firms that are taxed under a special income tax system
MCIT Rationale
To forestall the prevailing practice of DCs and RFCs of overclaiming
deductions in order to reduce their income tax payments.
As a tax on gross income, MCIT prevents tax evasion and minimizes
tax avoidance scheme achieved through sophisticated and artule
manipulations of deductions
MCIT Rate
2% of Gross Income
Gross Income equivalent to gross sales less sales returns, discounts
and allowances and COGS.
COGS includes all business expenses directly incurred to produce
the merchandise to bring them to their present location and use
Excluded from Gross Income Income exempt from income tax and
those subjected to final withholding tax
MCIT Quarterly Computation
RR No. 12-2007
If the quarterly MCIT is higher than the quarterly normal income tax,
the tax due to be paid for such taxable quarter at the time of filing
the quarterly corporate income tax return shall be the MCIT.
Items allowed to be credited against quarterly MCIT due:
CWT
Quarterly corporate income tax payments under the normal IT
MCIT paid in the previous quarters (previous years not allowed)
MCIT Annual Computation
The final comparison between the normal income tax payable and
the MCIT shall be made at the end of the taxable year.
The payable or excess payment in the Annual Income Tax Return
shall be computed taking into consideration corporate income tax
payment made at the time of filing of quarterly corporate income tax
returns whether this be MCIT or normal income tax
MCIT Annual Computation
In the computation of annual income tax due, if the normal income
tax due is higher than the computed annual MCIT, the following shall
be allowed to be credited against the annual income tax:
Quarterly MCIT payments
Quarterly normal income tax payments
Excess MCIT in prior years (subject to the prescriptive period)
CWTs in the current year
Excess CWTs in the prior year
MCIT Annual Computation
If in the computation of the annual income tax due, the computed annual
MCIT due is higher than the annual normal income tax due, the following
may be credited against annual MCIT due:
Quarterly MCIT payments
Quarterly normal income tax payments
CWTs in the current year
Excess CWTs in the prior year

Excess MCIT from the previous taxable years shall not be allowed to be
credited against the annual MCIT due as the same can only be applied against
normal income tax.
MCIT Excess MCIT
Any excess of MCIT over the normal income tax can be carried
forward on an annual basis 3 years
MCIT BIR Rulings
BIR Ruling Nos. DA-147-2007 dated March 8, 2007 and DA S40M 018
436-08 dated November 18, 2008
The excess MCIT credit balances of the absorbed corporations in
statutory merger of commonly-owned corporations may be transferred
and carried over to the surviving corporation
BIR Ruling No. 041-00, September 15, 2000
GOCCs are subject to MCIT
Relief from MCIT
Section 27(E), Tax Code
The Secretary of Finance, upon the recommendation of the CIR, may suspend
the imposition of the MCIT upon submission of proof by the applicant-
corporation that the corporation sustained substantial losses on account of
the following:
Prolonged labor dispute;
Force majeure; and
Legitimate business reverses
Net Operating Loss Carry Over (NOLCO)
Section 34 (D)(3), Tax Code
NOLCO shall mean the excess of allowable deduction over gross
income of the business in a taxable year
Can be carried over as a deduction from gross income for the next 3
consecutive taxable years immediately following the year of such loss.
Any net loss incurred in a taxable year during which the taxpayer was
exempt from income tax shall not be allowed as a deduction
Net Operating Loss Carry Over (NOLCO)
Allowed only if there has been no substantial change in the
ownership of the business or enterprise in that
No less than 75% in nominal value of the outstanding issued shares, if
the business is in the name of a corporation, is held by or on behalf o
the same person; or
Not less than 75% of the paid up capital of the corporation, if the
business is in the name of a corporation, is held by or on behalf of the
same persons.
This rule shall only apply to a transfer or assignment of the taxpayers
NOL as a result of or arising from the said taxpayers merger or
consolidation or business combination with another person
Net Operating Loss Carry Over (NOLCO)
Rules for mines other than oil and gas wells
A NOL without the benefit of incentives provided for under the
Omnibus Investments Code of 1987, incurred in any of the first 10 years
of operation may be carried overs as a deduction from taxable income
for the next 5 years immediately following the year of such loss
The entire amount of the loss shall be carried over to the first of the 5
taxable years following the loss, and any portion of such loss, which
exceeds the taxable income of such first year shall be deducted in like
manner from the taxable income of the next remaining 4 years.
Net Operating Loss Carry Over (NOLCO)
In general, NOLCO shall be allowed as a deduction from the gross income
of the same taxpayer who sustained and accumulated the NOL regardless
of the change in its ownership. This rule shall also apply in the case of a
merger where the taxpayer is the surviving entity.

Unless otherwise provided in the regulations, NOLCO of the taxpayer shall

not be transferred or assigned to another person, whether directly or
indirectly, such as, but not limited to, the transfer or assignment thereof
through a merger, consolidation or any form of business combination of
such taxpayer with another person.
Net Operating Loss Carry Over (NOLCO)
Examples:
1. Company X has NOLCO. Company Y purchased from Company X
stockholders all of their shares in Company X.
Can Company X still use its existing NOLCO?

