Tax Alert No. 7 [Revenue Memorandum Circular (RMC) No. 19-2022 dated 4 February 2022]

Providing 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

The Commissioner of Internal Revenue has issued RMC No.19-2022 to clarify the Tax-Free Exchanges of Properties under Section 8 of RR No. 5-2021, pursuant to Section 40(C)(2) of the Tax Code, as amended by CREATE.

The salient provisions of RMC No. 19-2022 are as follows:

• Reiteration of the transactions covered by the tax-free exchange of properties under Section 40(C)(2) of the Tax Code, as amended by CREATE.
• Reiteration of the determination of substituted basis of the properties received pursuant to Section 40(C)(5) of the Tax Code. Said substituted basis shall be used in computing the gain or loss on a subsequent sale or disposition of properties which are the subject of the tax-free exchange transactions.
• For proper monitoring of the substituted basis of the properties, the following provisions are adopted:

• Existing revenue issuances, particularly on the establishment and monitoring of substituted basis in case of subsequent sale or disposition, including their tax and accounting treatment, shall continue to apply.
• Parties to the transaction shall submit the documentary requirements to the RDO having jurisdiction over where the property is located, in case of real property, or in the case of shares of stock, the RDO where the issuing corporation is registered. For transfer of multiple real properties and/or share of stocks situated in various locations covered by different RDOs, the CAR shall be processed with the RDO having jurisdiction over the place where the transferee corporation is registered.
• Following the issuance of the CAR, the concerned RDO shall conduct a post-audit of said transactions. If the transaction has been found not entitled to tax deferral treatment, the transaction shall be subject to the applicable taxes and penalties but will not invalidate the CAR previously issued.
• The taxpayers have the option to secure ruling/legal opinion from the Law and Legislative Division (LLD) of the National Office. Requests not involving question/s of law will be endorsed to the concerned RDO for appropriate action.