Further Guidance on Tax-Free Transfers
By Nica Marsha Gasapo on February 10, 2022
The Bureau of Internal Revenue (BIR) has finally issued Revenue Memorandum Circular (RMC) 19-2022, the much-awaited clarification and guidance on tax-free exchanges of properties under Section 40(C)(2) of the National Internal Revenue Code of 1997 (Tax Code) as amended by Republic Act 11534 or the “Corporate Recovery and Tax Incentives for Enterprises” (Create) law.
The Create law expressly amended Section 40(C)(2) to state that a prior BIR confirmation or tax ruling is not required to avail of tax-free exemption under the said section. This new provision embodies the Supreme Court decision in Commissioner of Internal Revenue v. Co (G.R. 241424, Feb. 26, 2020), which states that there is nothing in Section 40(C)(2) that requires a taxpayer to first secure a prior confirmatory ruling before the transaction can be considered a tax-free exchange. The BIR should not impose additional requirements not provided by law, which would negate the availment of the tax exemption.
Earlier, the BIR issued Revenue Regulations (RR) 5-2021, setting out certain rules on how the tax exemption can be availed of despite the absence of prior BIR confirmation or tax ruling. RMC 19-2022 echoed the rule set out in Section 8 of RR 5-2021 that parties to a tax-free exchange transaction can implement the transaction and apply for the issuance of a certificate of registration (CAR) with the revenue district office (RDO) where the property is located — in case of real property — or the RDO where the business is registered — in case of shares of stocks — subject to post-transaction audit by the BIR.
RMC 19-2022 further clarifies that if the transaction involves numerous real properties and/or shares of stocks situated in various locations covered by different RDOs, the CAR should be processed with the RDO that has jurisdiction over the place where the transferee corporation is registered. It prescribes that the CAR should specify that the transaction involved is a tax-free exchange falling under Section 40(C)(2) of the Tax Code, the date of transaction and the substituted basis of the properties covered by the transaction.
RMC 19-2022 also states that after the issuance of the CAR, the concerned RDO should conduct a post-audit of said transactions pursuant to existing revenue issuance on tax audit and assessment in order to determine whether the transactions actually comply with the requirements of Section 40(C)(2).
If after the audit it is determined that the transaction is not entitled to the deferment of tax under Section 40(C)(2), the transaction will be subject to applicable taxes plus interest, penalty and surcharge. The result of the audit, however, will not invalidate the CAR issued for the transfer of the properties.
While the Tax Code does away with the requirement of prior BIR confirmatory ruling, RMC 19-2022 provides that the taxpayer is not precluded from requesting a ruling or opinion from the Law and Legislative Division of the BIR National Office.
RMC 19-2022 also restates the established rules on tax-free transfers under the Tax Code such as the kinds of covered transactions (reorganizations and transfers to controlled corporation); determination of the substituted basis of properties transferred; determination of the original basis of the properties to be transferred; and the basis for determining gain or loss on the subsequent transfer or disposition of the properties subject of the tax-free exchange. It further reiterates the requirements under RR 18-2001 for the proper monitoring of the substituted basis of properties. Moreover, RMC 19-2022 emphasizes the continued application of existing revenue issuances on exchanges of properties made pursuant to Section 40(C)(2) of the Tax Code.
The transfers of properties in exchange for shares of stock falling under Section 40(C)(2) will be exempt from capital gains tax, creditable withholding tax, income tax, donor’s tax, value-added tax and documentary stamp tax (DST) (on conveyances of real properties and shares of stocks). However, the original issuance of shares in exchange for properties transferred are subject to DST under Section 174 of the Tax Code.
RMC 19-2022 stresses that it is incumbent upon the parties to the transaction to prove compliance with the requirements of the law and existing revenue issuances in availing of benefits under Section 40(C)(2).
The BIR issuance indeed clarifies some questions involving the processing of the CARs for properties transferred under Section 40(C)(2) of the Tax Code as amended by the Create law. It is the hope of the taxpayers that with the processing work being now done mainly at the RDO level, obtaining the CARs will be more efficient and be expedited.
#taxpayer #comelec #disqualificationcomelec #taxcomelec #comelectax #bbm
Nica Marsha Gasapo is a junior associate of Mata-Perez, Tamayo and Francisco (MTF Counsel).