Taxpayers recently received some good news on how capital gains tax on the sale of unlisted shares of stocks is now calculated. This came in the form of the Bureau of Internal Revenue’s (BIR) issuance of Revenue Regulations (RR) 20-2020, which revised the valuation rules set by RR 6-2013. RR 20-2020 states that the book value (BV) of common shares, as shown in the latest audited financial statements (AFS) of the issuing company, that were issued prior to the transaction shall be considered their prima facie fair market value (FMV). It also prescribes how to calculate the BV of preferred shares.
The National Internal Revenue Code, as amended (Tax Code), prescribes that, when determining any net capital gains for unlisted shares that would be subject to any capital gains tax, the cost of the shares shall be deducted from the higher of the selling price or the shares’ FMV. However, unlike in the valuation of real property, the Tax Code does not prescribe how the FMV of unlisted shares of stock is determined. (For real property, the Tax Code says that, for purposes of computing any internal revenue tax, the value of the property shall be the higher of the zonal value, as determined by the Commissioner of Internal Revenue [CIR] or the market value as shown in the schedule of values of the provincial or city assessors). This gave the CIR the power to determine how to value shares of stock, especially those not listed on any stock exchange.