The Bureau of Internal Revenue (BIR) has recently issued Revenue Regulations (RR) No. 6-2013 which prescribes the determination of the Fair Market Value of shares not listed through a local stock exchange. RR No. 6-2013, entitled Amending Certain Provision of Revenue Regulations No. 06-2008 Entitled Consolidated Regulations Prescribing the Rules on the Taxation of Sale, Barter, Exchange or Other Disposition of Shares of Stock Held as Capital Assets, prescribes the use of the Adjusted Net Asset method in determining the fair value of the shares that are not listed in a local stock exchange.
Revenue Regulations Covered
- Revenue Regulations No. 06-2008 – Contains the full guidance on taxation of sale barter and exchange or other disposition of shares held as capital assets.
- Revenue Regulations No. 6-2013 – Contains the amendment in terms of determining the fair market value of unlisted shares, as discussed above and below.
The Old Determination of Fair Market Value for Unlisted Shares
The old determination is that the fair value of the unlisted shares are their book value as shown in the latest financial statements nearest to the date of sale. Book value of the shares is simple computed by dividing the shareholders’ equity by the number of outstanding shares. Quoted below is the Section 7 (c.2.2) in the RR No. 06-2008 before the amendment.
(c.2.2) In the case of shares of stock not listed and traded in the local stock exchanges, the book value of the shares of stock as shown in the financial statements duly certified by an independent certified public accountant nearest to the date of sale shall be the fair market value.
The New Determination of Fair Market Value of Unlisted Shares
From the old requirements that it should be the book value of the shares, the determination is now changed to the adjusted net asset value determined using the Adjusted Net Asset method. How this method works? Don’t worry, this determination is very, very simple. The adjusted net asset values is computed as the difference between the fair value of the assets of a company minus the fair value of its liabilities. Isn’t it that simple?
Fair market value are usually or approximates the carrying value (or often called book value) of the current and monetary assets. Complication then steps in when a company has real properties since the carrying value usually are not equal to their fair market value. In such a case, the fair value is determined as the highest of these three:
- The fair market value as determined by the Commissioner, or
- The fair market value as shown in the schedule of valued fixed by the Provincial and City Assessors, or
- The fair market value as determined by Independent Appraiser.
Observe that the fair value can be determined by the Commissioner. What qualification the Commissioner has to determine the fair value of the real properties? Are they accredited appraisers before they become commissioners? Oh well, maybe, and highly probable that they are accountants! But, I don’t think they are competent enough to determine the fair value of real properties unless they have this valuation background.
Computation of the Capital Gains Tax
There is no change in the computation of the capital gains tax from the sale of unlisted shares. A final tax at following rates shall be paid:
Capital Gain not over Php 100,000 – 5% , plus
Capital Gain on any amount in excess of Php 100,000 – 10%
Remember that the basis is the capital gain, not the fair market value. So how is the gain/loss determined? It’s just the selling price/amount realized less the basis or adjusted basis (e.g. cost plus expenses in case of purchase). Selling price and basis is not that simple to determine under different scenarios. These are further discussed in detail under RR No. 6-2008. Download a copy from the BIR website, click here, or from this website, click here. Just remember that such RR is not yet reflective of the amendment as discussed above.
Sometimes, although computation appears to be relatively simple, it may have some complications that we might fail to consider that might have tax implications. To avoid such circumstances, be sure to consult your professional accountants whenever in doubt.
Full Text of the Revenue Regulations No. 6-2013
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