Arquitectonica International Corporation

January 31, 2007 BIR RULING [DA-049-07] 28 (B) (1); 106 (P); DA 108-04; DA 201-06 Arquitectonica International Corporation 908 West Tower, PSE Centre Exchange Road, Ortigas Pasig City Attention: Attys. Othelo C. Carag & Atty. Maria Theresa C. San Pablo Tax Counsel Gentlemen : This refers to your letter dated January 3, 2007 requesting, on behalf of your client, Arquitectonica International Corporation (Arquitectonica) , for confirmation of your opinion on the tax consequences of the intended sale of several condominium units owned by Arquitectonica, a non-resident foreign corporation, to third-party buyers. The facts as you represented, are as follows: Arquitectonica International Corporation (the "Arquitectonica") is a non-resident foreign corporation organized and existing under the laws of the State of Florida, United States engaged in the business of manufacturing, building, purchasing, investing in, trading in, dealing in and with, goods, wares, merchandise, real and personal property and services of every class, kind and description and in international trade with affiliates, subsidiaries, or branch offices in the Asia-Pacific Region. On 05 April 1999, the Board of Investments (BOI) approved Arquitectonica's application for registration and issuance of license to establish a regional headquarters pursuant to the provisions of Book III of Executive Order 226, otherwise known as the Omnibus Investments Code, as amended by Republic Act 8756. On the basis of the BOI's approval, the Securities and Exchange Commission issued a Certificate of Registration and License to Arquitectonica to establish its regional or area headquarters in the Philippines under SEC License No. F-1999-0006. Consistent with its BOI and SEC registration, the activities of the regional or area headquarters of Arquitectonica are limited to acting as supervisory, communications or coordinating center for its affiliates, subsidiaries or branches in the region, and it does not derive any income from sources within the Philippines. Arquitectonica has been engaged by domestic entities to prepare conceptual design and schematic design for several projects in the Philippines, the related services for which are all performed by Arquitectonica's architects and personnel in Miami, Florida. In 2005, Arquitectonica acquired from Fort Bonifacio Development Corporation (FBDC), five (5) condominium units (Subject Units) in its project in Bonifacio Ridge intended to be used as temporary lodging of its architects for their visits to the Philippines which visits, averaging 10 day man trips (including travel time), are limited to site inspections, coordination with engineers, local architects and other professionals, in relation to the preparation and approval of plans for a specific project. Due to a change in its business direction, Arquitectonica is intending to dispose of said units and sell the same to interested third-party buyers. You now request for a confirmation of the following, that: (1) The gain from the sale of the Subject Units by Arquitectonica to third party buyers shall be subject to 35% final withholding tax pursuant to Section 4(e) of Revenue Regulations No. 07-03 in relation to Section 28(B)(1) of the 1997 National Internal Revenue Code, as amended by Republic Act No. 9337 (the "Tax Code"). The gain from the sale shall be the excess of the selling price over the acquisition cost of said units. (2) The sale by Arquitectonica of the Subject Units to third-party buyers shall not be subject to 12% VAT imposed under Section 109(P) of the Tax Code since said units are not primarily held for sale or lease in the ordinary course of business of Arquitectonica. (3) The sale by Arquitectonica of the Subject Units to third-party buyers shall be subject to documentary stamp tax (DST) at the rate of P15.00 for every P1,000.00 or fractional part thereof pursuant to Section 196 of the Tax Code. ETIDaH In reply, please be informed as follows: (1) Under Section 28 (B) (1) of the 1997 National Internal Revenue Code, as amended by Republic Act No. 9337 (the "Tax Code"), Arquitectonica being a non-resident foreign corporation shall be subject to 35% on its gross income from all source within the Philippines, such as interests, dividends, rents, royalties, salaries, premiums (except reinsurance premiums), annuities, emoluments or other fixed or determinable annual, periodic or casual gains, profits and income, and capital gains, except capital gains realized from sale, exchange or disposition of shares of stock in a domestic corporation not traded in the exchange. Consequently, said tax shall be withheld pursuant to Section 2.57 (I) (1) of Revenue Regulations No. 2-98, as amended. Section 36 of Revenue Regulations No. 2, otherwise known as the "The Income Tax Regulations", defined income as follows: tax2007cdasia "Income in the broad sense, means all wealth which flows into the taxpayer other than mere return of capital. It includes the forms of income specifically described as