BIR issued Revenue Memorandum Order (RMO) No. 17-2016 on May 5, 2016 to supplement the guidelines in recording the tax-free exchange of properties for issuance of shares.
Sec. 40 (C) of the National Internal Revenue Code of 1997 provides exceptions for exchanges solely for stock if the involved parties are pursuing mergers or consolidations. As a general rule, all the gains or losses arising from the exchange of property are recognized in computing the taxable income of taxpayers.
The RMO specifically prescribed the number of shares to be issued by the transferee-corporation in exchange for the property it received from the transferor.
Likewise, the memorandum order proposed that the value of shares to be issued be equal to the fair market value (FMV) of the property transferred. When the property consists of shares, the FMV of listed shares is the closing price on the day of the transfer, or the day nearest if no sale is made on that date. The FMV of shares not listed and not traded is the book value in the annual financial statements duly certified by an independent CPA nearest to the date of sale. The assets in the financial statements should be adjusted to its FMV as of a date not earlier than 90 days from the date of transaction. In determining the value of unlisted shares, the “adjusted net asset method” shall be sued whereby all assets and liabilities are adjusted to fair market values. The indicated value of the equity would result from subtracting the liability values from the adjusted assets.
On the other hand, for the transferor, the substituted basis shall be used in recording the shares received in consideration for the property exchanged. To emphasize, recognition of the gain or loss from the transaction is merely deferred. Accordingly, gain or loss may eventually be recognized in a subsequent transfer of the property or shares.
RMO 17-2016 also provides pro-forma entries in recording the property and shares in a tax-free exchange. It further stated that failure to annotate the tax-free exchange in the certificate of title of ownership of properties would render the ruling null and void.
RMO 17-2016 shall be the basis for taxpayers in explaining the treatment of the tax-free exchange transactions and the differences, if any, with Philippine Financial Reporting Standards.