Beware the sale below book value
(Article Published in the Manila Sunstar Online, April 17,2015)
The Supreme Court’s decision in the case of The Philippine American Life and General Insurance Company v. The Secretary of Finance and The Commissioner of Internal Revenue, G.R. No. 210987 promulgated on November 24, 2014 gave me the creeps. Out of the blue, we now learn that a sale just might be in part also a gift; you could, Janus-like, turn out to be a two-faced monster,--- both a seller and a donor, even if giving was not at all, in your mind.
The antecedent facts, as culled from the ponente, Associate Justice Presbitero J. Velasco, Jr., are not complicated. In 2009, The Philippine American Life and General Insurance Company (“Philamlife”) decided to divest itself of its interests in the health maintenance organization industry and accordingly offered all its shareholdings in Philam Care Health Systems, Inc. (“PhilamCare”) for sale through competitive bidding. The highest, and therefore the winning, bidder turned out to be STI Investments, Inc.(“STI”). The necessary documentary stamp and capital gains taxes imposed by the National Internal Revenue Code (“NIRC”) were accordingly paid.
The price of US$ 2,190,000 (or Php 104,259,330 at the then prevailing rate of exchange) for the PhilamCare shares was lower than their book value as determined from the financial statements of PhilamCare as of the end of 2008, a year prior to the sale in 2009.
During the process of transferring the PhilamCare shares from Philamlife to STI, which process entailed the issuance by the Bureau of Internal Revenue (“BIR”) of a certificate authorizing registration known as a tax clearance, the Large Taxpayers Service Division (“LTSD”) of the BIR required Philamlife to secure a ruling from the Commissioner. The ruling was required because the LTSD perceived a potential donor’s tax liability on the difference between the lower selling price and the higher book value of the shares sold. Philamlife dutifully complied on January 4, 2014.
Thus, on that day began Philamlife’s nightmare as the case transmigrated from a simple request for a ruling, to a denial by the Commissioner, to an appeal to the Secretary of Finance (who affirmed his Commissioner en toto), to the resort to the Court of Appeals where a new legal issue, i.e. the question of jurisdiction, raised its ugly head, and then petition to the Supreme Court for Review on Certiorari under Rule 45 of the Rules of Court, ending there, for the time being, with the decision rendered on November 24, 2014.
Two questions were resolved in the Supreme Court: first, was it correct for Philamlife to have brought its grievance against the Commissioner and her superior the Secretary of Finance before the Court of Appeals, and not before the Court of Tax Appeals? and second, was it correct for the tax authorities to have insisted that, in the case at bar, no donative intent (or the intent to make a gift) was required to trigger the imposition of the donor’s tax when the selling price was lower than the book value of the shares sold? In other words, did not the facts (a) that Philamlife went through the process of competitive bidding precisely to arrive that the value that the market, and not the financial statements of PhilamCare, was freely willing to buy the shares that it was freely willing to sell and (b) that never even in Philamlife’s wildest dreams did it ever want to make any gift by the selling of said shares to STI below their book value, matter at all in the resolution of the case?
The Supreme Court, on the question of jurisdiction, ruled that it was wrong for Philamlife to have gone to the Court of Appeals. It should have gone instead to the Court of Tax Appeals because, as the Supreme Court rationcinated, the petition brought before the Court of Appeals “not only contested the applicability of Sec. 100 of the NIRC over the sales transaction but likewise questioned the validity of Sec. 7(c.2.2) of RR 06-08 and RMC 25-11 does not divest the CTA of its jurisdiction over the controversy...”
On the second issue, the Supreme Court ruled that “The absence of donative intent, if that be the case, does not exempt the sales of stock transaction from donor’s tax since Sec. 100 of the NIRC categorically states that the amount by which the fair market value of the property exceeded the value of the consideration shall be deemed a gift (bold letters are the Court’s). Thus, even if there is no actual donation, the difference in price is considered a donation by fiction of law.”
The Supreme Court reiterates: “Moreover, Sec. 7(c.2.2) of RR 06-08 does not alter Sec. 100 of the NIRC but merely sets the parameters for determining the “fair market value” of a sale of stocks. Such issuance was made pursuant to the Commissioner’s power to interpret tax laws and to promulgate rules and regulations for their implementation.”
There goes the term “fair market value”, chameleon-like, changing its skin. With the Philamlife decision, as penned by Associate Justice Velasco, “fair market value” of an unlisted stock may under certain circumstances (limited, I trust) be not purely and simply the value freely given by the market; but, instead, shall be that value that is determined from the financial statements of company that issued the shares. Under the watchful eyes, of course, of the Commissioner of the BIR. Hence the creeps.
I (Reynaldo "Gerry" Geronimo is a partner at the Romulo, Mabanta, Buenaventura Sayoc & De los Angeles law office. He is known as The Trust Guru and maintains a website, www.thetrustguru.com.)