Fair market value redefined

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 6-2008) 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 donor’s 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 donor’s 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 donor’s 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 6-2013, 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 company’s 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 company’s 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 appraiser’s report covering the real property owned by the company to establish FMV.  In this respect, in the absence of the independent appraiser’s report, would the Tax Declaration and the Zonal Valuation of the real property be sufficient to establish FMV? If the independent appraiser’s 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 6-2013is 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 6-2013 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 company’s 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.

Glenn Raymond O. Paradela is a supervisor from the tax group of Manabat Sanagustin & Co. (MS&Co.), the Philippine member firm of KPMG International.

This article is for general information purposes only and should not be considered as professional advice to a specific issue or entity.

The view and opinions expressed herein are those of the author and do not necessarily represent the views and opinions of KPMG International or MS&Co. For comments or inquiries, please email [email protected] or [email protected]