2. Company A has NOLCO. It merged with Company B, with

Company A as the surviving entity.
Can Company A still use its NOLCO after merger
Net Operating Loss Carry Over (NOLCO)
Examples:
3. Company A has NOLCO. It merged with Company B, with
Company B as the surviving entity.
Can Company B still use the NOLCO acquired from Company A?
It depends. Company B can only use NOLCO from Company A if the
shareholders of Company A gains control of at least 75% in the
nominal value of the outstanding issued shares or paid up capital of
Company B as transferee.
Net Operating Loss Carry Over (NOLCO)
Sec. 2, RR No. 14-2001
The 3-year period on the carry-over of NOLCO shall continue to run
notwithstanding the act that the corporation paid its income tax
under the MCIT computation
NOLCO shall be availed of on a FIFO basis
The NOL incurred by a taxpayer in the year in which a substantial
change in ownership in such taxpayer occurs shall not be affected by
such change in ownership.
Net Operating Loss Carry Over (NOLCO)
Taxpayers Entitled to Deduct NOLCO (Sec. 4, RR No. 14-2011)
DC and RFC subject to the normal income tax or preferential tax
rates
Net Operating Loss Carry Over (NOLCO)
Taxpayers Not Entitled to Deduct NOLCO (Sec. 4, RR No. 14-2011)
OBU of a foreign banking corporation
FCDU of a domestic or foreign banking corporation
BOI registered enterprises enjoying the ITH incentive on their registered
activities
Enterprises registered with the PEZA and SBMA on their registered
activities
Foreign corporations engaged in international shipping or air carriage
business in the Philippines
Other persons enjoying exemption from income tax
Tax-Free Exchange
BIR Ruling No. 515-2012, August 3, 2012
Issue: Whether the transfer by Mr. H of his shares in Company O to
Company U, giving him control by owning 58.15% of the total voting
stock of Company U, is exempt from CGT and DST
Whether the transfer by Mr. R of his shares in Company P to
Company U, giving him control by owning 24.33% of the total voting
stock of Company U, is exempt from CGT and DST
Tax-Free Exchange
BIR Ruling No. 515-2012, August 3, 2012
Held: (a) Yes. Under Section 40(C)(2) and (6)(c) of the Tax Code, no gain or loss shall be
recognized if property is transferred to a corporation by a person, in exchange for stock
in such corporation, as a result of such exchange, said person, alone or together with
others, not exceeding four persons, gain control of said corporation. The term control
shall mean ownership of at least 51% of the total voting power of all classes of stocks
entitled to vote. Control is determined by the amount of stocks received (i.e., total
subscribed by the transferor).
In determining the 51% stock ownership, only those persons who transferred property
for stock in the same transaction may be counted up to a maximum of five. In short,
combining all the shares to be received by the transferors, the same should total to at
least 51% of the voting power of all classes entitled to vote.
Tax-Free Exchange
BIR Ruling No. 515-2012, August 3, 2012
Held: Applying the said provisions, it is clear that with the exchange
of share of Mr. H alone, he already gains control of Company U as he
acquires 58.15% of the outstanding capital stocks of the total voting
power of all classes of stocks entitled to vote. Hence, no gain or loss
shall be recognized with respect to the transfer of shares by Mr. J in
exchange for shares of stock of the transferee corporation. There is
no need to combine Mr. Hs shares with that of the other transferor
to determine the 51% stock ownership.
Tax-Free Exchange
BIR Ruling No. 515-2012, August 3, 2012
Held: However, Section 40(C)(2) and (6)(c) of the Tax Code merely defers
recognition of the gain or loss from such transactions, for in determining the
gain or loss from subsequent transaction of the property or of the stocks
involved in the exchange, the original or historical cost of the property or stocks
is considered.
Thus, if Mr. H later sells or exchanges the shares of stock he acquired, he shall be
subject to income tax on the gains he derived from such sale or exchange, taking
into consideration that the cost basis of the shares shall be the same as the
original acquisition cost or adjusted cost basis to the transferors of the
properties exchanged therefor; and that the cost basis to the transferee of the
properties exchanged for stocks shall be the same as it would be in the hands of
the transferors.
Tax-Free Exchange
BIR Ruling No. 515-2012, August 3, 2012
Held: In order that the parties to the exchange can avail of the non-
recognition of gains provided, they should comply with the following:
Mr. H must file with his income tax return for the taxable year in which the
exchange transaction was consummated a complete statement of all facts
pertinent to the exchange, including:
A description of the properties he transferred, or his interest in such properties, with a
statement of the original acquisition cost/adjustment cost basis or other basis at the time of
transfer
The kinds of stock received and preferences, if any
The number of shares of each class received
The FMV per share of each class at the date of the exchange
Tax-Free Exchange
BIR Ruling No. 515-2012, August 3, 2012
Held:
Company U must file along with its ITR for the same taxable year the
following
A complete description of the properties received from the transferor
A statement of the original acquisition cost or other basis of the properties in the
hands of the transferor and the adjusted cost basis thereof at the time of the
transfer
Information with respect to the capital stock of the corporation
Tax-Free Exchange
BIR Ruling No. 515-2012, August 3, 2012
Held:
The assignors and Company U shall enclose with their respective ITRs
for the taxable year in which the tax-free exchange occurred a copy of
the request for ruling filed with, and the corresponding ruling issued by
the BUR, both duly stamped received by the appropriate office of the
BIR. Such persons shall include as a note to their respective audited FS
a statement to the effect that they hold such assets/shares acquired in a
tax-free exchange and the year in which such exchange occurred, and in
the taxable years until the subject property are subsequently
transferred to another transferee
Tax-Free Exchange
BIR Ruling No. 515-2012, August 3, 2012
Held:
It is required that within 90 days from receipt of the BIR ruling, the
parties to the transaction must submit a certified true copy of the duly
annotated stock certificates in respect of the transferred shares of stock
of transferee corporation.

