On August 3, 2020, the Bureau of Internal Revenue (“BIR”) issued Revenue Regulation (“RR”) No. 20- 2020 amending RR No. 06-2013, clarifying the definition of the “fair market value” (“FMV”) of shares of stock not listed and traded in the local stock exchange in relation to the computation of capital gains tax in the sale, barter or exchange of such shares of stock.

RR No. 06-2013, which amended RR No. 06-2008, provided rules for determining the FMV of shares of stock not listed and traded in the local stock exchange. In particular, under RR No. 06-2013, the FMV of shares of stock not listed and traded in the local stock exchange shall be determined at the time of the sale using the “net adjusted method”. Pursuant to the said method, all of the assets and liabilities of the target corporation are adjusted to its FMV, and if there are any underlying real properties, such properties shall be valued based on appraised values. The excess of the adjusted value of the assets over the liabilities is deemed the FMV of the target corporation’s equity, which is then divided by the number of the target corporation’s outstanding shares to determine the FMV of each share of stock.

The requirement under RR No. 06-2013 necessitated minority and majority shareholders alike to submit adjusted financial statements and entailed additional costs in having the real properties of the target company appraised for every share-sale transaction. The issuance of RR No. 06-2013 was met with stern criticism from both taxpayers and tax practitioners.

With RR No. 20-2020, the rules for the valuation of unlisted shares of stock partially reverts to the previous definition of FMV of shares of stocks not listed and traded in the local stock exchange under RR No. 6-2008, as follows:

  • For common shares of stock, the prima facie FMV is the book value based on the latest available financial statements duly certified by an independent public accountant before the date of sale, but not earlier than the immediately preceding taxable year; and
  • For preferred shares of stock, the FMV is the liquidation value, which is equal to the redemption price of the preferred shares as of balance sheet date nearest to the transaction date, including any premium and cumulative preferred dividends in arrears.
  • If there are both common and preferred shares, the book value per common share is computed by deducting the liquidation value of the preferred shares from the total equity of the corporation and dividing the result by the number of outstanding common shares as of balance sheet date nearest to the transaction date.

RR No. 20-2020 further clarifies that, in determining the FMV, the book value of common shares of stock or the liquidation value of preferred shares of stock need not be adjusted to include any appraisal surplus from any property of the corporation not reflected or included in the latest audited financial statements (“AFS”). The latest AFS shall be sufficient in determining the FMV of shares of stock subject to the sale, barter or exchange.

By abandoning the “net adjusted method” as provided under RR 6-2013, the rules for the valuation of shares not listed and traded in the local stock exchange have been simplified by removing several documentary requirements and the need for taxpayers to bear additional costs to comply with such requirements. In effect, this reduces the length of time needed to secure the Certificate Authorizing Registration from the BIR, which is required before the target corporation’s corporate secretary may record the transfer of shares in the said corporation’s stock and transfer book. Moreover, RR No. 20- 2020 provides more certainty to both BIR officers and taxpayers alike in the computation of capital gains tax and donor’s tax, if any, due on the transaction involving shares of stock not listed and traded in the local stock exchange.