Determination of the Gain and the Loss from the Sale or Other Disposition of Property

September 20, 1994 BIR RULING NO. 139-94 36 176 000-00 139-94 Pac Pacis & Reyes op 3/F Valderrama Bldg. 107 Esteban St., Legaspi Village Makati, Metro Manila Attention: Mr . Michael Rex O . Celiz Gentlemen : This refers to your letter dated July 28, 1994 stating "May we request advice as to whether the difference or margin between a transferor's paid-in amount and the consideration received for the sale to a transferee of a partially-paid (e.g., to the extent of 25% balance payable upon call) subscription contract covering the acquisition of shares of the capital stock of an unlisted Philippine corporation , is subject to the tax imposed by the National Internal Revenue Code on capital gains derived, as the case may be, by individuals [Section 21(d) (1)] or by domestic, resident foreign or non-resident foreign corporations [Section 24(e)(2)(A), Section 25 (a) (6) (C) (i) and Section 26(b)(5)(C), respectively]? cdtech "Would your advice be significantly different if: (A) the transferor were a corporation incorporated under Hongkong law; (B) the transferee were a corporation incorporated under Singapore law; (C) neither the transferor nor the transferee would have a presence in, or links of any kind to, the Philippine; (D) none of the legal and beneficial owners of the transferor corporation and of the transferee corporation would be Philippine nationals; (E) the sale were to be perfected and consummated entirely in Hongkong where the sales document(s) would be executed and delivered by the parties; and (F) payment for the purchase of the subscription contract were to be delivered to the transferor by the transferee also in Hongkong? "Lastly, would the execution and delivery in Hongkong of the document(s) covering the sale of the partially paid subscription contract described in the foregoing paragraphs, be subject to the imposition of the documentary stamp tax prescribed by the National Internal Revenue Code (e.g. Section 176)? In reply thereto, please be informed as follows: (1) Pursuant to Section 34(a) of the Tax Code, as amended the gain (tax base) from the sale or other disposition of property shall be the excess of the amount realized therefrom over the basis or adjusted basis for determining gain and the loss shall be the excess of the basis or adjusted basis for determining loss over the amount realized. The amount realized from the sale or other disposition of property shall be the sum of money received plus the fair market value of the property (other than money) received. (As amended by E.O. No. 37). For purposes of determining the selling price in the case of sale, transfer or exchange of shares not listed in the stock exchange, the same shall be valued at their book value nearest the valuation date. The book value of the unlisted shares of stock shall be prima facie considered as their fair market value. However, if there have been previous bonafide sales/exchanges of the unlisted shares of stock, the price at which these shares exchanged hands should be taken/considered as its fair market value. (Sec. 6(a)(3), Revenue Regulations No. 2-82). Moreover, under Section 6(b) of Revenue Regulations No. 2-82, the cost basis for determining the capital gains or losses shall be the basis as determined in accordance with the provisions of Section 34 of the Tax Code, as amended, and its implementing regulations applied in the following manner: (1) If the stocks can be identified, then the cost shall be the actual purchase price plus all costs of acquisition such as commission, documentary tax, transfer fees, etc.; (2) If the stocks cannot be properly identified, then the cost to be assigned shall be computed on the basis of the first-in, first out (FIFO) method; However, (3) If books of accounts are maintained by the seller where every transaction of a particular stocks is recorded, then the moving average method shall be applied rather than the first-in, first out (FIFO) method; (4) In all cases, stock dividend received must be assigned a corresponding cost by allocating the original cost of acquisition to the total number of shares composed of the original shareholdings plus the number of shares of stock received as stock dividend. In other words, the gain or loss from a sale or other disposition or property is measured by the difference between the amount realized and the adjusted basis of the property disposed of (par. 1703, p. 425, Chap. 17, (1989) U.S. Master Tax Guide). Such being the case, the difference between the selling price per share and the original acquisition cost or adjusted cost basis of said share shall constitute the net capital gain subject to the capital gains tax imposed under Section 21(d)(1) of the Tax Code, as amended in the case of an individual stockholder-transferor; under Section 24(e)(2)(A) and the Tax Code, as amended in the case of a domestic and resident foreign corporation stockholder-transferor; and under Section 25(b)(5)(C)(i) of the Tax Code, as amended in the case of a non-resident foreign corporation stockholder-transferor. (BIR Ruling No. 046-90 dated March 29, 1990) (2) The gain from the sale of shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines regardless of where the said shares are sold pursuant to Section 36(e) of the Tax Code, as amended. In other words, regardless of the nationality of the transferor-seller and the transferee-buyer and irrespective of the place where the sale is perfected and/or consummated or where the sales document were executed and delivered and where the payment of the purchase price is made, the gain from the sale of the shares of stock in a domestic corporation shall be treated as derived entirely from sources within the Philippines. Accordingly, the gain from the sale of said shares of stock shall be subject to capital gains tax either under Sections 21(d)(1) or 24(e)(2)(A) or 25(a)(6)(C)(i) and 25(b)(5)(C)(i) all of the Tax Code, as the case may be. (3) The execution and delivery in Hongkong of the sales document of the partially paid subscription contract is subject to documentary stamp tax under Section 176 in relation to Section 173 both of the Tax Code, as amended. cdta Very truly yours, LIWAYWAY VINZONS-CHATO Commissioner of Internal Revenue