Prescribing Rules for the Income Tax Exemption of Certain Gains

November 6, 1980 REVENUE REGULATIONS NO. 11-80 SUBJECT : Prescribing Rules for the Income Tax Exemption of Certain Gains TO : All Internal Revenue Officers and Others Concerned SECTION 1. Scope . Pursuant to the provisions of Section 3 of Presidential Decree No. 1738 and Section 326 in relation to Section 4 of the National Internal Revenue Code of 1977, as amended, these regulations are hereby promulgated to govern the implementation of the income tax exemption of certain gains realized from September 17, 1980 up to September 16, 1985 as provided for by aforesaid Presidential Decree No. 1738. SECTION 2. Definitions of Terms . For the purposes of these regulations and unless the context otherwise indicates, the following definitions of terms are hereby adopted: (a) The term " bank " means every banking institution as defined in Section 2 of the General Banking Act, Republic Act No. 337, as amended. A bank may either be a commercial bank, a thrift bank, a rural bank or a specialized government bank. (b) The term " non-bank financial intermediary " means financial intermediary as defined in Section 2-D(c) of the General Banking Act, Republic Act No. 337, as amended, authorized by the Central Bank of the Philippines to perform quasi-banking functions . cd i (c) The term " quasi-banking functions " means borrowing funds, for the borrower's own account, through the issuance, endorsement or acceptance of debt instruments of any kind other than deposits, or through the issuance of participations, certificates of assignment, or similar instrument with recourse, trust certificates, or of repurchase agreements, from twenty or more leaders at any other similar obligations: Provided, however , That commercial industrial, and other non-financial companies, which borrow funds through any of these means for the limited purpose of financing their own needs or the needs of their agents or dealers, shall not be considered as performing quasi-banking functions. (d) The term " finance companies " refers to corporations or partnership other than a bank, or insurance company, primarily organized for the purpose of extending credit facilities to consumers and to industrial, commercial or agricultural enterprises whether by granting direct loans or by discounting or factoring commercial papers or accounts receivables for profit, buying and selling contracts, leases, chattel mortgages and other evidences of indebtedness arising out of one or more of the steps in the distribution and sale of commodities. (e) The term " corporation organized primarily for the purpose of owning equity in banks " shall refer only to corporation registered with and authorized by the Central Bank of the Philippines as such. SECTION 3. Nature and Treatment of Gains Exempt from Income Taxation . The following gains, whether derived from the sale or exchange of property, real or personal, used in business or owned as capital assets, shall be exempt from income tax if the disposition of asset upon which the gain was realized occurred in the period from September 17, 1980 up to September 16, 1985, subject to the conditions enumerated in Section 5 hereof: (a) Gains arising from merger or consolidation whereby: (i) a bank, a non-bank financial intermediary or a finance company exchanges property solely for stock in another bank, a non-bank financial intermediary or a finance company solely for the stocks of another bank, a non-bank financial intermediary or a corporation organized primarily for the purpose of owning equity in banks. (b) Gains arising from the disposition of property, real or personal, that corresponds to the portion of the proceeds of the sale that is invested, within six (6) months from the date the gains were realized, in new issues of capital stocks of banks, non-bank financial intermediaries existing as of the date of approval of this Decree, or a corporation organized primarily for the purpose of owning equity in banks. (c) Gains realized from exchanges of property, real or personal, new issues of capital stock in banks or non-bank financial intermediaries existing as of the date of approval of this Decree, or a corporation organized primarily for the purpose of owning equity in banks if, as a result of such exchange, the paid-in capital of such institution is increased. The gain realized need not be included in the gross income of the taxpayer realizing such income in the computation of taxpayer's income tax liability or the capital gains tax on real properties and stock transactions. However, such gain or entire proceeds shall remain to be subject to other taxes as provided for by the Tax Code, such as percentage taxes, gross receipts taxes, franchise tax, etc. SECTION 4. Persons Entitled to Tax Exemptions . The following persons may enjoy the income tax exemptions provided herein: (1) any individual taxpayer, citizen or alien; (2) any corporate taxpayer, domestic or foreign; (3) all other taxpayers not falling under (1) or (2) above, such trust, pension plan, etc. SECTION 5 . Conditions for Tax Exemption . As a general rule, gains from the sale or exchange of property to be exempt from income tax must satisfy the following conditions: (1) That the gain must have been realized in a sale or exchange, merger or consolidation transaction occurring within the period from September 17, 1980 up to September 16, 1985. Where the sale or disposition or property is classified as a sale on installment basis, i.e. initial payments (all payments received during the year of sale) do not exceed 25% of the total consideration stated in the sales agreement, gains derived therefrom shall be considered eligible for exemption only to the extent of payments actually received each time payments in any installment is made. Provided , That where the sales transaction is classified as a cash sale transaction, i.e. initial payments are more than 25% of total consideration, gains derived therefrom may be considered eligible for exemption in its