BIR Ruling [DA-008-04]

January 6, 2004 BIR RULING [DA-008-04] 27 (D) (5); DA 009-03 Lina Lavares Didulo Yam & Leviste-Avellana Unit 2202 Asia Tower Building Paseo de Roxas cor. Benavidez Street Legaspi Village Makati City Attention: Atty. Jose Leonilo V. Didulo Partner Gentlemen : This refers to your letter dated October 15, 2003 stating that the Philippine Wirerope Products, Inc. (PWP) is a domestic corporation initially incorporated with the Securities and Exchange Commission (SEC) as Electrodes, Inc. in 1965; that its original business was manufacturing and selling welding electrodes; that after welding electrodes business was sold, the SEC approved in 1981 PWP's application for the amendment of its Articles of Incorporation, whereby PWP's corporate name was changed to Philippine Wirerope Products, Inc.; that the new corporate name signified that the manufacture and sale of steel wireropes had become PWP's primary business; that over the years the country's logging and mining industries, which were the biggest markets for the company's wirerope, went into decline, as a result of which PWP completely ceased its wirerope business operations more than five (5) years ago; that PWP does not have any intention to revive its wirerope business of which PWP's subject parcel of land, covered by TCT No. 4558 issued by the Registry of Deeds for Pasig City with an area consisting, more or less, of 7,379 square meters, is the factory site and has since 1999 not produced any income for PWP; that PWP's comparative financial statements and annual income tax returns from 1999 up to 2003, disclose that PWP has (a) no reported income from operations and operating expenses; (b) no reported cash flow; (c) a running deficit of P3,107,616.00; and (d) the Property Plant and Equipment, of which the company's subject parcel of land is part of, were not subjected to depreciation; and that PWP's Board of Directors has approved a resolution that it is in the best interests of PWP's stockholders to sell the subject parcel of land; and that in the same resolution, the Chairman of the Board of Directors and the President were authorized to take all actions necessary to sell PWP's subject parcel of land and sign all the documents required to effect the sale. ADTEaI In connection therewith, you now request for a ruling that the proposed sale of a parcel of land by PWP classified as a capital asset is subject to the 6% capital gains tax and documentary stamp tax respectively imposed under Sections 27(D)(5) and 196 of the Tax Code of 1997 and that said sale is not subject to the 10% value-added tax. In reply thereto, please be informed that Section 27(D)(5) of the Tax Code of 1997 provides that a final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of lands and/or buildings which are not actually used in the business of a corporation and are treated as capital assets, based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the said Code, whichever is higher, of such lands and/or buildings. On the other hand, Section 3(e) of Revenue Regulations No. 07-03 provides the guidelines in determining whether a particular real property is a capital asset or ordinary asset. The regulations states that real properties formerly forming part of the stock in trade of a taxpayer engaged in the real estate business, or formerly being used in the trade or business of a taxpayer engaged or not engaged in the real estate business, which were later on abandoned and became idle, shall continue to be treated as ordinary assets. Real property initially acquired by a taxpayer engaged in the real estate business shall not result in its conversion into a capital asset even if the same is subsequently abandoned or becomes idle. However; properties classified as ordinary assets for being used in business by a taxpayer engaged in business other than real estate business as defined in Section 2(g) hereof are automatically converted into capital assets upon showing of proof that the same have not been used in business for more than two (2) years prior to the consummation of the taxable transactions involving said properties . . . . " (emphasis supplied) From the foregoing provisions, it is necessary to first determine the character of the real property being sold. Thus, if the real property is a parcel of land which is not actually used in the business of the seller-corporation and is treated as a capital asset, as that term is defined in Section 39(A) of the Tax Code of 1997, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition based on the gross selling price or fair market value whichever is higher as determined in accordance with Section 6(E) of the Tax Code of 1997. In the instant case, the proposed sale of PWP's subject parcel of land shall be treated as a sale of capital asset subject to capital gains tax of 6% under Section 27(D)(5) in relation to Section 39(A)(1) of the Tax Code of 1997. (BIR Ruling No. DA-040-03 dated February 10, 2003; DA-009-03 dated January 14, 2003; 166-81 dated September 3, 1981; DA-217-99 dated April 12, 1999; DA-397-2000 dated November 20, 2000; DA-010-02 dated January 29, 2002; DA-009-2002 dated January 28, 2002) . Because of the following reasons, to wit: 1. PWP completely ceased its primary business of manufacturing and selling steel wireropes more than five (5) years ago; PWP has no intention of reviving said business, of which PWP's subject parcel of land is the factory site and has produced no income for PWP since 1999. 2. PWP's subject parcel of land is treated as a capital asset in PWP's books of account, and does not form part of PWP's inventory of supplies, materials and products. 3. PWP's subject parcel of land is not held for speculative purposes. 4. Since 1999, no depreciation expense has been charged or applied to PWP's Property, Plant, and Equipment, of which PWP's subject parcel of land is a part of. SUCH BEING THE CASE, PWP's subject parcel of land is properly classified as a capital asset and its proposed sale is subject to capital gains tax at the rate of 6% based on the gross selling price or current fair market value at the time of sale, whichever is higher, pursuant to Sections 27(D)(5) and 39(A)(1) of the Tax Code of 1997. Moreover, the Deed of Sale embodying the transaction whereby PWP sells, transfers, and conveys to the Buyer the subject parcel of land, is subject to documentary stamp tax of 1.5% based on the consideration or value received or paid for the property, or on its fair market value whichever is higher, pursuant to Section 196 of the Tax Code of 1997. (BIR Ruling Nos. 459-88 of September 19, 1988 and DA-049-2000 dated January 21, 2000) . TCASIH However, the proposed sale of PWP's subject parcel of land is not subject to the 10% value added tax (VAT) inasmuch as PWP's subject parcel of land is not held primarily for sale or lease to PWP's customers nor for use in the ordinary course of PWP's primary trade or business of manufacturing and selling wireropes, the fact being that PWP ceased the said business more than five (5) years ago and has no intention of reviving the same, of which PWP's subject piece of land is the factory site and has not produced any income for PWP since 1999. 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. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group