By: Tax and Accounting Center Philippines
REVENUE REGULATIONS No. 6-2013 dated April 22, 2013 (RR No. 6-2013) entitled “Amending Certain Provision of Revenue Regulations No. 6-2008 (RR 6-2008) entitled “Consolidated Regulations Prescribing the Rules on Taxation of Sale, Barter, Exchange of Other Disposition of Shares of Stock Held as Capital Assets.”
RR 6-2013 amended Section 7 of RR 6-2008 to read as follows:
“SEC. 7. Sale, Barter or Exchange of Shares of Stock Not Traded Through a Local Stock Exchange Pursuant to Secs. 24 (C), 25 (A)(3), 25 (B), 27 (D) (2), 28(A) (7) (C), 28 (B) (5) (C) of The Tax Code, as Amended. — xxx xxx xxx
(c.2) Definition of “fair market value” of the Shares of Stock. — For purposes of this Section, “fair market value” of the shares of stock sold shall be:
(c.2.1) x x x
(c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the value of the shares of stock at the time of sale shall be the fair market value. In determining the value of the shares, the Adjusted Net Asset Method shall be used whereby all assets and liabilities are adjusted to fair market values. The net of adjusted asset minus the liability values is the indicated value of the equity. For purposes of this section, the appraised value of real property at the time of sale shall be the higher of –
(1) The fair market value as determined by the Commissioner, or
(2) The fair market value as shown in the schedule of valued fixed by the Provincial and City Assessors, or
(3) The fair market value as determined by Independent Appraiser.”
Implication of RR 6-2013
In effect, RMC 6-2013 requires that the value of the shares of stock for capital gains tax in the Philippines shall be the fair market value determined using the Adjusted Net Asset Method where all assets and liabilities are adjusted to fair market values.
To determine the fair market value of shares, services of an independent appraiser in the Philippines could be resorted, though RMC 6-2013 is silent as to whether such requirement is mandatory for the transfer of shares. By the use of the fair market value, the seller will become taxable with capital gains tax in the Philippines with respect to the incremental value of assets owned by the company who issued the shares. This scenario is most applicable to issuing companies owning real properties because real properties tend to increase valuation throughout the time.
The new ruling on RR 6-2013 amending RR 6-2008 is a warning to sellers of shares of stock held as capital asset in the Philippines to be extra careful in dealing with their valuations. Under RR 6-2008, if valuation is less than the fair valuation for tax purposes, then, the seller could be held additionally liable for donor’s tax under Section 100 of the Tax Code, as amended, for transfers for insufficient consideration on top of its capital gains tax liability.
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