BIR Ruling [DA-032-05]

January 27, 2005 BIR RULING [DA-032-05] 109 (w); VAT Ruling Nos. 046-98 & 034-2001; DA-669-2004 Asia Recovery Corporation 20th Floor, GT Tower International, Ayala Avenue, corner H.V. Dela Costa Street, Makati City Attention: Mr. Jose Mari Banzon Senior Vice-President Gentlemen : This refers to your letter dated November 25, 2004 requesting for a ruling that the assignment of buildings and all the improvements, edifices and structures erected on parcels of land comprising the Cebu Plaza Hotel made by Pathfinder Holdings Philippines, Inc . (" PHPI ") in favor of Asia Recovery Corporation (" ARC ") by way of dacion en pago is exempt from the 10% value-added tax. It is represented that PHPI is a holding company which used to be engaged in the business of managing and operating the Cebu Plaza Hotel ("Hotel") and has continuously operated at a loss for the past three (3) years; that PHPI ceased its operation, including the management of the Hotel in the first quarter of 2003; that in settlement of its obligation with ARC, PHPI executed a Deed of Dacion en Pago in favor of ARC over the Hotel building and the improvements, edifices, structures, buildings and the like erected on the parcels of land comprising the compound along Cebu Veterans Drive, Barangay Lahug, Cebu City where the Hotel is located; that PHPI is not a real estate dealer; and that the properties subject of dacion en pago were not held primarily for sale to customers or held for lease in the ordinary course of trade or business of PHPI. In reply, please be informed that Section 109(w) of the Tax Code of 1997 and Section 4.103(B)(w) of Revenue Regulations (RR) No. 7-95, as amended, provide as follows: EaSCAH "Section 109. Exempt Transactions . The following shall be exempt from value-added tax: (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 (P1,000,000.00) 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 (P1,000,000.00) shall be adjusted to its present value using the Consumer Price Index, as published by the National Statistics Office; xxx xxx xxx". "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. 046-98 , it was held that the sale by 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. 034-2001 , dated June 13, 2001 , it was held that the sale of real property may only imposed the 10% VAT provided that 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. HTSAEa More recently, in BIR Ruling No. DA-669-2004, dated December 28, 2004 , it was reiterated that the assignment by UIBC of its real properties, specifically the buildings which used to house the converting equipment, machinery and parts that were used in its cement paper bags manufacturing business, to RCBC as payment of UIBC's loan to the latter is exempt from VAT inasmuch as the said properties are not among the stock in trade of UIBC and due to the fact that UIBC was not primarily engaged in the buying and selling of real properties, nor in the leasing of properties. In view of the foregoing, since the buildings and improvements are not primarily held for sale to customers or held for lease in the ordinary course of trade or business, the assignment of the aforesaid properties by PHPI to ARC is not subject to 10% value-added tax, 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. Very truly yours, (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group