REVENUE MEMORANDUM CIRCULAR NO. 19-2022, FEBRUARY 4, 2022 (CLARIFICATION AND GUIDANCE ON SECTION 8 OF REVENUE REGULATIONS (RR) NO. 5-2021 ON THE TAX-FREE EXCHANGES OF PROPERTIES UNDER SECTION 40(C)(2) OF THE NATIONAL INTERNAL REVENUE CODE (TAX CODE) OF 1997, AS AMENDED BY REPUBLIC ACT (RA) NO. 11534 OR THE CREATE ACT (Revenue Memorandum Circular No. 19-2022, February 4, 2022.pdf)
- Section 40(C)(2) of the 1997 Tax Code, as amended by CREATE, merely defers the recognition of gain or loss on said exchange of properties or shares and shall only be recognized after the subsequent transfer as they will be taxed accordingly.
- The substituted basis of the transferred properties and received shares shall be properly established and monitored in case of subsequent sale or disposition.
- Reorganization – shall mean any of the following instances:
- A corporation, which is a party to a merger or consolidation, exchanges property solely for stock in corporation, which is party to the merger or consolidation; or
- The acquisition by one (1) corporation, in exchange solely for all or for a part of its voting stock, or in exchange solely for all or part of the voting of a corporation which is in control of the acquiring corporation, of stocks of another corporation if, immediately after the acquisition, the acquiring corporation has control of such other corporation, whether or not such acquiring corporation had control immediately before the acquisition: or
- The acquisition by one (1) corporation, in exchange solely for all or for a part of its voting stock, or in exchange solely for all or part of the voting of a corporation which is in control of the acquiring corporation, of substantially all of the properties of another corporation. In determining whether the exchange is solely for stocks, the assumption by the acquiring corporation of a liability of the others shall be disregarded; or
- A recapitalization which shall mean an arrangement whereby the stock and bonds of a corporation are readjusted as to amount, income, or priority or an agreement of all stockholders and creditors to change and increase or decrease the capitalization or debts of the corporation or both; or
- A reincorporation, which shall mean the formation of the same corporate business with the same assets and the same stockholders surviving under a new charter.
- Transfer to a Controlled Corporation – which means transfer of property to a corporation by a person, alone or together with others, not exceeding four (4) persons, in exchange for stock or unit of participation in such a corporation of which as a result of such exchange, the transferor or transferors, collectively, gains or maintains control of said corporation: Provided, that stocks issued for services shall not be considered as issued in return for property.
- In tax free-exchange of properties, control means ownership of stocks in a corporation after the transfer of property possessing at least fifty-one percent (51%) of the total voting power of all classes of stocks entitled to vote.
- Determination of Substituted Basis:
- Stocks/Securities
- The original basis of the property, stock securities to be transferred;
- Less:
- Money received, if any
- Fair market value of the other property received, if any;
- Plus:
- The amount treated as dividend of the shareholder, if any
- The amount of any gain that was recognized on the exchange, if any
- Property received as “boot” shall have as basis its fair market value
- Boot refers to the money and property received in excess of the stock or securities received by the transferor on a tax- free exchange.
- Property in the Hands of the Transferee:
- The original basis in the hands of the transferor;
- Plus: the amount of the gain recognized to the transferor on the transfer
- Original Basis
- The cost of the property, if acquired by purchase on or after March 1, 1913;
- The fair market price or value as of the moment of the death of the decedent, if acquired by inheritance
- The basis in the hands of the donor or the last preceding owner by whom the property was not acquired by gift, if the property as acquired by donation
- If the basis is greater than the fair market value of the property at the time of donation, then for purposes of determining the loss, the basis shall be such fair market value.
- The amount paid by the transferee for the property, if the property was acquired for less than adequate consideration in money or money’s worth
- The adjusted basis of (a) to (d) above, if the acquisition cost of the property is increased by the amount of improvements that materially add to the value of the property or appreciably prolong its life less accumulated depreciation.
- The substituted basis, if the property was acquired in a previous tax-free exchange under Section 40(C)(2) of the Tax Code of 1997
- Monitoring of the Substituted Basis of Properties
- Each corporation, which is a party to the reorganization, shall file a complete statement of all facts pertinent to the non-recognition of gain and loss in connection with the reorganization.
- Every taxpayer, other than a corporation, party to the reorganization, who received stocks or securities and other property or money in connection with the tax-free exchange shall incorporate in his income tax for the taxable year a complete statement of all facts pertinent to the non-recognition of gain or loss in such exchange.
- They shall note in their audited financial statements the assets acquired in the tax-fee exchange until the subject properties are subsequently transferred to another transferee.
