Taxation of Sales of Shares of Stock Classified as Capital Assets

March 29, 1982 REVENUE REGULATIONS NO. 02-82 SUBJECT : Taxation of Sales of Shares of Stock Classified as Capital Assets TO : All Internal Revenue Officers and Others Concerned Pursuant to the provisions of Section 1 of Batas Pambansa Blg. 221 and Section 326 in relation to Section 4 of the National Internal Revenue Code, as amended, the following regulations are hereby promulgated: cd i SECTION 1 . Scope . These regulations shall define the manner of taxation of sales of shares of stock classified as capital assets. SECTION 2 . Definition of Terms . For the purpose of these regulations, the following definitions of terms are hereby adopted: aisa dc (a) " Stock classified as capital assets " shall mean all stocks and securities held by taxpayers other than dealers in securities. (b) " Dealer in securities " includes all persons who for their own account are engaged in the sale of stock, bonds, exchange, bullion, coined money, bank notes, promissory notes, or other securities as licensed by the Securities and Exchange Commission. Notwithstanding the foregoing, nothing in these regulations shall preclude the Commissioner of Internal Revenue from treating other taxpayers engaged in similar activities but not licensed by the Securities and Exchange Commission as a dealer in securities. (c) " Gross selling price " is the total amount of money or its equivalent which the purchaser pays the vendor to receive or get the goods. SECTION 3 . Persons Liable to the Tax . The following persons are liable to the tax provided for in Section 5 of these Regulations: (a) individual taxpayer, citizens or alien; (b) corporate taxpayer, domestic or foreign; (c) other taxpayers not falling under (a) or (b), such as estate, trust, trust funds and pension funds among others. SECTION 4 . Persons Not Liable to the Tax . The taxes imposed herein shall not apply to the following: (a) gains derived by dealers in securities; (b) gains on sale of shares of stock to the extent invested in new shares of stock in banks, non-bank financial intermediaries and corporations organized primarily to hold equities in banks, i n accordance with Presidential Decree No. 1739; and (c) all other gains which are specifically exempt from income tax under existing investment incentives and other special law. SECTION 5 . Imposition of the Tax . (a) Sales of shares of stock listed and traded through a local stock exchange . A tax of 1/4 of 1% shall be imposed on the gross selling price of the shares of stock sold, exchanged or transferred through the facilities of a stock exchange registered with the Securities and Exchange Commission. (b) Shares of stock not traded through a local stock exchange . Net capital gains derived during the taxable year from sales, exchanges, transfers or similar transaction shall be taxed as follows: Not over P100,000 10% Over P100,000 20% SECTION 6 . Determination of Tax Base . In determining the tax base, the following rules shall apply: cd i (a) Determination of selling price . The selling price of the shares of stocks shall be the fair market value of the shares of stocks transferred or exchanged and not the fair market value of the property received in exchange. If the total consideration of the sale or disposition consists partly in cash or money and partly in kind, the selling price shall be the fair market value of the shares disposed. (1) In the case of shares traded through the stock exchange, "fair market value" shall consist of the actual selling price as shown in the sales confirmation issued by the member of the stock exchange through whom the sale was effected. (2) In the case of shares not traded through the stock exchange, but listed in one or more stock exchanges, the highest closing price on the day when the shares are sold, transferred or exchanged, shall be the "fair market value." When no sale is made in any stock exchange, the highest closing price on the day nearest to the day of sale, transfer or exchange of the shares shall be the fair market value. acd (3) In the case of sale, transfer or exchange of shares not listed in the stock exchange, the following rules shall be observed: (i) In general, the unlisted shares shall be valued at their book value nearest the valuation date. The book value of these unlisted shares of stock shall be prima facie considered as their fair market value. (ii) In case the shares are valued on a basis lower than their book values, a justification for the deviation from the book value, together with the evidences in support thereof, should be submitted. The following factors are considered relevant in the valuation of shares of stock of closed corporations. A) The nature of the business and the financial history of the enterprise, from the date of incorporation B) The economic outlook in general and the business condition and outcome of the specific industry in particular C) The financial condition of the business D) The earning capacity of the company E) The dividend paying capacity F) Goodwill G) Sales of stocks and size of the block of stock to be valued