Clarification, guidelines on Section 8 of Revenue Regulation 5-2021 on Tax-Free Exchanges of Properties under the NIRC as amended by CREATE Act

The Bureau of Internal Revenue issued Revenue Memorandum Circular (RMC) 19-2022, which provides clarification and guidance to Revenue District Offices (RDOs), revenue officers, and others concerned on Section 8 of Revenue Regulation (RR) 5-2021, particularly on the mandate to issue Certificate Authorizing Registration (CAR) without a prior BIR confirmation or tax ruling on the tax-free exchanges of properties, while at the same time ensuring that proper taxes due to the Government on their subsequent sale or disposition are protected and collected thru the establishment and proper monitoring of their correct substituted basis.

The following transactions are covered by tax-free exchanges:

A. Reorganization - which shall mean any of the following instances:

1. All corporations, which are parties to a merger or consolidation and exchange property solely for stock in a corporation, which is a party to the merger or consolidation; or
2. The acquisition by one (1) corporation, in exchange solely for all or a part of its voting stock, or in exchange solely for all or part of the voting stock of a corporation which is in control of the acquiring corporation, of stock of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation, whether such acquiring corporation had control immediately before the acquisition; or
3. The acquisition by one (1) corporation, in exchange solely for all or a part of its voting stock or in exchange solely for all or part of the voting stock of a corporation which is in control of the acquiring corporation, of substantially all the properties of another corporation; or
4. Recapitalization; or
5. Reincorporation.

B. Transfer to a Controlled Corporation - which means a transfer of property to a corporation by a person, alone or together with others, not exceeding four (4) persons, in exchange for stock or unit of participation in such a corporation of which as a result of such exchange, the transferor or transferors, collectively, gains or maintains control of said corporation; provided, that stocks issued for services shall not be considered as issued in return for the property.

The substituted basis of the properties transferred shall be determined as follows.

A. Stock or Securities - The substituted basis of the stock or securities received by the transferor on a tax-free exchange shall be:

1. The original basis of the property, stock, or securities to be transferred;
2. Less: (a) money received, if any, and (b) the fair market value of the other property received if any;
3. Plus: (a) the amount treated as dividend of the shareholder, if any, and (b) the amount of any gain that was recognized on the exchange, if any.

B. Property in the Hands of the Transferee - The substituted basis of the property transferred in the hands of the transferee shall be:

1. The original basis in the hands of the transferor:
2. Plus: the amount of the gain recognized by the transferor on the transfer.

C. Original Basis - The original basis of the property to be transferred, as mentioned herein, shall be the following, as may be appropriate:

1. The cost of the property, if acquired by purchase on or after March 1, 1913;
2. The fair market price or value as of the moment of death of the decedent, if acquired by inheritance;
3. The basis in the hands of the donor or the last preceding owner by whom the property was not acquired by gift if the property was acquired by donation;
4. The amount paid by the transferee for the property, if the property was acquired for less than adequate consideration in money or money's worth;
5. The adjusted basis of (a) to (d) above, if the acquisition cost of the property is increased by the amount of improvements that materially add to the value of the property or appreciably prolong its life, less accumulated depreciation; and
6. The substituted basis, if the property was acquired in a previous tax-free exchange under Section 40(c)(2) of the Tax Code of 1997.

The above substituted basis shall be used in determining gain or loss on a subsequent sale or disposition of properties subject of the tax-free exchange transactions under Section 40 (c)(2) of the 1997 Tax Code, as amended by the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Act.

For the purpose of issuing a CAR, submission of necessary documentary requirements shall be made to the RDO having jurisdiction on the place where the property is located, in case of real property. For shares of stocks, the submission shall be made to the RDO where the issuing corporation is registered.

Please be guided accordingly.

Source:

P&A Grant Thornton 

Certified Public Accountants

As published in SunStar Cebu, dated 18 February 2022