GHI, Inc. is a corporation authorized to engage in the business of manufacturing ultra-high density microprocessor unit packages. After its registration on July 5, 2005, GHI, Inc. constructed buildings and purchased machineries and equipment. As of December 31, 2005, the total cost of the machineries and equipment amounted to ₱250,000,000.00. However, GHI, Inc. failed to commence operations. Its factory was temporarily closed effective September 15, 2010. On October 1, 2010, it sold its machineries and equipment to JKL Integrated for ₱300,000,000.00. Thereafter, GHI, Inc. was dissolved on November 30, 2010.
(a) Is the sale of the machineries and equipment to JKL Integrated subject to normal corporate income tax or capital gains tax? Explain. (3%)
(b) Distinguish an ordinary asset from a capital asset.(2%)
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**Answer:** The sale is subject to normal corporate income tax, not capital gains tax. Ordinary assets comprise inventory, property for sale, or depreciable and real property used in trade; capital assets are all other properties. **Legal Basis:**
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Quick check
Under Section 27(D)(5) of the Tax Code, which corporate assets are subject to the 6% final capital gains tax?
Corporate 6% capital gains tax applies exclusively to land and buildings located in the Philippines that are classified as capital assets.
How are capital assets defined under Section 39(A)(1) of the National Internal Revenue Code?
Capital assets are defined negatively as any property held by a taxpayer that does not fall under the statutory definition of ordinary assets.
A manufacturing corporation sells its machinery and equipment at a gain. How is this gain treated for corporate income tax purposes?
Gains from the sale of personal property machinery are included in gross income and taxed at regular corporate income tax rates.
Which of the following properties is classified as an ordinary asset under Section 39(A)(1) of the Tax Code?
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In SMI-ED Philippines Technology v. CIR, why was the sale of machinery not subject to the 6% capital gains tax?
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Learn more about these topics
1. Capital Gains Scope
Section 27(D)(5) of the National Internal Revenue Code imposes a final tax of six percent on capital gains presumed to have been realized from the sale, exchange, or disposition of land and buildings located in the Philippines. This corporate capital gains tax applies exclusively to real properties classified as capital assets. Personal properties, including machineries and industrial equipment, are expressly excluded from the scope of final capital gains taxation. Consequently, any gain or loss realized from selling personal properties forms part of the corporation's gross income subject to regular corporate income tax under Section 27(A).
2. Ordinary Assets Criteria
Under Section 39(A)(1) of the Tax Code, ordinary assets encompass stock in trade, inventory, property held primarily for sale to customers in the ordinary course of business, depreciable property used in trade or business, and real property used in trade or business. If an asset falls within any of these statutory categories, it is classified as an ordinary asset. The gain or loss derived from the sale, exchange, or transfer of ordinary assets is recognized as ordinary gain or loss and is fully incorporated into gross income for corporate income tax computation.
3. Capital Assets Scope
Capital assets are defined negatively under Section 39(A)(1) as all property held by a taxpayer, whether or not connected with trade or business, that does not fall under any of the four statutory categories of ordinary assets. Personal property not held for sale or used in trade generally constitutes a capital asset. However, for corporate taxpayers, capital gains tax is limited solely to sales of real property. Therefore, even if personal property machinery is considered a capital asset, its sale remains subject to normal corporate income tax rather than final capital gains tax.