Taxwise or Otherwise By Samantha Joy H. Oreta, 2 July 2014
GENERALLY, a gift is something that is given to another for free.
In legal parlance, it is synonymous to a donation -- a gratuitous transfer of a thing or right in favor of another who accepts it.
Under the Civil Code, one of the key elements in donation is the intention to donate.
How does the tax court and tax authorities determine that a gift/donation has been made? Does intention come into play?
In April 2008, the Bureau of Internal Revenue (“BIR”) issued Revenue Regulations (“RR”) No. 6-2008 which provides that in case the fair market value (“FMV”) of property transferred is greater than the value of the consideration received, the excess shall be deemed a gift subject to donor’s tax under Section 100 of the Tax Code. The RR then pegged the FMV of unlisted shares of stock as “the book value of the shares of stock as shown in the financial statements duly certified by an independent certified public accountant nearest to the date of sale”.
In a recent case, the Court of Tax Appeals (“CTA”) supported the interpretation of the BIR as laid down in the above RR. In that case, a taxpayer sold shares of stock to a buyer at a price lower than their book value. To confirm that the transaction will not trigger donor’s tax, the taxpayer filed a request for ruling with the BIR in 2009 pointing out that the sale of the subject shares was an ordinary commercial transaction negotiated in good faith and motivated by legitimate business reasons. Moreover, there was no intention to donate and the pricing was not intended to avoid the payment of capital gains tax because total acquisition cost of the shares was very much higher than the book value. There was no intention to gain any tax advantage by selling at lower-than-book value because the taxpayer would still be in a loss position even if it were to dispose shares at book value/FMV.
On the basis of the representations of the taxpayer and on precedent rulings, the Assistant Commissioner for Legal Service confirmed that the subject transaction is an exception to the rule on deemed gift provisions and is not subject to donor’s tax.
However, in 2011, the BIR assessed donor’s tax on the same transaction and revoked the ruling on the ground that the claim for exemption had no legal basis.
Upon judicial appeal, the CTA upheld BIR’s position that the sale of shares is subject to donor’s tax based on the following grounds, among others:
• Section 100 of the Tax Code is clear that where the property is transferred for less than an adequate and full consideration, the excess of the FMV over the value of the consideration shall be deemed a gift. When the law is clear, it is not subject to interpretation.
• The taxpayer is estopped from questioning the propriety of using the book value as FMV. In citing the 2009 ruling in its defense, the taxpayer is deemed to have admitted the validity of the definition of FMV in the RR. Also, in the capital gains tax return covering the subject transaction, the taxpayer declared the book value of the shares as the FMV. The court considered the credibility of the return as this was filed with the BIR under the pain of perjury.
• The exemption from donor’s tax under American decisions and authorities, where Section 100 of the Tax Code was allegedly lifted from, was not adopted in our version of the provision. Exemptions are never presumed; the burden is on the claimant to clearly establish his right to exemptions.
• The non-retroactivity of the revocation of the 2009 ruling under Section 246 of the Tax Code does not apply because said ruling is considered invalid. Although the 2009 ruling cited other rulings and cases in support of the opinion, the Court held that it is one of first impression since those cited therein do not have similar factual scenarios as that of the taxpayer. Under the Tax Code, the power to issue a ruling of first impression lies only with the Commissioner of Internal Revenue. Thus, since the ruling was issued only by the Assistant Commissioner of the Legal Service, it is not valid.
• The taxpayer is estopped from questioning the propriety of using the book value as FMV. In citing the 2009 ruling in its defense, the taxpayer is deemed to have admitted the validity of the definition of FMV in the RR. Also, in the capital gains tax return covering the subject transaction, the taxpayer declared the book value of the shares as the FMV. The court considered the credibility of the return as this was filed with the BIR under the pain of perjury.
• The exemption from donor’s tax under American decisions and authorities, where Section 100 of the Tax Code was allegedly lifted from, was not adopted in our version of the provision. Exemptions are never presumed; the burden is on the claimant to clearly establish his right to exemptions.
• The non-retroactivity of the revocation of the 2009 ruling under Section 246 of the Tax Code does not apply because said ruling is considered invalid. Although the 2009 ruling cited other rulings and cases in support of the opinion, the Court held that it is one of first impression since those cited therein do not have similar factual scenarios as that of the taxpayer. Under the Tax Code, the power to issue a ruling of first impression lies only with the Commissioner of Internal Revenue. Thus, since the ruling was issued only by the Assistant Commissioner of the Legal Service, it is not valid.
In this court case, the taxpayer-seller became an unintentional donor where market forces dictated a price lower than the net book value. This is because Section 100 of the Tax Code was applied without regard to donative intent. The tax court’s decision, however, appears to run contrary to existing court decisions applying the same provision, where the intention to donate is a key element. Thus, we may yet see a different outcome if this case reaches the Supreme Court.
(Please note that in 2013, the BIR updated its definition of FMV in share disposals. The FMV is no longer pegged at simply the net book value, but on the adjusted net asset method whereby all assets and liabilities are adjusted to their fair market values.)
The author is a manager at the tax services department of Isla Lipana & Co., the Philippine member firm of the PwC network. Readers may send inquiries or feedback to samantha.joy.h.oreta@ph.pwc.com. The views or opinions presented in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The firm will not accept any liability arising from the article.
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