Under RR No. 20-2020, the following rules shall apply in case of sales of shares of stock not listed and traded in local stock exchanges:
- For common shares of stock, the book value based on the latest available financial statements duly certified by an independent public account prior to the date of sale, but not earlier than the immediately preceding taxable year, shall be considered as the prima facie fair market value.
- For preferred shares of stock, the fair market value shall be the liquidation value, equal to the redemption price of the preferred shares as of the balance sheet date nearest to the transaction date, including any premium and cumulative preferred dividends in arrears.
- In case 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 the balance sheet date nearest to the transaction.
- The book value of the common shares or the liquidation value of the preferred shares need not be adjusted to include any appraisal surplus from any property of the corporation not reflected on included in the latest audited financial statements, in order to determine the fair market value of the shares of stock. The latest audited financial statements shall be sufficient in determining the fair market value of the shares of stock subject of the sale, barter, exchange or other disposition.
RR No. 20-2020 amends Section 7(c.2) of RR No. 06-2008, as amended, in relation to the definition of "fair market value" of shares of stock sold. Previously, RR 06-2008 equated "fair market value" with "net book value." Further, under RR No. 06-2008, as amended, the Adjusted Net Asset Method was used in determining the fair market value of the shares of stock at the time of sale, where all assets and liabilities are adjusted to their fair market values.
RR 20-2020 reverts to the old rule where the book value is only a prima facie evidence of the fair market value of the shares. The rules now seem to allow a deviation of the fair market value from the book value of the shares if the same can be justified by, among others, the factors recognized by the BIR in previous tax regulations as affecting the valuation of shares of stocks. Further, such book value shall now be based on the latest available audited financial statements prior to the date of sale. The Adjusted Net Asset method will no longer be used to determine the fair market value of the shares at the time of sale.
*Authored by Quisumbing Torres, a member firm of Baker & McKenzie International, a Swiss Verein. Please contact QTInfoDesk@quisumbingtorres.com for inquiries.