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Let's Talk Tax

Like a basketball import, a bargain is not always a good thing

Basketball-crazy Filipinos watched the Philippine Gilas team fall short during the recently-concluded 2017 FIBA Asia Championships in Lebanon. The all-Filipino line up fought with their “puso” or heart but still, their honed skills were not enough to land them a podium finish. Many sports analysts agreed that the presence of an import like Andray Blatche would have made a difference.

Similar to our international basketball campaign, “imports” also play a critical role in our nation’s economic advancement.

According to the Philippine Statistics Authority (PSA), the total foreign investments approved for the first quarter of 2017 by at least seven investment promotion agencies amounted to P22.9 billion. The PSA further stated that the Netherlands is providing the most field goals, so to speak, with 27.2% of the total foreign investment commitments.

These foreign investments come in various forms, one of which is by way of equity acquisition in a Philippine company. Pursuant to Republic Act No. 7042, also known as the “Foreign Investments Act of 1991,” foreigners can invest up to 100% in the equity of a domestic enterprise, provided that the enterprise is not in the investment negative list.

Some investors find equity acquisition a convenient way to invest. Joining an already strong team roster is always a better idea than building a squad from scratch. An existing company with goodwill already attached to it is a foreign investor’s dream team.

However, in joining a dream team, a foreign investor should still watch out for some tax considerations. One of the main considerations in buying shares of stock in a company is the tax issues attached to the transaction. In case of a straight sale, the possible tax implications are the Capital Gains Tax, Documentary Stamp Tax, and Donor’s Tax.

Consideration for the transfer of the share is an important factor to determine the possible tax implications. Among these tax implications is that the possibility of introducing donor’s tax into the transaction might confuse the foreign investors. In case the consideration or selling price is less than the fair market value of the shares sold, the difference will be treated as a donation and will be subjected to 30% donor’s tax even if the seller never intended to make a donation.

This imposition of donor’s tax is based on Section 100 of the Tax Code which states that “where property 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.”

The legislative intent behind this provision is merely to discourage the parties from manipulating the selling price to save on income taxes. Based on prior Bureau of Internal Revenue (BIR) rulings, it was recognized that the deemed gift provision is not absolute and could admit exceptions. One of which is when the sale was entered into as an ordinary commercial transaction for legitimate business purposes between unrelated parties and more importantly, the evil which was sought to be avoided by the law does not exist in the given set of facts (BIR Ruling [DA-(DT-065) 715-09]).

The BIR in another ruling said that for as long as the transaction is conducted at arm’s length such that a bona fide business arrangement was done in the ordinary course of business, a sale for less than an adequate consideration is not subject to donor’s tax (BIR Ruling [DA-652-06]). Further, the BIR ruled that when there is no intention to donate and the transaction was undertaken for a legitimate or bona fide business purpose, the transaction is not subject to donor’s tax (BIR Ruling DA-398-95).

However, the mere absence of donative intent is not sufficient to exempt the sale of the stock from the donor’s tax. The Supreme Court ruled in the case of The Philippine American Life and General Insurance Company, vs. The Secretary of Finance and CIR, that “the absence of donative intent does not exempt the sales of stock transaction from donor’s tax since Sec. 100 of the National Internal Revenue Code categorically states that the amount by which the fair market value of the property exceeded the value of the consideration shall be deemed a gift.”

Significantly, the tax implications do not simply end by paying the taxes due on the transaction. Whenever a transfer of shares is made, securing a Certificate Authorizing Registration (CAR) from the BIR is necessary (RMC No. 37-2012). The CAR is in the nature of a tax clearance certificate, indicating that the tax liability for the transaction has been properly paid. CAR is an indispensable requirement before any transfer of ownership of shares of stock not traded in the stock exchange can be effected.

Under existing rules, CAR may be processed within five days from submission of complete documents. However, such fast track processing has not been consistently put into practice. Taxpayers are aware that it normally takes time for the BIR to release the CAR.

Considering the foregoing, purchasing shares of stock as a mode of foreign investment might look less tedious compared to the other means for which a foreigner may invest in the Philippines. However, as in the game of basketball, we Filipinos play the game here differently. These imports in the field of economic investment must thoroughly consider the nature of how things are done “Filipino-style.”

Resembling sports, proper coaching may reveal helpful strategies for winning. Other means like establishing a new corporation, setting up a branch or representative office, or joint venture arrangements can be more beneficial than acquiring direct equity in an existing domestic company.

A study of the surrounding circumstances should first be thoroughly conducted before a foreign investor should enter into such transaction. It is always advised that a foreign investor should first conduct due diligence before stepping into the court. As basketball legend Larry Bird puts it, “first, master the fundamentals.”

Rizza Mariz P. Mañalac is an associate with the Tax Advisory and Compliance division of P&A Grant Thornton.


As published in The Manila Times, dated 29 August 2017