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In brief

The Bureau of Internal Revenue (BIR) issued Revenue Regulations (RR) No. 20-2020 dated 3 August 2020, amending RR No. 06-2013 in relation to RR No. 06-2008, governing the imposition of tax on the sale, barter, exchange or other disposition of shares of stock not traded through the local stock exchange.


Contents

Under RR No. 20-2020, the following rules shall apply in case of sales of shares of stock not listed and traded in local stock exchanges:

  1. For common shares of stock, the book value based on the latest available financial statements duly certified by an independent public account prior to the date of sale, but not earlier than the immediately preceding taxable year, shall be considered as the prima facie fair market value.
  2. For preferred shares of stock, the fair market value shall be the liquidation value, equal to the redemption price of the preferred shares as of the balance sheet date nearest to the transaction date, including any premium and cumulative preferred dividends in arrears.
  3. In case there are both common and preferred shares, the book value per common share is computed by deducting the liquidation value of the preferred shares from the total equity of the corporation and dividing the result by the number of outstanding common shares as of the balance sheet date nearest to the transaction.
  4. The book value of the common shares or the liquidation value of the preferred shares need not be adjusted to include any appraisal surplus from any property of the corporation not reflected on included in the latest audited financial statements, in order to determine the fair market value of the shares of stock. The latest audited financial statements shall be sufficient in determining the fair market value of the shares of stock subject of the sale, barter, exchange or other disposition.

RR No. 20-2020 amends Section 7(c.2) of RR No. 06-2008, as amended, in relation to the definition of “fair market value” of shares of stock sold. Previously, RR 06-2008 equated “fair market value” with “net book value.” Further, under RR No. 06-2008, as amended, the Adjusted Net Asset Method was used in determining the fair market value of the shares of stock at the time of sale, where all assets and liabilities are adjusted to their fair market values.

RR 20-2020 reverts to the old rule where the book value is only a prima facie evidence of the fair market value of the shares. The rules now seem to allow a deviation of the fair market value from the book value of the shares if the same can be justified by, among others, the factors recognized by the BIR in previous tax regulations as affecting the valuation of shares of stocks. Further, such book value shall now be based on the latest available audited financial statements prior to the date of sale. The Adjusted Net Asset method will no longer be used to determine the fair market value of the shares at the time of sale.

 

Author

Ronald Bernas is a partner in Quisumbing Torres’ Tax Practice Group. He has 21 years of experience advising clients on various tax issues, including general tax planning, tax controversies, tax litigation, and customs issues and procedures.

Author

Kristine Anne Mercado-Tamayo is a partner in Quisumbing Torres’ Tax Practice Group. She has 13 years of experience assisting clients on tax issues, involving corporate restructuring, mergers and acquisitions and other cross-border transactions. Kristine advocates on clients' behalf in controversies involving disputed tax assessments, representing clients before the Bureau of Internal Revenue. Kristine Anne obtained her Doctor of Law degree from the Ateneo de Manila in 2005. She is cited as a Next Generation Partner in Tax by the Legal 500 Asia Pacific for 2020. She has been recently appointed as Chairperson in Tax and Financial Services Committee of the European Chamber of Commerce of the Philippines.

Author

Selynn Alexis Co is an Associate in Baker McKenzie (Quisumbing Torres) Manila office.