RMC No. 19-2022: Provides clarification and guidance on Section 8 of RR No. 5-2021 on the tax-free exchanges of properties under Section 40(C)(2) of the NIRC of 1997, as amended by RA No. 11534 (CREATE)

Summary

RMC No. 19-2022 gives clarification and guidance on Section 8 of RR No. 5-2021 on tax-free exchanges of properties under Section 40(C)(2) of the NIRC of 1997, as amended by RA No. 11534 (CREATE).

Key points

1. Purpose. A Certificate Authorizing Registration (CAR) is issued without prior BIR confirmation or tax ruling for these exchanges. The Circular ensures the substituted basis is established and monitored, so taxes on a later sale or disposition are collected.
2. Covered exchanges. Covered are reorganizations (mergers, consolidations, stock or property acquisitions solely for voting stock, recapitalization and reincorporation) and transfers to a controlled corporation. Control means at least fifty-one percent (51%) of the total voting power, and transferors may not exceed four (4) persons.
3. Substituted basis. For stock received, it is the original basis, less money and the fair market value of other property received, plus any amount treated as dividend and any gain recognized. For the property in the transferee’s hands, it is the transferor’s original basis plus the gain recognized. This basis is used to compute gain or loss on a later sale.
4. Monitoring requirements. Parties follow RR No. 18-2001: a statement of facts in the return, a note in the audited financial statements, and annotations on the TCT, CCT and Certificates of Stock. A certified photocopy of the annotated title or certificate goes to the RDO that issued the CAR within ninety (90) days from receipt of the CAR, or the RDO refers the docket to the Legal Division.
5. Tax treatment and CAR venue. The transfers are exempt from Capital Gains Tax, Creditable Withholding Tax, Income Tax, Donor’s Tax, VAT and Documentary Stamp Tax on conveyances, but the original issuance of shares is subject to DST under Section 174. The CAR is processed at the RDO where the real property is located or where the issuing corporation is registered, or at the transferee corporation’s RDO if multiple locations are involved.
6. Post-transaction audit. The RDO audits the transaction after the CAR is issued. If it does not qualify, the applicable taxes, interest, penalty and surcharge apply, but the CAR stays valid. A taxpayer may still ask the Law and Legislative Division for a ruling on legal issues.

Who is affected

• Revenue District Offices and other internal revenue officers
• Parties to tax-free exchanges under Section 40(C)(2)

Deadlines and effectivity

• Annotated title or certificate copy due within ninety (90) days from receipt of the CAR
• Takes effect immediately

Summary by Tax Resources PH. It is not a substitute for the full text of the issuance or professional advice.