gains derived from the sale or other disposition of assets." Thus, in the following instances, we have ruled that there is no flow of wealth and hence no income or profit subject to tax: (a) the payment for ancillary services at cost and (b) the assignment of receivables at cost. ( BIR Ruling [DA-108-04] dated March 9, 2004; BIR Ruling [DA-641-04] dated December 17, 2004 ) In a decided case by the Supreme Court, as quoted in DA ITAD BIR Ruling No. 020-06 dated 13 March 2006, the Court further explained "The three elements for the imposition of income tax are: (1) there must be gain or profit, (2) that the gain or profit is realized or received, either actually or constructively, and (3) the gain is not exempted by law or treaty from income tax ( Commissioner of Internal Revenue vs. Court of Appeals, et al ., G.R. No. 108576, January 20, 1999, 102 SCAD 119). Income in tax law is an amount of money coming to a person within a specified time, whether as payment for services, interest or profit from investment. It means cash or its equivalent. It is gain derived and severed from capital, from labor or from both combined. ( Ibid .) It should be noted that capital and income are different. Capital is wealth or fund; whereas income is profit or gain or the flow of wealth. The determining factor for the imposition of income tax is whether any gain or profit was derived from a transaction. ( Ibid .)" In another case involving the sale of real property, albeit by an individual, the Court of Appeals expressly stated that the gross income in the sale of said real property is the gain derived from said sale and not the selling price. Further, it ruled that the acquisition cost must be deducted from the selling price of the property, the balance of which is the gross income subject to income tax. ( The People of the Philippines vs. Leonor Litton , CA-G.R. No. 01428, August 1, 1986) Consistent with the foregoing, the gross income in relation to sale of real property located in the Philippines was interpreted by Revenue Regulations No. 7-03 as the gain from the sale thereof, i.e. , the difference between the gross selling price and the cost. Consequently, only the gain from the sale by Arquitectonica of the units to third-party buyers shall be subject to 35% final withholding tax pursuant to Section 4 (e) of RR 7-03 and Section 2.57 (I) (1) of RR 2-98, as amended in relation to Section 28 (B) (1) of the Tax Code. (2) With regard to the value added tax, Section 106 in conjunction with Section 109 of the Tax Code provides: "SEC. 106. Value-added Tax on Sale of Goods or Properties . "(A) Rate and Base of Tax . There shall be levied, assessed and collected on every sale, barter or exchange of goods or properties, a value-added tax equivalent to ten percent (10%) of the gross selling price or gross value in money of the goods or properties sold, bartered or exchanged, such tax to be paid by the seller or transferor: Provided, That the President, upon the recommendation of the Secretary of Finance, shall, effective January 1, 2006, raise the rate of value-added tax to twelve percent (12%), after any of the following conditions has been satisfied: xxx xxx xxx "(1) The term 'goods or properties' shall mean all tangible and intangible objects which are capable of pecuniary estimation and shall include: "(a) Real properties held primarily for sale to customers or held for lease in the ordinary course of trade or business; . . . " Section 109. Exempt Transactions . Subject to the provisions of Subsection (2) hereof, the following transactions shall be exempt from value-added tax: xxx xxx xxx "(P) 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, residential lot valued at One million five hundred thousand pesos (P1,500,000) and below, house and lot, and other residential dwellings valued at Two million five hundred thousand pesos (P2,500,000) and below: Provided, That not later than January 31, 2009 and every three (3) years thereafter, the amounts herein stated shall be adjusted to their present values using the Consumer Price Index, as published by the National Statistics Office (NSO); . . . " Given that the subject units were acquired primarily for the purpose of housing its visiting personnel and not for sale or lease in the ordinary course of its trade or business, the subsequent sale thereof by Arquitectonica shall not be subject to 12% VAT. ( BIR Ruling [DA-006-06] dated January 10, 2006; BIR Ruling [DA-201-06] dated April 3, 2006; BIR Ruling [DA-232-06] dated April 11, 2006; BIR Ruling [DA-305-06] dated May 10, 2006 ) (3) Finally, the subsequent sale of said units by Arquitectonica shall be subject to documentary stamp tax at the rate of P15.00 for every P1,000.00 or fractional part thereof. This ruling is being issued on the basis of the foregoing facts as represented. However, if upon investigation, it will be ascertained that the facts are different, then this ruling shall be considered as null and void. aDIHCT Very truly yours, (SGD.) JAMES H. ROLDAN Assistant Commissioner Legal Service