AS WITH most other transactions, selling or other disposition of shares is a taxable event.
A final tax or capital gains tax (CGT), depending on the amount of net gain realized during the taxable year, is imposed on the sale, barter, exchange or other disposition of shares of stock not traded through the Local Stock Exchange (LSE). If the net capital gain is not over P100,000, a rate of 5% is imposed. On the other hand, if the net capital gain exceeds P100,000, the rate on the excess is 10%.
Note that CGT is also applicable on shares listed in the LSE in cases where these shares are not sold through the stock exchange. The sale of a listed share is also subject to CGT if the listed company fails to comply with the minimum requirement for listing; and with the minimum amount of publicly traded shares.
The taxable gain from the sale is the excess of the amount realized therefrom over the cost of the investment in such shares. A loss arises if there is an excess of the cost of the investment over the amount realized.
On the other hand, the amount realized from the sale or other disposition of the shares is defined as the sum of money received plus the fair market value of the property (other than money) received, if any.
It appears that whatever amount agreed upon between the buyer and the seller shall be accepted as the amount realized for purposes of the determining CGT. It is, but not so.
While the agreed selling price will be the basis for determining the CGT, there is a provision under Section 100 of the Tax Code that donor’s tax shall apply if the consideration in any sale of property is less than the fair market value of the property sold, bartered, or exchanged. The buyer is deemed to have received a gift if the amount he paid is less than the fair market value of the shares.
The donor’s tax is at graduated rates of 0% to 15%. If the buyer is a stranger (not a relative of the seller), the donor’s tax is fixed at 30%. Since in most cases, the donor’s tax will be higher than the capital gains tax, the sellers would opt to sell at the fair market value and be subject to the lower capital gains tax.
So what is the fair market value of the shares?
Previously, the Bureau of Internal Revenue (BIR) issued various regulations and rulings including the comprehensive regulations on sale of shares, Revenue Regulation No. (RR) 06-2008, wherein the fair market value in the case of shares of stock not listed and traded in the local stock exchanges is the book value of the shares of stock as shown in the financial statements (FS) nearest to the date of sale duly certified by an independent certified public accountant.
Under these rules, whatever book value shown in the FS will be accepted regardless of the method of valuation adopted by the company pursuant to the accounting standards.
In the recently issued RR 06-2013, however, the BIR prescribed the use of the Adjusted Net Asset Method whereby all assets and liabilities are adjusted to fair market values. The net of adjusted assets minus the liability values is the indicated value of the equity.
In case of assets in the form of real property, the appraised value at the time of sale shall be the highest of the following: a) the fair market value as determined by the Commissioner; or b) the fair market value as shown in the schedule of valued fixed by the provincial and city assessors; or c) the fair market value as determined by the independent appraiser.
RR 06-2013 illustrates this in the case of Mr. X who sold on April 30, 2013, 5000 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 (AFS) are P25 million and P5 million respectively, resulting to a net asset of P20 million.
It was assumed that the book value of all its assets and liabilities is also the market value with the exception of its real property. Supposing the market values of the real properties of "A Corporation" are as follows: (see table).
Book Value per AFS Monetary Value per Tax Declaration Zonal Valuation Independent Appraiser Highest of the Three Adjustment
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
Based on the table above, the adjusted net asset is P29.5 million, computed as total assets of P25 million plus adjustment of P9.5 million less total liabilities of P5 million.
As such, with the adjusted value per share of stock at P2,950, the fair market value of the shares sold was P14.75 million, computed as 5000 shares at P2,950 per share. If there are no adjustments, the fair market value of the shares sold will only be P10 million, computed as 5000 shares at P2,000 per share.
With the new definition of fair market value, expect higher taxes will be collected on the sale, barter, exchange or other disposition of shares of stock not traded through the LSE, as is probably the objective of the BIR when it issued the new regulations.
In addition to the higher taxes that will be paid, there is the additional burden to have the assets and liabilities of the company revalued to arrive at the fair market value prescribed in this new regulations.
The process will neither be simple nor cheap. And it cannot be avoided.
The reappraisal requires the engagement of an independent appraiser. It is a good thing the new RR did not specifically mention that an FS using the Adjusted Net Asset Method is required to be certified by an independent accountant. Or is it?
And how often should there be a reappraisal? The old regulations accept an FS nearest the date of sale. Under the new regulations, would a reappraisal be required every time there is a sale of the shares?
As discussed above, the coverage of this regulation is not limited to shares not listed in the LSE. It also covers listed shares but which are not sold through the LSE. The definition of "shares of stock" actually include, in addition to shares of stock of a corporation, warrants and/or options to purchase shares of stock, as well as units of participation in a partnership, joint stock companies, joint accounts, joint ventures taxable as corporations, associations, and recreation or amusement clubs (such as golf, polo or similar clubs), and mutual fund certificates.
Sale transactions, therefore, will not be infrequent. So, who will bear the cost of the reappraisal? Based on the rules, this cannot be done away with. The fair market value of the shares will always have to be determined every time there is a sale. Or at the very least once a year, if the BIR will subsequently clarify. Should all companies therefore have on hand every year a balance sheet at fair value?
These are just some of the issues that may need to be further clarified. But for now, individuals and corporations must note that RR 06-2013 took effect on April 24, 2013 following its publication on the same d ate in a newspaper of general circulation in the Philippines. As the effectivity is immediate, all sales of shares on April 24 and onwards would require determination of the fair market value as prescribed in the regulations.
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