What is the Tax Consequence of a Sale or Transfer of Shares that are Not Listed and Traded in the Stock Exchange?
The sale or transfer of shares of stocks that are not listed and traded in the stock exchange is subject to Capital Gains Tax (“CGT”) of 15%[1] on the net capital gain. The net capital gain is the difference between the selling price and the original acquisition cost of the shares. Revenue Memorandum Circular No. 30-2019, in turn, provides that the difference between the Fair Market Value (“FMV”) of the shares and the selling price will be subject to donor’s tax.
Thus, it is important to know the Fair Market Value of the shares of stocks that are not listed and traded in the stock exchange.
How to Compute for the Fair Market Value of Shares that are Not Listed and Traded in the Stock Exchange?
Under Revenue Regulations No. 20-2020, here are the steps to compute for the fair market value of shares that are not listed and traded in the stock exchange.
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For common shares of stock
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The book value based on the latest available financial statements duly certified by an independent public accountant prior to the date of the sale, but not earlier than the immediately preceding taxable year.
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For preferred shares of stock
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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.
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Both common and preferred shares
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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.
R.R. No. 20-2020 provides an illustration on how to get the fair market value of both common and preferred shares:
Assume that Mr. A sold 10,000 shares in X Corporation on June 30, 2020. The corporation’s accounting period is on a calendar year basis. In this case, the book value as the fair market value of the shares of stock in X Corporation shall be determined based on its audited financial statements for year ending December 31, 2019, since the audited financial statements for taxable year 2020 is not yet existent as of the date of the sale of shares.
Assume further that based on the audited financial statements as of December 31, 2019, the total assets of X Corporation are Php 50,000,000 while its liabilities are Php 20,000,000 resulting to an equity of Php 30,000,000. Its outstanding shares are 200,000. For this purpose, the net book value as the fair market value of each share call be computed as follows:
30,000,000 (equity) / 200,000 (outstanding shares)
=150 (net book per share)
In this case, the net book value of the shares of stock in X Corporation based on its latest audited financial services shall be Php 150 per share. As such, the fair market value of the shares of stocks in X Corporation shall be Php 150 per share.
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- The book value of the common shares of stock or the liquidation value of the 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, 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.
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[1] With the exception of Non-Resident Corporations. The CGT rate remains at 5% for the first Php100,000 and 10% on amounts exceeding of Php100,000 of the net capital gain.