(b) No. The transfer by Mr. R, resulting in ownership of only 24.33% of

the total voting shares of Company U shall be treated as a separate
transfer subject to CGT and DST
Tax-Free Exchange
CTA Case No. 1150, May 12, 2015
Issue: Whether the BIR certification/ruling mentioned in RR No. 18-
01 (Guidelines on the Monitoring of the Basis of Property
Transferred and Shares Received, pursuant to a Tax-Free Exchange of
Property for Shares) is required to avail of a tax exemption in an
exchange of property for shares of stock under Section 40(C)(2) of
the Tax Code?
Held: No. The BIR ruling/certification mentioned in RR No. 18-01 is
not a precondition to avail oneself of the tax exemption under
Section 40(C)(2) of the Tax Code.
Tax-Free Exchange
CTA Case No. 1150, May 12, 2015
Held: RR No. 18-01 merely prescribes the guidelines in monitoring the tax-
free exchange of property, in order that in subsequent transfers of said
properties, they shall be taxed accordingly. The issuance does not state a
requirement to apply for a ruling as a prerequisite for the entitlement of
tax exemption. There is nothing in RR No. 18-01 that explicitly requires a
party, in exchanging property for shares of stock, to first secure a BIR
confirmatory certification or tax ruling before it can avail of a tax
exemption or refund.
Thus, securing a BIR Ruling is not a condition sine qua non for availing a
tax exemption.
Improperly Accumulated Earnings Tax
(IAET)
Rate: 10%
Base: Improperly accumulated taxable income earned beginning
January 1, 1998
Improperly Accumulated Earnings Tax
(IAET)
Sec. 29, Tax Code, as implemented by RR No. 2-01
Sec. 24-28, Tax Code
Rationale:
If earnings/profits were distributed, the shareholders would then be
liable for income tax
Final tax rates: DC/RFC Exempt; NRFC 30%/15%; RC/RA 10%;
NRAETB 20%; NRANETB 25%
Improperly Accumulated Earnings Tax
(IAET)
Nature:
A penalty imposed on a corporation for the improper accumulation of
earnings and as a form of deterrent to avoid tax upon shareholders.
The touchstone of the liability is the purpose behind the accumulation of the
income and not the consequences of the accumulation.
Thus, if the failure to pay dividends is due to some other causes, such as the
use of undistributed earnings and profits for the reasonable needs of the
business, such purpose would not generally make the accumulated or
undistributed earnings subject to tax.
However, if there is a determination that a corporation ahs accumulated
income beyond the reasonable needs of the business, the 10% of the IAET
shall be imposed.
Improperly Accumulated Earnings Tax
(IAET)
Coverage:
DCs classified as closely-held corporations
Closely-held corporations (being listed is irrelevant)
At least 50% in value of the OCS, or
At least 50% of the total combined voting power of all classes of stock entitled to
vote
Is owned, directly or indirectly, by or for not more than 20 individuals.
Improperly Accumulated Earnings Tax
(IAET)
Rules for determining whether a corporation is closely-held insofar
as basis stock ownership:
Stock not owned by individuals: stock owned directly or indirectly by or
for a corporation, partnership, estate or trust shall be considered as
owned proportionately by its shareholders, partners or beneficiaries
Family and partnership ownership
An individual shall be deemed as owning the stock owned, directly
or indirectly, by or his family, or by or for his partner
The family of an individual includes his brothers or sisters, spouse,
ancestors and lineal descendants
Improperly Accumulated Earnings Tax
(IAET)
Option to acquire stocks
If any person has an option to acquire stock, such stock shall be considered as
owned by such person
An option to acquire such an option and each of a series of option shall be
considered as an option to acquire such stock