CAR requirement on stock share transfer

IN THE course of the Corona impeachment trial in 2012, Senate President Juan Ponce Enrile and Bureau of Internal Revenue (BIR) Commissioner Kim Jacinto-Henares came to a disagreement on whether the National Internal Revenue Code, as amended (NIRC), requires that a Certificate Authorizing Registration (CAR) should be issued prior to recording any transfer by a Philippine resident of shares of stock not traded in the Stock Exchange. While Commissioner Jacinto-Henares was of the opinion that a CAR is required, the Senate President’s position was that there is no law imposing such a requirement.

Sometime in August 2012, the BIR issued Revenue Memorandum Circular No. 37-2012 (RMC 37-2012) for the purpose of clarifying Section 11 of Revenue Regulations No. 06-08 (RR No. 06-2008). In brief, Section 11 prohibits the registration of any sale, exchange, transfer or similar transaction conveying ownership or title to any share of stock unless receipts of payment of the required taxes (e.g., capital gains tax) are filed with and recorded by the stock transfer agent or corporate secretary. RMC 37-2012 clarifies this Section 11 in that, not only must receipt of payments of tax be filed with the corporate secretary, but "in order to transfer ownership of shares of stock not traded in the Stock Exchange, it is necessary to secure a CAR (Certificate Authorizing Registration)" from the BIR.

Nature of Shares of Stock. Shares of stock are personal property of the stockholder, who as owner has the inherent right to transfer them at will, without unreasonable restrictions. This principle has been upheld and recognized by the Supreme Court, which has repeatedly ruled that a reasonable restriction on the transfer of shares must have its source in legislative enactments and that the right of a transferee/assignee/buyer to have stocks transferred to his name is an inherent right flowing from ownership of the stocks. The Corporation Code makes the qualification, however, that no transfer of shares shall be valid except as between parties until the transfer has been duly recorded in the books of the corporation (i.e., stock and transfer book). Thus, until the name of the transferee is recorded, the corporation is not obliged to recognize the transferee as a stockholder and accord such transferee the rights of a stockholder, such as notice of stockholders’ meetings and voting rights.

In issuing RMC 37-2012, it appears that the BIR is effectively imposing a restraint on the free transferability of shares. This imposition restricting the transfer of shares, however, should not be countenanced as it has not been authorized by legislative enactment. While revenue regulations, as administrative regulations, have been found by the Supreme Court to have the force and effect of law for as long as they do not contravene any statute or the Constitution, a memorandum circular has been held to be merely interpretative in nature and should simply prescribe guidelines to the law which an administrative agency is tasked to enforce.

Existing Legislative Authority. Nevertheless, there are instances wherein the NIRC requires presentment of a CAR prior to the registration of a transfer of shares of stock. These include transfers of shares of stock under Title III of the NIRC (i.e., Estate and Donor’s Taxes), and Section 42(E). The latter provides that a transfer by a non-resident alien or a foreign corporation to anyone of any share of stock issued by a domestic corporation shall not be effected or made in the books of the corporation unless a CAR has been secured. Note that this legislative imposition is placed on transfers by non-resident aliens or foreign corporations only while under RR No. 06-2008, for all other transfers of shares of stock, presentment of receipts of payment of the required taxes to the corporate secretary is all that is necessary to register the transfer in the books of the corporation.

Now, with RMC 37-2012, all transfers of shares of stock not traded in the Stock Exchange, regardless of the nationality of the transferor, requires presentment of a CAR before the transfer can be recorded. Arguably, RMC 37-2012 imposes an additional burden not authorized by legislative enactment and effectively contravenes the principle of free transferability of shares espoused in the Corporation Code. Until a CAR is secured, the transfer cannot be recognized by the corporate secretary even if the stockholder has already provided the receipts proving payment of the required taxes, which is all that was previously required by RR No. 06-2008.

Ultimately, it is the transferee who will be prejudiced because although the payment for shares has been made and there is proof of payment of required taxes, until the CAR can be presented to the corporate secretary, the corporation will not be bound to accord the transferee the rights of a stockholder.

Although intended to ensure the proper payment of taxes, RMC 37-2012 goes beyond legislative intent, and should therefore be re-examined.

Diana G. Dizon is an associate of Angara Abello Concepcion Regala & Cruz Law Offices (ACCRALAW). She can be contacted at 830.8000 or via email at dgdizon@accralaw.com.

source:  Businessworld Column of Amicus Curiae