The Department of Finance has issued Revenue Regulations (RR) No. 20-2020, clarifying fair market value (FMV) definition for transfer of shares of stocks not listed and traded in the local stock exchange.

The RR partially reverts to the previous FMV definition of shares of stocks not listed and traded in the local stock exchange under RR No. 6-2008, as follows:

· For common shares of stock, the FMV is the book value based on the latest available financial statements duly certified by an independent public accountant before the date of sale, but not earlier than the immediately preceding taxable year; and

· For preferred shares of stock, the FMV is the 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.

If 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 balance sheet date nearest to the transaction date.

Lastly, in determining the FMV, the book value or the liquidation value 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 abandoning the adjusted net asset method provided under the previous RR 6-2013, this new definition aligns the FMV computation with basic taxation and accounting principles.

Further, this new FMV definition promotes ease of doing business and disincentivizes red tape in the tax agency by removing several documentary requirements prescribed under the previous RR 6-2013.

Lastly, the new RR provides certainty to both revenue personnel and the taxpaying public in computing the capital gains arising from the said transfer of shares.

A copy of the said RR is accessible at https://bit.ly/316v0p2.

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