BIR Ruling [DA-120-02]

July 22, 2002 BIR RULING [DA-120-02] Rev. Regs. 2-98 DA-119-2001 Genwil Development Corp . Unit 105 Minnesota Mansion Condominium #267 Ermin Garcia St., Cubao Quezon City Attention: Mr . Wilson Genato President Gentlemen : This refers to your letter dated September 19, 2001 requesting on behalf of Spouses Ruby Co Ang and Alexander Ng Chung, for a ruling on whether the sale by Belen Tan Ong Genato and Wilson Tan Genato married to Teodosa Co Genato and Genwil Construction & Development Corporation to Spouses Ruby Co Ang and Alexander Ng Chung is subject to withholding tax or capital gains tax. Documents show that on July 25, 2001, a Deed of Absolute Sale was executed by and between Belen Tan Ong Genato and Wilson Tan Genato married to Teodosa Co Genato (owners of land) and Genwil Construction & Development Corporation (developer) and Spouses Ruby Co Ang and Alexander Ng Chung (purchasers) whereby the landowners and the developer transferred the title and ownership over condominium unit covered by Condominium Certificate of Title No. N-20854 designated as Unit 301 of the Minnesota Mansion with a total floor area of 75.090 sq.m., together with an undivided 1.855% interest in the common areas and parking space with a total floor area of 12.5 sq.m., more or less, for and in consideration of P1,877,250.00, exclusive of value-added tax; that said condominium is located at #267 Ermin Garcia St., Silangan, Cubao, Quezon City, and registered in the name of Belen Tan Ong Genato and Wilson Tan Genato married to Teodosa Co Genato as the same forms part of the units to be allocated to Belen Tan Ong Genato and Wilson Tan Genato as shown in the Memorandum of Agreement executed by and between Belen Tan Ong Genato and Wilson Tan Genato and Genwil Construction & Development Corporation dated March 27, 2002; that on July 27, 2001, Spouses Ruby Co Ang and Alexander Ng Chung, paid documentary stamp tax in the amount of P28,158.75 and 3% withholding tax in the amount of P56,317.50 based on the assessment as computed and prepared by Revenue Officer Calpito of Revenue District No. 40, Cubao, Quezon City; that upon review of Revenue Examiner Conding, Spouses Ruby Co Ang and Alexander Ng Chung were assessed an additional 3% to complete the capital gains tax of 6%; that Spouses Ruby Co Ang and Alexander Ng Chung are willing to pay the additional 3% basic tax; and that the Minnesota Mansion Condominium is registered with the HLURB and the owners thereof, Belen Tan Ong Genato and Wilson Tan Genato and Genwil Construction & Development Corporation, were issued a License to Sell the saleable units therein. In reply, please be informed that pursuant to Section 24(D)(2) of the 1997 Tax Code, capital gains presumed to have been realized from the sale, exchange or other disposition of real property located in the Philippines, classified as capital assets, including pacto de retro sales and other forms of conditional sales, by individuals, including estates and trusts, shall be taxed at the rate of 6% based on the gross selling price or the fair market value prevailing at the time of sale, whichever is higher. Moreover, pursuant to Section 27(D)(5) of the same Code, a final tax of 6% is 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 same Code, whichever is higher. On the other hand, Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001, provides that there shall be withheld a creditable income tax rates from the following items of income payments to persons residing in the Philippines: "(J) Gross selling price or total amount of consideration or its equivalent paid to the seller/owner for the sale, exchange or transfer of real property classified as ordinary asset A creditable withholding tax based on the gross price/total amount of consideration or the fair market value determined in accordance with Section 6(E) of the Code, whichever is higher, paid to the seller/owner for the sale, transfer or exchange of real property, other than capital asset, shall be imposed upon the withholding agent/buyer, in accordance with the following schedule: A. Where the seller/transferor is exempt from creditable withholding tax in accordance with Sec. 2.57.5 of these regulations Exempt B. Upon the following values of real property, where the seller/transferor is habitually engaged in the real estate business: With a selling price of Five Hundred Thousand Pesos (P500,000.00) or less 1.5% With a selling price of more than Five Hundred Thousand Pesos (P500,000.00) but not more Than Two Million Pesos (P2,000,000.00) 3.0% With a selling price of more than Two Million Pesos (P2,000,000.00) 5.0% C. Where the seller/transferor is not habitually engaged in the real estate business 6.0% Registration with the HLURB or HUDCC shall be sufficient for a seller/transferor to be considered as habitually engaged in the real estate business . If the seller/transferor is not registered with HLURB or HUDCC, he/it may prove that he/it is engaged in the real estate business by offering other satisfactory evidence (for example, he/it consummated during the preceding year at least six taxable real estate transactions, regardless of amount). . . ." Furthermore, Section 39 (A)(1) of the 1997 Tax Code defines "capital assets" as property held by the taxpayer (whether or not connected with his trade or business), but does not include stock in trade of the taxpayer or other property of a kind which would properly be included in the inventory of the taxpayer if on hand at the close of the taxable year, or property held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business, or property used in the trade or business, of a character which is subject to the allowance for depreciation provided in Subsection (F) of Section 34; or real property used in trade or business of the taxpayer. Such being the case and since in the instant case, the subject property does not fall within the contemplation of the above negative definition of the term "capital assets", as it is held by Belen Tan Ong Genato and Wilson Tan Genato and Genwil Construction & Development Corporation, the owners, primarily for sale to customers in the ordinary course of their business, as their condominium project, the Minnesota Mansion Condominium, is registered with the HLURB thereby qualifying them as habitually engaged in the realty business, the aforesaid property, therefore, should be classified as an ordinary asset; and, thus, the sale by Belen Tan Ong Genato and Wilson Tan Genato married to Teodosa Co Genato and Genwil Construction & Development Corporation to Spouses Ruby Co Ang and Alexander Ng Chung of the above subject property, the CCT of which is in the name of Belen Tan Ong Genato and Wilson Tan Genato married to Teodosa Co Genato is subject to the creditable withholding tax prescribed under Section 2.57.2(J) of Revenue Regulations No. 2-98, as amended by Revenue Regulations No. 6-2001 ( BIR Ruling No. DA-119-2001 dated July 10, 2001 ), at the rate of three percent (3%) as the consideration of the foregoing sale of realty is less than Two Million (P2,000,000.00). Finally, the aforesaid sale of real property by Belen Tan Ong Genato and Wilson Tan Genato married to Teodosa Co Genato and Genwil Construction & Development Corporation to Spouses Ruby Co Ang and Alexander Ng Chung shall be subject to the documentary stamp tax imposed under Section 196 of the 1997 Tax Code. 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 as null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) EDMUNDO P. GUEVARA Deputy Commissioner Legal & Inspection Group