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Shares as ROPA: capital or ordinary assets?

ROPA in the form of shares of stock: capital or ordinary assets?

by Edward L. Roguel

To improve tax collection and administration, the Bureau of Internal Revenue (BIR) has been issuing regulations, memoranda and circulars to clarify or address the tax issues on particular transactions and industries.

For this year, the BIR has already issued three Revenue Regulations (RR) and five Revenue Memorandum Circulars (RMC) on the taxation of certain industries and transactions.

The latest that was published yesterday, March 5, is RR 6-08 entitled "Consolidated Regulations prescribing the rules on the taxation of sale, barter, exchange or other disposition of shares of stocks held as capital assets."

One of the interesting features of the RR is the definition of "stock classified as capital assets." Under this RR, "stock classified as capital assets" has been defined to refer to all stocks and securities held by taxpayers other than dealers in securities. Accordingly, stock and securities owned by banks shall be considered as stock classified as capital assets, because banks are not considered dealers in securities.

Banks, however, acquire some share of stocks from settlements of loans and/or through foreclosure of collaterals of client borrowers who were unable to pay their loans. (these are also known as real and other properties acquired, or ROPA — previously ROPOA). These ROPA are normally considered as part of the inventory of banks since these will eventually be sold to the public.

In the case of ROPA in the form of real properties, the BIR’s position has been clarified in various rulings that it has issued.

These shall be treated as "ordinary assets." Therefore, the sale, exchange or disposition of such real properties will not be subject to the capital gains tax.

Although the rulings relate to real properties considered as ROPA, it would be most logical that the treatment should also be applicable to shares of stock classified as ROPA held for sale. That is: sale of shares of stock considered as ROPA of the banks should also be treated as ordinary assets, rather than capital assets. Therefore, the sale should be subjected to regular income tax and not to the capital gains tax (which is considered a final tax).

It is critical to determine whether the shares of stocks are ordinary assets or capital assets because the tax rate and tax base will differ depending on said classification. Sale of share of stock classified as ordinary assets is subject to the regular income tax. Hence, any gain or loss derived from such sale is included in computing the net taxable income subject to 35% tax (30% effective January 1, 2009).

On the other hand, the tax rate on sale of shares of stock classified as capital assets will depend on whether or not the shares are listed and traded through the local stock exchange. If the shares of stocks are listed in the local stock exchange and the sale is also made through the local stock exchange, the sale is subject to the stock transaction tax of 1/2% based on the selling price.

Otherwise, the net gain from the disposition is subject to a capital gains tax of 5% on first P100,000 of the gain, and 10% on the gain in excess of P100,000. Both the stock transaction tax and capital gains tax are considered final taxes.

As RR 5-08 has already defined that only shares held by dealers in securities can qualify as ordinary assets, can the issue on the classification of shares of stock held by banks as ROPA held for sale, as well as the applicable tax treatment, be put to rest now?

(The author is a senior tax manager at Punongbayan & Araullo, a member firm within Grant Thornton International Ltd. For comments and inquiries, please e-mail the author or call 8 86-5511.)