Tax rules on shares of stock

Tax rules on shares of stock classified as capital assets

by Catherine C. Quilantang

The Bureau of Internal Revenue (BIR) has issued Revenue Regulations (RR) No. 6-2008, laying out the rules on the taxation of the sale, barter, exchange or other forms of disposition of shares of stock held as capital assets.

In general, the new regulation, published last May 5, consolidates the existing income tax rules applicable to these transactions. However, the new regulations introduced some interesting new rules intended to clarify the treatment of certain transactions. Companies or individuals holding shares of stocks as investment should, thus, take note of these changes.

For one, with respect to the transaction tax applied on an initial public offering (IPO), the regulation provides that, in computing the tax on initial public offering, commonly referred to as the IPO tax, the rate of tax applicable on primary and secondary offerings shall be separately determined. This means that the ratio of each type of offering to the total outstanding will be computed separately, rather than the number of shares from the two types of offering being aggregated. Consequently, the rate of IPO tax imposed on the primary offering may be different from the rate applicable to the secondary offering.

Also on IPOs, the new rules clearly provide that follow-on or follow-through offerings of shares by the listed company shall no longer be subject to the IPO tax. As defined, a follow-on or follow-through offering is an offering of shares to the investing public subsequent to an IPO.

For stocks already listed in the local stock exchange, the new regulations provide that the 1/2 of 1% stock transaction tax shall apply to all sales, trades or transactions of the local stock exchange and executed through the trading system and/or facilities of the exchange, including block sales of a listed stock executed through the exchange’s facilities. 

An earlier BIR circular had stated that stock transactions which exclude the public from taking part in the trading by any means will not be covered by the stock transaction tax of 1/2 of 1%.

For stocks not traded through the stock exchange, the new regulations may create some confusion since certain provisions are not consistent with existing provisions of the tax code. For one, Section 7 of the regulation, as published, provides that net capital gains shall be taxed at 5% on amounts not over P100,000 and 0% on any amount in excess of P100,000. The Tax Code, on the other hand, provides a 10% tax rate for the second bracket, not 0%. While this is clearly a typographical error, an immediate correction should be made.  

In addition, as regards the transactions to be covered under the 5% or 10% tax regime, the regulations describes this to cover all sale, barter or exchange of stock not traded through the local stock exchange. The tax code, on the other hand, explicitly refers only to the sale, barter or exchange of stocks of a domestic corporation not traded through the exchange. 

The interpretation in the past, before this new regulation was issued, is that capital gains from sale of stocks of foreign corporation are not covered by the final 5% or 10% capital gains tax but must instead be reported as part of the taxpayer’s other income subject to the regular income tax rates.  

The omission could only be an oversight on the part of the BIR and that it does not intend to apply the final capital gains tax of 5% or 10% to all other trans actions of shares of stocks such as foreign issues, outside the local stock exchange. However, as this is touted to be the comprehensive regulations governing the shares of stocks considered as capital assets, it is not unlikely that some taxpayers would interpret this to cover shares issued by for eign corporations which are also held as capital assets. It would have been so easy to include in the regulations the income tax treatment of shares of stocks in a foreign corporation to provide more clarity and to be more comprehensive, but this was not done. 

 However, regardless of the BIR’s intention, it is a basic principle that the regulations issued by the BIR should be consistent with the provisions of the Tax Code. In case of inconsistency, the latter must prevail.