Previously, one had to secure a confirmatory tax-free ruling to transfer legal title over certain business assets transferred via tax-free exchanges (TFEs). The requirement has been revoked with the passage of Republic Act No. 11534 or the Corporate Recovery and Tax Incentives for Enterprises (CREATE) Law, ratified on March 26, 2021. Many, dare I say, all of us in the tax profession, welcomed this development as may be gleaned from the articles written in anticipation of how this development can positively impact business transactions. Seven months since the enactment of CREATE, it may be an opportune time to share some actual experience with the new rules and what we hope to see in the immediate future: a uniform administration of TFEs that is true to the spirit of CREATE.
It is safe to say that when CREATE was passed, everyone agreed that the removal of the tax-free ruling was a significant step towards achieving easy implementation of reorganizations. After years of dealing with time-consuming tax-free ruling applications that delayed the transfer of legal ownership over certain business assets, it was such a sweet victory to read the now amended Section (40)(C)(2) of the Tax Code. The last paragraph specifically states, “[i]n all of the foregoing instances of exchange of property, prior Bureau of Internal Revenue confirmation or tax ruling shall not be required for purposes of availing (of) the tax exemption.” Less than two weeks from CREATE’s signing, the Department of Finance issued Revenue Regulations (RR) No. 5-2021 reiterating this no-ruling provision, and more importantly, providing for the obvious and practical effect — parties to a TFE can implement the transaction and secure a Certificate Authorizing Registration (CAR) from the relevant Revenue District Office (RDO).
The RR cleverly provided a balance between the codified tax exemption available to taxpayers and the right of the Bureau to conduct a post-transaction tax audit. Businesses can immediately carry out their reorganization plans, but not free from government review, and rightfully so as we are speaking of tax exemptions. It means that businesses may now transfer legal title over business assets, the subject of the TFE, to the transferee to serve their commercial purposes without unnecessary delay.
Prior to CREATE and RR No. 5-2021, securing a confirmatory ruling for TFEs from the taxman could take a patience-testing 18 months, and in some cases, even longer. Fortunately, we were spared this ordeal in a recent case. On the strength of the policy amendment, we secured a CAR for shares of stock transferred through a TFE, on behalf of a client, without a tax-free ruling from the BIR. Our CAR application illustrated the elements of a TFE and did not need to be supported by all the documentation required by Revenue Memorandum Order (RMO) No. 32-2001 for tax-free ruling applications. Not only was the administrative process smooth, but the time it took to complete it was also short. The experience was a breath of fresh air, and credit must be given where it is due. CREATE’s removal of the tax-free ruling requirement was proving to be effective, and the BIR officers’ implementation of RR No. 5-2021, in that case, ensured that CREATE’s intent was carried out. Even our discussions with tax officers from other BIR offices/RDOs were promising, as we hear that they intend to follow suit and honor CREATE and RR No. 5-2021 for our CAR applications.
However, not all tax officers we consulted at the RDO level seemed familiar with the new rules. Some appeared unaware of the latest regulations when we tried to get some guidance. The answers we received varied, depending on the Officer of the Day’s familiarity with CREATE and RR No. 5-2021. A handful of tax officers believe that when applying for a CAR, the parties to the TFE must still fully comply with RMO 32-2001, except that the documentary requirements should be submitted to the RDO that will issue the CAR, rather than to the BIR National Office Law Division. After all, it can be argued that the BIR still has the right to conduct a post-transaction audit, as provided by RR No. 5-2021.
Incidentally, RMO 32-2001 provides that the documentary requirements for a tax-free ruling should be submitted specifically to the National Office Law Division. It is the tax office with authority to evaluate tax-free ruling applications and their accompanying documentary support (or should I say “was” the tax office, considering tax-free ruling applications are no longer required by law). Such authority, however, was not devolved to the RDOs. When the tax-free ruling requirement was removed, neither law nor RR No. 5-2021 categorically transferred the authority to require RMO 32-2001 documents from the National Office Law Division to the RDOs. It is only the CAR issuance that is processed at the RDO level, subject to post-transaction audit.
That said, however, I am confident that eventually, the straightforward CAR process for TFEs we experienced a while back will be replicated nationwide. I believe there is no intent on the part of any tax officer to be vague or to make CAR processing for TFEs challenging. Perhaps, they only intend to have access to all information that will aid in their post-transaction audit, should they choose to conduct one. After all, our tax officers are tasked to look out for the government’s interests in terms of tax collection on the deferred gain resulting from tax-free transactions. We only hope that specific regulations on CAR requirements for TFEs will soon be issued for the common guidance and observance of all tax officers and taxpayers alike. They will be instrumental in fully realizing what we hoped CREATE sought to provide taxpayers — a pain-free, tax-free exchange.
The views or opinions expressed in this article are solely those of the author and do not necessarily represent those of Isla Lipana & Co. The content is for general information purposes only, and should not be used as a substitute for specific advice.
Chiara Feliz C. Gutierrez is a director at the Tax Services Department of Isla Lipana & Co., the Philippine member firm of the PwC network.
+63 (2) 8845-2728