And with the Philippines being considered as an “investor’s haven,” it would be worthwhile to look into the recent developments concerning the sale or transfer of Philippine shares of stock, the rules governing which will largely depend on whether the shares are listed and traded through the Philippine Stock Exchange.

The stock transfer tax on the sale of shares of stock listed and traded through the local stock exchange has been increased from one-half of 1 percent to 6/10 of 1 percent of the gross selling price. For shares not traded through the PSE, a capital gains tax (CGT) of 15 percent of the net gain will be imposed. Note that the pre-Train CGT rates were 5 percent on the first P100,000 of net gain, plus 10 percent in excess. For purpose of computing the CGT, the gain is the difference between the selling price and the acquisition cost of the shares.

Another important aspect to consider in share transactions is the fair market value (FMV) of the shares. The FMV for unlisted common shares is based on book value, while unlisted preferred shares are valued at par. So, if the selling price of the shares is lower than its FMV, the difference is considered a “deemed gift” and will be subject to donor’s tax (Article 100 of the Tax Code). The donor’s tax is now at 6 percent, which is imposed on the gifts received in excess of the P250,000 threshold for exempt gifts.

Note that the rule on donor’s tax on the sale of shares is not absolute. When the Train Law was passed, Article 100 of the Tax Code was amended to include the following criteria to remove the “deemed gift” stigma from a sale of shares for less than its FMV: The sale must be bona fide, at arm’s length, free from any donative intent, and must be in the ordinary course of business. 

These criteria are echoed in Revenue Memorandum Circular (RMC) 30-2019, recently issued by the BIR. The RMC further states that “the determination of whether the sale of shares of stock not listed and traded is at arm’s length is a question of fact and not of law.” The RMC even suggests that one must prove that the sale involves no irregularity between unrelated and independent parties.

Curiously, when we talk about “arm’s length” and “unrelated and independent parties” what comes to mind (especially for a transfer pricing practitioner) is Revenue Regulations (RR) 2-2013, the “Philippine Transfer Pricing Regulations,” issued in 2013. RR 2-2013 provides guidelines in applying the arm’s length principle for transactions between related parties. The arm’s length principle requires related party transactions to be made under comparable conditions and circumstances as a transaction with an independent party.

Manila Times Source

 

ATTY. RON ARRIESGADO

Partner LMA LAW