Share transfer transactions
By Jonald R. Vergara
First Published in Business World (6/24/2013)
Economists are touting the Philippines as being a ‘sweet spot’ for investments – an impressive 6.8% GDP growth in 2012, a solid 7.8% growth in the first quarter of 2013, manageable deficit and inflation, recent credit rating upgrades to investment status, strong domestic consumption, increased government spending on infrastructure, and investor confidence in President Aquino’s good governance policies.
With a rosy outlook for the domestic economy, both foreign and local investors are widely expected to seek opportunities to buy into Philippine companies. But while the sale or transfer of shares in a Philippine company may seem like a simple transaction, it can be a challenging exercise if the seller and buyer are not aware of the possible tax pitfalls. Recent changes in the tax rules on sales or transfers of shares of stock make the exercise even more challenging.
At the outset, we should bear in mind that the transfer of shares of stock in a Philippine corporation is not complete until and unless the BIR issues a Tax Clearance and Certificate Authorizing Registration (CAR), since the CAR is the document that authorizes the Corporate Secretary of the company to effect and record the transfer of ownership of the shares in the Stock and Transfer Book of the corporation. Both the seller and the buyer of shares should know that the BIR will not issue the Tax Clearance and CAR until the BIR determines that the correct taxes on the sale have been paid on the transaction. Let’s look at these new rules then.
Sale of shares listed and traded through the local stock exchange
The sale or transfer of shares that are listed and traded through the stock exchange is subject to a stock transaction tax (STT) of ½ of 1% of the gross selling price. The listed shares must be sold or traded through the facilities of the stock exchange for the STT to apply.
Beginning 1 January 2013, however, the STT will not apply to transfer of shares of listed companies which are not compliant with the minimum public ownership (MPO) requirement prescribed by the Securities and Exchange Commission or the Philippine Stock Exchange (PSE). Under Revenue Regulations (RR) No. 16-2012, the sale of listed shares of noncompliant companies will be subject to the 5%-10% capital gains tax (CGT).
Sale of shares not traded through the local stock exchange
For sale of shares not traded through the PSE, the CGT applies at the rate of 5% on the first P100,000 of net gain, plus 10% in excess thereof. The net gain is the difference between the selling price and the acquisition cost of the shares. The selling price is the consideration agreed in the sale document, while the acquisition cost includes the purchase or subscription price plus all other costs of acquisition such as commission, DST, and transfer fees.
As mentioned earlier, the 5%-10% CGT rates also apply to the sale of listed shares that are not traded through the PSE, as well as the sale of listed shares of companies who are not compliant with the MPO requirement.
In case of share transfers by a non-resident, the gain may be exempted from the CGT under the relevant provisions of the applicable tax treaty, provided a tax treaty relief application (TTRA) is filed in a timely manner with the BIR. For example, any gain derived by a resident of the United Kingdom or the Netherlands from the sale of Philippine company shares is exempt from CGT. On the other hand, any gain derived by a resident of other countries including Japan, Singapore, and China may also be exempt from CGT if the assets of the Philippine company whose shares are being sold do not ‘consist principally of immovable property’ or if its ‘real property interest’ does not exceed 50% of the entire assets of the company in terms of value.
Another important point to bear in mind in share transfers is that if the selling price or consideration is lower than the fair market value (FMV) of the shares, then, the difference is deemed a gift subject to donor’s tax. The donor’s tax ranges from 2% to 15% if the transaction is between individual relatives (i.e., brother, sister (whether by whole or half-blood), spouse, ancestor and lineal descendant, or relative by consanguinity in the collateral line within the fourth degree of relationship; otherwise, the donor’s tax rate is 30%. It is therefore critical to compare the selling price with the FMV of the shares sold to see if donor’s tax applies on the sale.
The recently issued RR No. 6-2013, which became effective on April 25, 2013, prescribes a new rule in determining the FMV of shares which are not listed and traded through the PSE. Under RR No.6-2013, the FMV of the shares will no longer be necessarily equivalent to the book value based on the audited financial statements nearest the date of sale. Instead, the FMV of the shares should now be determined using the Adjusted Net Asset Method 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. If the company has real property assets, the appraised value shall be whichever is the highest of:
• The FMV as determined by the Commissioner (i.e., zonal value); or
• The FMV shown in the Tax Declaration; or
• The FMV as determined by an independent appraiser.
With this new regulation, the FMV of shares of stock of corporations is expected to be higher, particularly for companies with real property assets, as the prescribed valuation method results in the upward adjustment of the values of real property.
Jonald R. Vergara is a Tax senior director of SGV & Co.
This article is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.