A year ago, I wrote about updates on Certificate Authorizing Registration (CAR) applications in relation to the Ease of Paying Taxes Law (EoPT). A lot can happen in a year, as it can be a transformative period filled with opportunities and significant life changes. One can get married, have a baby, and get a promotion in a span of one year. But not without challenges. Just like juggling married life, motherhood, and career, CAR applications get complicated when computations are involved. But the former are good kinds of challenges that make life worth living. The latter remains a challenge until resolved.
CAR APPLICATION PROCESS
To transfer ownership of shares of stock, especially those not traded on the Stock Exchange, it is necessary to secure a CAR from the Bureau of Internal Revenue (BIR). The CAR acts as a tax clearance relative to the transfer of certain properties. It is a mandatory document to register the transfer of shares to the new owner. The CAR is proof that all taxes due on the transfer have been paid. The process involves submitting various documentary requirements, such as the Tax Identification Number (TIN) of the seller, notarized Deed of Sale, Stock Certificate, Proof of Acquisition Cost, and more. However, before one can obtain a CAR, it is essential to file the capital gains tax return and pay the taxes due.
CAPITAL GAINS TAX
Capital gains tax (CGT) is imposed on the gains presumed to have been realized by the seller from the sale or other disposition of capital assets located in the Philippines. The gain from the sale of shares of stock is the excess between the selling price (or fair market value, whichever is higher) and the cost or adjusted cost basis of the shares. If the difference is negative, then such a difference will be a capital loss.
CGT COMPUTATION
The challenge lies in the computation of CGT. Some issues may arise regarding the correct selling price, as when the fair market value derived by the BIR is higher than the actual selling price. There may also be issues regarding the valuation of property received as payment for the shares.
On the other hand, if there is no issue with the selling price, the BIR may also challenge the cost claimed by the seller. Deductible costs for purposes of CGT computations include the actual purchase price plus all costs of acquisition, such as commissions, documentary stamp taxes, transfer fees, etc.
One issue is whether additional paid-in capital can be considered as part of the cost. For instance, suppose Stockholder X originally acquired 10 shares in Company A for P10. However, Company A needed additional operating capital and Stockholder X agreed to contribute P20. This was recorded in the books of Company A as additional paid-up capital (APIC). Subsequently, Stockholder X decided to sell his shares. In computing the capital gains, will Stockholder X be able to claim his total investment cost of P30?
RELEVANT RULINGS AND LEGAL BASIS
In CTA Case No. 9106, the Court of Tax Appeals noted that additional paid-in capital (APIC) is part of the paid-up capital. The APIC is the amount of capital in excess of the par value of the company’s shares. Definitely, APIC is not profit of a corporation generated from the normal and continuous operations of the business. Hence, the APIC should be included in the term “paid-up capital” provided in RR No. 2-2001 for purposes of determining the amount of earnings that may be accumulated for the reasonable needs of the business.
The BIR, in a ruling, explained that “additional funds received by a corporation from shareholders in the form of APIC are not considered taxable income as defined under the 1997 Tax Code, as amended. This additional capital contribution without the issuance of additional shares of stock merely increases the basis of the shareholders’ stock but not their proportionate equity in the corporation.”
In another ruling, the BIR noted that in computing CGT, the APIC should be considered part of the acquisition cost of shares of stock. The BIR affirmed that in the determination of the net capital gain subject to final capital gains tax, the additional contribution should be added to the original acquisition cost and the total amount deducted from the selling price of the shares. In this case, the BIR confirmed that for purposes of computing CGT, the cost of the shareholder’s stock includes that purchase price, including all costs of acquisition (e.g., commission, documentary stamp tax, transfer fees, etc.) as well as the APIC injected by the shareholders. Moreover, the APIC shall be allocated to each shareholder on a pro-rata basis.
In several BIR rulings, it has been consistently held that additional funds received by a corporation from shareholders in the form of APIC are not considered taxable income as defined under the 1997 Tax Code, as amended. This additional capital contribution, without necessarily issuing additional shares of stock, merely increases the basis of the shareholder’s stock but not their proportionate equity in the corporation.
In Stockholder X’s case, there were no additional shares of stock issued when it contributed an additional P20. Clearly, the APIC increased Stockholder X’s capital contribution in Company A. The APIC is considered part of his investment cost. It cannot be recognized as an ordinary business expense as it pertains to a capital transaction. Hence, the only way Stockholder X could recover the P20 is if it is considered as part of its cost when it subsequently sells his shares.
Given the facts and discussions above, I believe that APIC should be considered part of the cost of shares for CGT computation. As this is a common issue in securing the CAR, I am hoping that the BIR can shed light on this matter. Until then, the question of whether APIC can be part of the cost of shares for CGT computation will remain a significant point of contention between the taxpayer and the BIR.
Let’s Talk Tax is a weekly newspaper column of P&A Grant Thornton that aims to keep the public informed of various developments in taxation. This article is not intended to be a substitute for competent professional advice.
Ira Jennena J. Bero is a senior associate of the Tax Advisory & Compliance division of P&A Grant Thornton, the Philippine member firm of Grant Thornton International Ltd.
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