BIR Ruling [DA-155-97]

April 10, 1997 BIR RULING [DA-155-97] Nasipit Lumber Company, Inc. 5th Floor Maritima Building 117 Dasmarias, Manila Attention: Mr. Alfredo S. Velasquez Corporate Secretary Gentlemen : This refers to your letter dated March 31, 1997 requesting for a ruling on the tax consequences of your proposed plan to sell or exchange thru "Dacion en Pago" some of the real properties you received as property dividends from another domestic corporation. It is represented that Nasipit Lumber Co., Inc. (NALCO) is a domestic corporation engaged in logging, sawmilling and manufacturing of lumber and other lumber products; that it is also a registered VAT taxpayer; that on July 25, 1996, it acquired several parcels of lands all located in Nasipit, Agusan del Norte, in the form of property dividends; that it now intends to transfer some of the said properties by way of "Dacion en Pago" to the Social Security System (SSS) for the settlement of an existing obligation; that you would like to request confirmation of your opinion as follows: 1. That the proposed sale or exchange of the parcels of land you received as property dividends are not subject to VAT considering that NALCO is not engaged in real estate business nor are the said properties used or intended to be used in business; and caIACE 2. That in the disposition thru "Dacion en Pago" of the property received as dividend by NALCO, the gain, being an ordinary income, shall be subject to the 35% income tax. In reply, please be informed as follows: 1. The proposed sale or exchange of the parcels of land received by NALCO as property dividends are not subject to VAT considering that the subject real properties are not used in the course of trade or business nor are they intended for sale or for use in the course of trade or business, NALCO being engaged in logging, sawmilling and manufacturing of lumber and other lumber products and not in any way engaged in the buying and selling nor leasing of real properties. (VAT Ruling No. 27 dated September 23, 1996). 2. The gain presumed to have been realized by NALCO by way of transfer of the subject real properties acquired as property dividends thru "dacion en pago" to the Social Security System for the settlement of an existing obligation, which is the difference between the book value at the time of receipt of the property dividends and the fair market value at the time of its disposition, being an ordinary income, shall be subject to the 35% income tax pursuant to Sec. 24 of the Tax Code, as amended, and consequently, to the creditable withholding tax as provided for under Revenue Regulations No. 12-94 amending Revenue Regulations No. 12-89 as amended by Revenue Regulations No. 1-90 and as clarified by Revenue Memorandum Circular No. 7-90 implementing Sec. 50 (b) of the Tax Code, as amended. (BIR Ruling No. 168-92 dated May 27, 1992) EaTCSA Very truly yours, ALICIA P. CLEMENO Assistant Commissioner Legal Service By: (SGD.) ALICIA L. TOMACRUZ Head Revenue Executive Assistant Legal Service