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Administrative feasibility is one of the principles of a sound tax system which means that tax laws and regulations must be effectively administered and enforced with the least inconvenience to the taxpayer. True to this principle the Bureau of Internal Revenue (BIR), on behalf of the government, is consistently providing measures to simplify and expedite government transactions through various issuances.

To recap, Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises Act (CREATE) expressly amended Section 40(C)(2) of the Tax Code, which states that no prior BIR confirmation or tax ruling is required for transactions to be tax-free. In response to this, BIR issued Revenue Regulations (RR) No. 5-2021 which laid down the rules on availing the tax exemption despite the absence of prior BIR confirmation or tax ruling.

On 04 February 2022, BIR further issued Revenue Memorandum Circular (RMC) No. 19-2022 to provide clarification and guidance on Section 8 of RR No. 5-2021 on the tax-free exchanges of properties under Section 40(C)(2) of the Tax Code, as amended by CREATE, particularly on concerned parties to the tax-free exchange transaction and application for the issuance of a Certificate Authorizing Registration (CAR).

For covered transactions, tax-free exchanges of properties comprise of reorganization and transfer of property to a controlled corporation. The former includes (a) mergers or consolidations; (b) acquisition of a controlled corporation; (c) acquisition of all or substantially all of properties of another corporation; (d) recapitalization; and (e) reincorporation. In the latter, the term “control”, shall mean ownership of stocks in a corporation after the transfer of property possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote. The collective and not the individual ownership of all classes of stocks entitled to vote of the transferor or transferors shall be used in determining the presence of control.

In a tax-free exchange, the recognition of gain or loss is merely deferred. The substituted basis of the properties transferred, and shares received must be properly monitored so that in case of their subsequent sale or disposition, any gain shall be taxed accordingly. The substituted basis shall be used in determining gain or loss on a subsequent sale or disposition of properties.

The RMC explicitly echoes the requirements under RR No. 18-2001 and other existing revenue issuances, particularly on establishing and monitoring of substituted basis in case of subsequent sale or disposition, including their tax and accounting treatment, shall continue to apply.

The transfer of properties in exchange for shares of stock made pursuant to Section 40(C)(2) shall be exempt from capital gains tax, creditable withholding tax, income tax, donor’s tax, value-added tax, and documentary stamp tax on conveyances of real property and shares of stock, except original issuance of shares in exchange of real property transferred.

The RMC provides that for purposes of CAR issuance, parties to the transaction shall submit the documentary requirements to the RDO having jurisdiction over the place where the property is located in case of real property, or to the RDO where the issuing corporation is registered in case of shares of stock. For transfer of multiple real properties and/or share of stocks situated in various locations covered by different RDOs, the application shall be with the RDO having jurisdiction over the place where the transferee corporation is registered. The CAR should specify that the transaction involved is a tax-free exchange under Section 40(C)(2) of the Tax Code, the date of transaction and the substituted basis of the properties covered by the transaction.

Furthermore, the RMC states that after the CAR issuance, the concerned RDO should conduct a post-audit to determine whether the exchange complied with the requirements of Section 40(C)(2). If it is determined that the transaction is not entitled to the tax deferment, the transaction will be subjected to applicable taxes plus interest, penalty, and surcharge. Nevertheless, the result of the audit, will not invalidate the CAR issued for the transfer of the properties.

While CREATE eliminated the requirement of prior BIR confirmatory ruling, the RMC clearly states that the taxpayer is not precluded from requesting a ruling or opinion from the Law and Legislative Division (LLD) of the BIR National Office to clarify legal issues that may affect the transactions made. The LLD shall evaluate whether the request involves questions of law that would merit the issuance of a ruling. Otherwise, it shall endorse the request to the concerned RDO for appropriate action.

The RMC provides convenience to corporate taxpayers by making transactions simple and expeditious. In effect, issuance of CARs will be efficient but at the same time it ensures that proper taxes due to the government are protected and collected. The clarifications and guidelines under the Circular are adaptive to the changes of times and responsive to the needs of taxpayers. In summation, this RMC is truly a welcome development in administrative feasibility making a sound tax system.

Renier Aries A. Razon is a Supervisor from the Tax Group of KPMG R.G. Manabat & Co. (RGM&Co.), the Philippine member firm of KPMG International. The firm has been recognized in 2021 as a Tier 1 in Transfer Pricing Practice and in General Corporate Tax Practice 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 KPMG International or KPMG RGM&Co.

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