A gift for the new year: Exemptions on Section 100 of the Tax Code

Section 100 of the National Internal Revenue Code of 1997, as amended (Tax Code), is like a soulless person staring at dying person as their existence slowly perish. Before the effectivity of the Tax Reform for Acceleration and Inclusion (TRAIN Law), Section 100 of the Tax Code provides:

“Where property, other than real property referred to in Section 24(D), is transferred for less than an adequate and full consideration in money or money’s worth, then the amount by which the fair market value of the property exceeded the value of the consideration shall, for the purpose of the tax imposed by this chapter, be deemed a gift, and shall be included in computing the amount of gifts made during the calendar year.”

With respect to sales of shares not listed with the local stock exchange, this section has been used by the Bureau of Internal Revenue (BIR) for subjecting to donor’s tax the excess of the fair market value (FMV) of the shares over the selling price. 

Hence, when an individual transfers its shares of stock for less than adequate and full consideration, the transferor shall pay, in addition to the capital gains tax (CGT), donor’s tax on the difference between the consideration and FMV of the shares. It inflicts undue burden on a seller compelled to sell his shares to avoid further losses.

In BIR Ruling No. 194-15, Corporation A, due to the worldwide downfall of an industry, led to a decision to exit from that industry and the termination of its operations. The closure was expected to result in the loss of employment of over 1,100 employees, as well as the loss of revenues to both national and local government. However, Corporation B, showing interest in acquiring Corporation A, offered to buy its shares. Having weighed the consequence of a sale of its shareholdings as an outright closure of the latter, and taking into consideration not only the economic benefits of such sale, but also the welfare of its employees, Corporation A decided to sell. The sale resulted in a loss on the part of Corporation A. The BIR ruled that the sale is subject to donor’s tax under Section 100. Citing Cebu Portland Cement Co. vs. Municipality of Naga, Cebu, et al, G.R. No. 24116-17, Aug. 22, 1986, it pronounced that there is no mention of exempt transaction in the said section. Thus, the provision is clear and free from any doubt or ambiguity.

However, last Dec. 19, 2017, President Duterte approved the new TRAIN Law or Republic Act 10963, which took effect on Jan. 1. Included in the law is the amendment to Section 100 of the Tax Code. In addition to the old provision, the TRAIN provided an exception which states:

“provided however, that a sale, exchange, or other transfer of property made in the ordinary course of business (a transaction which is a bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth.” 

The amendments introduced by the TRAIN seem to lessen the burden on taxpayers who are caught by the fangs of taxation.  One example is the new proviso of Section 100. Hence, for transfers of property, except real property, for less than FMV, the difference will not be subject to donor’s tax provided that the transfer is made in the ordinary course of business. To be considered ordinary course of business, its transfer must be bona fide, at arm’s length and free from any donative intent.

It remains to be seen how the BIR will implement the new proviso. The new proviso seems to effectively strike down the BIR’s implementing regulations on the taxation of sales of shares and other rulings. It could facilitate the sales of shares by reducing their tax costs.  But it appears that for this to take place, there should be absence of donative intent.

Under the Tax Code, there is no definition of donative intent. However, donation is defined in Article 725 of the Civil Code as an act of liberality whereby a person disposes gratuitously of a thing or right in favor of another, who accepts it. In the case of Urbano Velasco vs. BIR [CTA Case No. 8497, 17 May 2016], donation has the following elements: (a) the reduction of the patrimony of the donor; (b) the increase in the patrimony of the donee; and, (c) the intent to do an act of liberality or animus donandi. Hence, donative intent is presumed to exist in transfers for less than an adequate and full consideration in money.

In view of the above definition of donation and the new proviso in Section 100, sale of shares similar to the sale cited in the BIR ruling earlier may no longer be subject to donor’s tax, if the said sale happened to take place after the effectivity of the TRAIN.

Looking at a few BIR rulings, the transactions covered by the rulings may now be considered made in the ordinary course of business without donative intent and consequently without donor’s tax implications. These transactions relate to sale of shares due to the need to generate funds to pay the separation benefits of the 300 member-employees as a result of the cessation of the corporation’s manufacturing operations (BIR Ruling No. 278-13) and sale of shares prompted by the ongoing liquidation of the sellers (BIR Ruling No. 557-12).

Perhaps the exemption provided by the TRAIN is truly the start of new beginnings this year. This new proviso could have a big impact. It aligns the implementation of tax rules with business realities. It could encourage acquisitions and spur economic activity.

Carlo Lester T. Ang is a supervisor from the tax group of KPMG R.G. Manabat & Co. (KPMG RGM&Co.), the Philippine member firm of KPMG International. KPMG RGM&Co. has been recognized as a Tier 1 tax practice, Tier 1 transfer pricing practice, Tier 1 leading tax transactional firm and the 2016 National Transfer Pricing Firm of the Year in the Philippines by the International Tax Review.

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

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