BIR issues guidance on tax-free transfer of properties

The Bureau of Internal Revenue (BIR) has finally issued Revenue Memorandum Circular (RMC) 19-2022, the much-awaited clarification and guidance on tax-free exchanges of properties under Section 40(C)(2) of the National Internal Revenue Code of 1997 (Tax Code) as amended by Republic Act 11534 or the "Corporate Recovery and Tax Incentives for Enterprises" (Create) law, according to a report by Manila Times.

The Create law expressly amended Section 40(C)(2) to state that a prior BIR confirmation or tax ruling is not required to avail of tax-free exemption under the said section. This new provision embodies the Supreme Court decision in Commissioner of Internal Revenue v. Co (G.R. 241424, Feb. 26, 2020), which states that there is nothing in Section 40(C)(2) that requires a taxpayer to first secure a prior confirmatory ruling before the transaction can be considered a tax-free exchange. The BIR should not impose additional requirements not provided by law, which would negate the availment of the tax exemption.

Earlier, the BIR issued Revenue Regulations (RR) 5-2021, setting out certain rules on how the tax exemption can be availed of despite the absence of prior BIR confirmation or tax ruling. RMC 19-2022 echoed the rule set out in Section 8 of RR 5-2021 that parties to a tax-free exchange transaction can implement the transaction and apply for the issuance of a certificate of registration (CAR) with the revenue district office (RDO) where the property is located — in case of real property — or the RDO where the business is registered — in case of shares of stocks — subject to post-transaction audit by the BIR.

RMC 19-2022 further clarifies that if the transaction involves numerous real properties and/or shares of stocks situated in various locations covered by different RDOs, the CAR should be processed with the RDO that has jurisdiction over the place where the transferee corporation is registered. It prescribes that the CAR should specify that the transaction involved is a tax-free exchange falling under Section 40(C)(2) of the Tax Code, the date of transaction and the substituted basis of the properties covered by the transaction.

RMC 19-2022 also states that after the issuance of the CAR, the concerned RDO should conduct a post-audit of said transactions pursuant to existing revenue issuance on tax audit and assessment in order to determine whether the transactions actually comply with the requirements of Section 40(C)(2).