BIR Ruling [DA-006-06]

January 10, 2006 BIR RULING [DA-006-06] 109 (w); VAT Ruling Nos. 046-98 & 034-2001; DA-032-2005 Trans-National Paper Corporation Room 301/302, Jollibee Center Building San Miguel Avenue, Pasig City Attention: Mr. Stephen Cheng President Gentlemen : This refers to your letter dated March 2, 2005 stating that your company, Trans-National Paper Corporation ("TNP"), is a Philippine corporation primarily engaged in the manufacture, production, preparation, purchase, import, export, sale and general dealership in any and all kinds of paper and in all ingredients products, and compound thereof, and in any material that now are or hereafter to be used in connection with such manufacture, except manufacturing of food, drugs and cosmetics. Due to the increasing difficulty of the paper manufacturing business compounded by TNP's substantial amount of debts, TNP will sell its factory in Tanza, Cavite which include the buildings, machinery and equipment as well as the parcels of land on which these structures and improvements are erected. Subject real properties comprise the manufacturing plant being used by TNP in producing paper and paperboards. The proceeds of the sale will primarily be used by TNP to pay of its debts. TNP is not engaged in the real estate business and the real properties being sold are not held primarily for sale to customers or held for lease in the ordinary course of trade or business of TNP. In connection therewith, you now request confirmation of your opinion that the sale by TNP of its factory in Tanza, Cavite which include the buildings, machinery and equipment as well the parcels of land on which the structures and improvements are erected is exempt from the Value-Added Tax (VAT). In reply thereto, please be informed that Section 109(w) of the Tax Code of 1997, as amended, provides as follows: "Section 109. Exempt Transactions . The following shall be exempt from value-added tax: "xxx xxx xxx "(w) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business or real property utilized for low-cost and socialized housing as defined by Republic Act No. 7279, otherwise known as the Urban Development and Housing Act of 1992, and other related laws, house and lot and other residential dwellings valued at One million pesos (P1,000,000) and below: Provided , That not later than January 31st of the calendar year subsequent to the effectivity of this Act and each calendar year thereafter, the amount of One million pesos (P1,000,000) shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office". CcaDHT Further, Section 4.103(B)(w)(1) of Revenue Regulations (RR) No. 7-95, as amended, provides: "Section 4.103-1. Exemptions . "xxx xxx xxx "(B) Exempt transactions. The following shall be exempt from the VAT: "xxx xxx xxx "(w) The following sales of real properties are exempt from VAT, namely: "(1) Sale of real properties not primarily held for sale to customers or held for lease in the ordinary course of trade or business; . . . ." The term "primary" is defined as 'first, principal, chief, leading or first in order of time, or development, or intention' ( Black's Law Dictionary , Sixth Edition ). Thus, to be 'held primarily for sale or lease,' the property must be held with the chief intention of being sold or leased. In VAT Ruling No. 048-98 , it was held that the sale by Eastern Canumay Industrial Development Corporation of its property to Ultimate Innovations, Inc. is not subject to VAT. In this ruling, Eastern Canumay Industrial Development Corporation, which is engaged in the production of marble and other marble products, owned several properties, one of which was sold to Ultimate Innovations, Inc. Since the property sold is not primarily held for sale in the ordinary course of trade or business, then its sale is not subject to VAT. Also, in VAT Ruling No. 034-01 , dated June 13, 2001 , it was reiterated that the sale of real property may only be imposed the 10% VAT provided the same is primarily held for sale to customers or held for lease in the ordinary course of trade or business. Since the gas pipeline, being sold is not held by FGP Corporation primarily for sale to customers or held for lease in the ordinary course, of its trade or business, considering that its business involves the operation of the aforesaid power generating plant, it follows that FGP Corporation is not subject to VAT with respect to the sale of the gas pipeline, pursuant to the aforesaid provision of the Code and its implementing rules and regulations. More recently, in BIR Ruling No. DA-032-2005 dated January 27, 2005 , it was reiterated that the assignment by PHPI of its buildings and all improvements, edifices, and structures erected on parcels of land comprising the Cebu Plaza Hotel in favor of Asia Recovery Corporation ("ARC') by way of dacion en pago is exempt from the 10% VAT inasmuch as the said properties are not among the stock in trade of PHPI and due to the fact that PHPI is not primarily engaged in the buying and selling of real properties, nor in the leasing of properties. In view of the foregoing, since TNP's factory in Tanza, Cavite (which include the buildings, machinery and equipment which must be in the nature of real properties within the purview of the New Civil Code, as well as the parcels of land on which the structures and improvements are erected) is not primarily held for sale to customers or held for lease in the ordinary course of trade or business, the sale of the same by TNP is not subject to the 10% VAT, pursuant to the aforesaid provision of the Tax Code of 1997 and its Implementing Rules and Regulations. ( VAT Ruling No. 034-2001 dated June 13, 2001 and BIR Ruling No. DA-669-2004 dated December 28, 2004 ) This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be disclosed that the facts are different, then this ruling shall be considered null and void. HcSETI Very truly yours, (SGD.) JOSE MARIO C. BUAG Commissioner of Internal Revenue