H) Market price of stocks of corporations engaged in the same or similar line of business to be valued I) Existence of corporate debts in favor of the family of the principal shareholder J) Restrictive agreements impairing the alienability of the stock K) Investments in business or property maintained at a deficit L) Dividend arrearages M) Voting rights of stockholders N) Difficulty in liquidating the assets If such lower fair market valuation is not clearly established and documented, the book value of the unlisted shares of stock shall be adopted. If there have been previous 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/s. (b) Determination of cost . The cost basis for determining the capital gains or losses shall be the basis as determined in accordance with the provisions of Section 35 of the National Internal Revenue 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 are 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 stocks received as stock dividend. (c) In determining the deductibility of capital losses, the following rules shall apply : (1) The provisions of Section 33 of the National Internal Revenue Code, as amended, and its implementing regulations on the non-deductibility of losses on wash sales. (2) The net capital losses sustained during the taxable year shall be allowed as a capital loss deductible in the same taxable year only. (3) The entire amount of capital gains and capital loss shall be considered without taking into account the period or duration during which the stocks were held by the seller up to disposition for purposes of computing net capital gains. (d) Installment sales of shares of stock not listed and traded through any local stock exchange . In cases of gains arising from installment sales of shares of stocks, the provisions of Section 43 of the National Internal Revenue Code, as amended, and its implementing regulations shall apply. SECTION 7 . Payment of Tax and Manner of Filing Returns . The tax imposed by Section 5 of these Regulations shall be collected as follows: (a) Payment of tax . (1) Tax on sale of shares of stock listed and traded through a stock exchange . For purposes of the tax herein imposed, the stockbroker shall be constituted as withholding agent. He shall withhold the tax from the seller upon issuance of the confirmation of sale and issue the corresponding official receipt to the seller or transferor. (2) Tax on gains on sale of shares of stock not traded through any local stock exchange . The tax on net capital gains shall be paid by the seller on a per transaction basis upon filing the required return within 30 days following each sale or other disposition of shares of stock . (b) Manner of Filing Returns . (1) Tax on sale of shares of stock listed and traded through a local stock exchange . It shall be the duty of every stockbroker to turn over the sums collected by him as tax to the Bureau of Internal Revenue within five banking days from the date of collection thereof; and to submit on Monday of each week to the secretary of the stock exchange of which he is a member, a true and complete return, which shall contain a declaration that he made it under the penalties of perjury, of all transactions effected through him during the preceding week and of the taxes collected by him and turned over to the Bureau of Internal Revenue. The secretary of the stock exchange shall reconcile the same with the weekly reports of stockbrokers and in turn transmit to the Bureau of Internal Revenue on the first and sixteenth day of each month a consolidated return of all transactions effected during the preceding period through the stock exchange. (2) On sale of shares of stock not traded through any local stock exchange . Taxpayers subject to the net capital gains tax shall, within 30 days following each sale or other disposition of shares of stock, file in duplicate a capital gains tax return on BIR form No. ______ showing, among others, the name of seller and buyer; amount realized (selling price or fair market value of other property received) and contract price; cost or adjusted basis; date of acquisition; sale or disposition. The return shall be accompanied with a copy of the instrument of sale. A final consolidated return or an adjustment return (BIR Form No. _____ ) covering all stock transactions during the taxable year shall be filed on or before the fifteenth day of the fourth month following the close of the taxable year. The return shall include all stock transactions resulting in capital gains or capital losses for the whole year. The tax shown on the final or adjustment return after deducting therefrom the taxes paid during the taxable year shall be paid upon filing or refunded as the case may be. If a taxpayer elects and is qualified to pay the capital gains tax on stock transaction on installments, the amount of the tax due on its installment payment shall be determined as follows: The net capital gains tax shall be computed on the basis of the entire amount of gain realized from the sale or disposition of shares of stock and the tax so computed may be paid in installments. The