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Let's Talk Tax

Tax treatment of unlisted shares sold for less than fair market value

With the advent of Republic Act (RA) No. 10963, or the Tax Reform for Acceleration and Inclusion (TRAIN) Law, taxpayers and tax practitioners have lauded the amendment made under Section 100 of the National Internal Revenue Code (NIRC). Section 100 imposes donor’s tax on the transfer of property for less than adequate or full consideration in money or money’s worth. The amendment provides an exception to the general rule. In this case, a transaction that is bona fide, at arm’s length, and free from any donative intent will be considered made for an adequate and full consideration, even if the selling price is lower than the established fair market value (FMV).

One year from the effectivity of RA No. 10963, the Bureau of Internal Revenue (BIR) issued Revenue Memorandum Circular (RMC) No. 30-2019, clarifying the application of Section 100 to the sale of shares not traded on the stock exchange. RMC No. 30-2019 provides that, when shares of stock not traded on stock exchange are sold for less than FMV, the excess of the FMV over the selling price shall be treated as a gift subject to donor’s tax, except for when it is sold at arm’s length and free of any donative intent.

RMC No. 30-2019 emphasized that the issue of whether the transaction is arm’s length is a question of fact and not of law. The parties must present proof of business purpose to fall within the exception to the rule on the imposition of donor’s tax on transfer of shares for less than its FMV. Thus, the facts claimed by the parties must be adequately established by supporting documents. The decision on whether the parties have sufficiently proven the business purpose is solely subject to the discretion of the BIR. While RMC No. 30-2019 has clarified the application of Section 100 and its exception, it did not provide for safe harbor rules or examples of acceptable proof of bona fide business transactions.

This recent issuance is a mere reiteration of the position of the BIR in its rulings prior to the amendment of the NIRC. There have been several instances in the past where the BIR imposed the donor’s tax, despite the transfers being legitimate business transactions, all because there was no exception provided under the old Section 100 of the NIRC. These instances included the sale of shares via public bidding, which resulted in a winning bid lower than fair market value of shares, sale of shares owned by a company undergoing liquidation, and divestment of shares of a company wanting to exit the Philippine market. Given the amended provision of Section 100, investors may now find Philippine tax rules more reasonable, since they would not be subject to unnecessary taxes on the transfer of shares, as long as they have sufficiently satisfied the requirements of bona fide and arm’s length transaction under the law and the regulations.

Further, since RMC No. 30-2019 provides that the difference between FMV of the shares and the selling price will be subject to donor’s tax, does this mean that the transaction shall be eligible for the donor’s tax exemption for the first P250,000? The circular is not clear, but this is the logical interpretation of the phrase “the amount by which the FMV of the property exceeded the values of the consideration shall be deemed as gift and shall be included in the computing the amount of gifts made during the calendar year” under Section 100 of the NIRC, as amended. Therefore, even if the shares were sold at an amount less than its FMV, the transaction may still be exempt from donor’s tax, provided the amount of the difference is P250,000 or less for a given year.

While this added exception is commendable, the rule is prone to abuse by unscrupulous and ingenious taxpayers. Considering that the donor’s tax is a lower rate of 6% compared to the capital gains tax of 15%, taxpayers may just opt to pay the donor’s tax on the difference between the FMV and the selling price. Under current rules on computing for the FMV of shares of stock not traded through the stock exchange, the BIR insists on computing for the capital gains tax based on the adjusted net asset value of the shares. With RMC No. 30-2019 clarifying that the imposition of the donor’s tax is still the general rule absent convincing proof that the transaction was done at arm’s length, can the taxpayer now pay the lower donor’s tax on the difference?

Prior to the amendment of the NIRC, the donor’s tax rate for strangers, which includes corporations, was 30%. The high rate of donor’s tax served as a deterrent for parties against simulating their sales agreement. Given the current rules, we are now facing an absurd situation where, even if the parties simulate the selling price for the sale of the shares by adopting a price lower than FMV, they will still pay the lower donor’s tax. A difference of 9% tax may lead to huge tax savings, especially if the transaction involves millions of pesos.

In view of the change in the rates of capital gains tax on the sale of shares and donor’s tax, Section 100 should have been reconsidered or repealed altogether. The imposition of donor’s tax instead of capital gains tax is counterproductive to the government’s goal of plugging tax leakages and collecting “forgone revenue” for transactions with lower consideration than the FMV of the property.


Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.


Jennylyn V. Reyes is a manager from the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.


As published in BusinessWorld, dated 19 March 2019