BIR’s current stand on the Sec. 100 of the Tax Code

BIR issues amendments to clarify Section 100 of National Internal Revenue Code (NIRC) of 1997 (the Tax Code), particularly on the issue of the existence or non-existence of “deemed gift.”

Prior to enactment of the TRAIN Law, Section 100 of the Tax Code, the measurement of gain from a disposition of property merely considers the amount realized from the sale, which is the selling price minus the basis of the property sold, hence, parties are discouraged to a sale from manipulating their selling price in order to save on income taxes.

If the parties would declare a lower selling price per document of sale than the actual amount of money which changed hands, there is foregone revenue and the government is placed at a very disadvantageous position. In order to plug this tax leakage, Section 100 automatically treats the disparity between the fair market value and selling price of the property as gift subject to donor’s tax.

In short, the “deemed gift” provision compliments the income tax rule on the measurement of gain and accordingly, works to avoid the recurrence of under-declaration of the selling price.

In the Philippine American Life and General Insurance Company vs. Secretary of Finance, et. Al., where 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 Section 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. Thus, even if there is no actual donation, the difference in price is considered a donation.

The TRAIN Law which took effect on January 1, 2018, however, provides an exception. Section 100 of the Tax Code now further states that “Provided, however, that a sale, exchange or other transfer of property made in the ordinary course of business (a transaction which is a bona fide, at arm’s length, and free from any donative intent), will be considered as made for an adequate and full consideration in money or money’s worth.”

Under the rules of statutory construction, exceptions, as a rule, should be strictly, but reasonably construed; they extend only so far as their language fairly warrants and all doubts should be resolved in favor of the general provisions rather than exception.

The appropriate and natural and natural office of the exception is to exempt something from the scope of the general words of a statute which is otherwise within the scope and meaning of such general words. Consequently, the existence of an exception in a statute clarifies the intent that the statute shall apply to all cases not excepted.

Exceptions are subject to the rule of strict construction; hence, any doubt will be resolved in favor of the general provision and against the exception. Indeed, the liberal construction of a statute will seem to require many circumstances that the exception, by which the operation of the statute is limited or abridged, should receive a restricted construction.

Thus, starting January 1, 2018, when shares of stock not traded in stock exchange are sold for less than its fair market value, the excess of the fair market value over the selling price shall be treated as gift subject to donor’s tax imposed by Section 100 of the 1997 NIRC, as amended, except when it is sold at arm’s length, free from any donative intend (in the ordinary course of business).

The determination of whether the sale of shares of stock not listed and traded is at arm’s length is a question of fact and not of law. Since an arm’s length transaction is a question of fact, it therefore behooves upon the party seeking to apply the exception to prove that indeed the sale involves no irregularity between unrelated and independent parties.

This would require presentation and reception of reasonable evidence enough to convince that the sale of the shares of stock for less than its FMV is without intent to evade tax and defraud the government (of the tax due therein). There evidence that should be presented should be viewed in accordance with its relation and relevance to the transaction on a case to case basis.

All revenue officials and employees are hereby enjoined to this Circular as wide a publicity as possible.

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