amount of the tax on each installment shall be the proportion of the tax so determined which bears to the total installment payment received over the total selling price or to the total contract price, in case of sale or mortgaged shares of stock or where the mortgage on such shares is assumed by the purchaser. For this purpose, installment received shall mean (i) On the date of sale or disposition . First payment received, including the excess of the mortgage, if any, assumed by the purchaser over the basis of the property sold. (ii) Succeeding installments . Installment payments actually received by seller. SECTION 8 . Effect of Non-payment of Tax . No sale, exchange, transfer or similar transaction intended to convey ownership of, or title to any share of stock shall be registered in the books of the corporation unless the receipt of payment of the tax herein imposed is filed with and recorded by the stock transfer agent or secretary of the corporation. It shall be duty of the aforesaid persons to inform the Bureau of Internal Revenue in case of non-payment of tax. acd Any stock transfer agent or secretary of the corporation who caused the registration in violation of the aforementioned requirement shall be punished by a fine of not more than P2,000.00 or by imprisonment for not more than six months, or both. SECTION 9 . Penalties . In addition to civil and criminal penalties for violation of the Income Tax Laws as provided for under Sections 73, 74 and 337 of the National Internal Revenue Code, as amended, the following administrative penalties incident to delinquency or deficiency prescribed in Sections 51 and 72 of the National Internal Revenue Code, as amended, shall be imposed. These penalties shall be collected at the same time in the same manner and as part of the tax. (a) Surcharges . In case of any failure to make and file a return within the time prescribed by law, not due to willful neglect, there shall be added to the tax twenty-five per centum (25%) of its amount, except that when a return is voluntarily and without notice from the Commissioner or any other revenue officer filed after such time, and it is shown that the failure to file it was due to a reasonable cause, no such addition shall be made to the tax. If a false or fraudulent return is filed, there shall be added to the tax or the deficiency tax, in case payment had been made on the basis of the return before the discovery of the falsity or fraud, a surcharge of 50% thereof plus 25% of the tax or deficiency tax due. (b) Interest on deficiency tax . Where a deficiency tax is determined to exist, there shall be collected as part of the tax, deficiency interest at the rate of twenty per centum (20%) per annum from the date prescribed for the payment of the tax to the date the deficiency is assessed: Provided , That the maximum amount of interest that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three (3) years. (c) Addition to tax in case of non-payment . (1) Tax shown on the return . Where the amount determined by the taxpayer as the final capital gains tax is not paid on or before the date prescribed for its payment, there shall be collected as part of the tax, interest upon such unpaid amount at the rate of twenty per centum (20%) per annum from the date prescribed for its payment until it is paid: Provided , That the amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three (3) years. (2) Deficiency . Where a deficiency, or any interest assessed in connection therewith, or any addition to the final capital gains tax provided herein is not paid in full within thirty days from the date of notice and demand from the Commissioner of Internal Revenue, there shall be collected upon the unpaid amount, as part of the tax, interest at the rate of twenty per centum (20%) per annum from the date of such notice and demand until it is paid: Provided , That the maximum amount that may be collected as interest on deficiency shall in no case exceed the amount corresponding to a period of three years. (3) Surcharge . If any amount of final capital gains tax included in the notice and demand from the Commissioner of Internal Revenue is not paid in full within thirty days after notice and demand, there shall be collected in addition to the interest prescribed herein and in paragraph (b) above and as part of the tax a surcharge of ten per centum (10%) of the amount of tax unpaid. Similar surcharges and penalties shall be collected from the person selling, transferring or exchanging, in case of trading outside the stock exchange, who f ails to pay the tax to the stock transfer agent or secretary of the corporation. cd SECTION 10 . Repealing Clause . All regulations, rules, orders or portion thereof which are inconsistent with the provisions of these regulations are hereby repealed. SECTION 11 . Effectivity . These regulations shall take effect fifteen (15) days after publication in any newspaper of general circulation in the Philippines or in the Official Gazette. CESAR VIRATA Minister of Finance Recommended by: RUBEN B. ANCHETA Chairman (BIR) MANUEL G. ABELLO Acting Commissioner (SEC)