Concern

A person purchased shares in a hospital for PHP 250,000 in 2022. Now, they plan to sell these shares at the same price (PHP 250,000). They are unsure whether the 15% Capital Gains Tax (CGT) imposed by the Bureau of Internal Revenue (BIR) applies to the selling price (PHP 250,000) or only to any profit earned from the sale.

∇ Legal Contemplator

Let’s begin by carefully unpacking the question. At its core, this is about the application of the Capital Gains Tax (CGT) under Philippine tax laws. However, the phrasing introduces potential complexities, so I’ll start small and build upward.

Step 1: Defining Capital Gains Tax (CGT)

CGT Basics
- CGT is a tax levied on the profit earned from the sale or exchange of a capital asset.
- Key elements are:
  - The "capital asset" (a type of asset not used in trade or business).
  - A "gain" from its sale, typically defined as the difference between the acquisition cost and selling price.
CGT Rate
- Under Philippine law, CGT on the sale of shares not traded on the stock exchange is 15% of the net gain (Republic Act No. 10963, also known as the TRAIN Law).
Important Consideration
- If there is no "gain"—meaning the selling price equals the acquisition cost—would CGT still apply? At first glance, one might assume "no gain, no tax," but is this assumption legally sound? Let me investigate further.

Step 2: Is CGT Based Solely on Gains?

TRAIN Law Provisions
- The CGT provision in Section 24(C) of the Tax Code, as amended, refers specifically to the "net capital gain" as the taxable base.
- "Net capital gain" means selling price minus acquisition cost (and allowable deductions, if applicable).
Observation: Based on this, CGT would theoretically not apply if no gain exists. But let’s dig deeper—are there exceptions?
BIR Regulations on CGT
- The Bureau of Internal Revenue (BIR) may issue regulations that modify or clarify statutory provisions.
- For shares not traded on the stock exchange, BIR Form No. 1707-A is used to compute CGT.
  - This form explicitly asks for "net capital gain."
  - If the computation shows no gain, the tax payable should be zero.
Initial Conclusion: If the selling price equals the acquisition cost, CGT should not apply. But this conclusion feels too simple; could there be overlooked nuances?

Step 3: Are There Exceptions or Hidden Liabilities?

Documentary Stamp Tax (DST)
- Even if CGT is not due, the sale might still be subject to Documentary Stamp Tax (DST).
- DST for shares of stock is calculated at PHP 1.50 for every PHP 200 (or a fraction thereof) of the par value or selling price, whichever is higher.
Note: DST is separate from CGT but is often overlooked by sellers.
Potential Misinterpretation of "15% CGT on the Selling Price"
- Sellers sometimes believe CGT applies to the full selling price. This misunderstanding likely arises because other taxes (e.g., real estate taxes) use gross selling price as the base.
- However, for CGT on shares, the tax base is the "gain," not the selling price.
What if the Sale Price is Artificially Low or High?
- BIR may assess whether the sale price reflects "fair market value" (FMV).
- If FMV is higher than the declared selling price, the BIR might compute CGT based on FMV.
- For hospital shares, FMV might be determined by:
  - Recent comparable sales.
  - Independent valuation.
  - Par value (as a minimum).
Concern: Could the BIR argue that selling the shares at cost is below FMV, triggering additional tax liabilities?

Step 4: Revisiting the Assumptions

No Gain, No CGT?
- Theoretically, CGT should not apply without a gain.
- However, CGT computations rely on accurate disclosures.
  - If acquisition cost or FMV is incorrectly reported, disputes may arise.
Implications of BIR Scrutiny
- Selling at acquisition cost could raise BIR red flags.
- To avoid penalties, proper documentation is critical. This includes:
  - Proof of acquisition cost.
  - Evidence supporting the declared selling price (e.g., valuation reports).

Step 5: Addressing the Concern Head-On

If Selling Price = Acquisition Cost (PHP 250,000)
- CGT = 15% × (Selling Price - Acquisition Cost).
- Since Selling Price = Acquisition Cost, the net gain is zero.
- Therefore, no CGT should apply.
Other Taxes
- DST: PHP 1.50 for every PHP 200 of the selling price.
  - For PHP 250,000: DST = PHP 1,875.
Key Assumption
- The selling price reflects FMV. If the BIR determines otherwise, tax liabilities could change.

Final Answer

The 15% Capital Gains Tax (CGT) should apply only to the net gain, which is the difference between the selling price and acquisition cost. If the selling price equals the acquisition cost (PHP 250,000 in this case), there is no net gain, and CGT should not apply. However, the sale will still incur Documentary Stamp Tax (DST) of PHP 1,875.

To ensure compliance and avoid disputes, proper documentation of the acquisition cost and fair market valuation is recommended.