BIR Ruling [DA-151-05]

April 14, 2005 BIR RULING [DA-151-05] 27 (D) (5); 39; 106 (A) DA-545-2004; 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 H. Banzon Senior Vice-President Gentlemen : This refers to your letter dated January 10, 2005 requesting for a ruling on the tax consequences of the assignment by Pathfinder Holdings Philippines, Inc. ("PHPI") of its furniture, fixtures and equipment located inside the building of the Cebu Plaza Hotel in favor of Asia Recovery Corporation ("ARC") by way of dacion en pago . 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 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 its furniture, fixtures and equipment located inside the building of the Cebu Plaza Hotel; 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 pursuant to Section 27(D)(5) of the Tax Code of 1997, acquisition of real property treated as capital asset and acquired by way of "dation in payment" is subject to capital gains tax on the gains presumed to have been realized from said transfer taking into consideration the outstanding balance of the loans as the selling price. [ BIR Ruling Nos. DA-459-88 dated September 19, 1988 and DA-049-2000 dated January 21, 2000 ] If the property transferred by way of "dation in payment" is an ordinary asset, it shall be subject to income tax imposed under Section 27(A) of the same Code. The outstanding balance of the loan shall be taken into consideration in determining the selling price of the real property or chattel acquired by way of dacion en pago . In the instant case, the properties to be transferred by way of dacion en pago are furnitures, fixtures and equipment located inside the building of the Cebu Plaza Hotel. Thus, for income tax purposes, the taxable income shall be net taxable gains derived from dacion en pago and determined in accordance with Section 39 of the Tax Code of 1997. In short, the original acquisition cost of the real property, or the net book value of the chattel, as the case may be, shall be allowed as deduction from the selling price (outstanding balance of the loan inclusive of the interest) to arrive at the net taxable gain (loss) subject to income tax imposed under Section 27(A) of the same Code. It should be noted also that the Deed of Dacion en Pago conveying the abovementioned furniture, fixtures and equipment, not being a land, tenement or other realty, shall not be subject to the documentary stamp tax imposed under Section 196 of the Tax Code of 1997. SAHIDc Finally, since the assignment of the furniture, fixtures and equipment are not primarily held for sale to customers or held for lease in the ordinary course of trade or business, such assignment is not subject to 10% value-added tax (VAT). ( 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