BIR Ruling [DA-684-06]

November 30, 2006 BIR RULING [DA-684-06] Sec. 24 (C); RR #2-82; DA-668-2006 Atty. Wencito F. Yap 3/F Gonzaga Building 414 Rizal Ave., Sta. Cruz Manila Gentlemen : This refers to your letter dated December 7, 2005 requesting for ruling in connection with the intended sale of shares of stock of PILGOR DEVELOPMENT SERVICES CORPORATION. It is represented that PILGOR DEVELOPMENT SERVICES CORPORATION (PDSC), a domestic corporation with an authorized capital stock of P10,000,000.00 divided into 100,000 shares with a par value of P100.00 per share; that all of which were already subscribed at par value and fully paid by the following stockholders, to wit: Stockholders Shares Amount 1. Thelma D. Santos 16,789 P1,678,900.00 2. Candida D. Gener 16,642 1,664,200.00 3. Melissa D. Ignacio 16,642 1,664,200.00 4. Gregorio A. Dimaano 16,642 1,664,200.00 5. Renato A. Dimaano 16,685 1,668,500.00 6. Abdiel A. Dimaano 16,600 1,660,000.00 TOTALS 100,000 P10,000,000.00 ====== =========== that recently, three (3) of the stockholders, namely: Thelma D. Santos, Candida D. Gener and Gregorio A. Dimaano, are intending to sell their shares in the PDSC to any person or entity at a price of not less than P2,300.00 per share; and that you are now requesting for a ruling on the following: 1. What shall be the basis and manner of determining the Capital Gains Tax and documentary stamp tax liabilities of the selling stockholders? 2. In the event that all the stockholders shall decide to sell their shares all together at the same time, would the basis and manner of determining the CGT and DST as in the 1st query be the same? DHaECI In reply, please be informed that Section 24(C) of the Tax Code of 1997, as amended, provides as follows: "SEC. 24. Income Tax Rates . (C) Capital Gains from Sale of Shares of Stock not Traded in the Stock Exchange . The provisions of Section 39(B) notwithstanding, a final tax at the rates prescribed below is hereby imposed upon the net capital gains realized during the taxable year from the sale, barter, exchange or other disposition of shares of stock in a domestic corporation, except shares sold, or disposed of through the stock exchange . Not over P100,000.00 5% On any amount in excess of P100,000.00 10% (Emphasis supplied) In relation thereto, Sec. 39(A)(2) of the Tax Code of 1997, as amended defines Net Capital Gains, viz: "(2) Net Capital Gains . The term " net capital gains " means the excess of the gains from sales or exchanges of capital assets over the losses from such sales or exchanges." Accordingly, since the shares of stock owned by the three (3) stockholders will be sold directly to any person or entity and not through the stock exchange, the net capital gains realized therefrom shall be subject to the capital gains tax pursuant to the aforecited provisions of the Tax Code. Further, the net capital gains shall be computed based on the actual consideration / selling price or the fair market value, whichever is higher, less the cost and other selling expenses. For purposes of determining the fair market value, the book value per share based on the latest audited financial statement closest to the date of sale shall be used pursuant to Revenue Regulations No. 2-82. Furthermore, the sale of the aforementioned shares of stock shall be subject to the documentary stamp tax imposed under Section 175 of the same Code, at the rate of Seventy-five centavos (P0.75) on each Two Hundred pesos (P200.00), or fractional part thereof, of the par value of such stock. Finally, in the event that all the aforementioned stockholders decided to sell all their shares all together at the same time, the CGT and DST shall be computed in the same manner as discussed above. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. cCTIaS Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service