BIR Ruling [DA-130-A-03]

April 25, 2003 BIR RULING [DA-130-A-03] Sec. 109 (w) VAT Ruling Nos. 046-98 & 034-01 SGV & Co. 6760 Ayala Avenue Makati City Attention: Atty. E. C. Alcantara Tax Division Gentlemen : This refers to your letter dated February 4, 2003 requesting for confirmation of your opinion that the transfer by your client, JS Gaisano, Incorporated (JS Gaisano), of its real properties is exempt from the 10% value-added tax (VAT). It is represented that JS Gaisano is a domestic corporation with principal office in Davao City; that as stated in its Articles of Incorporation, its primary purpose is "to buy, sell, manufacture, barter, and generally deal in, at wholesale or retail, goods, wares, merchandise and other commodities of every kind and description, such as dry goods and groceries, and to carry on and engage in general import and export business;" that with borrowed funds, JS Gaisano constructed and operated a mall in Davao City called the "JS Citimall;" that its actual operations consist of the department store/dry goods section and grocery store operated by JS Gaisano; and that only a small portion of the mall building, or less than five percent (5%) of the total mall building space, is actually rented out to various tenants; and that to pay off its obligations, JS Gaisano sold the JS Citimall and the land on which the mall is standing. It is further represented that the real properties are not primarily held for sale to customers or held for lease in the ordinary course of trade or business, hence, the transfer by JS Gaisano of its real properties is not subject to the 10% VAT pursuant to Section 109(w) of the Tax Code of 1997, as amended, and Section 4.103-1(B)(w)(1) of Revenue Regulations No. 7-95. In reply, please be informed that Section 109(w) of the Tax Code of 1997 and Section 4.103(B)(w)(1) of Revenue Regulations No. 7-95, as amended, provide as follows: "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) 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; TAIEcS xxx xxx xxx". "Section 4.1.03-1. 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 in 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 046-98 , 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. More recently, 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. Since JS Gaisano acquired the land and the improvements thereon were constructed for the purpose of conducting JS Gaisano's main line of business, which is to buy and sell, at wholesale and retail, various goods, wares, merchandise and other commodities, which JS Gaisano remains primarily engaged in, the subject real properties being sold by JS Gaisano cannot be considered as being held primarily for sale to customers, nor as being primarily held for lease in the ordinary course of trade or business. While a small portion of the mall building is being rented out, this only constitutes less than five percent (5%) of the total mall building spaces. Thus, it cannot be said that the subject properties are held primarily for lease. Furthermore, the sale was not made in the ordinary course of the regular trade or business of JS Gaisano, but merely an isolated transaction. Thus, inasmuch as the said properties are not among the stock in trade of JS Gaisano, and due to the fact that JS Gaisano is not primarily engaged in the buying and selling of real properties, nor in the leasing of properties, it follows that the sale of the real properties should not be subject to VAT. 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, and/or any of the requirements imposed in this letter are not complied with, then this ruling shall be considered null and void. Very truly yours, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal & Inspection Group