The Bureau of Internal Revenue (BIR) has issued Revenue Regulations No.

6-2013
(RR 6-2013), amending certain provisions of Revenue Regulations No. 6-2008 (RR 62008) entitled Consolidated Regulations Prescribing the Rules on the Taxation of Sale,
Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets.
Specifically, the new regulation, published last April 22, 2013, amended the definition of
fair market value (FMV) of the shares of stock being sold where the shares are not
traded through a local stock exchange. The definition is critical in view of the possible
imposition of the donors tax on top of the capital gains tax (CGT). Under the Tax Code,
in case of sale of shares of stock not traded in the local stock exchange, the net capital
gains will be subject to a CGT of five percent on the first P100,000 and 10 percent on
the amounts in excess of P100,000. However, in the event the selling price is less than
the FMV of the shares of stock, the seller is deemed to have received a gift. The
excess of the FMV over the selling price will be considered as taxable gift subject to
donors tax. Hence, it is common for taxpayers selling shares of stock not traded
through the local stock exchange to use the FMV as the selling price to avoid the
donors tax.
However, with RR 6-2013, the question now is how to determine FMV. Under the old
regulations (RR 6-2008), the FMV of shares of stock not traded in the local stock
exchange would be the book value of the shares as shown in the audited financial
statements (AFS) nearest to the date of sale. On the other hand, according to RR 62013, the value of the shares of stock at the time of the sale would be the FMV. In
determining the value of the shares, RR 6-2013 prescribes a valuation procedure that
changes the stated values of a companys assets and liabilities to reflect its current fair
market values. RR 6-2013 states that the Adjusted Net Asset should be used whereby
all assets and liabilities are adjusted to FMV. The difference between the total FMV of
the adjusted assets and the total FMV of the adjusted liabilities is the indicative value of
the equity (what the business is considered to be worth).
In the event the assets of the corporation consist of real property, the appraised value at
the time of sale should be the higher of FMV as determined by the commissioner of
Internal Revenue, or FMV as shown in the schedule of values fixed by the provincial
and city assessors, or FMV as determined by an independent appraiser.
With the new definition of FMV in place, it is expected that higher taxes would be
collected on the sale of shares of stock not traded in the local stock exchange.
But this situation is not that simple because the determination of FMV under RR 6-2013
raises a lot of questions with respect to sufficiency and timing of documents to establish
FMV. When a taxpayer sells shares of stock not traded in the local stock exchange, he
needs to get a Certificate Authorizing Registration (CAR) from the proper BIR office. The
CAR is required to have the sale recorded in the companys Stock and Transfer Book.

To get the CAR, the taxpayer would have to submit to the BIR documentary
requirements such as the Deed of Absolute Sale, latest AFS, and the CGT and
Documentary Stamp Tax Returns. Based on RR 6-2013, it appears that he would also
need to present the Tax Declaration, Zonal Valuation and independent appraisers
report covering the real property owned by the company to establish FMV. In this
respect, in the absence of the independent appraisers report, would the Tax Declaration
and the Zonal Valuation of the real property be sufficient to establish FMV? If the
independent appraisers report is a requirement, who would shoulder the costs which
are most likely not cheap? It could be that this requirement imposes additional burden
to the selling stockholder to pay for the report. With respect to personal property, RR 62013is not clear if the AFS of the company is sufficient to establish its FMV.
As to the timing of the document, would the documents needed to establish the FMV be
as of the time of sale?
What could add to the confusion is that there seems to be a view within the BIR that the
valuation under RR 6-2013 applies only to certain properties.
To answer these questions, the BIR may have to issue clarifications; otherwise, RR 62013 may impede sales transactions that could impact on the financial viability of the
company. When fresh capital is required by the company, and the solution is for an
existing shareholder to sell to a new investor, a problem could arise if the BIR cannot
agree on the valuation of the companys shares in view of the valuation issues caused
by the implementation of RR 6-2013. One could say then that redefining matters is
creating gray areas.

On April 11 2013, the Philippine Bureau of Internal Revenue issued Revenue

Regulations No 62013 (RR 62013) amending certain provisions of Revenue
Regulations No 62008, which provides for, among other things, the rules involving the
determination of the fair market value of shares of stock not listed and traded in the
local stock exchanges. These regulations implement the provisions of the Philippine
National Internal Revenue Code (the Tax Code) relating to the imposition of capital
gains tax on the sale or transfer of shares that are not traded through a local stock
exchange. The general rule under the Tax Code is that gains realised from the sale or
disposition of shares of stock is subject to a capital gains tax of 10% (other than a sale
of shares through a stock exchange, which is generally subject to a stock transfer tax of
0.5%). For the purposes of calculating the tax, the gain is the amount by which the
selling price or fair market value of the shares (whichever is higher) exceeds the seller's
acquisition cost. Under the previous set of rules, the fair market value of the shares was
deemed equal to their book value, as shown in the financial statements duly certified by

an independent certified public accountant nearest to the date of sale. In case the fair
market value of the shares of stock sold or transferred was greater than the amount of
money and/or fair market value of the property received, the excess received as
consideration will be deemed a gift subject to the donor's tax under section 100 of the
Tax Code (at a rate of up to 30% of the net gifts). RR 62013 adopted a new rule,
however. Under the new rule, the fair market value of the shares will be determined as
of the time of the sale, using the adjusted net asset method, whereby all assets and
liabilities of the target corporation are adjusted to their fair market value, and the amount
by which the adjusted value of the assets exceeds that of the liabilities will be the fair
market value of the equity. RR 62013 is not, however, clear on the person or entity
responsible for the adjustment of such assets and liabilities.