entirety, although actual payments of the total consideration is payable in installments within a certain specified period of time. aisa dc (2) The gain to be exempted must correspond to that portion of the proceeds of the sale or disposition of property that is actually invested in new issues of capital stock of banks, non-bank financial intermediaries or corporations organized primarily for the purpose of owning equity in banks as authorized by the Central Bank of the Philippines, and (3) That the new issues of capital stock acquired are not disposed of, transferred, assigned or conveyed, except in cases of transmission on account of death, within a period of five (5) years from the date of issue. For this purpose, "Date of issue" shall mean date of actual payments to the corporation for new issues. In addition to the above, the following specific conditions must be satisfied. (4) In the case of gains arising from the disposition of property, the proceeds of which are invested in new issues of capital stock of bank, non-bank financial intermediaries or corporations organized primarily for the purpose of owning equity in banks, the investment in new issues of capital stock must be made within six (6) months from the date the gains were realized. For this purpose, gains from sale, disposition or transfer of property shall be deemed invested under any of the following circumstances: (i) Where the investor presents official receipt representing actual payment for new issues of shares of stock in a bank, non-bank financial intermediary or corporation primarily authorized to hold equities in banks. (ii) Where the investor shows proof that the he has firmly subscribe to new issues of shares of stock of a bank, non-bank financial intermediary or corporation, organized primarily to hold equities in banks and had actually paid for a portion of its cost with the payments of the balance to be made in accordance with a schedule of payment within a definite period as may be prescribed by the entity invested in. In this case, the investor shall also submit proof that the balance of the proceeds that corresponds to the gain to be paid for such subscription is maintained in a special account in a bank, whether interest-earning or not, withdrawable only for this special purpose: Provided , that, if the transaction from where the gains will be derived is payable in installments, the deposits shall be made as every installment payment is received. cd i The sale or exchange transaction from which the gain arose must be registered within thirty (30) days from the date of sale or disposition and the investment of the proceeds thereof within thirty (30) days from date of payment for stock subscription must be registered with the Bureau of Internal Revenue and the Central Bank of the Philippines. (5) In the case of gains arising from the exchange of property for new issues of capital stocks of banks, non-bank financial intermediaries or corporations organized primarily for the purpose of owning equity in banks, the exchange must result in an actual increase in capital stock. For this purpose, the corporate secretary of the corporation receiving such subscription must prepare a certification to that effect, a copy of which must be furnished the Central Bank of the Philippines and the Bureau of Internal Revenue. SECTION 6. Basis of Computing Gains Exempt from Income Tax . For purpose of these regulations: (a) " Gain " shall mean the profit derived after deducting from the total selling price (money received plus the fair market value of property received), all elements of cost. (b) In determining the fair market value of the property sold, transferred or exchanged, as well as the property received, for purposes of these regulations, the Governor of the Central Bank of the Philippines and the Commissioner of the Bureau of Internal Revenue acting as a body, reserves the right to reappraise such property. (c) In the case of gains arising from the disposition of capital assets, especially real properties and shares of stocks, the provisions of Section 34 and its implementing regulations must be considered. (d) In the case of gains arising from merger of consolidation, the provision of Section 35 and its implementing regulations must be considered. (e) In all cases, only that portion of the gains that correspond to the proceeds of the sale or exchange that are actually used as payment for new issues of shares of stock shall be exempted from income tax in accordance with the following formula: Total amount invested Total selling price X Gain = Amount of tax exempt gain Illustration : Mr. A, on October 10, 1980, sold for P100,000 a piece of land originally acquired for P50,000. Out of the proceeds, Mr. A invested in new shares of stock of Bank A, P90,000. The gain exempt from income tax is P45,000 computed as follows: Selling price P100,000 Cost basis 50,000 ____ Gain P50,000 ======== Total amount invested x Gain = Amount of tax-exempt gain Total selling price or P90,000 x P50,000 = P45,000 100,000 In the above illustration, the amount of P50,000 (P50,000-P45,000) gain shall be subject to income tax, if the land is considered as ordinary asset or subject to the final capital gains tax, if the land is considered as capital assets. SECTION 7. Procedures in Applying for Exemption of Gain Realized from Income Tax . Within thirty (30) days from the sale or exchange of property, the taxpayer must file an application with the Bureau of Internal Revenue for exemption of gains realized from income tax. The application must show, among others, the following information: date of sale, kind of property disposed, selling price, cost, terms and dates of payment and must be accompanied by a written declaration of intention to invest, within the six (6) month period, such gain realized in new issues of shares of a bank or non-bank financial intermediary or corporation organized primarily to hold equities in banks. Within twenty (20) days after the lapse of the six (6) months' period within which to invest, the applicant