BIR Ruling [DA-152-04]

March 31, 2004 BIR RULING [DA-152-04] Sec. 39 (A); RR 67-2003 DA-27-02; 217-99-010-02 SGV & Co. 6760 Ayala Avenue 1226 Makati City Attention: Atty. W.U. Villanueva Tax Division Gentlemen : This refers to your letter dated May 12, 2003 requesting for confirmation of your opinion that (1) The sale of Lima Land Inc. non-Philippine Economic Zone Authority (PEZA) registered lots, which are classified as `investment properties' in its books and considered as capital assets, to PEZA registered and non-PEZA registered entities is (i) subject to the 6% capital gains tax (CGT), (ii) subject to documentary stamp tax (DST) of 1.5%, but (iii) is exempt from 10% Value Added Tax (VAT) pursuant to the Tax Code of 1997, as amended; (2) The sale of Lima Land, Inc., non-PEZA registered lots, which are classified as `real estate held for sale' in its books and considered as ordinary assets, to PEZA registered and non-PEZA registered entities is subject to (i) the regular corporate income tax, (ii) applicable creditable withholding tax (CWT), (iii) DST of 1.5% and (iv) 10% VAT pursuant to the Tax Code of 1997, as amended; and (3) The lease of Lima Land Inc. non-PEZA registered lots to PEZA registered and non-PEZA registered entities is subject to (i) corporate income tax, (ii) creditable withholding tax (CWT) or 5%, (iii) DST pursuant to Section 196 of the Tax Code of 1997, as amended, and (iii) 10% Value Added Tax (VAT). It is represented that your client, Lima Land, Inc. ("LLI"), is a domestic corporation primarily engaged in real estate development; that LLI is likewise registered with the Philippine Economic Zone Authority ("PEZA") as an economic zone ("ecozone") developer/operator with Certificate of Registration No. EZ-97-06 dated February 6, 1998, that it is mandated to establish, develop, construct, administer, manage and operate the Lima Technology Center a Special Economic Zone located in Batangas City; that LLI duly declared and registered 279.2519 hectares PEZA lots are part of the 441.1146 hectares of land which was originally applied for declaration and registration with PEZA; that the remaining 161.8627 hectares of LLI non-PEZA registered lots are further classified into 'real estate held for sale' and 'investment properties' in LLI's books; that the non-PEZA; registered lots which LLI classified as 'investment properties are raw, idle, and have remained undeveloped since the time of acquisition, whereas lots which LLI booked as 'real estate held for sale' are those that it holds for sale or lease' to customers in the ordinary course of its business; that LLI intends to sell and/or lease these non-PEZA registered lots to PEZA and non-PEZA registered entities; that LLI desires to be informed of the tax implications of the sale and/or lease of its non-PEZA registered lots. In reply, please be informed that pursuant to Section 27(A) of the Tax Code of 1997, whenever a corporate-real estate developer sells, real properties forming part of its inventory or those primarily held for sale to customers, it is considered as a sale of ordinary assets subject to the 32% income tax. However, when the real estate involved is idle, raw, undeveloped, has never formed part of the real estate developer's inventory for sale to customers and has not been used in its trade or business, such real properties are properly classified as capital assets subject to a final tax of 6% on the gain presumed to have been realized from the sale or transfer pursuant to Section 27(D)(5) of the Tax Code of 1997. Thus, if the real property is a land or building which is not actually used in the business of the seller-corporation and is treated as a capital asset, as that term is defined in Section 39(A) of the 1997 Tax Code, then a final tax of six percent (6%) shall be imposed on the gain presumed to have been realized on its sale, exchange or disposition of such land or building based on the gross selling price or fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher, of such land and/or building. [Sections 27(D)(5); 1997 Tax Code of 1997]. This rule applies, whether or not the seller-corporation is engaged it real estate business. On the other hand, it is only when the real property being sold is an ordinary asset that the withholding tax rates imposed under Section 2.57.2 of Revenue Regulations No. 2-98, as amended, shall apply. The rate of withholding tax will depend on whether, first, the seller is exempt or taxable; second, whether the seller is habitually engaged in real estate business or not; and third, if the seller is habitually engaged in real estate business, the gross selling price, as that term is defined in the above-mentioned Revenue Regulations. (BIR Ruling No. 27-02 dated-July 3, 2002) Based on your representation, the property of LLI which is idle and vacant and had not been used in the ordinary course of trade or business nor had it ever been classified as property of a kind which would properly be included in the inventory