BIR Ruling [DA-149-00]

March 10, 2000 BIR RULING [DA-149-00] 24 (D) (1) 61-96 DA-149-2000 Mr. Anandram V. Dargani 929 Ideal Street Mandaluyong City S i r : This refers to your letter dated April 5, 1999 requesting in effect for a ruling as to whether or not the sale of your real property is subject to the 6% capital gains tax or to the 7% expanded withholding tax. It is represented and documents show that subject property is an industrial lot with an area of 2,628 square meters covered by Tax Declaration No. 013-02000 and Transfer Certificate of Title No. 12486 located at Market Avenue Maybunga Pasig City with a zonal value of P3,000.00 per square meter or P7,884,000.00; that Anandram V. Dargani with postal address at 929 Ideal Street Mandaluyong City sold the above-described property to Ishwalrial A. Dargani and Gobindram A. Dargani for P8,000,000.00 under RVO No. C-041-98-1187 dated September 9, 1998; that the corresponding creditable withholding tax and documentary stamp tax due thereon was computed at 7.5% amounting to P600,000.00 and documentary stamp tax amounting to P120,000.00 respectively; that when payment was presented, however, it was found out that the taxpayer paid the capital gains tax at 6% only or at P480,000.00; that Corazon C. San Pedro Revenue Officer II informed the taxpayer that the sale of the property should be subject to 7.5% or at P600,000.00 and that he should pay a deficiency tax of P120,000.00 since the real property involved is classified as industrial as shown in its tax declaration; that a building was erected on the subject property by Beauty Loom Manufacturing Inc. a garment manufacturing firm of which the seller is a majority stockholder; that the buyers are likewise stockholders of the corporation; that Beauty Loom Manufacturing Inc. certified that it was not paying rental fee to the seller notwithstanding the continuous use and the construction of the improvement; that the taxpayer insisted that he should be taxed at 6% pursuant to RMC No. 1-98; and that considering the close relationship between seller and the corporation it is the opinion of Corazon C. San Pedro, Revenue Officer II that the principle of arm's length transaction should be applied and therefore rental expense should be paid by the corporation. In reply, please be informed that pursuant to Section 24(D)(1) of the Tax Code of 1997 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. LibLex In this connection, Section 39(A)(1) of the Tax Code of 1997 defines "capital asset" 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 property would 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. Based on the foregoing, the aforementioned real property with a building constructed thereon classified as industrial as shown in its tax declaration does not fall within the contemplation of the foregoing definition or the term "capital assets". As regards the withholding tax, Section 2.57.2(J) provides, viz: Sec. 2.57.2 Income payment subject to creditable withholding tax and rates prescribed thereon . Except as herein otherwise provided, there shall be withheld a creditable income tax at the rates herein specified for each class of payee 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, other than capital asset, by an individual, estate, trust fund or pension fund or by a corporation who is not habitually engaged in real estate business Seven and one-half percent (7.5%) Gross selling price shall mean the consideration stated in the sales document or the fair market value determined in accordance with Section 6 (E) of the Code, as amended, whichever is higher. . . . Thus, contrary to your opinion, your property is an ordinary asset the sale of which is subject to the creditable withholding tax of 7.5% prescribed under Revenue Regulations No. 2-98 implementing Section 57(B) of the Tax Code. Finally, the aforesaid sale or conveyance of real property by your clients shall be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. (BIR Ruling No. 61-96 dated May 22, 1996) Very truly yours, Commissioner of Internal Revenue By: (SGD.) SIXTO S. ESQUIVIAS IV Deputy Commissioner (Legal and Enforcement Group)