BIR Ruling [DA-155-05]

April 14, 2005 BIR RULING [DA-155-05] RR 7-2003; DA-152-04 Joaquin Cunanan & Co. 8767 Paseo de Roxas 1226 Makati City Attention: Atty. Alexander B. Cabrera Tax Services Gentlemen : This refers to your letter dated March 2, 2005 requesting for confirmation of your opinion that the sale of Sucat Land Corporation of its long abandoned and idle property is subject to the six percent (6%) final tax on sale of capital assets under Section 27(D)(5) of the Tax Code of 1997. It is represented that your client Sucat Land Corporation ("Sucat Land") , is a domestic corporation primarily engaged in the acquisition of real and personal properties of all kinds, including the ownership, use, improvement, development, subdivision, sale, mortgage, exchange, lease and development and holding for investments of such real and personal properties; that sometime in 1957, Firestone Tire & Rubber Company of the Philippines ("Firestone") purchased more than fourteen (14) hectares as site for its tire plant; that during its commercial operations, the land was an integral component of the plant site of Firestone ; that in 1986, the company name was changed to Philtread Tire & Rubber Corporation ("Philtread") ; that Sucat Land is incorporated primarily as a repository of fourteen (14) hectares of real property of Philtread ; that severe labor problems forced the permanent shutdown of Philtread in November 1994; that the financial restructuring package of Philtread called for the sale of the business or assets to a third-party buyer; that pursuant to the plan, the assets of Philtread were transferred to two companies, namely: a) Philtread , which retained ownership over the plant and equipment and the tire manufacturing business; and b) Sucat Land , a landholding company, which became the repository of the real property, including the land; that the reason for such split was the possibility for a foreign company to either infuse equity or purchase the business of Philtread ; that in such a situation, the foreign company would be prohibited by Philippine nationality restrictions from owning the land where the plant site was situated; that Sucat Land was spun off pursuant to the financial restructuring plan of Philtread ; that sometime in 1995, Philtread sold its entire plant to MSF Tire & Rubber, Inc. ("MSF Tire") , a foreign-controlled domestic company; that forty percent (40%) of the shares in Sucat Land were also sold to the foreign controlling interest of MSF Tire ; that Sucat Land is organized to be the landholding company of MSF Tire with the land under a long-term lease contract; that in year 2001, MSF Tire closed operations because of huge business losses and the lease contract was immediately cancelled; that Sucat Land , even before and after the closure of MSF Tire , does not have any intention of engaging in the real estate business and after the closure of MSF Tire , the land has remained idle and abandoned for already four (4) years, with no improvements whatsoever. In reply, please be informed that pursuant to Section 27(D)(5) of the Tax Code of 1997, a final tax of six percent (6%) is hereby imposed on the gain presumed to have been realized on the sale, exchange or disposition of land and/or buildings which are actually not used in the business of a corporation and are treated as capital assets, based on the gross selling price, or fair market value, whichever is higher. This rule applies, whether or not the seller-corporation is engaged in the 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. DA-152-04 dated March 31, 2004; BIR Ruling No. 27-02 dated-July 3, 2002) Based on your representation, the income from the sale of the property of Sucat Land which has long been idle and abandoned and which was never intended to be sold or leased in the ordinary course of business nor 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 held by the taxpayer primarily for sale to customers in the ordinary course of trade or business, but which was merely previously used by its operating company, MSF Tire, 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 fair market value as determined in accordance with Section 6(E) of the Tax Code of 1997, whichever is higher. (BIR Ruling No. DA-217-99 dated April 12, 1999; BIR Ruling No. DA-010-02 dated January 29, 2002) After the closure of operations of the operating company (MSF Tire), Sucat Land never leased out the real property nor held it out for sale as inventory in the ordinary course of business. This was so because Sucat Land was not incorporated for the purpose of being actively engaged in the real estate business but was merely incorporated for the purpose of being a repository of the land of the operating company, since the financial restructuring package of the latter company required the infusion of foreign capital. Such equity infusion resulting in the operating company being foreign controlled, would violate the nationality restrictions on the foreign ownership of land, and thus, the need for the spin-off of Sucat Land as a landholding company. Moreover, Sucat Land cannot also be considered as being engaged in the business of real estate due to the presence of a lease contract. It is but natural for the owners to have a contract to protect their rights, an acknowledgment and/or recognition by the lessee that the petitioners are the owners of the lot, considering the lessee took the active management of the property as amplified by the introduction of the building and other structures introduced by the latter. ( Gloria Elumba et al., v. Commissioner of Internal Revenue, CTA Case No. 5103 dated August 16, 1996). Corollarily, only such real properties held primarily for sale or lease to customers in the ordinary course of 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 other than those enumerated under Section 39(A)(1) of the Tax Code of 1997 and Section 2(b) of Revenue Regulations No. 7-2003 are properly deemed as capital assets. Considering that the real property of Sucat Land has long been idle and abandoned, and has not been leased since the closure of MSF's Tire & Rubber, Inc. in 2001 with no improvements, and does 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, and that Sucat Land was a mere repository of the land for purposes of complying with nationality restrictions, the same should be properly classified as a capital asset for tax purposes. (BIR Ruling No. DA-060-03 dated March 03, 2003) DICSaH Accordingly, we hereby confirm your opinion that: The sale of the real property of Sucat Land , which has long remained idle and abandoned for four (4) years, and does 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 be considered as capital assets and, is subject: 1. To capital gains tax ("CGT") of 6% pursuant to Section 27(D)(5) of the Tax Code of 1997; and 2. To documentary stamp tax 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 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