if on hand at the close of the taxable year nor had it ever been held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, the income derived from the sale thereof is not subject to the expanded withholding tax under Section 2.57.2(J) of Revenue Regulations No. 2-98, but only to the 6% capital gains tax imposed under Section 27(D)(5) of the Tax Code of 1997 and to the documentary stamp tax under Section 196 of the same Code, based on the gross selling price or FMV as determined in accordance with Section 6(E) of the Code, whichever is higher. (BIR Ruling Nos. DA-217-99 and DA-010-02 dated April 12, 1999 and January 29, 2002) Corollarily, only such real properties held by a real estate developer primarily for sale or lease to customers in the ordinary course of its real estate development business, or which would be properly included in the inventory of such taxpayer if on hand at the close of the taxable year, or used in his trade or business, are appropriately classified as ordinary assets. Otherwise stated, real properties of a real estate developer other than those enumerated under Section 39(A)(1) of the Tax Code of 1997 and Section 2(b) of RR 7-2003 are properly deemed as capital assets. Considering that the non-PEZA registered lots classified in LLI books as 'investment properties' are idle, unproductive and unimproved real properties; since the time of acquisition, and do not fall under any of the assets enumerated under Sections 39(A)(1) of the Tax Code of 1997 and 2(b) of Revenue Regulations No. 7-2003, the same should be properly classified as capital assets for tax purposes. On the other hand, LLI non-PEZA registered lots classified in its books as 'real estate held for sale' are developed and held primarily for sale to its customers and thus properly considered as ordinary assets pursuant to Section 39(A)(l) of the Tax Code of 1997 and Sections 2(b) of RR 7-2003. Accordingly, we hereby confirm your opinion that: (1) The sale of LLI's non-PEZA registered lots, which are classified as "investment properties" in its books and considered as capital assets to PEZA registered and non-PEZA registered entities, is: (i) subject to capital gains tax ("CGT") of 6% pursuant to Section 27(D)(5) of the Tax Code of 1997; (ii) subject to DST at the rate of P15.00 for each P1,000 or fractional part thereof in excess of P1,000, or 1.5% of the consideration or fair market value of the properties, whichever is higher, pursuant to Section 196 of the Tax Code; and (iii) exempt from 10% VAT, the properties not being primarily held and offered for sale or lease to customers in the ordinary course of LLI's trade or business, as provided under Section 109 (w) of the Tax Code of 1997. (2) The sale of LLI's non-PEZA registered lots which are developed and primarily held by LLI for sale to its customers to PEZA registered and non-PEZA registered entities is subject to: (i) The regular 32% corporate income tax under Section 27(A)(1) of the Tax Code of 1997, the same being ordinary assets pursuant to Sections 9 (A)(1) of the same Code, and Sections 2(b) and 3(a)(2) of Revenue Regulations No. 7-2003; (ii) The CWT to be withheld and remitted by the buyer pursuant to Section 3(J) of Revenue Regulations No. 6-2001, in accordance with the following schedule 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 1.5% Pesos (P500,000) or less With a selling price of more than Five Hundred 3.0% Thousand Pesos (P500,000) but not more than Two Million Pesos (P2,000,000) With a selling price of more than Two Million 5.0% Pesos (P2,000,000) (iii) DST at the rate of P15.00 for each P1,000 or fractional, part thereof in excess of P1,000, or 1.5% of the sale amount or the fair market value of the properties, whichever is higher in accordance with Section 196 of the Tax Code of 1997; and (iv) 10% VAT based on the gross selling price or gross value in money of the properties sold pursuant to Section 106 in relation to Section 105 of the Tax Code of 1997. (3) The lease of LLI's non-PEZA registered lots classified as "investment properties" is subject to: (i) The ordinary 32% corporate income tax under Section 27(A)(1) in relation to Section 32(A)(5) of the Tax Code of 1997; (ii) The CWT at the rate of 5% based on the gross rental, to be withheld and remitted by the lessor in accordance with Sections 57(B) and 58 of the Tax Code of 1997 and Section 2.57.2 (C) of Revenue Regulations No. 2-98, as amended; EAHcCT (iii) DST of P3.00 for the first P2,000.00 or fraction thereof and an additional P1.00 for every P1,000.00 or fraction thereof, in excess of the first P2,000.00 for each year of said contract or agreement, pursuant to Section 194 of the Tax Code of 1997; and (iv) 10% VAT based on the gross value in money of the properties leased pursuant to Section 106 in relation to Section 105 of the Tax Code of 1997. 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, Commissioner of Internal Revenue By: (SGD.) JOSE MARIO C. BUAG Deputy Commissioner Legal and Inspection Group