- The parties shall cause to annotate, at the back of the Transfer Certificate of Title (TCC), Condominium Certificate of Title (CCT) and Certificates of Stock, the date the deed of exchange was executed, the original or historical cost of acquisition of the properties or shares of stock transferred, and the fact that no gain or loss was recognized as a result of such exchange.
- A photocopy of the TCT/CCT/Certificate of Stock that bears the annotation of substituted bases of the real properties/shares of stock transferred/received in connection with the transaction, as duly certified by the RD/Corporate Secretary, should be submitted to the RDO which issued the CAR, within ninety (90) days from the date of the receipt of the CAR, by any of the parties to the exchange transaction. Otherwise, the RDO shall refer the docket of the case to the Legal Division for appropriate action.
- The shareholders of the absorbed/transferor corporation and the surviving/ transferee corporation shall record in their respective books the mandatory accounting entries stated in Annexes “A” “A-1” and “A-2” hereof, as the case may be, pursuant to RMO No. 17-2016.
- Tax Treatment of Exchanges of Properties Made Pursuant to Section 40(C)(2) of the tax Code, as amended:
- Transfer of properties in exchange for shares of stocks pursuant to Section 40 (C)(2) shall be exempt from the following:
- Capital Gains Tax (CGT)
- Creditable Withholding Tax (CWT)
- Income Tax (IT)
- Donor’s Tax (DT)
- Value-Added Tax (VAT)
- Documentary Stamp Tax (DST) on conveyances of real properties and transfer of stocks
- However, original issuance of shares in exchange for the properties transferred shall be subject to DST under Section 174 of the 1997 Tax Code
AUDITED FINANCIAL STATEMENTS OF COMPANIES WHOSE FISCAL YEAR ENDS ON DECEMBER 31, 2021
- All corporations, including branch offices, representative offices, regional headquarters and regional operating headquarters of foreign corporations, shall file their AFS depending on the last numerical digit of their SEC registration or license number in accordance with the following schedule through Efast:
| DATE | LAST NUMERICAL DIGIT OF SEC REGISTRATION |
| July 1 – 15 | 1 and 2 |
| July 16 – 31 | 3 and 4 |
| August 1 – 15 | 5 and 6 |
| August 16 – 31 | 7 and 8 |
| September 1 – 15 | 9 and 0 |
*Corporations may still file on or before its respective filing dates through Efast:
- The above filing schedule shall not apply to the following corporations:
- Those whose fiscal year ends on a date other than December 31, 2021. Such entities shall file their AFS within 120 calendar days from the end of their fiscal year
- Those whose securities are listed on the Philippine Stock Exchange (“PSE”) and those which are covered under Section 17.2 of the SRC, except those companies which filed a Notification of Suspension to file reports. These entities are encouraged to observe the due date of filing of their AFS (within 105 days after the end of the fiscal year) as an attachment to their Annual Reports. However, subject entities are given an extension of until May 15, 2022 to file their Annual Reports.
- Those whose AFS are being audited by the Commission on Audit (“COA “) provided the following are attached:
- An affidavit signed by the President and Treasurer (or CFO) attesting to the fact that the company timely provided COA with the financial statements and supporting documents and that the audit of COA has just been concluded.
- A letter from COA confirming the information provided.
- Late filings after respective due dates shall be accepted starting September 16, 2022, and shall be subject to the prescribed penalties which shall be computed from the date of the last day of the filing schedule as provided.
- The AFS, other than the consolidated financial statements, shall have the stamped “received by the Bureau of Internal Revenue (BIR)” or its authorized banks, unless the BIR allows an alternative proof of submission for its authorized banks (e.g. bank slips) and/or other facilities.
- The basic components of the AFS as prescribed under Revised SRC Rule 68, shall be submitted by the filers. Failure to comply with any of the formal requirements under the said Rule, including the prescribed qualifications for independent auditors and/or any material deficiency or misstatement that may be found upon evaluation of the specific contents thereof, shall be considered a sufficient ground for the imposition of penalties by SEC. The acceptance and receipt by the Commission of the financial statements shall be without prejudice to such penalties.
- Companies qualifying under the below thresholds are required to submit properly audited financial statements as stated under Rule 68 of the Revised SRC:
- Stock corporations with total assets or liabilities of P600,000.00 or more as prescribed under the RCC and any of its subsequent revisions or such amounts as may be subsequently prescribed.
- Branch offices/representative offices of stock foreign corporations with assigned capital in the equivalent amount of P1,000,000.00 or more.
- Branch offices/representative offices of non-stock foreign corporations with assigned capital in the equivalent amount of P1,000,000.00 or more.
- Regional operating headquarters of foreign corporations with total revenues in the equivalent amount of P1,000,000.00 or more.
Corporations which do not meet the above threshold may submit their annual financial statements accompanied by a duly notarized Treasurer’s Certification only.
