Written by Alebeth Libra L. De La Calzada, 25 July 2008
Oftentimes, we would see properties — real or personal, tangible or intangible — sold at prices lower than their market value.
Thus, quarter-end and year-end sales in department stores and groceries are a common occurrence where goods are sold at discounted prices ranging from as much as 30%-70% of the market price.
Similarly, sales of real property or personal property by persons who are in dire need of immediate cash for a price way below the book or market value of the property is not uncommon.
Generally, the seller would not realize any gain from these sales transactions and, therefore, no income tax or capital gains tax should be due on the transaction.
However, Section 100 of the National Internal Revenue Code of 1997 (the Tax Code) provides that any sale of property, other than real property — transferred for less than an adequate and full consideration in money or money’s worth — is a deemed "gift" transaction and, as such, the amount by which the fair market value of the property exceeded the value of the consideration shall be subject to donor’s tax.
This provision, if read literally, would mean that any sale for less than the market value of the goods sold could be deemed a donation, regardless of the intention of the seller. Thus, in a broad sense, all the bargain sales above-mentioned may seem to fall under this provision.
But, is this really the intention of this provision?
In relation to this, the Bureau of Internal Revenue recently issued Revenue Regulations (RR) No. 06-08, which amends RR No.14-80 and consolidates all the rules on taxation of sale, barter, exchange and other disposition of shares of stocks of domestic corporations that are listed and traded and not listed and traded through the local stock exchange.
In said RR, a controversial provision was included which provides the rule in determining the selling price of unlisted and non-traded shares of stock which are sold or disposed of at a price lower than their book value or fair market value.
In Section 7(c)(c.1.4) of RR 06-08, the Bureau invoked Section 100 of the Tax Code to deem as a gift, subject to donor’s tax, the difference between the actual selling price and the fair market value of shares.
It is further illustrated that where the shares of stocks were acquired for less than an adequate consideration in money or money’s worth, the seller of the shares of stock shall be required to pay capital gains tax (CGT) and documentary stamp tax (DST) on the over-the-counter sale transactions of shares, and at the same time donor’s tax on the indirect gift — which is the difference between the fair market value of the shares of stocks sold and the actual consideration for the sold shares of stock.
Effectively, a sale of shares of stocks for less than adequate consideration is subject to three taxes, namely: CGT, DST and donor’s tax, thus, making the transaction too burdensome on the part of the seller.
The imposition of the CGT on the difference between the book value or fair market value of the shares and the acquisition cost of the seller is fair and equitable and has been the existing rule applied under RR14-80.
However, I have reservations in respect to the application of the donor’s tax on the alleged indirect gift.
Under Section 98 of the Tax Code, donor’s tax is imposed on the transfer by any person of property by gift.
A gift denotes a transfer made out of the pure liberality or generosity of the transferor and therefore has no business purpose or element. In other words, for the donor’s tax to apply, the donative intent of the transferor must be clearly established in the terms and conditions of the transfer and cannot be presumed simply because the transfer was for less than an adequate consideration.
The transfer contemplated under Section 100 of the Tax Code merely assumes the existence of a donative intent, but can be overturned if there is evidence to prove that the transfer is really for a business consideration.
The section, therefore, simply means that a transfer for less than adequate consideration is presumed to be a gift in the absence of concrete evidence showing the business purpose for the transfer.
Mere sale or transfer of shares of stock for a price lower than the fair market value of the shares does not per se make the transaction a donation since the disparity of the consideration is not synonymous to the existence of donative intent.
We know that in our current business environment, where mergers and combinations of businesses are normal occurrences among big and small companies, sale of shares of stock for less than adequate consideration could be for many reasons, business or personal.
But in all these cases, existence of donative intent should still be clearly established before donor’s tax can be imposed.
In other words, without proof of donative intent, application of the donor’s tax on the difference between the fair market value and the selling price of the shares sold has no basis. (Pirovano v. Commissioner, 14 SCRA 832 [1965]).
While I understand that the donor’s tax on sale of unlisted shares of stock was inserted to capture transactions intended to avoid or reduce the CGT, application of this tax should still be done with due regard to the intention of the law.
