If you’ve ever tried selling or inheriting shares in a private corporation, you may have faced the challenge of determining their fair value. Disputes, delays, and unclear methods made the process frustrating—for both taxpayers and the Bureau of Internal Revenue (BIR).
Revenue Regulation No. 20-2020 (RR 20-2020) was issued by the BIR in August 2020 to address this issue. It introduced a clear, consistent method for valuing unlisted shares, streamlining tax compliance for estates, donations, and share transfers.
Why RR 20-2020 Was Needed
Before RR 20-2020, taxpayers often relied on subjective appraisals or outdated financial data to determine the value of unlisted shares. This resulted in:
- Frequent disputes with the BIR
- Delayed estate settlements and share transfers
- Additional legal and accounting costs
- Risk of penalties and reassessments
Example: If you inherited shares in a family-owned business, the BIR could question your declared value, leading to higher tax assessments or delays in releasing the estate.
What Changed in RR 20-2020
RR 20-2020 provided a standardized method for determining the Fair Market Value (FMV) of shares not listed on the Philippine Stock Exchange.
For Common Shares
FMV is based on the book value as shown in the latest audited financial statements (AFS), which must be:
- Certified by an independent CPA
- Not earlier than the immediately preceding taxable year
For Preferred Shares
FMV is based on the liquidation value, calculated as:
- Redemption price plus any unpaid dividends
If Both Common and Preferred Shares Are Present
To compute FMV of common shares:
- Subtract the liquidation value of preferred shares from the total equity.
- Divide the remainder by the total outstanding common shares.
No More Appraisal Surplus Adjustments
Appraised property values not recorded in the books are no longer required. Only figures from properly audited financial statements are used.
Who Benefits from RR 20-2020?
This regulation benefits a wide range of stakeholders:
Individual Taxpayers
- Easier estate or donor’s tax compliance
- Reduced disputes with the BIR
- Faster resolution of legal and tax concerns
Businesses
- Simplified tax reporting
- Lower accounting and legal fees
- Fewer audit-related issues
BIR and Government
- Better enforcement and tax collection
- More efficient audits
- Fewer backlogged cases
Investors and Developers
- Greater transparency in private equity deals
- Lower risk of unexpected tax liabilities
How to Comply with RR 20-2020
If you’re involved in a transaction with unlisted shares, follow these steps:
- Obtain audited financial statements, certified by a CPA.
- Calculate the FMV using the prescribed method (book value or liquidation value).
- File the correct tax forms (capital gains or donor’s tax) with supporting documents.
- Consult a tax professional, especially for complex or high-value transactions.
Reminder: Incorrect or incomplete valuations can lead to tax penalties and assessments.
Why RR 20-2020 Matters
RR 20-2020 introduced clarity and fairness to a process that was previously subjective and contentious. By grounding share valuation in audited financials, it ensures:
- Clearer tax rules
- More predictable outcomes
- Reduced paperwork and legal disputes
Next Steps for Taxpayers
Whether you’re selling, inheriting, or donating shares in a private company, take action now:
- Review your latest audited financials
- Ensure compliance with RR 20-2020
- Seek professional advice to avoid costly errors
DISCLAIMER: This article is developed by subject matter experts at Babylon2k. This is for general information only and does not constitute expert advice. It is based on current regulations and may not account for all related topics. Any tax or compliance guidance provided cannot be used to avoid penalties or promote specific actions. Laws and interpretations may change over time, which could affect the accuracy of this report. We are not obligated to update this advisory if new regulations arise.
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