must show proof to the Bureau of Internal Revenue that the proceeds that correspond to the gains realized have been invested in new issues of shares of a bank, non-bank financial intermediary or corporation primarily organized to hold equities in banks. Documents to be submitted shall include, among others, a certification from the Central Bank of the Philippines that the proposed investment is eligible for exemption in accordance with the provisions of P.D. 1378 and its implementing regulations. Notwithstanding the preceding provisions, a taxpayer may still enjoy the capital gain exemption benefit if he files within six (6) months from the sale or exchange of property a similar application with the Bureau of Internal Revenue. In this latter case, however, the tax exemption benefit can be availed of only if it has been shown that any capital gains levy which has become due and payable in the meantime has actually been paid, and the enjoyment of the tax exemption benefit shall take the form of an appropriate refund of that portion of the tax paid which shall now be refundable as a result of investment in eligible shares of stock. cd In any case, the processing shall be jointly undertaken by personnel of the Central Bank of the Philippines and the Bureau of Internal Revenue. If the application is in order, a certificate of tax-exemption jointly signed by the Governor of the Central Bank of the Philippines and the Commissioner of Internal Revenue shall be issued to the taxpayer, copy of which shall be sent directly to the corporate secretary of the institution where the investment is intended to be made and shall be the basis for the issuance of the new issue of capital stock properly marked in conformity with the provision of Section 8 hereof. If the gain sought to be exempted arose out of merger or consolidation, then the application must be accompanied by a copy of the approval by the Monetary Board of the Central Bank of the Philippines. SECTION 8. Special Rule in Issuing Shares of Stock . Before issuing shares of stock on subscription agreement executed beginning September 17, 1980, the corporate secretary of a bank, non-bank financial intermediary or a corporation organized primarily for the purpose of owning equity in banks must require investor to execute a sworn declaration as to whether he is availing of the tax exemption privilege extended by Presidential Decree No. 1738. If the taxpayer is availing himself of the tax exemption under said law, the corporate secretary shall cause the stamping across the face of the stock certificate to be issued in bold letters the words "EXEMPT UNDER PRESIDENTIAL DECREE NO. 1738". Thereafter, for a period of five years beginning from the date of issuance, no bank or corporate official shall cause the transfer of ownership unless (a) the original revenue tax receipt of tax payment on the gain originally considered as tax exempt is submitted, or aisa dc (b) in case of involuntary transmission due to death, a copy of the certificate of clearance on the estate of the deceased owner issued by the Commissioner of Internal Revenue or his authorized representative. For this purpose, the corporate secretary of all banks, non-bank financial intermediaries or corporations organized primarily for the purpose of owning equity in banks shall submit to the Central Bank of the Philippines, Office of the Deputy Governor, Supervision and Examination Sector, copy furnished the Bureau of Internal Revenue, Atty.: The Chief, Financing, Real Estate and Transfer Taxes Division within thirty (30) days from the end of each calendar year beginning with December 31, 1980 up to December 31, 1986, a list of all stock certificates issued during the year, payment of which arose out of transactions granted tax-exempt status. SECTION 9. Imposition of Tax in Case of Transfer of Ownership is Effected within five (5) years . In the event the original shares of stock issued as a consequence of a transaction granted tax-exempt status is sold or disposed within the five (5) year holding period, then the gain arising thereon shall be subject to tax, either to income tax or to final capital gains tax, dependent upon the classification of the stock in the hands of the seller, and to all the penalties incident to delinquency as imposed by the National Internal Revenue Code. In computing the gain subject to tax, the cost basis of the share of the stock shall be the original cost of the property sold or exchange to acquire the aforesaid shares of stock. Example : Mr. A, on October 27, 1980, sold for P100,000 a piece of land originally acquired for P50,000. He invested the whole proceed of P100,000 in acquiring new shares of stock of Bank A. On November 10, 1980, he sold all the shares of Bank A for P150,000. In the example above , the cost of the shares of stock is P50,000 (cost of the land) and not P100,000, (subscription price of the shares of stock) for purposes of computing his taxable gain. Thus, his taxable gain is P100,000 computed as follows: Selling price P150,000 Cost 50,000 ___ Taxable gain P100,000 ========= SECTION 10 . Penalties . (1) Any bank or corporate official who shall cause the transfer of ownership of shares of stock in its stock and transfer book contrary to the provision of Presidential Decree No. 1738 shall be punished by a fine of not less than five thousand pesos and imprisonment of not less than two years. (2) Any person who violates any provision of these regulations shall be punished by a fine of not more than three hundred pesos or by imprisonment for not more than six months or both. SECTION 11 . Repealing Clause . All existing rules and regulations or part thereof inconsistent with the provisions of these regulations are hereby revoked or modified accordingly. SECTION 12 . Effectivity . These regulations shall take effect immediately and shall apply on gains realized beginning September 17, 1980 up to September 16, 1985. (SGD.) EFREN I. PLANA Acting Minister of Finance Recommended by: (SGD.) RUBEN B. ANCHETA Acting Commissioner