Why is this RR important? It is important because it has a significant impact on tax

planning initiatives involving real estate kept in corporations. In other words, it plugs a
tax loophole.

Tax advantages of booking real estate in a corporation

You may have heard of people putting real estate in the name of corporations instead of
their own names, and wondered how exactly that helps them.
Fair warning, this will be a long discussion, but I will attempt to explain this in laymans
terms. Please take note that this will be an overly simplified version for information
purposes only. Consult your lawyer for legal advice about your particular circumstances.
Before RR 6-2013
Previously, the fair market value of a share of stock not traded in the stock exchange
was based on the corporations book value per share.
In accounting for real estate, the asset is recorded at acquisition cost. Meaning, if you
bought a piece of land fifty years ago at P5,000.00 and put it in a corporation, the book
value of that land will still be P5,000.00 today (unless an appraisal increase was
recorded). If instead of land it was a house and lot, technically, the book value will be
lower because of depreciation on the house.
What are the taxes if you want to sell the land?
Since the land is booked in the corporation (and it is possible that the corporation has
no other asset other than the land), you have a choice of either a) having the

corporation selling the land or b) selling the shares of the corporation which holds the
land.
Under a), if the land is an ordinary asset of the corporation, the corporation will be
subject to 12% VAT, plus income tax which shall be based on the difference between
the highest among the selling price, BIR zonal value, and tax declaration value, and the
cost (which we expect to be high since the historical cost is so low).
If the land is a capital asset, the corporation will be subject to capital gains tax on the
sale of land, which shall be 6% of the highest among the selling price, BIR zonal value,
and tax declaration value, without taking the cost into consideration as a deduction.
Under b), instead of having the corporation sell the land, you will sell the shares of the
stock of the corporation which holds the real estate (and the shares are not traded in the
stock exchange).
The owner of the shares will then be subject to capital gains tax on the sale of shares
not listed in the stock exchange, which is 5% on the first P100,000.00 gain and 10% on
the gain in excess of P100,000.00.
Since the tax is on the gain (meaning selling price less acquisition cost), the tax will be
less compared to capital gains tax on the sale of real estate which is based on
presumed gain.
If a person has an intent of evading the payment taxes, the selling price may be
understated to be just a little over the book value of the shares, so the gain will be lower
and consequently, the taxes will be lower as well.
Plugging the tax loophole
Under RR 6-2013, the fair market value of shares not sold on the stock exchange is
now determined using the Adjusted Net Asset Method. Under this method, all assets
and liabilities are adjusted to fair market values. The value of the share shall be the
adjusted asset value minus the liability.
RR 6-2013 specifically stated that 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.

Note that based on RR 6-2008, the net capital gain is computed as selling price less
acquisition cost. Selling price was further defined as (among others) in the case of
cash sale, the selling price shall be the total consideration per deed of sale. It was
defined further that, In case the fair market value of the shares of stock sold,
bartered, or exchanged is greater than the amount of money and/or fair market value
of the property received, the excess of the fair market value of the shares of
stock sold, bartered or exchanged over the amount of money and the fair
market value of the property, if any, received as consideration shall be deemed a
gift subject to the donors tax under Sec. 100 of the Tax Code, as amended.
What are the implications?
The effect of this regulation is to raise the fair market value of the shares while
maintaining its cost. Thus, in order to avoid donors tax in situations where the fair
market value is higher than the selling price, the selling price should be at least the
same as the fair market value this in turn raises the taxable net capital gain.
Furthermore, since there is a specific mention of real property, I foresee that the
evaluation of requests for Certificates Authorizing Registration (CAR) on the sale of
shares of stock of corporations with real estate assets will be stricter.
Will this have an effect on estate tax?
Some people put their real estate assets in corporations for estate tax purposes. This is
partly because it is easier to transfer shares of stock compared to real estate.
The net estate shall be based on the fair market value of the properties at the time of
death. The definition of fair market value of shares not traded in the stock exchange for
purposes of estate tax (as stated in RR 2-03) has not changed, to wit:
In the case of shares of stocks, the fair market value shall depend on whether
the shares are listed or unlisted in the stock exchanges. Unlisted common shares are
valued based on their book value while unlisted preferred shares are valued at par
value. In determining the book value of common shares, appraisal surplus shall not be
considered as well as the value assigned to preferred shares, if there are any.
Thus, this regulation should have no effect on estate tax.